the latter’s mining claim, known as the Sto.
Nino mine, located in
Bad Debts
1. PHILEX MINING VS. COMMISSIONER OF INTERNAL
REVENUE
G.R. No. 148187, April 16, 2008
Case:
Philex and Baguio Gold entered into an agreement for the operation
of the Sto Nino Mine and denominated as "Power of Attorney". It was
stipulated, among others, that Philex shall advance to Baguio an
amount of Php 11m and additional funds and property as maybe
necessary, such advance cannot be unilaterally withdrawn until the
termination of the agreement, and Philex share shall be 50% of the
profits from the Sto. Nino Project. The project incurred losses which
eventually lead to the dissolution of the agreement. Philex assessed
that Baguio Gold has a remaining obligation of Php 114, 996, 768
representing the amount it advanced to the agreement and acting as
a guarantor for Baguio Gold. Philex deducted the said amount from
its taxable income claiming them as Bad Debts. The BIR disallowed
the deduction and assessed petitioner a deficiency income tax. The
CTA affirmed the BIR and stated that the advances does not
constitute a loan but rather investments to a joint venture, in addition,
as to the claims for the amounts wherein Philex acted as a guarantor
to Baguio Gold, such amounts where not yet demandable. The CA
affirmed the decision of the CTA.
The SC affirmed the decisions of the lower courts stating that the
"Power of Attorney" was in fact a joint venture agreement. There was
no agreement that the amount so advanced shall be unilaterally be
returned so as to constitute them as loans. Furthermore, there is the
agreement that Philex shall be entitled to a 50% share of the profits
of the project which strongly indicates that what was entered into was
a partnership agreement. The SC also affirmed that amounts
advanced by philex as guarantor are not yet due and demandable.
Facts:
• On April 16, 1971, petitioner Philex Mining Corporation (Philex
Mining), entered into an agreement with Baguio Gold Mining
Company (”Baguio Gold”) for the former to manage and operate
Atok and Tublay, Benguet Province. The parties’ agreement was
denominated as “Power of Attorney”.
• The agreement provides, among others, the following stipulations:
- The Principal, Baguio Gold, shall advance an amount of Php
11M to the Manager, Philex, and it is to be called as the
"Manager's Account".
- Whenever necessary for the management of the project, the
Manager shall advance additional funds and property to the
said project. The cash and property shall not thereafter be
withdrawn from the Sto. Nino PROJECT until termination of
this Agency.
- The Compensation of the Manager shall be fifty per cent
(50%) of the net profit of the Sto. Nino project before income
tax.
- The Principal has current pecuniary obligation in favor of the
Managers and, in the future, may incur other obligations in
favor of the Managers. This Power of Attorney has been
executed as security for the payment and satisfaction of all
such obligations of the Principal in favor of the Managers and
as a means to fulfill the same. Therefore, this Agency shall
be irrevocable while any obligation of the Principal in favor of
the Managers is outstanding, inclusive of the Managers'
account. After all obligations of the Principal in favor of the
Managers have been paid and satisfied in full, this Agency
shall be revocable by the Principal upon 36-month notice to
the Managers.
• In the course of managing and operating the project, Philex Mining
made advances of cash and property in accordance with the
agreement. However, the mine suffered continuing losses over the
years which resulted to petitioner’s withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine
operations on February 20, 1982.
• On September 27, 1982, the parties executed a “Compromise with
Dation in Payment” wherein Baguio Gold admitted an indebtedness
to petitioner in the amount of P179,394,000.00 and agreed to pay
the same in three segments by first assigning Baguio Gold’s
tangible assets to petitioner, transferring to the latter Baguio Gold’s
equitable title in its Philodrill assets and finally settling the
 remaining liability through properties that Baguio Gold may acquire
in the future.
• On December 31, 1982, the parties executed an “Amendment to
Compromise with Dation in Payment”where the parties determined
that Baguio Gold’s indebtedness to petitioner actually amounted to
P259,137,245.00, which sum included liabilities of Baguio Gold to
other creditors that petitioner had assumed as guarantor.
• Baguio Gold undertook to pay petitioner in two segments by first
assigning its tangible assets for P127,838,051.00 and then
transferring its equitable title in its Philodrill assets for
P16,302,426.00. The parties then ascertained that Baguio Gold
had a remaining outstanding indebtedness to petitioner in the
amount of P114,996,768.00.
• Subsequently, petitioner wrote off in its 1982 books of
account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and reserves
that were set up in 1981 and P2,860,768.00 to the 1982
operations.
• In its 1982 annual income tax return, petitioner deducted from
its gross income the amount of P112,136,000.00 as “loss on
settlement of receivables from Baguio Gold against reserves
and allowances.” However, the Bureau of Internal Revenue
(BIR) disallowed the amount as deduction for bad debt and
assessed petitioner a deficiency income tax of P62,811,161.39.
• Petitioner protested before the BIR arguing that the deduction must
be allowed since all requisites for a bad debt deduction were
satisfied, to wit: (a) there was a valid and existing debt; (b) the debt
was ascertained to be worthless; and (c) it was charged off within
the taxable year when it was determined to be worthless.
• On October 28, 1994, the BIR denied petitioner’s protest for lack of
legal and factual basis. It held that the alleged debt was not
ascertained to be worthless since Baguio Gold remained existing
and had not filed a petition for bankruptcy; and that the deduction
did not consist of a valid and subsisting debt considering that,
under the management contract, petitioner was to be paid fifty
percent (50%) of the project’s net profit.
• Petitioner appealed to the CTA, however the latter denied the
former's petition and held that the power of attorney was in fact an
agreement to form a partnership. That the amount thus advanced
are in the nature of an investment, and that Baguio Gold cannot be
considered in default since the debt was not yet demandable.
• The CA affirmed the ruling of the CTA, hence the instant petition.
Issues:
• Whether or not Philex is entitled to a Bad Debt deduction
arising from its claims from Baguio Gold.
Held:
• No.
• An examination of the “Power of Attorney” reveals that a
partnership or joint venture was indeed intended by the parties.
Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves.
While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it
has been held that it may enter into a joint venture which is akin to
a particular partnership.
• Perusal of the agreement denominated as the “Power of Attorney”
indicates that the parties had intended to create a partnership and
establish a common fund for the purpose. They also had a joint
interest in the profits of the business as shown by a 50-50 sharing
in the income of the mine.
• In this case, the totality of the circumstances and the stipulations in
the parties’ agreement indubitably lead to the conclusion that a
partnership was formed between petitioner and Baguio Gold.
• The strongest indication that petitioner was a partner in the Sto
Niño mine is the fact that it would receive 50% of the net profits as
“compensation” under paragraph of the agreement. The entirety of
the parties’ contractual stipulations simply leads to no other
conclusion than that petitioner’s “compensation” is actually its
share in the income of the joint venture.
• All told, the lower courts did not err in treating petitioner’s advances
as investments in a partnership known as the Sto. Nino mine. The
advances were not “debts” of Baguio Gold to petitioner inasmuch
as the latter was under no unconditional obligation to return the
same to the former under the “Power of Attorney”.
• As for the amounts that petitioner paid as guarantor to Baguio
Gold’s creditors, we find no reason to depart from the tax court’s
 factual finding that Baguio Gold’s debts were not yet due and
demandable at the time that petitioner paid the same. Verily,
petitioner pre-paid Baguio Gold’s outstanding loans to its bank
creditors and this conclusion is supported by the evidence on
record.
Final Verdict: WHEREFORE, The instant petition is denied and
the order of the CA is hereby affirmed.
2. PHIL. REFINING COMP. VS CA
REYES NOTES:
Q34.6. Is the declaration by the taxpayer that a debt is
worthless sufficient for it to claim a bad debt deduction?
No. In PHILIPPINE REFINING COMPANY VS. COURT OF APPEALS [M AY 8,
1996], at issue was PRC’s (now Unilever) claimed of bad debt
deduction. On appeal, the CTA disallowed the same as there was no
iota of documentary evidence to prove the worthlessness of the
debts sought to be deducted. The Supreme Court stated that before
a debt can be considered worthless, the taxpayer must also show
that it is indeed uncollectible even in the future. PRC here failed to
prove the worthlessness of the amounts receivable.
FACTS:
 This is an appeal by certiorari from the decision of respondent
Court of Appeals affirming the decision of the Court of Tax
Appeals which disallowed petitioner’s claim for deduction as bad
debts of several accounts in the total sum of P395,324.27, and
imposing a 25% surcharge and 20% annual delinquency interest
on the alleged deficiency income tax liability of petitioner.
 Petitioner Philippine Refining Company (PRC) was assessed by
respondent Commissioner of Internal Revenue (CIR) to pay a
deficiency tax for the year 1985 in the amount of P1,892,584.00,
computed as follows:
Deficiency Income Tax
Net Income per investigation P197,502,568.00
Add: Disallowances
Bad Debts P 713,070.93
Interest Expense P P 3,379,616.00
2,666,545.49
Net Taxable Income P 200,882,184.00
Tax Due Thereon P 70,298,764.00
Less: Tax Paid P 69,115,899.00
Deficiency Income Tax P 1,182,865.00
Add: 20% Interest (60% P 709,719.00
max.)
Total Amount Due and P 1,892,584.00
Collectible
 CIR contend that:
o Mere testimony of the Financial Accountant of the
Petitioner explaining the worthlessness of said debts is
seen by this Court as nothing more than a self-serving
exercise which lacks probative value.
o There was no iota of documentary evidence (e.g.,
collection letters sent, report from investigating fieldmen,
letter of referral to their legal department, police
report/affidavit that the owners were bankrupt due to fire
that engulfed their stores or that the owner has been
murdered, etc.), to give support to the testimony of an
employee of the Petitioner. Mere allegations cannot
prove the worthlessness of such debts in 1985.
o Hence, the claim for deduction of these thirteen (13)
debts should be rejected.
 CTA modified the findings of the Commissioner by reducing the
deficiency income tax assessment to P237,381.26, with
surcharge and interest incident to delinquency. In said decision,
the Tax Court reversed and set aside the Commissioner’s
disallowance of the interest expense of P2,666,545.19 but
maintained the disallowance of the supposed bad debts of
thirteen (13) debtors in the total sum of P395,324.27.
 UNILEVER’s contention:
o Nobody is in a better position to determine when an
obligation becomes a bad debt than the creditor itself,
and its judgment should not be substituted by that of SC
as it is UNILEVER which has the facilities in ascertaining
the collectability or uncollectibility of these debts, are
presumptuous and uncalled for.
o The CTA is a highly specialized body specialized body
specifically created for the purpose of reviewing tax
cases. Through its expertise, it is undeniably competent
 to determine the issue of W/N the debt is deductible
through the evidence presented before it.
ISSUE:
1. Is UNILIVER liable to pay the assessed deficiency resulting from
the bad debts?
2. Is UNILIVER also liable to pay tax surcharge?
HELD & RATIO:
YES (to both). The findings of the CTA will not ordinarily be reviewed
absent a showing of gross error or abuse on its part. The findings of
fact of the CTA are binding on this Court and in the absence of
strong reasons for this Court to delve into facts, only questions of law
are open for determination. Were it not, therefore, due to the desire
of this Court to satisfy petitioner’s calls for clarification and to use this
case as a vehicle for exemplification, this appeal could very well
have been summarily dismissed.
Major Point 1: Conditions before debts could be considered as
”worthless.”
 For debts to be considered as “worthless,” and thereby qualify as
“bad debts” making them deductible, the taxpayer should show
that:
o (1) there is a valid and subsisting debt;
o (2) the debt must be actually ascertained to be worthless
and uncollectible during the taxable year;
o (3) the debt must be charged off during the taxable year;
and
o (4) the debt must arise from the business or trade of the
taxpayer.
o Additionally, before a debt can be considered worthless,
the taxpayer must also show that it is indeed
uncollectible even in the future.
 In this case –
o UNILEVER evidently failed to prove the worthless of the
amounts receivable.
o Under Sec. 248 there imposes a 25% surcharge penalty.
o Under Sec. 249 - (c) Delinquency Interest.—In case of
failure to pay:
 (1)
 The amount of the tax due on any return
required to be filed, or
 (2)
 The amount of the tax due for which no
return is required, or
 (3)
 A deficiency tax, or any surcharge or
interest thereon, on the due date appearing in
the notice and demand of the Commissioner,
there shall be assessed and collected, on the
unpaid amount, interest at the rate prescribed in
paragraph (a) hereof until the amount is fully
paid, which interest shall form part of the tax.
Major Point 2: The fact that a taxpayer appealed the assessment to
the CTA and that the same was modified does not relieve it of the
penalties incident to delinquency.
 The deficiency tax assessment in this case, which was the
subject of the demand letter of respondent Commissioner dated
April 11, 1989, should have been paid within thirty (30) days from
receipt thereof. By reason of petitioner’s default thereon, the
delinquency penalties of 25% surcharge and interest of 20%
accrued from April 11, 1989. The fact that petitioner appealed
the assessment to the CTA and that the same was modified
does not relieve petitioner of the penalties incident to
delinquency. The reduced amount of P237,381.25 is but a part of
the original assessment of P1,892,584.00.
 Tax laws imposing penalties for delinquencies, so we have
long held, are intended to hasten tax payments by
punishing evasions or neglect of duty in respect thereof. If
penalties could be condoned for flimsy reasons, the law
imposing penalties for delinquencies would be rendered
nugatory, and the maintenance of the Government and its
multifarious activities will be adversely affected.
 We have likewise explained that it is mandatory to collect penalty
and interest at the stated rate in case of delinquency. The
intention of the law is to discourage delay in the payment of
taxes due the Government and, in this sense, the penalty and
interest are not penal but compensatory for the concomitant use
of the funds by the taxpayer beyond the date when he is
supposed to have paid them to the Government.
Unquestionably, petitioner chose to turn a deaf ear to these
injunctions.
FINAL VERDICT: The petition at bar is DENIED and the judgment of
respondent Court of Appeals is hereby AFFIRMED, with treble costs
against petitioner.
3. HERMANOS V. CIR
REYES NOTES:
Q34.7. ABC, an investment company made advances to XYZ under
an agreement that a portion of its net profits would go to ABC. XYZ
suffered substantial losses but continued to operate. ABC made a
partial write-off of the losses and deducted the amount in its return. Is
the deduction proper?
NO. SC held that the deduction was improper. The court opined that
assuming that in this case there was a valid subsisting debt and that
the debtor was incapable of paying the debt, the debt is still not
deductible worthless debt because the debtor was still in operation. It
has been held that if the debtor corporation, although losing money
or insolvent was still operating at the end of the taxable year, the
debt is not considered worthless and therefore not deductible.
CASE:
Fernandez Hermanos is a domestic corporation engaged in
investment, CIR assessed deficiency of income taxes for years 1950-
54, arising from discrepancies in income tax returns as petitioner
write-off deductions, which CIR disallowed. SC ruled that for there to
bad debt, there must be an existing debt, but even assuming there
was, if the debtor corporation losses money or insolvent but still in
operation, they cannot be considered as worthless thereof not
deductible.
FACTS:
 Fernandez Hermanos is a domestic corporation engaged in the
business as an investment company. CIR assessed deficiency of
income taxes for years 1950-54, arising from discrepancies in
the income tax returns. Basically, CIR disallowed some of the
petitioner’s declared deductible losses.
 The Court of Tax Appeals modifying the CIR assessments –
allowing some, disallowing others. Both appealed.
ISSUES: Whether or not there was proper deduction?
HELD & RATIO:
 Matti Lumber Co – YES, FH declared as worthless its stock in
Matti Lumber, CTA allowed after finding that at the time
declaration of loss was made, Matti Lumber had ceased in
operation and was insolvent. CIR argued that its equipment still
has value. CTA said that if these will realize gain in the future,
then FH should make a proper declaration in the year that it
receives profits for them. SC affirmed.
 Palawan Manganese Mines – NO, the controlling stockholders of
FH are also that of Palawan Manganese. The latter requested
from former the financial help for its mining operations, to which
the former agreed through a MOA, stated therein that FH would
grant accommodation advances and Palawan would
compensate FH of 15% of profits. But Palawan continued to
suffer losses meanwhile FH continued to grant advances but in
reduced amount. FH then started writing off its books as
worthless the advances given for 1945-49 even if Palawan was
still in operation. CTA disallowed and said that their
understanding was that Palawan would compensate them with
15% of profits. In short, if there were no profits, there’s no
obligation to pay. So FH cannot claim as loss an amount (the
advances) Palawan was not required to pay back.
 Are these Bad Debts? NO. There can be no bad debt if there
was no valid and existing debt. But even assuming there was,
FH made the deductions at a time when Palawan was still in
operation. It has been held that if the debtor corporation,
although losing money or insolvent, was still operation at the end
of the taxable year, the debt is not considered worthless and
therefore not deductible. Furthermore, neither under Sec
30(d)(2) of our Tax code providing for deduction by corporations
of losses actually sustained and charged off during the taxable
year nor under Sec 30(e)(1) thereof providing for deduction of
bad debts actually ascertained to be worthless and chared off
within the taxable year, can there be a partial writing off of a loss
or bad debt, as was sought to be done here by the taxpayer. For
such losses or bad debts must be ascertained to be so and
written off during the taxable year, are therefore deductible in full
 or not at all, in the absence of express provision in the Tax Code
authorizing partial deductions.
 Balamban Coal Mines – FH made deductions while operations
were ongoing because according to it, it made no sales of coal
during those years because the coal could not be transported for
lack of road. CTA disallowed because some definite event must
fix the time when the loss is sustained and here it was only the
event of actual abandonment of the mines, which came later.
 Hacienda Dalupiri and Samal – CIR disallowed the deduction
because they found that the farms were operated for pleasure
and not business and thus not entitled to claim deductions. But
CTA disallowed because it was convinced they operated for
business. Losses were determined by inventories sanctioned by
Sec 100 RR2 to which method the CTA was satisfied.
FINAL VERDICT: SC modifies CTA’s decision on Balamban Coal
Mines, crediting the loss which was disallowed, but affirms the
decision to the others.
Notes/ Source: This digest focuses primarily on the Bad Debt
doctrine
RR 5-99 (March 10, 1999)
Depreciation
4. BASILAN ESTATES, INC. v. CIR
Deduction; Depreciation
REYES NOTES/ CASE: (p.33,Q.35.3)
Can an asset be depreciated beyond is acquisition cost? — NO.
Basilan Estates claimed deductions for the depreciation of its assets
up to 1949 on the basis of their acquisition cost. In 1950, however, it
changed the depreciable value of the assets by increasing it to
conform with the increase in cost of their replacement. Accordingly,
in 1950-53, the company deducted from gross income the value of
the depreciation based on this reappraised value. The SC held that
such value cannot be deducted from gross income as it was
beyond the acquisition cost. Depreciation as a deduction is
allowed so that the owner of the assets can set aside some money to
buy a replacement or, in other words, to gradually recover the
acquisition costs. The reason is that deductions from gross income
are privileges, not matter of right. More importantly, the recovery,
free of income tax, of an amount more than the invested capital in an
asset will run counter to the purpose of a depreciation allowance. For
then, the taxpayer can not only recover the acquisition cost, but also
make some profit. Recovery in due time through depreciation of
investment made is the philosophy behind depreciation allowance;
the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction fro depreciation.
FACTS:
• Basilan Estates, Inc (Basilan) is a Philippine corporation engaged
in the coconut industry with principal offices at Basilan City,
• Paid its income tax returns for 1953
• 1959 - CIR assessed Basilan a deficiency income tax for the same
year pursuant to Sec.25 o the Tax Code
• P3,912 for 1953 and P86,876.85 as 25% surtax on
unreasonably accumulated profits
• Basilan filed with the CTA a petition for review of the assessment
alleging prescription of the period for assessment and collection;
error in disallowing claimed depreciations
• CTA Decision: affirmed the deficiency in toto, there was no
prescription
• Basilan claimed deductions for the depreciation of its assets up to
1949 on the basis of the acquisition cost
• 1950: it changed the depreciable value of said assets by increasing
it to conform with the increase in cost for their replacement
• 1950-53: it deducted from gross income the value of depreciation
computed on the reappraised value
ISSUES: Whether or not the disallowance of items claimed as
deductible was proper
HELD & RATIO: YES
• Depreciation is the gradual diminution in the useful value of
tangible property resulting from wear and tear and normal
obsolescense.
• Depreciation commences with the acquisition of the property and
its owner is not bound to see his property gradually waste, without
making provision out of earnings for its replacement. It is entitled to
see that from earnings the value of the property invested is kept
unimpaired, so that at the end of any given term of years, the
original investment remains as it was in the beginning. It is not only
the right of a company to make such a provision, but it is its duty to
its bond and stockholders, and, in the case of a public service
corporation, at least, its plain duty to the public
• The law permits the taxpayer to recover gradually his capital
investment in wasting assets free from income tax
• Section 30 (f) (1): “In general. — A reasonable allowance for
deterioration of property arising out of its use or employment in the
business or trade, or out of its not being used: Provided, That
when the allowance authorized under this subsection shall equal
the capital invested by the taxpayer . . . no further allowance shall
be made. . . .” allows a deduction from gross income for
depreciation but limits the recovery to the capital invested in the
asset being depreciated.
• >>> The income tax law does not authorize the depreciation of
an asset beyond its acquisition cost. Hence, a deduction over
and above such cost cannot be claimed and allowed. The reason
is that deductions from gross income are privileges, not matters of
right. They are not created by implication but upon clear
expression in the law.
• Moreover, the recovery, free of income tax, of an amount more
than the invested capital in an asset will transgress the underlying
purpose of a depreciation allowance. For then what the taxpayer
would recover will be, not only the acquisition cost, but also some
profit. Recovery in due time thru depreciation of investment made
is the philosophy behind depreciation allowance; the idea of profit
on the investment made has never been the underlying reason for
the allowance of a deduction for depreciation.
• Claim for depreciation beyond P36,842.04 or in the amount of
P10,500.49 has no justification in the law.
FINAL VERDICT: CIR and CTA decisions sustained
5. LIMPAN INVESTMENT CO. V. CIR & CTA
REYES NOTES/ CASE:
In this case PET Limpan Investment Corp a corp engaged in
the leasing of private property in the cities of Manila and Pasay had
been assessed to have underreported its incomet ax for the years of
1956 to 1957. Therefore, it was required by the CIR to pay the
amounts due for those years. The matter was taken to the CTA
where the PETs claimed that 1. The depreciation scheme it used
should not have been overturned and 2. The rentals that they had
been collecteinf ro those periods were in fact not collected during
those years. It was found by both the CTA and the SC that 1. The
depreciation scheme was not justified as it must find its basis in fact,
and 2. That the rentals were in fact available to the PET corp and
should be deemed to have been collected in the years where they
were available for collection.
FACTS:
 This appeal is taken by PET Limpan Investment Corp.
against the CTA for ruling in favor of the CIR. The CTA
ordered the PET in this case to pay the sums of P7,338.00
and P30,502.50 which represented deficiency income tax, 50
percent surcharge and 1 percent interest from the date of
June 1959.
 PET is a domestic corp. engaged in the business of leasing
real properties. It’s principal stock holders are the spouses
Isabelo P. Lim and Purificacion Ceñiza de Lim. The
properties being leased are located in Manila and in Pasay
City.
 In the years 1956 and 1957 respectively it was found that the
PET corp underdeclared its income by P20,199.00 and
P81,690.00 respectively. Also, they had claimed excessive
depreciation of the buildings that they owned P4,260.00 and
P16,336.00.
 They were subsequently assessed at a deficiency of
P30,502.50.
 To make the long story short the PETs in this case were
merely saying, simply, that the rent collected wasn’t actually
 collected as planned so the amount was not yet really
earned.
 They also alleged that striking down of the scheme for
depreciating their buildings was unfair and oppressive.
 Sole witness for petitioner corporation in the Tax Court was
its Secretary-Treasurer, Vicente G. Solis, who admitted that
it had omitted to report the sum of P12,100.00 as rental
income in its 1956 tax return and also the sum of P29,350.00
as rental income in its 1957 tax return. However the spouses
claimed that these amoutns were not earned as they had
ceded their interest in the buildings to PET corp.
ISSUES:
1. W/N the deprecation scheme was proper?
2. W/N the lease that was technically not collected in those
years be assessed as having been earned in those
years?
HELD & RATIO:
1. No, It was alleged: “With regard to the depreciation which
respondent disallowed and deducted from the returns filed
by petitioner, the same witness tried to establish that some
of its buildings are old and out of style; hence, they are
entitled to higher rates of depreciation than those adopted by
respondent in his assessment. “ The SC decided not to
disturb this finding as no evidence had been presented to
overturn it outside of the aforementioned bare statement.
2. Yes, On the other hand, Plaridel M. Mingoa, one of the BIR
examiners who personally conducted the investigation of the
1956 and 1957 income tax returns of petitioner corporation,
testified for the respondent that he personally interviewed the
tenants of petitioner and found that these tenants had been
regularly paying their rentals to the collectors of either
petitioner or its president, Isabelo P. Lim, but these
payments were not declared in the corresponding returns;
and that in applying rates of depreciation to petitioner's
buildings, he adopted Bulletin "F" of the U.S. Federal Internal
Revenue Service. With respect to the balance, which
petitioner denied having unreported in the disputed tax
returns, the excuse that Isabelo P. Lim and Vicenta
Pantangco Vda. de Lim retained ownership of the lands and
only later transferred or disposed of the ownership of the
buildings existing thereon to petitioner corporation, so as to
justify the alleged verbal agreement whereby they would turn
over to petitioner corporation six percent (6%) of the value of
its properties to be applied to the rentals of the land and in
exchange for whatever rentals they may collect from the
tenants who refused to recognize the new owner or vendee
of the buildings, is not only unusual but uncorroborated by
the alleged transferors, or by any document or unbiased
evidence. Hence, the first assigned error is without merit.
FINAL VERDICT: Petition is denied. The CTA decision is affirmed.
Notes/ Source:
The withdrawal in 1958 of the deposits in court pertaining to the 1957
rental income is no sufficient justification for the non-declaration of
said income in 1957, since the deposit was resorted to due to the
refusal of petitioner to accept the same, and was not the fault of its
tenants; hence, petitioner is deemed to have constructively received
such rentals in 1957. The payment by the sub-tenant in 1957 should
have been reported as rental income in said year, since it is income
just the same regardless of its source.
RR 12-2012 (October 12, 2012)
Depletion
6. CONSOLIDATED MINES V COURT OF TAX APPEALS AND
COMMISSIONER OF INTERNAL REVENUE
REYES NOTES/ CASE:
Consolidated Mine had filed its income tax returns for 1951, 1952,
1953 and 1956. In 1957 examiners of the BIR investigated the
income tax returns filed by the Company because its auditor, Felipe
Ollada, claimed the refund representing alleged overpayments of
income taxes for the year 1951. The investigators reported that the
company had underpaid its tax obligations. CIR then sent the
company letter of demand requiring the payment of deficiency
income taxes. The company appealed to the CTA, which likewise
rendered an unfavourable decision. The company questions the rate
or mine depletion adopted by the CTA and the disallowance of
depreciation charges and certain miscellaneous.
The issue is WON the CTA erred with respect to the rate of mine
depletion. The Supreme Court ruled in favour of the petitioner saying
that the Tax Code provides that in computing net income there shall
be allowed as deduction in the case of mines, a reasonable
allowance for depletion thereof not to exceed the market value in the
mind of the product thereof which has been mined and sold during
the year for which the return is made. Art. 3, Sec. 16 of the Const: All
persons shall have the right to a speedy disposition of their cases
before all judicial, quasi-judicial, or administrative bodies
(for the correct formula that must be used regarding the rate of
depletion, please see below.)
FACTS:
• Consolidated Mines (The Company), a domestic corporation
engaged in mining, had filed its income tax returns for 1951,
1952, 1953 and 1956. In 1957 examiners of the BIR
investigated the income tax returns filed by the Company
because its auditor, Felipe Ollada, claimed the refund of the
sum ofP107,472.00 representing alleged overpayments of
income taxes for the year 1951.
• After the investigation the examiners reported that (A) for the
years 1951 to 1954 (1) the Company had not accrued as an
expense the share in the company profits of Benguet
Consolidated Mines as operator of the Company's mines,
although for income tax purposes the Company had
reported income and expenses on the accrual basis; (2)
depletion and depreciation expenses had been
overcharged; and (3) the claims for audit and legal fees and
miscellaneous expenses for 1953 and1954 had not been
properly substantiated; and that (B) for the year 1956 (1) the
Company had overstated its claim for depletion; and (2)
certain claims for miscellaneous expenses were not duly
supported by evidence.
• In view of said reports the Commissioner of Internal
Revenue sent the Company a letter of demand requiring it to
pay certain deficiency income taxes for the years 1951 to
1954, inclusive,and for the year 1956. Deficiency income tax
assessment notices for said years were also sent to the
Company.
• The Company requested a reconsideration of the
assessment, but the Commissioner refused to reconsider,
hence the Company appealed to the Court of
Tax Appeals.On May 6, 1961 the Tax Court rendered
judgment ordering the Company to pay the amounts
ofP107,846.56, P134,033.01 and P71,392.82 as deficiency
income taxes for the years 1953, 1954and 1956,
respectively.
• However, on August 7, 1961, upon motion of the Company,
the Tax Court reconsidered its decision and further reduced
the deficiency income tax liabilities of the Company to
P79,812.93,P51,528.24 and P71,382.82 for the years 1953,
1954 and 1956, respectively.
1. Both the company and the commissioner appealed to this
court. the company questions the rate or mine depletion
adopted by the CTA and the disallowance of depreciation
charges and certain miscellaneous.
ISSUES:
1. Whether or not the Court of Tax Appeals erred with
respect to the rate of mine depletion.
HELD & RATIO:
1. YES, The Tax Code provides that in computing net income
there shall be allowed as deduction in the case of mines, a
reasonable allowance for depletion thereof not to exceed the
market value in the mind of the product thereof which has
been mined and sold during the year for which the return is
made. Art. 3, Sec. 16 of the Const: All persons shall have
 the right to a speedy disposition of their cases before all amount of P1,738,974.37 as "suspense account (mining
judicial, quasi-judicial, or administrative bodies. properties subject to war losses)." The Company claims that
• The formula for computing the rate of depletion is: its accountant, Mr. Calpo, made these errors, because he
was then new at the job. Granting that was what had
Cost of Mine Property happened, it does not affect the fact that the, evidence on
---------------------- = Rate of Depletion Per Unit Estimated ore hand is insufficient to prove the cost of development alleged
Deposit of Product Mined and sold by the Company.
The Commissioner and the Company do not agree as to the Nor can w the statements of Eligio S. Garcia be relied to,
figures corresponding to either factor that affects the rate of who was the Company's treasurer and assistant secretary at
depletion per unit. The figures according to the the time he testified on August 14, 1959. He admitted that he
Commissioner are: did not know how the figure P4,238,974.57 was arrived at,
P2,646,878.44 (mine cost) P0.59189 (rate of explaining: "I only know that it is the figure appearing on the
------------------------- = depletion per ton) balance sheet as of December 31, 1946 as certified by the
4,471,892 tons (estimated ore deposit) Company's auditors; and this we made as the basis of the
while the Company insists they are: valuation of the depletable value of the mines
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated Practicality therefore suggest that there is a better need to
rely on the Commissioner's assertion that the "development
ore deposit) cost" was P131,878.44, broken down as follows:
assessment, P34,092.12; development, P61,484.63;
They agree, however, that the "cost of the mine property" exploration, P13,966.62; and diamond drilling, P22,335.07.
consists of (1) mine cost; and (2) expenses of development
before production The question as to which figure should properly correspond
to "mine cost" is one of fact. The findings of fact of the Tax
• Court, where reasonably supported by evidence, are
As an income tax concept, depletion is wholly a creation of conclusive upon the Supreme Court.
the statute — "solely a matter of legislative grace." Hence,
the taxpayer has the burden of justifying the allowance of FINAL VERDICT: Petition GRANTED. The decision of CTA is
any deduction claimed. As in connection with all other tax modified.
controversies, the burden of proof to show that a
disallowance of depletion by the Commissioner is incorrect
or that an allowance made is inadequate is upon the
Charitable and other contributions
taxpayer, and this is true with respect to the value of the
property constituting the basis of the deduction. This burden- RA 9500 (Sec. 25 only)
of-proof rule has been frequently applied and a value RA 9521, Sec. 3
claimed has been disallowed for lack of evidence.
7. BIR Ruling No. 19-01
The Company's balance sheet for December 31, 1947 lists
the "mine cost" of P2,500,000 as "development cost" and the (VERY SHORT)

FACTS:
 Conservation International is an international organization
with a home office and board members based overseas..
ISSUES:
3. Whether or not international organizations with home
offices based abroad are qualified to be granted done
institution status?
HELD & RATIO:
3. NO, the requirements of the Tax Code of 1997 and Rev.
Regs. No 13-98 require that non-stock, non-profit corporation
or organizations must be created or organized under
Philippine Laws and that an NGO must be a non-profit
domestic corporation. A foreign corporation, like
Conservation International, whether resident or non-resident,
cannot be accredited as a done institution.
 Section 34 (H) (1) of the Tax Code of 1997
specifically mentions “accredited domestic
corporation or associations” and “non-government
organizations”. On the other hand, subparagraph (2)
of the same Section of the Tax Code defines a “non-
government organization” to mean a non profit-
domestic corporation.
 In implementing Sec. 34(H), Rev. Regs. No. 13-98
states Sec 1 (a) “Non-stock, non-profit corporation or
organization” – shall refer to a corporation or
association/organization referred to under Section
30 (E) and (G) of the Tax Code created or
organized under Philippine laws exclusively for
one or more purposes.
Research and Development
8. 3M PHILIPPINE INC. v. COMMISSIONER OF INTERNAL
REVENUE
Petitioner 3M, is a subsidiary of the Minnesota Mining and
Manufacturing Company (or "3M-St. Paul") a non-resident foreign
corporation with principal office in St. Paul, Minnesota, U.S.A. It is
the exclusive importer, manufacturer, wholesaler, and distributor in
the Philippines of all products of 3M-St. Paul. For it to be able to
manufacture, sell and install the highly specialized products of its
parent company, and render the necessary post-sales service and
maintenance to its customers, petitioner entered into a "Service
Information and Technical Assistance Agreement" and a "Patent and
Trademark License Agreement" with the latter under which the
petitioner agreed to pay to 3M-St. Paul a technical service fee of 3%
and a royalty of 2% of its net sales. Petitioner now claims such
expenses as tax deductions, which CIR denied on the ground that
such royalties are not the proper royalties contemplated under CB
Circular 393. In the case at bar, the royalty payments which
petitioner wishes to deduct are royalties paid for products already
manufactured by the licensor (3M-St. Paul). However, royalties
contemplated under CB Circular 393 are products actually
manufactured by the licensee; hence, petition is denied.
Recit-ready
FACTS:
 3M Philippines, Inc. is a subsidiary of the Minnesota Mining
and Manufacturing Company (or "3M-St. Paul") a non-
resident foreign corporation with principal office in St. Paul,
Minnesota, U.S.A. It is the exclusive importer, manufacturer,
wholesaler, and distributor in the Philippines of all products
of 3M-St. Paul.
 To enable it to manufacture, sell and install the highly
specialized products of its parent company, and render the
necessary post-sales service and maintenance to its
customers, petitioner entered into a "Service Information and
Technical Assistance Agreement" and a "Patent and
Trademark License Agreement" with the latter under which
the petitioner agreed to pay to 3M-St. Paul a technical
service fee of 3% and a royalty of 2% of its net sales. Both
 agreements were approved by the Central Bank of the
Philippines.
 In its income tax return the petitioner claimed the following
deductions as business expenses:
o royalties and technical service fees of P
3,050,646.00
o pre-operational cost of tape coater of P97,485.08
 On the first item, the respondent Commissioner of Internal
Revenue allowed a deduction of P797,046.09 only as
technical service fee and royalty for locally
manufactured products, but disallowed the sum of
P2,323,599.02 paid by the petitioner to 3M-St. Paul as
technical service fee and royalty on P46,471,998.00worth of
finished products imported by the petitioner from the parent
company, on the ground that the fee and royalty should be
based only on locally manufactured goods. The improper
deduction was treated by respondent as a disguised
dividend or income.
 On the second item, respondent allowed P19,544.77 or one-
fifth (1/5) of petitioner's capital expenditure of P97,046.09 for
its tape coater which was installed in 1973 because such
expenditure should be amortized for a period of five (5)
years, hence, payment of the disallowed balance of
P77,740.38 should be spread over the next four (4) years.
Respondent ordered petitioner to pay P840,540 as
deficiency income tax on its 1974 return, plus P353,026.80
as 14% interest per annum from February 15, 1975 to
February 15, 1976, or a total ofP1,193,566.80.
 Petitioner protested the assessment but the respondent
Commissioner did not answer the protest. Instead, he issued
warrants of distraint and levy. Petitioner appealed to the
Court of Tax Appeals and was granted a prayer for the
issuance of a writ of preliminary injunction to stop the
enforcement of the warrants of distraint and levy.
 After hearings were held, the Tax Court rendered a decision
on upholding the Commissioner's ruling. Petitioner's motion
for reconsideration was denied; hence, this for petition for
review.
ISSUES: Whether or not CTA erred in upholding the ruling of
CIR.
HELD & RATIO:
1. NO MERIT in this petition. The pertinent legal provisions in
this case are Section 29(a)(1) of the Internal Revenue Code
and Circular No. 393 (Because remittances to foreign
licensors are made in foreign exchange an exchange control
regulation to conserve foreign exchange and avoid
unnecessary drain on the country's international reserves)
a. Section 3-C of the circular provides that royalties
shall be paid only on commodities manufactured by
the licensee under the royalty agreement.
b. Petitioner points out that the Central bank "has no
say in the assessment and collection of internal
revenue taxes as such power is lodged in the
Bureau of Internal Revenue.” They argue that the
law applicable to its case is only Section 29(a)(1) of
the Tax Code which provides:
i. (a) Expenses. — (1) Business expenses. —
(A) In general. — All ordinary and necessary
expenses paid or incurred during the taxable
year in carrying on any trade or
business, including a reasonable allowance
for salaries or other compensation for
personal services actually rendered;
travelling expenses while away from home
in the pursuit of a trade, profession or
business, rentals or other payments required
to be made as a condition to the continued
use or possession, for the purpose of the
trade, profession or business, for property to
which the taxpayer has not taken or is not
taking title or in which he has no equity.
c. The argument is specious, for, although the Tax
Code allows payments of royalty to be deducted
from gross income as business expenses, it is CB
Circular No. 393 that defines what royalty payments
are proper. Hence, improper payments of royalty are
not deductible as legitimate business expenses.

FINAL VERDICT: Petition is DENIED.
Notes/ Source:
Additional requirements for
deductibility
RMO 38-82 (Nov. 14, 1983)
RR 12-2013 (July 12, 2013)
Optional Standard Deduction
Sec. 34 (L), Tax Code as amended by RA 9504
RR 2-2010 (Feb. 18, 2010)
RR 16-2008 (Nov. 26, 2008) (Sections 1 to 7 only)
NOLCO
9. PAPER INDUSTRIES CORPORATION OF THE PHILIPPINES
(PICOP) v. CIR and CTA
G.R. Nos. 106949-50 December 1, 1995
G.R. Nos. 106984-85 December 1, 1995
REYES NOTES/CASE:
PICOP, a BOI-registered entity, entered into a merger
transaction with RPPM and RMC. Under the agreement, the
companies will be merged into one wherein the assets and liabilities
of RPPM and RMC, as dissolved corporations, will be transferred to
PICOP, as the surviving corporation. Prior to the merger, RPPM
has an accumulated operating losses incurred from the previous
years. PICOP claimed such losses as NOLCO in its income tax
return. The BIR disallowed such NOLCO as a deduction and hence
assessed PICOP for deficiency income tax. Can PICOP be allowed
to claim as a deduction in its income tax return the losses sustained
by RPPM? No. The SC disallowed it since a taxpayer cannot claim
as a deduction, the NOLCO of another taxpayer. Also, at that
time, the tax code does not allow the carrying over of losses
(i.e., losses must only be deducted in the year they were
incurred). It was the BOI law that allows for the carry over BUT
to claim as deduction the NOLCO of another would be contrary
to the intent of such law. If such will be allowed, the income that
would be shielded from taxation is not income that was, after much
effort, eventually generated by the same registered operations which
earlier had sustained losses.
PM Reyes: NOLCO of the taxpayer shall not be transferred or
assigned to another person, whether directly or indirectly such as,
but not limited to, the transfer or assignment thereof through merger,
consolidation or any form of business combination of such taxpayer
with another person. To allow the deduction claimed by the surviving
corporation would be to permit one corporation or enterprise to
benefit from the operating losses accumulated by another
corporation or enterprise.
FACTS:
 Paper Industries Corporation of the Philippines ("Picop"), is a
Philippine corporation registered with the Board of
Investments ("BOI") as a preferred pioneer enterprise with
respect to its integrated pulp and paper mill, and as a
preferred non-pioneer enterprise with respect to its
integrated plywood and veneer mills.
 Picop entered into a merger agreement with the Rustan Pulp
and Paper Mills, Inc. ("RPPM") and Rustan Manufacturing
Corporation ("RMC"). Under this agreement, the rights,
properties, privileges, powers and franchises of RPPM and
RMC were to be transferred, assigned and conveyed to
Picop as the surviving corporation.
 On 30 November 1977, apparently the effective date of
merger, RPPM and RMC were dissolved.
 It appears that RPPM and RMC were, like Picop, BOI-
registered companies.
 Immediately before merger effective date, RPPM had over
preceding years accumulated losses in the total amount of
P81,159,904.00. In its 1977 Income Tax Return, Picop
claimed P44,196,106.00 of RPPM's accumulated losses
as a deduction against Picop's 1977 gross income.
  The BIR disallowed as deduction, the accumulated losses
pertaining to RPPM that was claimed by Picop. Hence, it
was assessed a deficiency income tax for this.
 Picop protested the assessment.
 The CIR issued a warrant of distraint on personal property
and a warrant of levy on real property against Picop, to
enforce collection of the contested assessments; in effect,
the CIR denied Picop's protests.
ISSUE: Whether or not Picop can be allowed to claim as a NOLCO
deduction the accumulated losses incurred by RPPM prior to the
merger
HELD & RATIO:
NO. A taxpayer cannot claim as a deduction, the NOLCO of
another taxpayer. Also, at that time, the tax code does not allow
the carrying over of losses1 (i.e., losses must only be deducted
in the year they were incurred). It was the BOI law that allows for
the carry over BUT to claim as deduction the NOLCO of another
would be contrary to the intent of such law.
 The ordinary rule — that is, the rule applicable in respect of
corporations not registered with the BOI as a preferred
pioneer enterprise — is that net operating losses cannot be
carried over. Under our Tax Code, both in 1977 and at
present, losses may be deducted from gross income only if
such losses were actually sustained in the same year that
they are deducted or charged off. Such losses may be
charged off only against income earned in the same taxable
year when the losses were incurred.
 It is R.A. No. 5186 (BOI law) which introduced the carry-
over of net operating losses as a very special
incentive to be granted only to registered pioneer
enterprises and only with respect to their registered
operations.
1
The 1997 NIRC now allows the carrying over of operating loss. The deduction is
called “Net Operating Loss Carry Over (NOLCO)”. See Sec. 34 (D) (3) of the Tax
Code.
o The statutory purpose is the encouragement of the
establishment and continued operation of pioneer
industries by allowing the registered enterprise to
accumulate its operating losses which may be
expected during the early years of the enterprise and
to permit the enterprise to offset such losses against
income earned by it in later years after successful
establishment and regular operations. To promote its
economic development goals, the Republic foregoes
or defers taxing the income of the pioneer enterprise
until after that enterprise has recovered or offset its
earlier losses.
o The statutory purpose can be served only if the
accumulated operating losses are carried over
and charged off against income subsequently
earned and accumulated by the same enterprise
engaged in the same registered operations.
 To allow the deduction claimed by Picop would be to permit
one corporation or enterprise, Picop, to benefit from the
operating losses accumulated by another corporation or
enterprise, RPPM. To grant Picop's claimed deduction would
be to permit Picop to shelter its otherwise taxable income (an
objective which Picop had from the very beginning) which
had not been earned by the registered enterprise which had
suffered the accumulated losses.
 Picop would benefit by immunizing P44,196,106.00 of its
income from taxation thereof although Picop had not run the
risks and incurred the losses which had been encountered
and suffered by RPPM. Conversely, the income that would
be shielded from taxation is not income that was, after much
effort, eventually generated by the same registered
operations which earlier had sustained losses. There is
nothing in Section 7 (c) of R.A. No. 5186 which either
requires or permits such a result. Indeed, that result
makes non-sense of the legislative purpose which may
be seen clearly to be projected by Section 7 (c), R.A. No.
5186.
FINAL VERDICT: The deduction claimed by Picop in the amount of
P44,196,106.00 in its 1977 Income Tax Return must be disallowed.
Notes/ Source: I think under the current Tax Code, if the losses
were incurred by RPPM after the merger, Picop may be allowed to
claim it as a NOLCO deduction since by that time, they are already
considered as one (one juridical personality). -Aubbrey 
RR 14-01
10. BIR RULING 30-00
Tax free merger under certain conditions
REYES NOTES:
If several corporations enter an agreement to integrate
their respective businesses, can each of the corporations
continue to carry-over their respective net operating
losses?
It depends on the nature of the integration plan. In BIR RULING 30-00
[AUGUST 10, 2000], three cement companies (Republic, Fortune and
Blue Circle) sought the opinion of the CIR on the tax implications of
their integration plan. With regard to NOLCO, the CIR held that
since, under the plan, the corporation are not dissolved but merely
integrated for a specific bona fide purpose, the net operation losses
of each of the cement corporations are preserved after the proposed
share swap and may be carried over and claimed as a deduction
from their respective gross income because there is no substantial
change in the ownership of either of the three cement companies.
FACTS:
 Blue Circle Philippines Inc. (BCPI), Round Royal Inc. (RRI), SM
Investment Corp. (SMIC), Sysmart Corp. and CG&E Holdings
transferred shares to Republic, in exchange of new Republic
shares. The shares transferred were to Fortune, Zeus and Iligan
shares.
ISSUE: W/N the net operating losses after the proposed share spaw
may be claimed as a deduction from income tax.
HELD & RATIO:
YES. Pursuant to Sec. 40 (c) (2) , no gain or loss shall be
recognized, because together they hold more than 51% of the total
voting stock of Republic after the transfer.
 Transfer of Fortune and Zeus shares: subject to ½ tax of 1%
stock transaction stock
o Based on the gross selling price or gross value in money
of the shares transferred (from the 6th to the last
transferor).
 Transfer of Iligan shares: subject to 5% capital gains tax
o Of the par value of the shares transferred
 The Republic shares to be issued shall be subject to
Documentary Stamp Tax pursuant to Sec. 175 of the Tax Code.
 The net operating losses of each of the companies are
preserved after the proposed share swap and may be carried
over and claimed as deduction from their respective gross
income, pursuant to Sec. 34 (d) of the Tax Code, because there
is no substantial change in ownership in either.
Relevant Tax Code provisions:
SEC. 40 (C) (2) Exception. - No gain or loss shall be recognized if
in pursuance of a plan of merger or consolidation -
(a) A corporation, which is a party to a merger or consolidation,
exchanges property solely for stock in a corporation, which is
a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is a party
to the merger or consolidation, solely for the stock of another
corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger
or consolidation, exchanges his securities in such corporation,
solely for stock or securities in such corporation, a party to the
merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a
corporation by a person in exchange for stock or unit of
participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation:
 Provided, That stocks issued for services shall not be
considered as issued in return for property.
SEC. 175. Stamp Tax on Original Issue of Shares of Stock. - On
every original issue, whether on organization, reorganization or for
any lawful purpose, of shares of stock by any association, company
or corporation, there shall be collected a documentary stamp tax of
Two pesos (P2.00) on each Two hundred pesos (P200), or fractional
part thereof, of the par value, of such shares of stock: Provided, That
in the case of the original issue of shares of stock without par value
the amount of the documentary stamp tax herein prescribed shall be
based upon the actual consideration for the issuance of such shares
of stock: provided, further, That in the case of stock dividends, on the
actual value represented by each share.
SEC. 34 (D) (3) Net Operating Loss Carry-Over. - The net
operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which
had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided,
however, That any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax shall not be
allowed as a deduction under this Subsection: Provided,
further, That a net operating loss carry-over shall be allowed
only if there has been no substantial change in the ownership
of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in nominal value
of outstanding issued shares., if the business is in the name of
a corporation, is held by or on behalf of the same persons;
or(ii) Not less than seventy-five percent (75%) of the paid up
capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.
Premium payments on health and/or
hospitalization insurance
Non-deductible expenses
Sec. 365, Tax Code
11. ESSO STANDARD EASTERN INC. v. CIR
REYES NOTES:
Q42.1. Are margin fees deductible business expenses?
No. In ESSO STANDARD EASTERN, INC. VS. COMMISSIONER
OF INTERNAL REVENUE [JULY 7, 1989], Esso made profit
remittances to its New York Head Office. Esso claims that the margin
fees it paid to the Central Bank on the remittances are ordinary and
necessary expenses and should be deducted from its gross income.
CASE:
ESSO deducted the amount it had spent for drilling and
exploration of its petroleum accessions from its gross income as part
of its ordinary and necessary business expenses. This was,
however, disallowed by the CIR saying that it will only be considered
as a loss when a dry hole should result. ESSO also claimed as
ordinary and necessary expenses in the same return amount
representing margin fees it had paid to the Central Bank on its profit
remittances to its New York Office. CIR denied the claims for refund
contending that margin fees paid to the Central Bank could not be
considered taxes or allowed as deductible business expenses. It is
ESSO’s contention that margin fees should atleast be considered as
business expense (if not taxes) because the fees were paid for the
remittance by ESSO as part of the profits to the head office in the
US. Such remittance was an expenditure necessary and proper for
the conduct of its corporate affairs.
The issue is whether or not margin fees are deductible from gross
inome as an ordinary and necessary business expense.
No. Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New York, which is
a separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said therefore that
the margin fees were appropriate and helpful in the development of
petitioner's business in the Philippines exclusively. ESSO has not
shown that the remittance to the head office of part of its profits was
made in furtherance of its own trade or business. (See Ratio for ‘test
of deductability’)
FACTS:
 In CTA Case No. 1251, petitioner ESSO deducted from its
gross income for 1959, as part of its ordinary and necessary
business expenses, the amount it had spent for drilling and
exploration of its petroleum concessions. This claim was
disallowed by the respondent Commissioner of Internal
Revenue on the ground that the expenses should be
capitalized and might be written off as a loss only when a
"dry hole" should result.
 ESSO then filed an amended return where it asked for a
refund by reason of its abandonment as dry holes of several
of its oil wells. It also claimed as ordinary and necessary
expenses in the same return the margin fees it had paid to
the Central Bank on its profit remittances to its New York
head office.
 The CIR granted a tax credit only, disallowing the claimed
deduction for the margin fees paid.
 In CTA Case No. 1558, the CIR assessed ESSO a
deficiency income tax for the year 1960 arising from the
disallowance of the margin fees paid by ESSO to the Central
Bank on its profit remittances to its New York head office.
ESSO settled the same by applying as tax credit its
overpayment on its income tax in 1959 and paying
under protest the remaining amount.
 The CIR denied the claims for refund of the overpayment of
its 1959 and 1960 income taxes, holding that the margin fees
paid to the Central Bank could not be considered taxes or
allowed as deductible business expenses.
 ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary
business expenses and therefore still deductible from its
gross income. The fees were paid for the remittance by
ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and
proper for the conduct of its corporate affairs.
ISSUES:
4. Whether or not the margin fees were deductible from
gross income as an ordinary and necessary business
expense
HELD & RATIO:
2. NO, margin fees are not ordinary and necessary business
expense.
a. In the case of Atlas Consolidated Mining and
Development Corporation v. Commissioner of
Internal Revenue, the Court laid down the rules on
the deductibility of business expenses:
(1) The expense must be ordinary and
necessary.
(2) It must be paid or incurred within the
taxable year, and
(3) It must be paid or incurred in carrying on
a trade or business.
 In addition, not only must the taxpayer meet the
business test, he must substantially prove by
evidence or records the deductions claimed under
the law, otherwise, the same will be disallowed.
 The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify
its deduction.
 There are no hard and fast rule in determining
whether an expense is ordinary or necessary but
there are guiding principles worthy of serious
considerations when it comes to conflicting claims:
o Ordinarily, an expense will be considered
'necessary' where the expenditure is
 appropriate and helpful in the development FINAL VERDICT: Petition is denied. CTA’s decision AFFIRMED.
of the taxpayer's business.
o It is 'ordinary' when it connotes a payment,
which is normal in relation to the business of Notes/ Source:
the taxpayer and the surrounding
circumstances. The term 'ordinary' does not Original Digest
require that the payments be habitual or
normal in the sense that the same taxpayer
will have to make them often; the payment 6. Individuals
may be unique or non-recurring to the Sec. 24 (as amended by RA 9504) & 25, Tax Code
particular taxpayer affected.
 Since the margin fees in question were incurred for Ordinary Income
the remittance of funds to petitioner's Head Office in
New York, which is a separate and distinct income Passive Income
taxpayer from the branch in the Philippines, for its Sec. 22 (T) to (Y), Tax Code
disposal abroad, it can never be said therefore that RR 01-2011 (Feb. 24, 2011)
the margin fees were appropriate and helpful in the RR 14-2012 (Nov. 7, 2012)
development of petitioner's business in the
Philippines exclusively or were incurred for purposes
proper to the conduct of the affairs of petitioner's
Capital Gains Tax
Sec. 22 (z) and 39 (B), Tax Code
branch in the Philippines exclusively or for the
purpose of realizing a profit or of minimizing a loss in
12. SUPREME TRANSLINER, INC. vs. BPI FAMILY SAVINGS
the Philippines exclusively. If at all, the margin fees
BANK
were incurred for purposes proper to the conduct of
the corporate affairs of Standard Vacuum Oil
REYES NOTES/ CASE:
Company in New York, but certainly not in the
Philippines.
Note: No Pierre Reyes notes.
 ESSO has not shown that the remittance to the head
office of part of its profits was made in furtherance of
CASE:
its own trade or business. The petitioner merely
presumed that all corporate expenses are necessary
Supreme Transliner obtained a loan from BPI Family Savings Bank,
and appropriate in the absence of a showing that
which was secured by a REM over the lot owned by Spouses
they are illegal or ultra vires. This is error. The public
Alvarez. When the debt was due and demandable, the petitioner was
respondent is correct when it asserts that "the
not able to pay. Foreclosure of the mortgage took place with the
paramount rule is that claims for deductions are a
defendant bank as the highest bidder in the public auction. Before
matter of legislative grace and do not turn on mere
the one-year redemption period expired, the petitioner redeemed the
equitable considerations. The taxpayer in every
property but later on filed a case claiming that the charges were
instance has the burden of justifying the allowance
excessive. The petitioner claimed that the redemption price included
of any deduction claimed."
attorney’s fees, liquidated damages and capital gains tax. The
Supreme Court ruled that as stipulated in the contract, the petitioner
shall bear the burden of paying the attorney’s fees and liquidated Add: Attorney’s Fees (15%) 1,555,906.70
damages. However, with respect to the capital gains tax, the Liquidated Damages (15%) 1,555,906.70
defendant bank shall return the amount corresponding to the amount
Interest on P
paid by the petitioner. In a foreclosure sale, no one shall bear the
burden of paying the capital gains tax because there is no actual 10,372,711.35
transfer of ownership when the property is redeemed before the 1 from 08/07/96 to 04/07/97 1,207,772.58
year period expires. (243 days) at 17.25% p.a.

xxxx
FACTS:
Asset Acquired Expenses:
 Petitioner Supreme Transliner obtained a loan in the amount
of P9.85M from BPI Family Savings Bank, which was
secured by a REM over the lot owned by the Spouses Documentary Stamps 155,595.00
Alvarez. Note: Moises Alvarez held the Managing Director Capital Gains Tax 518,635.57
post in the company. Foreclosure Fee 207,534.23
Registration and Filing Fee 23,718.00
 When unable to pay, the mortgage was extrajudicially Add’l. Registration & Filing 660.00 90
foreclosed and the property was sold to the bank as the
highest bidder in a public auction.
Fee 6,142.79
Interest on P 906,142.79
 Before the expiration of the one-year redemption period, the from 08/07/96 to 04/07/97
petitioner wrote the bank of its intent to redeem the property. (243 days) 105,509.00
at 17.25% p.a.
Cancellation Fee 300.00
 The bank quoted an amount of P15,704,249.12 redemption
price. Below is the statement of account:
Total Amount Due As
Balance of Principal P 9,551,827.64 Of 04/07/97 (Subject to P 15,704,249.12
Add: Interest Due 1,417,761.24 Audit)
Late Payment Charges 155,546.25
 The petitioner redeemed the property based on the quoted
MRI 0.00
amount of P15.70M but filed a complaint against the bank to
Fire Insurance 0.00 recover the allegedly unlawful and excessive charges
Foreclosure Expenses 155,817.23 totaling P5.33M.
Sub-total P 11,280,952.36
Less: Unapplied Payment 908,241.01  The trial court held that petitoner is bound by the terms of the
Total Amount Due As 10,372,711.35 mortgage loan documents which clearly provided for the
payment of the following interest, charges and expenses:
Of 08/07/96 (Auction Date) 18% p.a. on the loan, 3% post-default penalty, 15%
 liquidated damages, 15% attorney’s fees and collection and
legal costs.
 However, on appeal, the CA ruled in favor of the petitioner
that the attorney’s fees and liquidated damages were already
included in the bid price.
 In a separate case, the petitioners-mortgagors raise the
single issue of whether the foreclosing mortgagee
should pay capital gains tax upon execution of the
certificate of sale, and if paid by the mortgagee, whether
the same should be shouldered by the redemptioner.
They specifically prayed for the return of all asset-
acquired expenses consisting of documentary stamps
tax, capital gains tax, foreclosure fee, registration and
filing fee, and additional registration and filing fee
totaling P906,142.79, with 6% interest thereon.
ISSUES:
1. Whether or not the attorney’s fees and liquidated damages
are already included in the bid price?
NO. The attorney’s fees and liquidated damages were not
yet included in the bid price of P10,372,711.35 is clearly
shown by the Statement of Account. On the other hand, par.
23 of the Mortgage Loan Agreement indicated that asset
acquired expenses were to be added to the redemption price
as part of “costs and other expenses incurred” by the
mortgagee bank in connection with the foreclosure sale.
2. CENTRAL ISSUE: Whether or not the capital gains tax shall
be included in the redemption price? In other words, who
bears the burden of paying the capital gains tax?
NO. The capital gains tax shall not be included in the
redemption price. In the redemption of a foreclosed
mortgage, nobody shall pay for the capital gains tax.
In foreclosure sale, there is no actual transfer of the
mortgaged real property until after the expiration of the one-
year redemption period as provided in Act No. 3135 and title
thereto is consolidated in the name of the mortgagee in case
of non-redemption. In the interim, the mortgagor is given the
option whether or not to redeem the real property. The
issuance of the Certificate of Sale does not by itself transfer
ownership.
FINAL VERDICT: Petition is PARTLY GRANTED. BPI Family
Savings Bank, Inc. is hereby ordered to RETURN the amounts
representing capital gains and documentary stamp taxes as reflected
in the Statement of Account To Redeem as of April 7, 1997, to
petitioners Supreme Transliner, Inc., Moises C. Alvarez and Paulita
Alvarez, and to retain only the sum provided in RR No. 4-99 as
documentary stamps tax due on the foreclosure sale..
RR 8-98 (Aug. 25, 1998)
RR 4-99 (March 9, 1999)
RR 13-99 (July 26, 1999)
RR 14-2000 (Nov. 20, 2000)
RR 06-2008 (April 22, 2008)
RR 06-2013 (April 11, 2013)
RMC 37-2012 (Aug. 3, 2012)
13. BIR RULING [DA-029-08]
January 23, 2008
REYES NOTES:
If the title to property is transferred to one spouse as a result of a
court decision in annulment case is the transfer subject to capital
gains tax (CGT)?
No. In BIR RULING DA-029-08 [January 23, 2008], title to a house
and lot was transferred to the husband by virtue of a decision of the
court declaring his marriage with his wife null and void. In BIR Ruling
DA 287-07 [May 8, 2007], title to a condominium unit was transferred
to the wife as a result of an agreement to distribute communal
property executed in the course of annulment proceedings. In both
BIR Rulings, the CIR held that the transfer of the title of the subject
properties are not subject to CGT, as such transfers are equivalent to
conveyance but without monetary consideration, made in
accordance with the Court’s Decision granting parties agreement for
the distribution of communal property.
CASE:
Avila and his ex-wife executed a MOA for the dissolution of
their property relations. Among their agreements is the transfer of the
title of their house and lot to him by virtue of a Court’s Decision
declaring his marriage with his (ex) wife null and void.
W/N the transfer of the title of the subject property to Avila is
subject to CGT.
NO, it is not subject to CGT. Such transfer is equivalent to
a conveyance but without monetary consideration, made in
accordance with the Court's Decision granting parties’
agreement for the distribution of communal property.
FACTS:
 Jaime Avila (Avila) requested exemption from the payment of
donor's tax on the transfer of the title of their house and lot to
him by virtue of a decision of the Court declaring his
marriage with his wife null and void.
 Avila and his ex-wife executed a Memorandum of Agreement
(MOA) for the dissolution of their property relations.
 Among their agreements are as follows:
o Avila waives his one half undivided right and share
over the Condominium Unit in favor of his ex-wife.
o Ex-wife waives her one half undivided right and
share over the house and lot in Parañaque
o That the party in whose favor a right and share is
waived will shoulder the expenses to effect the
transfer thereof
o Ex-wife waives her right and interest over the share
at Punta Fuego, Nasugbu, Batangas and over all the
motor vehicles
ISSUES:
1. W/N Avila is liable for donor's tax on the transfer of the title
of their house and lot to him by virtue of a Court Decision.
2. W/N the transfer of the title of the subject property to
Avila is subject to capital gains tax. (Relevant Issue)
HELD & RATIO:
3. NO. The transfer of title of the properties is not subject to
donor's tax.
a. No donation had taken place when former spouses
adjudicated to themselves separately the properties
which belong to their community property/conjugal
partnership as a consequence of the liquidation of
the partnership.
b. Parties merely segregated and adjudicated for their
own individual and separate ownership the
properties which, from the celebration of their
marriage, rightfully belong to them equally.
c. Since the parties merely appropriated to themselves
their respective shares in the community property,
particularly, the wife waiving all her right and share
to the husband over their house and lot, such
appropriation of the properties is not subject to
donor's tax as there is no donative intent.
4. NO, the transfer of the title of the subject property to
Avila is not subject to capital gains tax.
a. Such transfer is equivalent to a conveyance but
without monetary consideration, made in
accordance with the Court's Decision granting
parties’ agreement for the distribution of
communal property.
.
14. BIR RULING [DA-287-07]
Capital Gains Tax; Distribution of Communal Property not subject to
Capital Gains Tax
CASE:
Nicanor Vergara and Anna Marie Padilla were married with their
property relations governed by Absolute Community Property (ACP).
Anna Marie filed a petition for declaration of nullity of marriage. Both
spouses executed an Agreement on Distribution of Communal
Propety. The Agreement provides that Nicanor is the registered
owner of a condominium unit and that such unit would be transferred
to Anna Marie’s name. RTC granted the petition for declaration of
nullity of marriage, dissolved the parties’ ACP relations, and
approved the Agreement on Distribution of Communal Property.
The relevant issue in this case is whether or not the transfer of title of
the condominium unit to the wife’s name is subject to Capital Gains
Tax.
The Court held that such transfer is not subject to Capital Gains Tax
because the transfer is equivalent to a conveyance but without any
monetary consideration, made in compliance with the Court's
Decision granting the parties' agreement for the distribution of
communal property.
FACTS:
 Nicanor Vergara and Anna Marie Padilla were married
without having executed an ante-nuptial agreement.
 Thus, parties' property relations are governed by the
Absolute Community of Property (ACP).
 Anna Marie, filed a petition for declaration of nullity of
marriage before Quezon City RTC.
 During the pendency of the proceedings, the spouses
executed an Agreement on Distribution of Communal
Property:
o Wherein, parties agreed that the condominium unit
with parking slot (Platinum Condominiums) would
belong to Anna Marie
 Said condominium unit is presently registered under the
name of Nicanor Vergara.
 RTC granted the petition for declaration of nullity of marriage
o Dissolved the parties' ACP relations
o Approved the Agreement on Distribution of
Communal Property (wherein it is the intention of
Anna Marie to transfer the title covering the subject
condominium unit in her name.)
ISSUES:
Whether or not the transfer of title of the condominium unit to Anna
Marie’s name is subject to CAPITAL GAINS TAX.
HELD & RATIO:
NO. The transfer of title of the condominium unit to the wife’s name is
NOT SUBJECT TO CAPITAL GAINST TAX.
 BIR Ruling No. DA-435-00 (Dec. 18, 2000)
o No donation had taken place when former spouses
appropriate to themselves separately the properties
which belong to their community property as a
consequence of the liquidation of the partnership.
o The parties merely segregated and adjudicated for
their own individual and separate ownership the
properties which, from the celebration of their
marriage, rightfully belong to them equally.
NOT SUBJECT TO DONOR’S TAX
 In the instant case, since the parties merely appropriated to
themselves their respective share in the community property,
such appropriation of the properties covered by the
Agreement on distribution thereof is not subject to donor's
tax.
NOT SUBJECT TO CAPITAL GAIN’S TAX
 The transfer of the condominium unit to Anna Marie is
also not subject to capital gains tax, as such transfer is
equivalent to a conveyance but without any monetary
consideration, made in compliance with the Court's
Decision granting the parties' agreement for the
distribution of communal property.
NOT SUBJECT TO DOCUMENTARY STAMP TAX
 Neither is the said transfer subject to documentary stamp tax
since the monetary consideration in the conveyance of said
condominium unit from which tax shall be base is wanting.
FINAL VERDICT: Therefore, the aforestated Agreement executed by
and between Nicanor Vergara and Anna Marie Vergara to transfer
the title covering the subject condominium unit may be registered
with the Register of Deeds without the necessity of paying the
donor's tax, capital gains tax, and documentary stamp tax.

OCWs/ Senior Citizens/ Disabled/
Employees of Foreign Governments
RA 9257, Sec. 4(c) only
15. M.E. Holdings Corporation vs CIR & CTA (March 3, 2008)
REYES NOTES:
Is the 20% sales discount granted by establishments to qualified
senior citizens considered a tax credit or a tax deduction?
Under RA 9257, or the Expanded Senior Citizens Act of 2003,
starting taxable year 2004, the 20% sales discount shall be treated
as a tax deduction and no longer as a tax credit.
CASE:
M.E. Holding Corporation filed its 1995 Corporate Annual Income
Tax Return and treated the 20% sales discount it granted to qualified
senior citizens as deductions from gross income relying on BIR’s RR
2-94 which treats the sales discount as tax deductions. But later, M.E
argued that such should be treated as tax credit as clearly provided
under RA 7432. Thus, ME sent a letter to BIR claiming that it
overpaid its income tax due to BIR’s erroneous interpretation of RA
7432. Court ruled that M.E. is entitled to treating such sales discount
as tax credit. BUT SC said starting taxable year 2004, the 20% sales
discount granted by establishments to qualified senior citizens is to
be treated as tax deduction, no longer as tax credit due to the
passage of RA 9257 which amended RA 7432.
FACTS:
 RA 7432, An Act to Maximize the Contribution of Senior
Citizens to Nation Building, Grant Benefits and Special
Privileges and for other Purposes. It granted, among
others, a 20% sales discount on purchases of medicines
by qualified senior citizens.
 M.E. Holding Corporation (M.E.) filed its 1995 Corporate
Annual Income Tax Return, claiming the 20% sales discount
it granted to qualified senior citizens.
o M.E treated the discount as deductions from gross
income purportedly in accordance with RR 2-94,
Section 2(i) of the BIR which states:
i.Tax Credit- refers to the amount representing the
20% discount granted to qualified senior citizens by
all establishments relative to their utilization of
transportation services, hotels and similar lodging
establishments, restaurants, drugstores, recreation
centers, theaters, cinema houses, concert halls,
circuses, carnivals and other similar places of
culture, leisure, and amusement, which discount
shall be deducted by the said establishments
from their gross income for income tax purposes
and from their gross sales for value-added tax or
other percentage tax purposes.
 ME claimed deductions worth Php603,424. It filed the return
under the protest, arguing that the discount to senior citizens
should be treated as tax credit as provided under Sec 4(a) of
RA 7432 and not as mere deductions from ME’s gross
income as provided for in RR 2-94.
o Section 4(a) of RA 7432—The senior citizens shall
be entitled to the following:
a) The grant of 20% discount from all
establishments relative to the utilization of
transportation services, hotels and similar
lodging establishments, restaurants and
recreation centers and purchase of medicines
anywhere in the country: Provided, that private
establishments may claim the cost as tax
credit.
 ME sent BIR a letter-claim stating that it overpaid its income
tax owing to the BIR’s erroneous interpretation of Sec 4(a) of
RA 7432 and insisted that it should be treated as tax credit
NOT as deductions.
 CTA ruled in favor of ME and ordered respondent to refund
M.E representing the overpaid income tax since the 20%
sales discount grated to qualified senior citizens should be
treated as tax credit and not as item deduction from the
gross income or sales, pointing out that Sec 4(a) of RA 7432
was unequivocal on this point. It ruled that Sec 2(i) of RR 2-
 94 contravenes the clear provisio of RA 7432 prescribing
that the 20% sales discount should be claimed as tax credit.
RA 7432 is a law that necessarily prevails over an
administrative issuance such as RR-294.
o HOWEVER, victory of ME before CTA was watered
down by CTA’s declaration that while the
independent auditor MR hired found the amount Php
603,923.46 as having been granted as sales
discount to qualified senior citizens, ME failed to
properly support the claimed discount with
corresponding cash slips. Hence, CTA disallowed
Php 241, 348 unsupported claims and consequently
lowered refundable amount to Php122, 195.74
ISSUES:
5. Whether or not the 20% sales discount granted by
establishments qualified to senior citizens should be
considered as tax credit? – Yes for M.E. BUT note that
because of the passage of RA 9257 on February 26, 2004
amending RA 7432, sales discount are treated as tax
deductions starting taxable year of 2004.
HELD & RATIO:
The 20% sales discount to senior citizens may be claimed by an
establishment owner as tax credit. RA 7432, the applicable law, is
unequivocal on this. The implementing RR 2-94 that considers such
discount as mere deductions to the taxpayer’s gross income or gross
sales clearly clashes with the clear language of RA 7432, the law
sought to be implemented.
ME is entitled as matter of law to claim as tax credit the full amount
of the sales discount granted to senior citizens. Jurisprudence
provides that “cost” found in Sec 4(a) of RA 7432 as referring to the
amount of the 20% discount extended by a private establishments to
senior citizens in their purchase of medicines. Court ruled that it is
the Government that should fully shoulder the cost of the sales
discount granted to senior citizens. Hence, it is erroneous to construe
the word “cost” to mean the theoretical acquisition cost of medicines
purchased by qualified senior citizens. Hence, ME is entitled to a tax
credit equivalent to the actual 20% sales discount it granted to
qualified senior citizens.
It ought to be noted, however, that on February 26, 2004, RA
9257, or The Expanded Senior Citizens Act of 2003, amending
RA 7432, was signed into law, ushering in, upon its effectivity
on March 21, 2004, a new tax treatment for sales discount
purchases of qualified senior citizens of medicines. Sec. 4(a) of
RA 9257 provides:
SEC. 4. Privileges for the Senior Citizens. – The senior citizens
shall be entitled to the following:
(a) the grant of twenty percent (20%) discount from all
establishments relative to the utilization of services in hotels
and similar lodging establishments, restaurants and recreation
centers, and purchase of medicines in all establishments for the
exclusive use or enjoyment of senior citizens, x x x;
xxxx
The establishment may claim the discounts granted under (a),
(f), (g) and (h) as tax deduction based on the net cost of the
goods sold or services rendered: Provided, That the cost of the
discount shall be allowed as deduction from gross income for
the same taxable year that the discount is granted. Provided,
further, That the total amount of the claimed tax deduction net
of value added tax if applicable, shall be included in their gross
sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal
Revenue Code, as amended. (Emphasis supplied.)
Conformably, starting taxable year 2004, the 20% sales discount
granted by establishments to qualified senior citizens is to be
treated as tax deduction, no longer as tax credit.14
FINAL VERDICT: WHEREFORE, in view of the foregoing, petitioner
M.E.'s claim for refund is hereby PARTIALLY GRANTED in the form
of a tax credit. Respondent Commissioner of Internal Revenue is
ORDERED to issue a tax credit certificate in favor of M.E. in the
amount of PhP 151,201.71.
16. Manila Memorial Park v. DSWD, DOF
Senior Citizens
REYES NOTES/ CASE:
No Reyes Notes. This is a long digest.
PET wanted Section 4 of RA 7432 and regulations issued by the
DSWD and the DOF be declared unconstitutional. It provides that
allow business establishments to claim the 20% discount given to
senior citizens as a tax deduction. PET were assailing that private
property shall not be taken for public use without just compensation.
The issue is w/n the Sec. 4 of RA 7432 and the IRR are
unconstitutional. The Court held that these are constitutional. It is an
exercise of police power of the State, has already been settled
in Carlos Superdrug Corporation. The discount is treated as a
deduction, a tax-deductible expense that is subtracted from the
gross income and results in a lower taxable income. The law is a
legitimate exercise of police power.
PETITION IS DISMISSED
FACTS:
 Petitioners assail the constitutionality of Section 4 of
Republic Act (RA) No. 7432,3 as amended by RA 9257,4 and
the implementing rules and regulations issued by the DSWD
and DOF insofar as these allow business establishments to
claim the 20% discount given to senior citizens as a tax
deduction.
 DSWD likewise issued its own Rules and Regulations
Implementing RA 9257
o PET filed the present recourse, praying that Section
4 of RA 7432, as amended by RA 9257, and the
implementing rules and regulations issued by the
DSWD and the DOF be declared unconstitutional
insofar as these allow business establishments to
claim the 20% discount given to senior citizens as a
tax deduction; that the DSWD and the DOF be
prohibited from enforcing the same; and that the tax
credit treatment of the 20% discount under the
former Section 4 (a) of RA 7432 be reinstated.
 PET:
o engaged in the business of providing funeral and
burial services
o not questioning the 20% discount granted to senior
citizens but are only assailing the constitutionality of
the tax deduction scheme prescribed under RA 9257
and the implementing rules and regulations issued
by the DSWD and the DOF
o tax deduction scheme contravenes Article III,
Section 9 of the Constitution, which provides that:
"[p]rivate property shall not be taken for public use
without just compensation.
o cite Central Luzon Drug Corporation, 12 where it was
ruled that the 20% discount privilege constitutes
taking of private property for public use which
requires the payment of just compensation
 RES:
o constitutionality of RA 9257 and its implementing
rules and regulations, respondents contend that
petitioners failed to overturn its presumption of
constitutionality.
o Carlos Superdrug Corporation v. Department of
Social Welfare and Development,14 where it was
acknowledged that the tax deduction scheme does
not meet the definition of just compensation. (PET
also seeks the reversal of this decision)
ISSUES:
1. WHETHER SECTION 4 OF REPUBLIC ACT NO. 9257 AND
X X X ITS IMPLEMENTING RULES AND REGULATIONS,
INSOFAR AS THEY PROVIDE THAT THE TWENTY
PERCENT (20%) DISCOUNT TO SENIOR CITIZENS MAY
BE CLAIMED AS A TAX DEDUCTION BY THE PRIVATE
 ESTABLISHMENTS, ARE INVALID AND
UNCONSTITUTIONAL
HELD & RATIO:
o The validity of the 20% senior citizen discount and tax
deduction scheme under RA 9257, as an exercise of
police power of the State, has already been settled in
Carlos Superdrug Corporation.
o Carlos Superdrug Corporation case
o Compelling drugstore owners and establishments to
grant the discount will result in a loss of profit and
capital because 1) drugstores impose a mark-up of
only 5% to 10% on branded medicines; and 2) the
law failed to provide a scheme whereby drugstores
will be justly compensated for the discount.
o The discount is treated as a deduction, a tax-
deductible expense that is subtracted from the
gross income and results in a lower taxable income.
Stated otherwise, it is an amount that is allowed by
law to reduce the income prior to the application of
the tax rate to compute the amount of tax which is
due.
o being a tax deduction, the discount does not reduce
taxes owed on a peso for peso basis but merely
offers a fractional reduction in taxes owed.
o A tax deduction does not offer full reimbursement of
the senior citizen discount. As such, it would not
meet the definition of just compensation.
o Having said that, this raises the question of whether
the State, in promoting the health and welfare of a
special group of citizens, can impose upon private
establishments the burden of partly subsidizing a
government program. The Court believes so.
o The Senior Citizens Act was enacted primarily to
maximize the contribution of senior citizens to
nation-building, and to grant benefits and privileges
to them for their improvement and well-being as the
State considers them an integral part of our society
o the law provides that business establishments
extending the twenty percent discount to senior
citizens may claim the discount as a tax deduction.
The law is a legitimate exercise of police power.
o For purposes of reimbursement, the law states that
the cost of the discount shall be deducted from
gross income, the amount of income derived from
all sources before deducting allowable expenses,
which will result in net income.
o We, thus, found that the 20% discount as well as the
tax deduction scheme is a valid exercise of the
police power of the State.
o No compelling reason has been proffered to overturn,
modify or abandon the ruling in Carlos Superdrug
Corporation.
o However, it is a settled rule that the acquisition of
title or total destruction of the property is not
essential for "taking" under the power of eminent
domain to be present
o although the private property owner is not divested
of ownership or possession, payment of just
compensation is warranted because of the burden
placed on the property for the use or benefit of the
public.
o
o The 20% senior citizen discount is an exercise of police
power.
o The 20% senior citizen discount has not been shown
to be unreasonable, oppressive or confiscatory.
o we note that petitioners hypothesize, consistent with
our previous ratiocinations, that the discount will
force establishments to raise their prices in order to
compensate for its impact on overall profits or
income/gross sales. The general public, or those not
belonging to the senior citizen class, are, thus, made
to effectively shoulder the subsidy for senior citizens.
This, in petitioners’ view, is unfair.
o Congress must be given sufficient leeway in
formulating welfare legislations given the enormous
challenges that the government faces relative to,
 among others, resource adequacy and
administrative capability in implementing social
reform measures which aim to protect and uphold
the interests of those most vulnerable in our society.
o In fine, without the requisite showing of a clear and
unequivocal breach of the Constitution, the validity of
the assailed law must be sustained.
o First, the assailed law, by imposing the senior citizen
discount, does not take any of the properties used
by a business establishment like, say, the land on
which a manufacturing plant is constructed or the
equipment being used to produce goods or services.
o Second, rather than taking specific properties of a business
establishment, the senior citizen discount law merely
regulates the prices of the goods or services being sold to
senior citizens by mandating a 20% discount.
o Third, because the law impacts the prices of the goods or
services of a particular establishment relative to its sales to
senior citizens, its profits or income/gross sales are affected.
o Fourth, when the law imposes the 20% discount in favor of
senior citizens, it does not prevent the business
establishment from revising its pricing strategy.
o Court is not the proper forum to debate the economic
theories or realities that impelled Congress to shift from the
tax credit to the tax deduction scheme.
o The shift from the tax credit to tax deduction scheme is a
policy determination by Congress and the Court will respect
it for as long as there is no showing, as here, that the subject
regulation has transgressed constitutional limitations.
o we cannot assume that the 20% discount results in a
permanent reduction in profits or income/gross sales, much
less that business establishments are forced to operate at a
loss under the assailed law.
FINAL VERDICT: WHEREFORE PETITION IS DISMISSED
Notes/ Source:
SECTION 4. Privileges for the Senior Citizens. – The senior citizens
shall be entitled to the following:
a) the grant of twenty percent (20%) discount from all establishments
relative to utilization of transportation services, hotels and similar
lodging establishment[s], restaurants and recreation centers and
purchase of medicine anywhere in the country: Provided, That
private establishments may claim the cost as tax credit;
b) a minimum of twenty percent (20%) discount on admission fees
charged by theaters, cinema houses and concert halls, circuses,
carnivals and other similar places of culture, leisure, and
amusement;
c) exemption from the payment of individual income taxes: Provided,
That their annual taxable income does not exceed the property level
as determined by the National Economic and Development Authority
(NEDA) for that year;
d) exemption from training fees for socioeconomic programs
undertaken by the OSCA as part of its work;
e) free medical and dental services in government establishment[s]
anywhere in the country, subject to guidelines to be issued by the
Department of Health, the Government Service Insurance System
and the Social Security System;
f) to the extent practicable and feasible, the continuance of the same
benefits and privileges given by the Government Service Insurance
System (GSIS), Social Security System (SSS) and PAG-IBIG, as the
case may be, as are enjoyed by those in actual service.
Revenue Regulations (RR) No. 02-94 was issued to implement RA
7432. Sections 2(i) and 4 of RR No. 02-94 provide:
Sec. 2. DEFINITIONS. – For purposes of these regulations: i. Tax
Credit – refers to the amount representing the 20% discount granted
to a qualified senior citizen by all establishments relative to their
utilization of transportation services, hotels and similar lodging
establishments, restaurants, drugstores, recreation centers, theaters,
cinema houses, concert halls, circuses, carnivals and other similar
places of culture, leisure and amusement, which discount shall be
deducted by the said establishments from their gross income for
income tax purposes and from their gross sales for value-added tax
or other percentage tax purposes. x x x x Sec. 4.
RECORDING/BOOKKEEPING REQUIREMENTS FOR PRIVATE
ESTABLISHMENTS. – Private establishments, i.e., transport
services, hotels and similar lodging establishments, restaurants,
recreation centers, drugstores, theaters, cinema houses, concert
halls, circuses, carnivals and other similar places of culture[,] leisure
and amusement, giving 20% discounts to qualified senior citizens are
required to keep separate and accurate record[s] of sales made to
senior citizens, which shall include the name, identification number,
gross sales/receipts, discounts, dates of transactions and invoice
number for every transaction. The amount of 20% discount shall be
deducted from the gross income for income tax purposes and from
gross sales of the business enterprise concerned for purposes of the
VAT and other percentage taxes.
RR 1-2009 (Dec. 9, 2008)
RR 7-2010 (July 20, 2010)
RR 1-2011 (Feb. 24, 2011)
RMC 031-2013 (April 12, 2013)
Personal and additional exemptions/
PERA
Sec. 35 (A), (B), (C), and (D), Tax Code
RA 10165, Sec. 3-5 & 22-24 only
RA 9504
RA 9505
17. CARMELINO PANSACOLA v. COMMISSIONER OF
INTERNAL REVENUE
Personal and additional exemptions
CASE:
Petitioner Pansacola filed his income tax return for the
taxable year 1997, and paid the tax due thereon in April 1998. He
sought refund of an alleged overpayment on the ground that Sec. 35
of the NIRC had increased the additional and personal exemptions.
The issue is whether or not the exemptions under Sec. 35, which
took effect on January 1, 1998, could be availed of for the taxable
year 1997.
The Court held against the petitioner. Deductions for income
tax purposes partake the nature of tax exemptions, hence, must be
strictly construed against the taxpayer. For the purpose of
determining the tax due from a taxpayer, what is considered is his
status and qualified dependents at the close of the taxable year, and
not at the time the return is filed and tax due is paid.
In this case, the NIRC made no reference that the personal
and additional exemptions shall apply on income accrued before
January 1, 1998. Therefore, petitioner cannot claim such refund.
[Reyes Notes on the rationale behind the personal and
additional exemptions] Exemptions are fixed at arbitrary amounts
intended to substitute for the disallowance of personal or living
expenses as deductible items from the taxable income of certain
individual taxpayers. The amounts represent roughly the equivalent
of the taxpayer’s minimum subsistence and those of his dependents.
FACTS:
 Petitioner Carmelino Pansacola filed his income tax return for the
taxable year 1997, and paid the tax due thereon in April 1998.
 He claimed that there was an overpayment of P5,950.00 in his
income tax return (based on an increased personal and
additional exemptions found in the NIRC), so he asked for a
refund which was denied by the BIR. CTA also denied his claim.
 CTA decided that
o the increased exemptions claimed by petitioner were not
yet available for the taxable year 1997, because all
provisions of the NIRC took effect on January 1, 1998
only. Petitioner’s exemptions were determined as of
December 31, 1997;
o the fixed character of personal and additional
exemptions does not necessarily mean that these were
time bound.
 The petitioner posits that
o the personal and additional exemptions are of a fixed
character based on Section 35 of the NIRC, and as ruled
by Umali v. Estanislao, these exemptions are fixed
amounts to which an individual taxpayer is entitled;
 o the availability of these exemptions does not depend on
the taxpayer’s profession, trade or business for a
particular taxable period;
o CTA erred in ruling that the increased exemptions were
meant to be applied beginning taxable year 1998.
ISSUE: Could the exemptions under Sec. 35 of the NIRC, which took
effect on January 1, 1998, be availed of for the taxable year 1997?
o Petitioner’s additional exemptions had not yet
accrued as of December 31, 1997, the last day of his
taxable year. Petitioner’s taxable income covers his
income for the calendar year 1997.
o Furthermore, tax laws have prospective application,
unless it is expressly provided to apply retroactively.
FINAL VERDICT: Petition is denied.

HELD & RATIO: No, the exemptions under Sec. 35 have no

retroactive application, hence, cannot be availed of by petitioner. RR 17-2011 (Oct. 27, 2011)
• Personal and additional exemptions under Sec. 35 of the NIRC
are fixed amounts to which certain individual taxpayers are
entitled. They are the theoretical personal, living and family 7. Partnerships
expenses of an individual allowed to be deducted from the gross Sec. 26 & 73 (D), Tax Code
net income of an individual taxpayer. They are predetermined by
the lawmakers as provided under the NIRC. RMC 89-2012 (Dec. 27, 2012)
o Rationale behind personal and additional RR 2-2010 (Feb. 18, 2010)
exemptions [Reyes Notes]: Exemptions are fixed at
arbitrary amounts intended to substitute for the 8. Corporations
disallowance of personal or living expenses as deductible
items from the taxable income of certain individual Sections 27 (A) & (D), and 28, Tax Code as amended by TA 9294
taxpayers. The amounts represent roughly the equivalent and RA 9337
of the taxpayer’s minimum subsistence and those of his
dependents.
• Deductions for income tax purposes partake the nature of tax
exemptions, hence, must be strictly construed against the
(1) Domestic Corporations
taxpayer, and cannot be allowed unless granted in the most Ordinary Income
categorical and explicit language.
o For the purpose of determining the tax due from an Passive Income
individual taxpayer, what is considered is his status and
qualified dependents at the close of the taxable year 18. CHINA BANKING CORPORATION v. CIR (2013)
and not at the time the return is filed and the tax due
thereon is paid. REYES NOTES:
o Consequently, the corresponding allowable None
deductions, if any, had already been determined as of the
end of the calendar year. CASE:
o The NIRC made no reference that the personal China Banking Corporation (CBC) paid a total of P93,119,433.50 as
and additional exemptions shall apply on income gross receipts tax for the four quarters of 1996. CBC included the
earned before January 1, 1998. 20% final withholding tax on its passive interest income.

In 1996, CTA rendered a Decision entitled Asian Bank Corporation v.
Commissioner of Internal Revenue, (ASIAN BANK v. CIR) that the
20% final withholding tax on a bank’s passive interest income should
NOT form part of its taxable gross receipts. On the strength of the
aforementioned decision, CBC filed a claim for refund of the alleged
overpaid GRT for the four (4) quarters of 1996 in the aggregate
amount of P6,646,829.67.
CTA: rendered a Decision agreeing with petitioner that the 20% final
withholding tax on interest income does not form part of its taxable
gross receipts. However, the CTA dismissed petitioner’s claim for for
its failure to prove that the 20% final withholding tax forms part of its
1996 taxable gross receipts. (Insufficiency of Evidence)
ISSUE: Whether or not the 20% final withholding tax on a bank’s
passive interest income should be excluded from its taxable gross
receipts.
NO, it should not be excluded.
- ASIAN BANK v. CIR has an erroneous ruling. It erroneously
interpreted Section 4(e) of RR 12-80. It cited Section 4(e) when it
was no longer the applicable revenue regulation. The RR applicable
at the time the tax court decided Asia Bank was RR 17-84, not RR
12-80.
- "Gross receipts" must be understood in its plain and ordinary
meaning. SC ruled that gross receipts should be interpreted as the
whole amount received as interest, without deductions;
otherwise, if deductions were to be made from gross receipts, it
would be considered as "net receipts."
- CBC failed to point to any specific provision of law allowing the
deduction, exemption or exclusion from its taxable gross receipts, of
the amount withheld as final tax. Besides, the exclusion sought by
petitioner of the 20% final tax on its passive income from the
taxpayer’s tax base constitutes a tax exemption, which is highly
disfavored
FACTS:
 For the four quarters of 1996, China Banking Corporation
(CBC) paid a total of P93,119,433.50 as gross receipts tax.
o CBC included the 20% final withholding tax on its
passive interest income.
 January 30, 1996: CTA rendered a Decision entitled Asian
Bank Corporation v. Commissioner of Internal Revenue, that
the 20% final withholding tax on a bank’s passive interest
income should NOT form part of its taxable gross receipts.
o April 20, 1998: On the strength of the
aforementioned decision, CBC filed a claim for
refund of the alleged overpaid GRT for the four (4)
quarters of 1996 in the aggregate amount of
P6,646,829.67
 CBC filed a Petition for Review with the CTA.
o November 8, 2000: CTA rendered a Decision
agreeing with petitioner that the 20% final
withholding tax on interest income does not form
part of its taxable gross receipts.
o However, the CTA dismissed petitioner’s claim for its
failure to prove that the 20% final withholding tax
forms part of its 1996 taxable gross receipts.
(DISMISSED for Insufficiency of Evidence)
 Appeal and MR with CA DENIED.
o China Banking Corporation vs. Court of Appeals
(2003) - ruled that the Tax Court:
 Asia Bank v. CIR (1996) erroneously
interpreted Section 4(e) of RR 12-80
 It cited Section 4(e) when it was no longer
the applicable revenue regulation. The RR
applicable at the time the tax court decided
Asia Bank was RR 17-84, not RR 12-80.
ISSUES:
1. Whether or not the 20% final withholding tax on a bank’s
passive interest income should be excluded from its taxable
gross receipts.
HELD & RATIO:
1. NO, it should not be excluded from its taxable gross receipts.
The CA has already resolved the issue of whether the 20%
final withholding tax should form part of the total gross
receipts for purposes of computing the GRT.
 China Banking Corporation v. Court of Appeals
(2003) ruled that the amount of interest income
withheld, in payment of the 20% final withholding
tax, forms part of the bank’s gross receipts in
computing the GRT on banks.
• *1996: Asian Bank Corporation v. Commissioner of
Internal Revenue (1996) - erroneous ruling. The RR
applicable at the time the tax court decided Asia Bank was
RR 17-84, not RR 12-80.
• 2001: Far East Bank & Trust Co. v. Commissioner and
Standard Chartered Bank v. Commissioner, both
promulgated on 16 November 2001 - reversed ruling of
Asian Bank - ruled that the final withholding tax forms
part of the bank’s gross receipts in computing the
gross receipts tax.
• (1) The tax court held that Section 4(e) of Revenue
Regulations 12-80 did not prescribe the computation of
the gross receipts but merely authorized "the
determination of the amount of gross receipts on the
basis of the method of accounting being used by the
taxpayer”
• (2) The exclusion of the final withholding tax from
gross receipts operates as a tax exemption which the
law must expressly grant. No law provides for such
exemption.
• (3) Section 7(c) of Revenue Regulations No. 17-84
had already superseded Section 4(e) of Revenue
Regulations No. 12-80.
• Notably, this Court, in the same case, held that under
RR Nos. 12-80 and 17-84, the Bureau of Internal
Revenue (BIR) has consistently ruled that the term
gross receipts do not admit of any deduction. It
emphasized that interest earned by banks, even if
subject to the final tax and excluded from taxable
gross income, forms part of its gross receipt for GRT
purposes. The interest earned refers to the gross
interest without deduction, since the regulations do not
provide for any deduction.
• 2003: Commissioner of Internal Revenue v. Solidbank
Corporation (2003) - held that "gross receipts" refer to the
total, as opposed to the net, income. These are, therefore,
the total receipts before any deduction for the expenses of
management.
• 2005: Commissioner of Internal Revenue v. Bank of
Commerce (2005) - adhered to the ruling that the term
"gross receipts" must be understood in its plain and
ordinary meaning. In this case, we ruled that gross receipts
should be interpreted as the whole amount received as
interest, without deductions; otherwise, if deductions were
to be made from gross receipts, it would be considered as
"net receipts."
• As commonly understood, the term "gross receipts"
means the entire receipts without any deduction.
Deducting any amount from the gross receipts
changes the result, and the meaning, to net receipts.
Any deduction from gross receipts is inconsistent with
a law that mandates a tax on gross receipts, unless
the law itself makes an exception.
• Highly refined and technical tax concepts have been
developed by the accountant and legal technician
primarily because of the impact of federal income tax
legislation. However, this in no way should affect or
control the normal usage of words in the construction
of our statutes; x x x Under the ordinary basic methods
of handling accounts, the term gross receipts, in the
absence of any statutory definition of the term, must
be taken to include the whole total gross receipts
without any deductions, x x x. (Supreme Court of
Pennsylvania in Commonwealth of Pennsylvania v.
Koppers Company, Inc)
• 2006: Commissioner of Internal Revenue v. Bank of the
Philippine Islands (2006) - ruled that "the legislative intent
to apply the term in its ordinary meaning may also be
surmised from a historical perspective of the levy on gross
receipts. From the time the gross receipts tax on banks
was first imposed in 1946 under R.A. No. 39 and
 throughout its successive reenactments, the legislature
has not established a definition of the term ‘gross receipts.’
Absent a statutory definition of the term, the BIR had
consistently applied it in its ordinary meaning, i.e., without
deduction. On the presumption that the legislature is
familiar with the contemporaneous interpretation of a
statute given by the administrative agency tasked to
enforce the statute, subsequent legislative reenactments of
the subject levy sans a definition of the term ‘gross
receipts’ reflect that the BIR’s application of the term
carries out the legislative purpose.
• In sum, all the aforementioned cases are one in saying
that "gross receipts" comprise "the entire receipts
without any deduction." Clearly, then, the 20% final
withholding tax should form part of petitioner’s total
gross receipts for purposes of computing the GRT.
• Also worth noting is the fact that petitioner’s reliance on
Section 4 (e) of RR 12-80 is misplaced as the same was
already superseded by a more recent issuance, RR No.
17-84.
• Revenue Regulations No. 12-80, issued on
November 7, 1980, had been superseded by
Revenue Regulations No. 17-84 issued on October
12, 1984. Section 4 (e) of Revenue Regulations No.
12-80 provides that only items of income actually
received shall be included in the tax base for
computing the GRT.
• On the other hand, Section 7 (c) of Revenue
Regulations No. 17-84 includes all interest income
in computing the GRT. (Commissioner of Internal
Revenue v. Citytrust Investment Phils. Inc. 2006)
• Significantly, the Court even categorically stated in the
aforementioned case that there is an implied repeal of
Section 4 (e). It held that there exists a disparity
between Section 4 (e) of RR No. 12-80, which
imposes the GRT only on all items of income actually
received (as opposed to their mere accrual) and
Section 7 (c) of RR No. 17-84, which includes all
interest income (whether actual or accrued) in
computing the GRT. Plainly, RR No. 17-84, which
requires interest income, whether actually received or
merely accrued, to form part of the bank’s taxable
gross receipts, should prevail.
• All told, petitioner failed to point to any specific
provision of law allowing the deduction, exemption or
exclusion from its taxable gross receipts, of the
amount withheld as final tax. Besides, the exclusion
sought by petitioner of the 20% final tax on its passive
income from the taxpayer’s tax base constitutes a tax
exemption, which is highly disfavored. A governing
principle in taxation states that tax exemptions are to
be construed in strictissimi juris against the taxpayer
and liberally in favor of the taxing authority and should
be granted only by clear and unmistakable terms.
FINAL VERDICT: Petition is denied. CA decision is AFFIRMED.
Notes/ Source:
Section 7. Nature and Treatment of Interest on Deposits and Yield
on Deposit Substitutes. –
(a) The interest earned on Philippine Currency bank deposits and
yield from deposit substitutes subjected to the withholding taxes in
accordance with these regulations need not be included in the gross
income in computing the depositor’s investor’s income tax liability. x
xx
(b) Only interest paid or accrued on bank deposits, or yield from
deposit substitutes declared for purposes of imposing the withholding
taxes in accordance with these regulations shall be allowed as
interest expense deductible for purposes of computing taxable net
income of the payor.
(c) If the recipient of the above-mentioned items of income are
financial institutions, the same shall be included as part of the tax
base upon which the gross receipt tax is imposed.
Revenue Regulations No. 17-84 categorically states that if the
recipient of the above-mentioned items of income are financial
institutions, the same shall be included as part of the tax base
upon which the gross receipts tax is imposed. x x x.
Capital Gains Tax
RR 4-99 (March 9, 1999)
RR 06-2008 (April 22, 2008)
(2) Resident Foreign Corporations
Sec. 28 (A), Tax Code as amended by RA 9294
In general
International Carrier
RA No. 10378 (March 7, 2013)
18. AIR NEW ZEALAND v. CIR
CTA Case, January 30, 2008
REYES NOTES:
ABC Airlines is an off-line international carrier selling passage
documents through an independent sales agent in the
Philippines. Is ABC engaged in trade or business in the
Philippines and, as such, subject to the corporate income tax on
resident foreign corporations?
In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and
intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character.
Here, ABC maintained a general sales agent and it was engaged in
selling or issuing tickets, which is considered the main lifeblood of an
airline.
The absence of flight operations to and from the Philippines is not
determinative of the source of income for purposes of ascertaining
income tax liability. It is sufficient that the income is derived from
activity within the Philippine territory. For the source of income to be
considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In ABC’s case,
the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here in the country and the
payments for fares were also made with Philippine currency. The site
of the source of payments is the Philippines.
CASE:
Air New Zealand is a foreign corporation existing and organized
under the laws of New Zealand. Air New Zealand does not maintain
flight operations from and to the Philippines. However, it has a
general sales agent in the Philippines, Aerotel, which sells air tickets
covering off-line flights of Air New Zealand. In other words, Air New
Zealand, through Aerotel, sells air tickets in the Philippines with
flights between two points outside the Philippines. Now, Air New
Zealand claims refund in the amount of P257,698 as tax returns on
the Gross Philippine Billings it paid arguing that it is not a resident
foreign corporation hence not subject to income tax.
Air New Zealand is a resident foreign corporation. The absence of
flight operations to and from the Philippines is not determinative of
the source of income for purposes of ascertaining income tax liability.
It is sufficient that the income is derived from activity within the
Philippine territory. Air New Zealand is however NOT subject to
income tax at 32% under the NIRC but at 1 ½ % under RP-New
Zealand Tax Treaty.
FACTS:
 Air New Zealand, petitioner herein, is a foreign corporation
organized and existing under the laws of New Zealand with
principal office at New Zealand.
 As an off-line international air carrier having no landing rights
in the Philippines, Air New Zealand does not maintain flight
operations to and from the Philippines. It is also not
registered with the SEC as a corporation and therefore not
licensed to do business in the Philippines.
Air New Zealand, though, has a general sales agent in the
Philippines, Aerotel Limited Corporation, which sells passage
documents for compensation or commission covering off-line flights
of Air New Zealand.
(Note: Off-line international air carrier here means that it does
not maintain any flight to and from the Philippines but it sells air
tickets through a general sales agent in the Philippines between
two points outside the Philippines.)
 Air New Zealand, through Aerotel, filed its Quarterly Income
Tax Returns on the Gross Philippine Billings for the 1 st and
2nd quarters of taxable year 2002 and paid the total amount
due of P257,698.
 Now, Air New Zealand claims refund with the CIR in the
amount abovementioned arguing that it is not a resident
foreign corporation and therefore NOT subject to:
a. 32% regular income tax on taxable income under
Section 28(a)(1) of the NIRC
b. 1 ½ % tax pursuant to the RP-New Zealand Tax Treaty
 Air New Zealand further argues that the sale of passage
documents (air tickets) is not Philippine-source income;
hence, not subject to income tax.
ISSUE: Whether or not Air New Zealand, as an offline
international carrier selling passage documents through an
independent sales agent in the Philippines, is engaged in trade
or business in the Philippines subject to corporate income tax
on resident foreign corporations, either at 32% under the NIRC
or at 1 ½ % RP-New Zealand Tax Treaty?
HELD & RATIO:
1. YES. Air New Zealand is engaged in trade or business in
the Philippines subject to corporate income tax on
resident corporations. However, it is NOT subject to
income tax at 32% under the NIRC BUT at 1 ½ % under
RP-New Zealand Tax Treaty.
 Air New Zealand is a resident foreign corporation engaged in
trade or business in the Philippines and must be subject to
income tax.
 The absence of flight operations to and from the Philippines
is not determinative of the source of income for purposes of
ascertaining income tax liability.
 It is sufficient that the income is derived from activity
within the Philippine territory. Therefore, petitioner is a
resident foreign corporation doing business in the
Philippines.
 The definition of gross income in the Tax Code is broad and
comprehensive to include proceeds from sales of transport
documents. The words “income from any source whatever”
disclose a legislative policy to include all income not
expressly exempted within the class of taxable income under
our laws. (This case cited CIR v. British Overseas Airways
Corporation which stated the same ruling herein.)
FINAL VERDICT: Since petitioner already paid its income tax
liabilities for taxable year 2002 at the rate of 1 ½ % of gross income,
the payment is correct and therefore no refundable amount is due.
Petition is DENIED.
19. COMMISSIONER OF INTERNAL REVENUE v. BRITISH
OVERSEAS AIRWAYS CORPORATION and COURT OF TAX
APPEALS
CASE:
BOAC is a 100% British Government-owned corporation
existing under the laws of UK. It operates air transportation service
and sells transportation tickets over the routes of the other airline
members. CIR assessed BOAC for deficiency income taxes covering
the years 1959 to 1963 and for 1968 to 1971. BOAC paid under
protest. This deficiency stems from its unpaid alleged taxes for being
a resident foreign corporation and from having revenues from sales
of tickets which are allegedly from Philippine sources. The Court
ruled that BOAC is a foreign resident corporation. Even if BOAC just
had agents in the Philippines for its selling tickets, its regular sale of
tickets, its main activity, is the very lifeblood of the airline business,
the generation of sales being the paramount objective. There should
be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the
assessments. A resident foreign corporation is one engaged in trade
or business in the Philippines as the Tax Code provides. The
definition does not have a specific criterion, only that there must be
continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a
temporary character. Therefore, the revenues from sales of tickets
are from Philippine sources so these are taxable under our income
laws. For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here
in Philippine currency. The site of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth
should share the burden of supporting the government.
FACTS:
 BOAC is a 100% British Government-owned corporation
existing under the laws of UK, engaged in the international
airline business and is a member-signatory of the Interline
Air Transport Association (IATA). As such it operates air
transportation service and sells transportation tickets over
the routes of the other airline members.
 During the periods covered by the disputed assessments, it
is admitted that BOAC had no landing rights for traffic
purposes in the Philippines, and was not granted a
Certificate of public convenience and necessity to operate in
the Philippines by the Civil Aeronautics Board (CAB), except
for a nine-month period, partly in 1961 and partly in 1962,
when it was granted a temporary landing permit by the CAB.
 Consequently, it did not carry passengers and/or cargo to or
from the Philippines, although during the period covered by
the assessments, it maintained a general sales agent in
the Philippines — Wamer Barnes and Company, Ltd.,
and later Qantas Airways — which was responsible for
selling BOAC tickets covering passengers and cargoes.
 There are two cases in this petition:
o First Case
 May 7, 1968: CIR assessed BOAC
P2,498,358.56 for deficiency income taxes
covering the years 1959 to 1963. This was
protested by BOAC.
 January 16, 1970: Subsequent investigation
resulted in the issuance of a new
assessment, for the years 1959 to 1967 in
the amount of P858,307.79. BOAC paid this
new assessment under protest.
 October 7, 1970: BOAC filed a claim for
refund of the amount of P858,307.79, which
claim was denied by the CIR. But before
said denial, BOAC had already filed a
petition for review with the Tax Court on 27
January 1972, assailing the assessment and
praying for the refund of the amount paid.
o Second Case
 November 17, 1971: BOAC was assessed
deficiency income taxes, interests, and
penalty for the fiscal years 1968-1969 to
1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise
penalties for violation of Section 46
(requiring the filing of corporation returns)
penalized under Section 74, NIRC.
 November 25, 1971: BOAC requested that
the assessment be countermanded and set
aside.
 February 16, 1972: In a letter, CIR not only
denied the BOAC request for refund in the
First Case but also re-issued in the Second
Case the deficiency income tax assessment
for P534,132.08 for the years 1969 to 1970-
71 plus P1,000.00 as compromise penalty
under Section 74 of the Tax Code.
o This case was subsequently tried jointly with the
First Case. It went to CTA praying it be absolved of
liability.
 January 26, 1983: CTA rendered a decision reversing CIR. It
held that the proceeds of sales of BOAC passage tickets in
the Philippines by Warner Barnes and Company, Ltd., and
 later by Qantas Airways, during the period in question, do
not constitute BOAC income from Philippine sources "since
no service of carriage of passengers or freight was
performed by BOAC within the Philippines" and, therefore,
said income is not subject to Philippine income tax. Income
from transportation is income from services so that the place
where services are rendered determines the source. Thus,
CTA ordered CIR to credit BOAC with the taxes it paid.
 Hence, this petition for review on certiorari of CTA’s decision.
ISSUES:
1. Whether or not during the fiscal years in question BOAC
is a resident foreign corporation doing business in the
Philippines or has an office or place of business in the
Philippines.
2. Whether or not the revenue derived by BOAC from sales
of tickers in the Philippines for air transportation, while
having no landing rights here, constitute income of
BOAC from Philippine sources, and accordingly taxable.
HELD & RATIO:
5. YES, BOAC is a resident foreign corporation.
a. Sec. 20, 1977 Tax Code: (h) the term resident
foreign corporation engaged in trade or business
within the Philippines or having an office or place of
business therein.
b. There is no specific criterion as to what constitutes
"doing" or "engaging in" or "transacting" business.
Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a
continuity of commercial dealings and arrangements,
and contemplates, to that extent, the performance of
acts or works or the exercise of some of the
functions normally incident to, and in progressive
prosecution of commercial gain or for the purpose
and object of the business organization. "In order
that a foreign corporation may be regarded as doing
business within a State, there must be continuity of
conduct and intention to establish a continuous
business, such as the appointment of a local agent,
and not one of a temporary character.
c. BOAC, during the periods covered by the subject -
assessments, maintained a general sales agent in
the Philippines, That general sales agent, from 1959
to 1971, was engaged in:
i. (1) selling and issuing tickets
ii. (2) breaking down the whole trip into series
of trips — each trip in the series
corresponding to a different airline company
iii. (3) receiving the fare from the whole trip and
iv. (4) consequently allocating to the various
airline companies on the basis of their
participation in the services rendered
through the mode of interline settlement as
prescribed by Article VI of the Resolution
No. 850 of the IATA Agreement.
d. Those activities were in exercise of the functions
which are normally incident to, and are in
progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact,
the regular sale of tickets, its main activity, is the
very lifeblood of the airline business, the generation
of sales being the paramount objective. There
should be no doubt then that BOAC was "engaged
in" business in the Philippines through a local agent
during the period covered by the assessments.
6. YES, BOAC’s revenue from sales of tickets in the Philippines
constitutes income from Philippine sources so these are
taxable under our income tax laws.
a. "Gross income" includes gains, profits, and income
derived from salaries, wages or compensation for
personal service of whatever kind and in whatever
form paid, or from profession, vocations, trades,
business, commerce, sales, or dealings in property,
whether real or personal, growing out of the
ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the
transactions of any business carried on for gain or
profile, or gains, profits, and income derived from
 any source whatever (Sec. 29[3], Tax Code;
Emphasis supplied)
b. The definition is broad and comprehensive to include
proceeds from sales of transport documents.
c. The source of an income is the property, activity or
service that produced the income. For the source of
income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines.
d. In BOAC's case, the sale of tickets in the Philippines
is the activity that produces the income. The tickets
exchanged hands here and payments for fares were
also made here in Philippine currency. The site of
the source of payments is the Philippines. The flow
of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded
by the Philippine government. In consideration of
such protection, the flow of wealth should share the
burden of supporting the government.
e. A transportation ticket is not a mere piece of paper.
When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It
gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding
obligation of the carrier to transport the passenger
upon the terms and conditions set forth thereon.
f. Section 37 of the Tax Code which enumerates items
of gross income from sources within the Philippines,
by its language, does not intend the enumeration to
be exclusive. It merely directs that the types of
income listed therein be treated as income from
sources within the Philippines.
g. Sec. 24(b), Tax Code: Provided, however, That
international carriers shall pay a tax of 2-½ per cent
on their cross Philippine billings.
h. PD 1355 (April 21, 1978): "Gross Philippine billings"
includes gross revenue realized from uplifts
anywhere in the world by any international carrier
doing business in the Philippines of passage
documents sold therein, whether for passenger,
excess baggage or mail provided the cargo or mail
originates from the Philippines.
i. The foregoing provision ensures that international
airlines are taxed on their income from Philippine
sources. The 2-½ % tax on gross Philippine billings
is an income tax. If it had been intended as an
excise or percentage tax it would have been place
under Title V of the Tax Code covering Taxes on
Business.
FINAL VERDICT: CTA’s decision is set aside. BOAC is ordered to
pay P534,132.08 as deficiency income tax for the fiscal years 1968-
69 to 1970-71 with some interests. The BOAC claim for refund in the
amount of P858,307.79 is hereby denied.
20. UNITED AIRLINES, INC. v. COMMISSIONER OF INTERNAL
REVENUE,
G.R. No. 178788
CASE:
Petitioner used to be an online international carrier of passenger and
cargo, i.e., it used to operate passenger and cargo flights originating
in the Philippines. Upon cessation of its passenger flights in and out
of the Philippines beginning February 21, 1998, petitioner appointed
a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent
general sales agent acting as such for several international airline
companies. Petitioner continued operating cargo flights from
the Philippines until January 31, 2001.
Petitioner filed a claim for refund of taxes allegedly
erroneously assessed in 1999-2001 for P5,028,813.23 allegedly
representing income taxes paid in 1999 on passenger revenue from
tickets sold in the Philippines, the uplifts of which did not originate in
the Philippines (because by then, Petitioners were no longer
operating passenger flights to and from the Philippines, which is why
they claim that they are no longer subject to the 2.5% Gross
Philippine Billings/ GPB for passenger flights; see definition in the
NOTES).
CIR and CTA pointed out that petitioner was still liable for
P31.43 million deficiency income tax from its cargo revenues, as it
was found that in reporting a cargo revenue of P740.33 million in
1999, it was found that petitioner deducted two (2) items from its
gross cargo revenue of P2.84 billion: 1) P141.79 million as
commission and 2) P1.98 billion as other incentives of its agent. Thus
its claim for refund must be rejected.
Petitioner claims this as contrary to the well entrenched rule
that taxes may not be set-off as the tax payer and government are not
mutual debtors and creditors.
Two issues arise:
1.Whether or not Petitioner is subject to GPB during
1999-2001 for passenger flight revenues?=NO The SC ruled that
Inasmuch as petitioner ceased operating passenger flights to or from
the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of
the NIRC for gross passenger revenues.
2. Whether or not petitioners are entitled to their claim of refund?-
NO. Petitioner understated its income tax returns, thus the claim for
refund may be offset with its existing deficiency liability. Having
underpaid the GPB tax due on its cargo revenues for 1999, petitioner
is not entitled to a refund of its GPB tax on its passenger revenue
FACTS:
 Petitioner United Airlines, Inc. is a foreign corporation
organized and existing under the laws of the State of
Delaware, U.S.A., engaged in the international airline
business.
 Petitioner used to be an online international carrier of
passenger and cargo, i.e., it used to operate passenger and
cargo flights originating in the Philippines.
o Upon cessation of its passenger flights in and out of
the Philippines beginning February 21, 1998,
petitioner appointed a sales agent in the Philippines
-- Aerotel Ltd. Corp., an independent general sales
agent acting as such for several international airline
companies.
o Petitioner continued operating cargo flights from
the Philippines until January 31, 2001.
 On April 12, 2002, petitioner filed with respondent
Commissioner a claim for income tax refund, pursuant to
Section 28(A)(3)(a) of the National Internal Revenue Code of
1997 (NIRC) in relation to Article 4(7) of the Convention
between the Government of the Republic of the Philippines
and the Government of the United States of America with
respect to Income Taxes (RP-US Tax Treaty).
o Petitioner sought to refund the total amount of
P15,916,680.69 pertaining to income taxes paid on
gross passenger and cargo revenues for the taxable
years 1999 to 2001, which included the amount of
P5,028,813.23 allegedly representing income taxes
paid in 1999 on passenger revenue from tickets sold
in the Philippines, the uplifts of which did not
originate in the Philippines.
o Citing the change in definition of Gross
Philippine Billings (GPB) in the NIRC, petitioner
argued that since it no longer operated passenger
flights originating from the Philippines beginning
February 21, 1998, its passenger revenue for 1999,
2000 and 2001 cannot be considered as income
from sources within the Philippines, and hence
should not be subject to Philippine income tax under
Article 9 of the RP-US Tax Treaty.
o Petitioner asserted that under the new definition of
GPB under the 1997 NIRC and Article 4(7) of the
RP-US Tax Treaty, Philippine tax authorities have
jurisdiction to tax only the gross revenue derived by
US air and shipping carriers from outgoing traffic in
the Philippines. Since the Bureau of Internal
Revenue (BIR) erroneously imposed and collected
income tax in 1999 based on petitioner’s gross
passenger revenue, as beginning 1998 petitioner no
longer flew passenger flights to and from the
Philippines, petitioner is entitled to a refund of such
erroneously collected income tax in the amount
of P5,028,813.23
 o Since no resolution was passed by the CIR,
petitioner filed a petition for review with the Court of
Tax Appeals (CTA).
CTA Ruling:
 the CTA’s First Division ruled that no excess or erroneously
paid tax may be refunded to petitioner because the income tax
on GPB under Section 28(A)(3)(a) of the NIRC applies as well
to gross revenue from carriage of cargoes originating from the
Philippines. It agreed that petitioner cannot be taxed on its
1999 passenger revenue from flights originating outside the
Philippines.
o However, in reporting a cargo revenue of P740.33
million in 1999, it was found that petitioner
deducted two (2) items from its gross cargo
revenue of P2.84 billion:
 P141.79 million as commission and
 P1.98 billion as other incentives of its agent.
o These deductions were erroneous because the gross
revenue referred to in Section 28(A)(3)(a) of the NIRC
was total revenue before any deduction of
commission and incentives.
o Petitioner’s gross cargo revenue in 1999, being
P2.84 billion, the GPB tax thereon was P42.54
million and not P11.1 million, the amount petitioner
paid for the reported net cargo revenue of P740.33
million.
o The CTA First Division further noted that petitioner
even underpaid its taxes on cargo revenue by
P31.43 million, which amount was much higher than
the P5.03 million it asked to be refunded.
Petitioner’s Arguments before the SC:
 Petitioner argues that its claim for refund of
erroneously paid GPB tax on off-line passenger revenues
cannot be denied based on the finding of the CTA that
petitioner allegedly underpaid the GPB tax on cargo
revenues by P31,431,171.09, which underpayment is
allegedly higher than the GPB tax of P5,028,813.23 on
passenger revenues, the amount of the instant claim.
 The denial of petitioner’s claim for refund on such ground is
tantamount to an offsetting of petitioner’s claim for refund of
erroneously paid GPB against its alleged tax liability.
Petitioner thus cites the well-entrenched rule in taxation
cases that internal revenue taxes cannot be the subject of
set-off or compensation.
 According to petitioner, the offsetting of the liabilities is very
clear in the instant case because the amount of petitioner’s
claim for refund of erroneously paid GPB tax of
P5,028,813.23 for the taxable year 1999 is being offset
against petitioner’s alleged deficiency GPB tax liability on
cargo revenues for the same year, which was not even the
subject of an investigation nor any valid assessment issued
by respondent against the petitioner—contrary to Section
228 of the NIRC.
ISSUE:
Whether or not petitioner may be taxed the GPB during the
years 1999-2001 for passenger flights?
No, it may not be taxed for passenger flights. Inasmuch as it
ceased operating passenger flights to or from the Philippines in
1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for
gross passenger revenues.
Whether or not petitioner is entitled to the refund of the GPB tax
of P5,028,813.23 it allegedly overpaid representing income taxes
from passenger revenue tickets sold in the Philippines in 1999-
2001 (even though they ceased passenger flights in and out of
the country during said period)?
 No. Petitioner understated its income tax returns, thus the
claim for refund may be offset with its existing deficiency liability.
Having underpaid the GPB tax due on its cargo revenues for 1999,
petitioner is not entitled to a refund of its GPB tax on its passenger
revenue
HELD:
 Inasmuch as petitioner ceased operating passenger flights to
or from the Philippines in 1998, it is not taxable under
Section 28(A)(3)(a) of the NIRC for gross passenger
revenues.
o This much was also found by the CTA. In South
African Airways v. Commissioner of Internal
Revenue, we ruled that the correct interpretation of
the said provisions is that, if an international air
carrier maintains flights to and from the Philippines,
it shall be taxed at the rate of 2½% of its GPB, 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 rate of 32% of such income.
Petitioners claim for refund may be offset with its tax
deficiency:
 Here, the subject of claim for tax refund is the tax paid on
passenger revenue for taxable year 1999 at the time when
petitioner was still operating cargo flights originating from
the Philippines although it had ceased passenger flight
operations.
o The CTA found that petitioner had underpaid its
GPB tax for 1999 because petitioner had made
deductions from its gross cargo revenues in the
income tax return it filed for the taxable year 1999,
the amount of underpayment even greater than the
refund sought for erroneously paid GPB tax on
passenger revenues for the same taxable period.
Hence, the CTA ruled petitioner is not entitled to a
tax refund.
 Under Section 72 of the NIRC, the CTA can make a valid
finding that petitioner made erroneous deductions on its gross
cargo revenue; that because of the erroneous deductions,
petitioner reported a lower cargo revenue and paid a lower
income tax thereon; and that petitioner's underpayment of the
income tax on cargo revenue is even higher than the income
tax it paid on passenger revenue subject of the claim for
refund, such that the refund cannot be granted.
o SEC. 72. Suit to Recover Tax Based on False or Fraudulent
Returns. - When an assessment is made in case of any list,
statement or return, which in the opinion of the Commissioner
was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be
recovered by any suit, unless it is proved that the said list,
statement or return was not false nor fraudulent and did not
contain any understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and
mines.
 Commissioner of Internal Revenue v. Court of Tax Appeals,
however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
o The grant of a refund is founded on the
assumption that the tax return is valid, that is,
the facts stated therein are true and correct. 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.
o Thus, 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 the case at bar, the CTA explained that it merely
determined whether petitioner is entitled to a refund based
on the facts. On the assumption that petitioner filed a correct
return, it had the right to file a claim for refund of GPB tax on
passenger revenues it paid in 1999 when it was not
operating passenger flights to and from the Philippines.
o However, upon examination by the CTA, petitioner’s
return was found erroneous as it understated its
gross cargo revenue for the same taxable year due
to deductions of two (2) items consisting of
commission and other incentives of its agent.
o Having underpaid the GPB tax due on its cargo
revenues for 1999, petitioner is not entitled to a
refund of its GPB tax on its passenger revenue,
the amount of the former being even much higher
(P31.43 million) than the tax refund sought (P5.2
million). The CTA therefore correctly denied the claim
for tax refund after determining the proper
assessment and the tax due.
FINAL VERDICT:
WHEREFORE, we DENY the petition for lack of merit and AFFIRM
the Decision dated July 5, 2007 of the Court of Tax Appeals En Banc
in C.T.A. EB No. 227.
With costs against the petitioner.
NOTES:
Gross Philippine Billings- gross revenue whether for passenger,
cargo, or mail originating from the Philippines up to final destination,
regardless of the place of sale or payments of the passage or freight
documents (NIRC Annotated, Vol. 2, Sacdalan-Casasola, 2013 ed.,
Rex Book Store, p. 151)
Kinds of Carriers-
1. Off-line= international air carrier having no flight
operations to and from Ph
2. On-line= international air carrier having flight operations to
and from Ph
Taxes imposed-
o International air carrier having flights originating from any
port or point in Ph, irrespective of the place where passage
documents are sold or issued=GPB Tax of 2.5%
o Off-line carrier having a branch or sales agent in the Ph
which sells passage documents for compensation or
commission to cover off-line flights of its principal or head
office, or for other airlines covering flights originating from
Philippine ports or off-line flights, is NOT considered
engaged in business as an international air carrier in the Ph
and is NOT subject to the GPB nor to 3% common carrier’s
tax. Without prejudice to classification under a different
category under the NIRC.
RR 15-2002 – Sections 1to 5 only
OBUs/ FCDUs
RR 14-2012 (Nov. 7, 2012)
Branch Profit Remittance Tax
21. BANK OF AMERICA NT & SA VS. COURT OF APPEALS
Profits of Branch of Foreign Companies are taxable 15% of what is
actually remitted abroad
RECIT READY:
Bank of America, a foreign corp, has a branch in Phils and remitted
some of its profits to the head office. However, it paid 15% of its
profits, which basis of 15% includes those that were yet to be
remitted abroad. BA claims that it should only pay 15% of what was
actually remitted abroad. Court ruled that refund must be given to BA
and that the 15% tax should be based on income actually remitted
abroad. (Please read the NOTES below for the rationale, as it is
included in PM Reyes and Atty. Montero might ask about this)
FACTS:
 Petitioner (Bank of America) is a foreign corporation duly
licensed to engage in business in the Philippines with
Philippine branch office at BA Lepanto Bldg., Paseo de
Roxas, Makati, Metro Manila (I used to work here!)
 On July 20, 1982 it paid 15% branch profit remittance tax in
the amount of P7,538,460.72 on profit from its regular
banking unit operations and P445,790.25 on profit from its
foreign currency deposit unit operations or a total of
P7,984,250.97. The tax was based on net profits after
income tax without deducting the amount corresponding to
the 15% tax.
 Petitioner filed a claim for refund with the Bureau of Internal
Revenue of that portion of the payment which corresponds to
the 15% branch profit remittance tax, on the ground that
the tax should have been computed on the basis of
profits actually remitted abroad, which is P45,244,088.85,
and not on the amount before profit remittance tax, which
is P53,228,339.82.
 Subsequently, without awaiting respondent's decision,
petitioner filed a petition for review on June 14, 1984 with
this Honorable Court for the recovery of the amount.
 Bank of America Contention: 15% of branch profit
remittance tax on the basis of the above provision should be
assessed on the amount actually remitted abroad
 CIR Contention: in computing the 15% remittance tax, the
tax should be inclusive of the sum deemed remitted.
(meaning the profit of the branch before it will be remitted)
 The Court of Tax Appeals upheld petitioner bank in its claim
for refund. The Commissioner of Internal Revenue filed a
timely appeal to the Supreme Court (docketed G.R. No.
76512) which referred it to the Court of Appeals, which set
aside the CTA decision.
 Court of Appeals: The use of the word remitted may well be
understood as referring to that part of the said total branch
profits which would be sent to the head office as
distinguished from the total profits of the branch (not all of
which need be sent or would be ordered remitted abroad).
ISSUE:
Whether or not tax on profits remitted by foreign corporations abroad
(15%) should be based on profits actually remitted abroad
HELD + RATIO:
Yes, any profit remitted by a branch to its head office shall be subject
to 15% be based on total profits applied or earmarked for remittance
(NIRC Sec 28(A,5)). This means that what was actually remitted
must be subject to the 15% tax
 On the other hand, there is absolutely nothing in Section
24(b) (2) (ii), (Sec 28(A,5 now)), which indicates that the
15% tax on branch profit remittance is on the total amount of
profit to be remitted abroad which shall be collected and paid
in accordance with the tax withholding device provided in
Sections 53 and 54 of the Tax Code.
 The statute employs "Any profit remitted abroad by a branch
to its head office shall be subject to a tax of fifteen per cent
(15%)" — without more. Nowhere is there said of "base on
the total amount actually applied for by the branch with
the Central Bank of the Philippines as profit to be
remitted abroad, which shall be collected and paid as
provided in Sections 53 and 54 of this Code."
 Where the law does not qualify that the tax is imposed and
collected at source based on profit to be remitted abroad,
that qualification should not be read into the law. It is a basic
rule of statutory construction that there is no safer nor better
canon of interpretation than that when the language of the
law is clear and unambiguous, it should be applied as
written. And to our mind, the term "any profit remitted
abroad" can only mean such profit as is "forwarded, sent, or
transmitted abroad" as the word "remitted" is commonly and
popularly accepted and understood.
  The taxpayer is a single entity, and it should be
understandable if, such as in this case, it is the local branch
of the corporation, using its own local funds, which remits the
tax to the Philippine Government.
 We hold, accordingly, that the written claim for refund of the
excess tax payment filed, within the two-year prescriptive
period, with the Court of Tax Appeals has been lawfully
made.
WHEREFORE, the decision of the Court of Appeals appealed
from is REVERSED and SET ASIDE, and that of the Court of
Tax Appeals is REINSTATED.
NOTES: (Kind of important, Rationale)
The remittance tax was conceived in an attempt to equalize the
income tax burden on foreign corporations maintaining, on the one
hand, local branch offices and organizing, on the other hand,
subsidiary domestic corporations where at least a majority of all the
latter's shares of stock are owned by such foreign corporations. Prior
to the amendatory provisions of the Revenue Code, local branches
were made to pay only the usual corporate income tax of 25%-35%
on net income (now a uniform 35%) applicable to resident foreign
corporations (foreign corporations doing business in the Philippines).
While Philippine subsidiaries of foreign corporations were subject to
the same rate of 25%-35% (now also a uniform 35%) on their net
income, dividend payments, however, were additionally subjected to
a 15% (withholding) tax (reduced conditionally from 35%). In order to
avert what would otherwise appear to be an unequal tax treatment
on such subsidiaries vis-a-vis local branch offices, a 20%, later
reduced to 15%, profit remittance tax was imposed on local branches
on their remittances of profits abroad. But this is where the tax pari-
passu ends between domestic branches and subsidiaries of foreign
corporations.
22. COMPANIA GENERAL DE TABACOS DE FILIPINAS v. CIR
CTA Case Nos. 4141 and 4451
August 23, 1993 and November 17, 1993
PM REYES NOTES:
Q74.2 What is the correct tax base for computing the branch profit
remittance tax? Is it the “profit actually remitted” or the “amount
actually applied for”?
The correct tax base is the amount actually applied for by the
branch with the Central Bank as profit to be remitted abroad.
In Compania General v. CIR, Compania General contended
that the correct tax base for computing the branch profit remittance
tax is the profit actually remitted abroad given its reliance on previous
BIR ruling and the case of CIR v. Burroughs. On the other hand, CIR
contends that because of RMC NO. 8-82 (March 17, 1982), the tax
base should be the amount actually applied for by the branch with
the central Bank of the Philippines as profit to be remitted. The CTA
ruled in favor of CIR as the branch profit remittance taxes were
paid after the effectivity of RMC No. 8-82.
CASE:
In both cases, Compania General filed a claim for refund with CIR for
the alleged overpaid Branch Profit Remittance Tax in the amount of
P593, 948.61 and P1,768,931.05 for the year 1980-1985,
respectively. Compania General, in both cases, alleged a) that the
15% branch profit remittance tax should be based on the profits
actually paid abroad; and b) the profits remitted abroad by a branch
office to its mother company is an income tax hence, passive income
which are already subjected to the final tax shall not be included for
purposes of computing the branch profits remittance tax. On the
other hand, CIR contends that a) the 15% branch profit remittance
tax is imposed and collected at source necessarily the tax base
should be the amount actually applied for by the branch with
Central Bank of the Philippines as profit to be remitted abroad
pursuant to Revenue Memorandum No. 8-12 (March 17, 1982).
The issues in these cases are: 1) Whether or not the branch
profits tax are computed based on the profits actually remitted
abroad or on the total branch profits out of which the remittance
is made; and 2) Whether or not passive income which are
already subjected to the final tax are still included for purposes
of computing the branch profits remittance tax.
With regard to the first issue, CTA ruled in favor of CIR stating that
the taxable base in computing the 15% branch profit remittance
tax is the amount applied for with the Central Bank as profit to
be remitted abroad and not the total amount of branch profits. In
Case No. 4451, according to Sec 24(b)(2)(ii) of NIRC, the rule is
interest and dividends received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be
considered as branch profits unless the same are effectively
connected with the conduct of its trade or business. The phrase
“effectively connected” was interpreted to mean income derived
from the business activity in which the corporation is engaged.
In Case No. 4141, The applicable provision of the Tax Code is Sec
24(b)(2)(ii)[now Sec 25(a)(5)] which provides: “Any profit remitted by
a branch to its head office shall be subject to a tax of 15%(except
those registered with EPZA); xxx”. The use of the word “remitted”
may be well understood as referring to that part of the said total
branch profits which would be sent to the head offices as
distinguished from the total profits of the branch. In both cases, CTA
held that because of RMC NO. 8-82 (March 17, 1982), the tax
base should be the amount actually applied for by the branch
with the central Bank of the Philippines as profit to be remitted.
Hence, CTA ruled in favor of CIR as the branch profit remittance
taxes were paid after the effectivity of RMC No. 8-82.
As to the second issue, the CTA ruled that, passive income already
subject to final tax shall not be included for purposes of
computing the branch profits remittance tax. Pursuant to Sec 24
(c) and (d) of NIRC, dividends and interests are subject to final tax.
To include them again as subject to branch profit remittance tax
under the same Section 24 (b)(2)(ii) would be contrary to the law.
For CTA Case No. 4451, CTA ruled that CIR should refund
Compania General, the amount of P121, 696. 34, representing
overpaid 15% branch profit remittance tax on interest and dividends
received. The computation is based on RMC No. 8-82 and the
jurisprudence cited, stating that the tax base should be the amount
applied for with the Central Bank for remittance without prior
deduction of the 15% branch profit remittance tax. While for CTA
Case No. 4141, CIR is ordered to refund in favor of Compania
General, the amount of 152,690.61 representing overpaid 15%
branch profit remittance taxes on dividends, interests and
capital gain received during the years 1981-1983.
NOTE: Sorry guys, tried my hardest but these cases are just beyond
my competence. SORRY. 
CTA Case No. 4451 (August 23, 1993):
FACTS:
 Compania General De Tobaccos de Filipinas (Compania
General) duly licensed by Philippine Laws to engage in business
through its branch office. It is in the business as leaf tobacco
dealer, exporter, importer and general merchants.
 Compania General filed a claim for refund with Commissioner of
Internal Revenue (CIR) in the amount of P593, 948.61,
representing allegedly overpaid Branch Profit Remittance Taxes.
 Petitioner’s (Compania General) Contention:
o The 15% branch profit remittance tax should be based on
the profits actually paid abroad.
o Basis:
 Sec 24(b)(2)(ii) of the National Internal Revenue Code
(NIRC).
 BIR Ruling dated January 21, 1980
 CIR v Burroughs Limited and CA
 Respondent’s (CIR) Contention:
o The 15% branch profit remittance tax is imposed and
collected at source necessarily the tax base should be the
amount actually applied for by the branch with Central
Bank of the Philippines as profit to be remitted abroad
pursuant to Revenue Memorandum No. 8-12 (March 17,
1982)
ISSUES:
1. Whether or not the branch profits tax are computed based on the
profits actually remitted abroad or on the total branch profits out
of which the remittance is made.
2. Whether or not passive income which are already subjected to
the final tax are still included for purposes of computing the
branch profits remittance tax.
RATIO:
1. The taxable base in computing the 15% branch profit
remittance tax is the amount applied for with the Central
 Bank as profit to be remitted abroad and not the total
amount of branch profits.
 According to Sec 24(b)(2)(ii) of NIRC, the rule is interest and
dividends received by a foreign corporation during each
taxable year from all sources within the Philippines shall not
be considered as branch profits unless the same are
effectively connected with the conduct of its trade or
business.
o The phrase “effectively connected” was interpreted to
mean income derived from the business activity in
which the corporation is engaged.
 Compania General is in the business as leaf tobacco dealer,
exporter, importer and general merchants. The interests
received from savings deposit with PhilTrust, interests
received from money market placements and interest on
Land Bank Bonds and cash dividends received from PLDT
and Tabacalera Industrial Development Corporation of the
Philippines are not effectively connected with its trade or
business.
 The case in question is readily distinguishable from the
Burroghs Limited case, where the Supreme Court upheld the
application of BIR Ruling of January 1980 because the
branch profit remittance tax was paid on March 14, 1979. The
High added that Memorandum Circular No. 8-82 dated March
17, 1982 cannot be given retroactive effect in the light of
Section 327 of the NIRC.
2. No, passive income already subject to final tax are not included
for purposes of computing the branch profits remittance tax.
 Pursuant to Sec 24 (c) and (d) of NIRC, dividends and
interests are subject to final tax. To include them again as
subject to branch profit remittance tax under the same
Section 24 (b)(2)(ii) would be contrary to the law.
 Compania Tobacco has sufficiently established a right to be
refunded the amount of profit remittance tax paid on these
interests and dividends which were included as part of the
branch profits for 1985 (partial) and 1986.
FINAL VERDICT: CIR should refund Compania General, the amount
of P121, 696. 34, representing overpaid 15% branch profit remittance
tax on interest and dividends received. The computation is based on
RMC No. 8-82 and the jurisprudence cited, stating that the tax base
should be the amount applied for with the Central Bank for
remittance without prior deduction of the 15% branch profit
remittance tax.
CTA Case No. 4141 (November 17, 1993)
FACTS:
 Compania General is foreign corporation duly licensed by
Philippine Laws to engage in business through its branch office.
 It claims refund in the amount of P1,768,931.05, representing the
alleged overpaid branch profit remittance tax during the years
1980-1985.
 The branch profit remittance tax corresponding to branch profit
for 1980 was paid on February 7, 1984.
 It was on February 4, 1986 that Compania General filed a
request before CIR for the refund of the sum of P1,447,295.62.
representing the alleged overpaid branch profit remittance tax
during the years 1980-1983.
ISSUES:
1. Whether or not the right to claim for refund of payments has
already prescribed.
2. Whether or not the branch profits tax are computed based on the
profits actually remitted abroad or on the total branch profits out
of which the remittance is made.
3. Whether or not passive income which are already subjected to
the final tax are still included for purposes of computing the
branch profits remittance tax
4. Whether or not Compania General is legally entitled to the refund
of P1,768,931.05, representing the alleged excess branch profit
remittance tax during the years 1980-1985.
RATIO:
1. Yes, when the claim for refund was filed more than 2 years have
lapsed from the time the payment of the tax was made.
 Accdg to Sec 230 of the Tax Code: No suit for the
recovery of tax erroneously or irregularly collected shall
begin after the expiration of 2 years from the date of
payment of the tax or penalty regardless of any
supervening cause that may arise after payment.
 It is evident that payment prior to April 9, 1985 had already
expired.
 When the claim for refund was filed more than 2 years
have lapsed from the time the payment of the tax was
made.
2. The taxable base in computing the 15% branch profit
remittance tax is the amount applied for with the Central
Bank as profit to be remitted abroad.
 The applicable provision of the Tax Code is Sec
24(b)(2)(ii)[now Sec 25(a)(5)] which provides: “Any profit
remitted by a branch to its head office shall be subject to a
tax of 15%(except those registered with EPZA); xxx”
 The applicable RMC is RMC No. 8-82 since the branch
profit remittance taxed were paid after the effectivity of
such RMC. (as applied in CTA Case No. 4451).
o It states that the 15% branch profit remittance tax
is imposed and collected at the source,
necessarily, the tax base should be the amount
actually paid for by the branch with the Central
Bank of the Philippines as profit to be remitted
abroad.
 The use of the word “remitted” may be well understood as
referring to that part of the said total branch profits which
would be sent to the head offices as distinguished from
the total profits of the branch.
3. No, passive income already subject to final tax are not
included for purposes of computing the branch profits
remittance tax.
 Pursuant to Sec 24 (c) and (d) of NIRC, dividends and
interests are subject to final tax. To include them again as
subject to branch profit remittance tax under the same
Section 24 (b)(2)(ii) would be contrary to the law.
4. Yes, Compania General is legally entitled to the refund of
P152,690.61, corresponding to the overpaid branch profit
remittance tax during the years 1981-1983.
 As to the 1984 & 1985 branch profit remittance taxes, no
refund or tax credit is due to Compania General since the
latter did not present any proof of passive income it
received during said period.
FINAL VERDICT: CIR is ordered to refund in favor of Compania
General, the amount of 152,690.61 representing overpaid 15%
branch profit remittance taxes on dividends, interests and
capital gain received during the years 1981-1983.
23. ITAD BIR Ruling No. 018-09
PM REYES:
Q74.3. Norway and the Philippines entered into a tax treaty.
Article 25 of the Convention provides for equal treatment
between nationals of the two countries and as between a
Norwegian enterprise in the Philippines and a domestic
enterprise. Det Norske Philippines, a local branch of De Norske,
a Norwegian enterprise, invokes Article 25 for the non-
imposition of the branch profits remittance tax. Is its contention
valid?
No. In ITAD BIR RULING NO. 018-09 [JUNE 23, 2009], the CIR
ruled that the principle of equal treatment in Article 25 does not
prevent the imposition of the branch profit remittance tax. First, the
principle of equal treatment is limited to nationals of the Philippines
and of Norway who are both residents of the Philippines. While
indeed Det Norske is a national of Norway, it is not a resident of the
Philippines. Second, while the treaty lays down a principle of equal
treatment between a Norwegian enterprise in the Philippines and a
domestic enterprise, as long as the aggregate taxes imposed by the
Philippines on such Norwegian enterprise is not greater than the
taxes imposed by the Philippines on a domestic enterprise, it cannot
be considered that such Norwegian enterprise is treated less
favourably in the Philippines than the domestic enterprise.
CASE/PM Reyes:
Det Norske is a corporation organized and existing under the laws of
Norway; it is also tax resident of Norway, and that based on the
Certification issued by the SEC, Det Norske is licensed to establish a
branch office in the Philippines (Det Norske Philippine Branch). With
this, Det Norske Philippine Branch had remitted branch profits to Det
Norske for taxable years 1998 to 2004. Now, Det Norske, AS A
PHILIPPINE BRANCH, is asserting that it should be exempt from the
15% BPRT based on Article 25 of the Philippines-Norway tax treaty
which provides for equal treatment between nationals of the two
countries and as between a Norwegian enterprise in the Philippines
and a domestic enterprise. The issue is whether the BPRT (branch
profit remittance tax) is contrary to Article 25 of the Philippines
Norway Treaty? NO, the contention of Det Norske is invalid. First, the
principle of equal treatment is limited to nationals of the Philippines
and of Norway who are both residents of the Philippines. While
indeed Det Norske is a national of Norway, it is not a resident of the
Philippines. Second, while the treaty lays down a principle of equal
treatment between a Norwegian enterprise in the Philippines and a
domestic enterprise, as long as the aggregate taxes imposed by the
Philippines on such Norwegian enterprise is not greater than the
taxes imposed by the Philippines on a domestic enterprise, it cannot
be considered that such Norwegian enterprise is treated less
favourably in the Philippines than the domestic enterprise. Thus, the
BPRT can be imposed by the Philippines on a permanent
establishment without going against the principle of equal treatment
envisaged in paragraph 2, Article 25 of the Philippines-Norway tax
treaty.
Relevant Laws:
Article 25 of the Philippines-Norway tax treaty
1. Nationals of a Contracting State shall not be subjected in the other
Contracting State to any taxation or any requirement connected
therewith, which is other or more burdensome than the taxation and
connected requirements to which nationals of that other State in the
same circumstances are or may be subjected.
2. The taxation on a permanent establishment which an enterprise of
a Contracting State has in the other Contracting State shall not
be less favourably levied in that other State than the taxation levied
on enterprises of that other State carrying on the same activities.
This provision shall not be construed as obliging a Contracting State
to grant to residents of the other Contracting State any personal
allowances, reliefs and reductions for taxation purposes on account
of civil status or family responsibilities which it grants to its own
residents
Article 10, paragraph 7 of the Philippines-Norway Tax Treaty
" Nothing in this Convention shall be construed as preventing a
Contracting State from imposing in accordance with its internal law, a
tax apart from the corporate income tax on remittances of profits by a
branch to its head office provided that the tax so imposed shall not
exceed fifteen per cent of the amount remitted."
Facts:
 Det Norske is a corporation organized and existing under
the laws of Norway
 Det Norske is a tax resident of Norway; and that based on
the Certification issued by the SEC, Det Norske is licensed
to establish a branch office in the Philippines (that is, Det
Norske Philippine Branch)
 It is also represented that Det Norske Philippine Branch had
remitted branch profits to Det Norske for taxable years 1998
to 2004
 In this case, Det Norske, AS A PHILIPPINE BRANCH, is
asserting that the BPRT (branch profit remittance tax)
imposed on the remittance of branch profits by a local
branch of a Norwegian corporation to its head office in
Norway is more budrensome (or less favorable) than the tax
treatment on the local branch of a domestic corporation
whose remittance is not subject to BPRT.
  Det Norske contends that it should thus be exempt from the
15% BPRT.
Issue: W/N the BPRT (branch profit remittance tax) is contrary to
Article 25 of the Philippines Norway Treaty? NO, it is not
Held:
 Despite it being an additional income tax, it is noteworthy
that the Philippines-Norway tax treaty recognizes the BPRT
and gives way to its imposition, as seen in Article 10
paragraph 7 of the treaty (SEE TOP)
o From that paragraph, it can be seen that the branch
profits remitted by a branch office of a Norwegian
corporation in the Philippines to its head office in
Norway may be subject to an additional tax such as
the BPRT as long as the rate does not exceed 15%
of the amount remitted.
 Even in the absence of Article 10, paragraph 7, the BIR
pointed out the ff (BIR lifted these/ cited the OECD Model
Tax Convention summary)
o According to the OECD Model Convention, the
phrase "in the same circumstances" (SEE Art. 25 on
top) , the scope of this paragraph would be limited to
residents of the Philippines only.
o the term 'resident of a Contracting State' means any
person who, under the laws of that State, is liable to
tax therein by reason of his domicile, residence,
place of management or any other criterion of a
similar nature. But this term does not include any
person who is liable to tax in that State in respect
only of income from sources in that State or capital
situated therein.
 Under this definition, Det Norske is a
resident of the State where it is liable to tax
by reason of its domicile, residence, place of
management, or any other similar criterion
of a similar nature. By the fact that Det
Norske is organized and existing under the
laws of Norway, that its head office is in
Norway, and that it is issued a certificate of
residence by the Norwegian Directorate of
Taxes of Norway, it follows that Det Norske's
domicile, residence, or place of
management is in Norway and as such is a
resident of Norway for purposes of the
Philippines-Norway tax treaty.
o "Less favourably levied"
 The standard of 'less favorably levied', on its
face, differs from the standard 'other or more
burdensome' that in certain treaties is used
in the nationality provision and the foreign-
controlled enterprise provision (ito talaga
yung nasa case sorry, basta iba yung
meaning nila so you have to look at the
treaty)
 The permanent establishment provision (in
paragraph 2 of Article 25 of the Philippines-
Norway Treaty) clearly does not prevent the
imposition of different ('other') taxes on a
permanent establishment than those
imposed on a domestic business, as long as
the taxes in the aggregate on the permanent
establishment are not greater than those on
the domestic business. In effect, the focus is
on the result of the taxation, irrespective of
the method."
 Consistent with the foregoing, this Office is of the opinion
and so holds that, as far as the Philippines is concerned, as
long as the aggregate taxes imposed by the Philippines on a
permanent establishment of a foreign enterprise in the
Philippines are not greater than the taxes imposed by the
Philippines on a domestic enterprise, it cannot be said that
the permanent establishment is treated less favorably in the
Philippines than the domestic enterprise.
 Thus, the BPRT and other similar taxes on income, can be
imposed by the Philippines on a permanent establishment
without going against the principle of equal treatment
envisaged in paragraph 2, Article 25 of the Philippines-
Norway tax treaty provided that the aggregate taxes levied
 on the permanent establishment are not greater than the
taxes levied on a domestic enterprise.
From 2A Digest + a few extras
Regional or Area Headquarters and
ROHQs
Sec. 22 (DD) & (EE), Tax Code
RR 11-2010 (Oct. 26, 2010)
(3) Nonresident Foreign Corporations
Sec. 28 (B), Tax Code
In general
24. CIR VS SC JOHNSON AND SONS
PM Reyes:
Q. XYZ Corporation is a domestic corporation which entered
into a license agreement with ABC Corporation, a NON-
RESIDENT FOREIGN CORPORATION based in the US pursuant
to which the former was granted the right to use trademark,
patents and technology owned by the latter. For such use, XYZ
paid royalties to ABC and subjected the same to the 25%
withholding tax on royalty payments. XYZ claimed for a refund
and argues that the withholding tax should only be 10%
pursuant to the most-favored nation clause of the RP-US tax
treaty in relation to the RP West Germany Tax Treaty. Is XYZ’s
contention correct?
NO. In CIR V. S.C. JOHNSON AND SONS, INC. [JUNE 25, 1999],
the Supreme Court held that the concessional tax rate of 10%
provided for in the RP-Germany Tax Treaty could not apply to taxes
imposed upon royalties in the RP-US Tax Treaty since the two taxes
imposed under the two tax treaties are not paid under similar
circumstances and do not contain similar provisions on tax crediting.
It is not proved that the RP-US Tax Treaty grants similar tax reliefs to
residents of the US in respect of the taxes imposable upon royalties
earned from sources within the Philippines as those allowed to their
German counterparts. Further, the RP-Germany Tax Treaty allows
for crediting against German income and corporate tax of 20% of the
gross amount of royalties paid under the law of the Philippines. On
the other hand, the RP-US Tax Treaty does not provide for the
similar crediting of 20% of the gross amount of royalties paid. The
similarity in the circumstances of payment of taxes is a condition for
the enjoyment of most favored nation treatment precisely to
underscore the need for equality of treatment. since the RP-US Tax
Treaty does not give a matching tax credit of 20 percent for the taxes
paid to the Philippines on royalties as allowed under the RP-West
Germany Tax Treaty, XYZ cannot be deemed entitled to the 10
percent rate granted under the latter treaty for the reason that there
is no payment of taxes on royalties under similar circumstances.
SUMMARY
SC JOHNSON Phil. is a domestic corporation which entered into a
license agreement with SC Johnson (USA) for the use of the latter’s
trademark, patent, technology among others in exchange for royalty
fees. Hence SC Johnson (Phil) was required to pay 25% withholding
tax on royalty payments paid which amounted to P1,603,443 for July
1992-May 1993. But on Oct. 1993, SC Johnson Phil. applied for tax
refund citing that under ART. (2)(b)(iii) of the RP US Tax Treaty or
also known as the most favored nation clause that they are entitled
to the lowest rate of Philippine tax that may be imposed on royalties
of the same kind paid under similar circumstances to a resident of a
third State. The similar circumstance they compare themselves to is
the 10% withholding tax pursuant to RP-west germany agreement.
CIR disagrees saying that the circumstance under the RP-Germany
and RP-US is not similar because under the RP-Germany
Agreement, German Corporation given 10% withholding tax are
subject to be credited 20% tax of the gross amount of such royalties
also known as the matching credit. This matching credit does not
exist in the RP-US Agreement. SC agrees with CIR.
FACTS:
 Respondent SC Johnson and Son, Inc is a domestic
corporation organized under Philippine Laws entered into a
LICENSE AGREEMENT with SC Johnson and Son (United
States), a non-resident foreign corp. based in the USA.
  Pursuant to the License Agreement, the SC Johnson and
Son (US) allows SC Johnson (Phil) to use their trademark,
patents and technology, manufacture, package and
distribute their products and secure assistance in the
management, marketing and production of SC Johnson
(USA) in the Php.
 For the use of trademark or technology SC Johnson(Phil)
was obliged to pay SC Johnson(US) royalties based on
percentage of net sales and subjected the same to 25%
withholding tax on royalty payments. SC Johnson (Phil)
paid for the period covering July 1992 to May 1993 in the
total amount of P1,603,443.
 On October 29, 1993, SC Johnson (Phil) filed with the
International Tax Affairs Division (ITAD) of the BIR a claim
for refund of overpaid withholding tax on royalties
(amounting to P963,266) arguing that “the case of
respondent has the same circumstances under the
MacGeorge and Gillete rullings. That instead of 25%
withholding tax they should only pay 10% withholding tax
pursuant to the most-favored nation clause of the RP-US
Tax in relation to the RP-West Germany Tax Treaty.
 The CIR did not act on the claim hence respondent filed a
petition for review before the CTA.
CTA and CA RULINGS
 CTA ruled in favor of SC Johnson (Phil) and ordered the CIR
to issue a tax credit certificate in the amount of P963,266.
 CIR filed a petition for review with the CA
 CA affirmed CTA’s decision in toto, hence this case.
ISSUE:
THE COURT OF APPEALS ERRED IN RULING THAT SC
JOHNSON AND SON, USA IS ENTITLED TO THE “MOST
FAVORED NATION” TAX RATE OF 10% ON ROYALTIES AS
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE
RP-WEST GERMANY TAX TREATY
Article 13(2)(b)(iii) of the RP US Tax Treaty or also known as the
most favored nation clause
1) Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State may be taxed by
both Contracting States.
2) However, the tax imposed by that Contracting State shall not
exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties,
where the royalties are paid by a corporation
registered with the Philippine Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may be
imposed on royalties of the same kind paid under
similar circumstances to a resident of a third State.
RESPONDENT’S CONTENTION
 Petition must be denied due to:
1) Defective certification against forum shopping,
certification was not executed by the petitioner herself
but by her counsel
2) That under the most favored clause of the RP-US tax
treaty, they are entitled to 10% royalty.
BASIS: Art. 13(2)(b)(iii) which states that the lowest rate
of Philippine tax that may be imposed on royalties of the
same kind paid under similar circumstances to a resident
of a third state.
The similar circumstance that they compared
themselves to is the RP-Germany Tax Treaty which
provides:
(2) However, such royalties may also be taxed in the
Contracting State in which they arise, and according to
the law of that State, but the tax so charged shall not
exceed:
 xxx
b) 10 percent of the gross amount of royalties arising
from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or
process, or from the use of or the right to use, industrial,
commercial, or scientific equipment, or for information
concerning industrial, commercial or scientific
experience.
PETITIONER’S CONTENTION:
 Petitioner contends that respondent’s taxes are not paid
under SIMILAR CIRCUMSTANCES as those under in the
RP-West Germany Tax Treaty.
 Since in the RP-West Germany Tax Treaty, taxes in royalties
are only reduced to 10 or 15 percent if there will be a TAX
CREDIT OF 20 PERCENT OF THE GROSS AMOUNT OF
SUCH ROYALTIES AGAINST GERMAN INCOME (this is
called the matching credit).
 This 20% tax credit does not exist in the RP-US Treaty
hence they don’t have similar circumstance.
 Further, Pet. sees the action of SC Johnson (Phil.) of citing
the most favored clause as a claim for exception for the 25%
tax rate, the BIR states that the treaty must be construed
against exemption.
COURT’S RULING
1. Ruling against forum shopping:
 As a general rule the party and not the counsel must certify
under oath the certification of non-forum shopping. This is so
because it is the party who knows whether they have
commenced any other action involving the same issues in
the SC or any other courts.
 But since in this case, Since CIR is only handled by the
OSG, as required by the admin code, the certification
executed by the OSG constitutes substantial compliance.
2. If Johnsons and Sons entitled to the most favorable
clause.
 No. The RP-US and the RP-West Germany Tax Treaties do
not contain similar provisions on tax crediting. Article 24 of
the RP-Germany Tax Treaty, supra, expressly allows
crediting against German income and corporation tax of 20%
of the gross amount of royalties paid under the law of the
Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to
relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid.
Side Notes:
 The RP-US Tax Treaty is one of the bilateral treaties entered
by the Philippines to other countries to avoid double taxation.
 International juridical double taxation-imposition of
comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for
identical periods. The apparent rationale for doing away with
double taxation is to encourage the free flow of goods and
services and the movement of capital, technology and
persons between countries, conditions deemed vital in
creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and
reasonable international investment climate and the
protection against double taxation is crucial in creating such
a climate.
 Double taxation usually takes place when a person is
resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states
impose tax on that income or capital. In order to eliminate
double taxation, a tax treaty resorts to several methods.
First, it sets out the respective rights to tax of the state of
source or situs and of the state of residence with regard to
 certain classes of income or capital. In some cases, an
exclusive right to tax is conferred on one of the contracting
states; however, for other items of income or capital, both
states are given the right to tax, although the amount of tax
that may be imposed by the state of source is limited.
 The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited
right to tax together with the state of residence. In this case,
the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation. There are two
methods of relief- the exemption method and the credit
method. In the exemption method, the income or capital
which is taxable in the state of source or situs is exempted in
the state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable to
the taxpayer’s remaining income or capital. On the other
hand, in the credit method, although the income or capital
which is taxed in the state of source is still taxable in the
state of residence, the tax paid in the former is credited
against the tax levied in the latter. The basic difference
between the two methods is that in the exemption method,
the focus is on the income or capital itself, whereas the credit
method focuses upon the tax.
 In the case at bar, the state of source is the Philippines
because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located
within the Philippines. The United States is the state of
residence since the taxpayer, S. C. Johnson and Son, U. S.
A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax
the royalties, with a restraint on the tax that may be collected
by the state of source. Furthermore, the method employed to
give relief from double taxation is the allowance of a tax
credit to citizens or residents of the United States (in an
appropriate amount based upon the taxes paid or accrued
to the Philippines) against the United States tax, but such
amount shall not exceed the limitations provided by United
States law for the taxable year.
25. MARUBENI V CIR
REYES NOTES/ CASE: A Japanese Corporation licensed to do
business in the Philippines has equity investments in a domestic
corporation. The domestic corporation paid stock dividends to the
Japanese Corporation and paid corresponding taxes thereon. The
latter now claims for a refund because of an alleged overpayment
arguing there is a principal-agent relationship between the foreign
corporation and its branch office in the Philippines.
SC denied the claim for refund holding that the general rule that a
foreign corporation and its branch office are the same juridical entity
is inapplicable to the instant case. It concluded that there was no
principal-agent relationship because the investment that resulted in
the dividends was made for purposes germane to the business of the
foreign corporation and not its branch office.
FACTS: Marubeni Corporation of Japan has equity investments in
Atlantic Gulf and Pacific Co. of Manila (AG&P). AG&P declared and
paid cash dividends to petitioner.
AG&P directly remitted the cash dividends to petitioner's head office
in Tokyo, Japan. AG&P as withholding agent paid 10% final
intercorporate dividend tax and 15% branch profit remittance tax
on cash dividends declared and remitted to petitioner at its head
office in Tokyo.
Petitioner, through the accounting firm Sycip, Gorres, Velayo and
Company, sought a ruling from the Bureau of Internal Revenue on
whether or not the dividends petitioner received from AG&P are
effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to the
15% profit remittance tax.
Acting Commissioner Ruben Ancheta ruled that “only profits remitted
abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to
the 15% profit remittance tax. To be effectively connected it is
sufficient that the income arises from the business activity in which
the corporation is engaged. In the instant case, the dividends
received by Marubeni from AG&P are not income arising from
the business activity in which Marubeni is engaged.”
Consequently, petitioner filed with the CIR a claim for refund which
was denied. CTA affirmed the denial.
ISSUES: W/N whether [Petitioner] is a resident or a non-resident
foreign corporation under Philippine laws (If petitioner is a resident
corp it would not be liable to pay the 15% branch profit remittance
tax)
HELD & RATIO: NON-RESIDENT. The general rule that a foreign
corporation is the same juridical entity as its branch office in the
Philippines cannot apply here. This rule is based on the premise that
the business of the foreign corporation is conducted through its
branch office, following the principal agent relationship theory. It is
understood that the branch becomes its agent here. So that when
the foreign corporation transacts business in the Philippines
independently of its branch, the principal-agent relationship is set
aside. The transaction becomes one of the foreign corporation, not of
the branch. Consequently, the taxpayer is the foreign corporation,
not the branch or the resident foreign corporation. Corollarily, if the
business transaction is conducted through the branch office, the
latter becomes the taxpayer, and not the foreign corporation.
In other words, the alleged overpaid taxes were incurred for the
remittance of dividend income to the head office in Japan which is a
separate and distinct income taxpayer from the branch in the
Philippines. There can be no other logical conclusion considering the
undisputed fact that the investment was made for purposes
peculiarly germane to the conduct of the corporate affairs of
Marubeni Japan, but certainly not of the branch in the Philippines. It
is thus clear that petitioner, having made this independent
investment attributable only to the head office, cannot now claim the
increments as ordinary consequences of its trade or business in the
Philippines and avail itself of the lower tax rate of 10 %.
FINAL VERDICT: Petition is denied.
Notes/ Source: copy paste from the orig
26. N.V. REEDERIJ “AMSTEDAM” AND ROYAL INTEROCEAN
LINES V. CIR
PM REYES NOTES
XYZ is a foreign shipping company. It does not have a branch office
in the PH and it made only two calls n the PH ports. What kind of
foreign corp is XYZ?
XYZ is a foreign corporation not authorized or licensed to do
business in the PH. In order that a foreign corporation may be
considered engaged in trade or business, its business transactions
must be continuous. A casual business activity in the Philippines by a
foreign corporation, as in the present case, does not amount to
engaging in trade or business in the Philippines for income tax
purposes. Accordingly, its taxable income for purposes of our income
tax law consists of its gross income from all sources within the PH.
CASE:
MV Amstelmeer and MV Amstelkroon called on PH ports to load
cargoes for foreign destinations twice on 1963 and 1964. Royal
Interocean Lines is their husbanding agent. CIR computed their tax
due based on prevailing market rate of P3.90, however, Royal
contends that the exchange rate to be used must only be P2.00 on
the assumption that PET is a foreign corporation engaged in
business based on RR 2.
WON PET is a foreign corporation engaged in trade or business or
not.
WON the exchange rate of P3.90 is correct.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not
authorized or licensed to do business in the Philippines. It does not
have a branch office in the Philippines and it made only two calls in
Philippine ports, one in 1963 and the other in 1964.
In order that a foreign corporation may be considered engaged in
trade or business, its business transactions must be continuous. A
casual business activity in the Philippines by a foreign corporation,
as in the present case, does not amount to engaging in trade or
business in the Philippines for income tax purposes.
The transactions involved in this case are for the taxable years 1963
and 1964. Under Rep. Act No. 2609, the monetary board was
authorized to fix the legal conversion rate for foreign exchange. The
free market conversion rate during those years was P3.90 to US
$1.00.
FACTS:
 From March 27 to April 30, 1963, M.V. Amstelmeer and from
September 24 to October 28, 1964, MV "Amstelkroon, " both
of which are vessels of petitioner N.B. Reederij
"AMSTERDAM," called on Philippine ports to load cargoes
for foreign destination. Royal Interocean Lines is their agent.
The freight fees for these transactions were paid abroad in
the amount of US $98,175.00 in 1963 and US $137,193.00
in 1964.
 No income tax appears to have been paid by petitioner N.V.
Reederij "AMSTERDAM" on the freight receipts.
 Applying the then prevailing market conversion rate of P3.90
to the US $1.00, the gross receipts of petitioner N.V.
Reederij "Amsterdam" for 1963 and 1964 amounted to
P382,882.50 and P535,052.00, respectively.
 On June 30, 1967, respondent Commissioner assessed said
petitioner in the amounts of P193,973.20 and P262,904.94
as deficiency income tax for 1963 and 1964, respectively, as
"a non-resident foreign corporation not engaged in trade or
business in the Philippines under Section 24 (b) (1) of the
Tax Code.
 On the assumption that the said petitioner is a foreign
corporation engaged in trade or business in the Philippines,
on August 28, 1967, petitioner Royal Interocean Lines filed
an income tax return of the aforementioned vessels
computed at the exchange rate of P2.00 to USs1.00 1 and
paid the tax thereon in the amount of P1,835.52 and
P9,448.94, respectively, pursuant to Section 24 (b) (2) in
relation to Section 37 (B) (e) of the National Internal
Revenue Code and Section 163 of Revenue Regulations No.
2.
 On the same two dates, petitioner Royal Interocean Lines as
the husbanding agent of petitioner N.V. Reederij
"AMSTERDAM" filed a written protest against the
abovementioned assessment made by the respondent
Commissioner.
 Petitioners contend that respondent court erred in holding
that petitioner N.V. Reederij "AMSTERDAM" is a non-
resident foreign corporation because it allegedly disregarded
Section 163 of Revenue Regulations No. 2 (providing for the
determination of the net income of foreign corporations doing
business in the Philippines) and in holding that the foreign
exchange and e receipts of said petitioner for purposes of
computing its income tax should be converted into Philippine
pesos at the rate of P3.90 to US $1.00 instead of P2.00 to
US $1.00.
ISSUE:
1. WON N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY
OFFICE OR PLACE OF BUSINESS IN THE PHILIPPINES,
WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS
FOR THE PURPOSE OF LOADING CARGOES ONLY
TWICE-ONE IN 1963 AND ANOTHER IN 1964 — SHOULD
BE TAXED AS A FOREIGN CORPORATION NOT
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
UNDER SECTION 24(B) (1) OF THE TAX CODE OR
SHOULD BE TAXED AS A FOREIGN CORPORATION
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
 UNDER SECTION 24(B) (2) IN RELATION TO SECTION 37
(E) OF THE SAME CODE; AND
2. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V.
REEDERIJ "AMSTERDAM" SHOULD BE CONVERTED
INTO PHILI PINE PESOS AT THE OFFICIAL RATE OF
P2.00 TO US $1.00, OR AT P3.90 TO US $1.00.
HELD & RATIO:
 The petition is devoid of merit.
 Petitioner N.V. Reederij "AMSTERDAM" is a foreign
corporation not authorized or licensed to do business in
the Philippines. It does not have a branch office in the
Philippines and it made only two calls in Philippine
ports, one in 1963 and the other in 1964.
 In order that a foreign corporation may be considered
engaged in trade or business, its business transactions
must be continuous. A casual business activity in the
Philippines by a foreign corporation, as in the present
case, does not amount to engaging in trade or business
in the Philippines for income tax purposes.
 A domestic corporation is taxed on its income from sources
within and without the Philippines, but a foreign corporation
is taxed only on its income from sources within the
Philippines. (Sec. 24(a), Tax Code; Sec. 16, Rev. Regs. No.
2.)
 However, while a foreign corporation doing business in the
Philippines is taxable on income solely from sources within
the Philippines, it is permitted to deductions from gross
income but only to the extent connected with income earned
in the Philippines. (Secs. 24(b) (2) and 37, Tax Code.) On
the other hand, foreign corporations not doing business in
the Philippines are taxable on income from all sources within
the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities Compensations, remunerations,
emoluments, or other fixed or determinable annual or
periodical or casual gains, profits and income and capital
gains" The tax is 30% (now 35%) of such gross income.
(Sec. 24 (b) (1), Tax Code.)
 Now to the case at bar. Here, petitioner N.V. Reederij
"Amsterdam" is a non-resident foreign corporation,
organized and existing under the laws of The
Netherlands with principal office in Amsterdam and not
licensed to do business in the Philippines. As a non-
resident foreign corporation, it is thus a foreign corporation,
not engaged in trade or business within the Philippines and
not having any office or place of business therein.
 As stated above, it is therefore taxable on income from all
sources within the Philippines, as interest, dividends, rents,
salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable
annual or periodical or casual gains, profits and income and
capital gains, and the tax is equal to thirty per centum of
such amount, under Section 24(b) (1) of the Tax Code.
 The accent is on the words of--`such amount." Accordingly,
petitioner N. V. Reederij "Amsterdam" being a non-resident
foreign corporation, its taxable income for purposes of our
income tax law consists of its gross income from all sources
within the Philippines.
 The conversion rate of P2.00 to US $1.00 which petitioners
claim should be applicable to the income of petitioners for
income tax purposes instead of P3.90 to s1.00 is likewise
untenable. The transactions involved in this case are for the
taxable years 1963 and 1964. Under Rep. Act No. 2609, the
monetary board was authorized to fix the legal conversion
rate for foreign exchange. The free market conversion rate
during those years was P3.90 to US $1.00.
 Indeed, in the course of the investigation conducted by the
Commissioner on the accounting records of petitioner Royal
Interocean Lines, it was verified that when said petitioner
paid its agency fees for services rendered as husbanding
agent of the said vessels, it used the conversion rate of
P3.90 to US $1.00. 5 It is now estopped from claiming
otherwise in this case.
 WHEREFORE, the petition is DENIED with costs against
petitioners. This decision is immediately executory and no
extension of time to file motion for reconsideration shall be
entertained.
 SO ORDERED.