CIR V ST LUKES

FACTS
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non-profit corporation. On 16 December 2002, the Bureau of Internal Revenue (BIR)
assessed St. Luke's deficiency taxes comprised of deficiency income tax, value-added
tax, withholding tax on compensation and expanded withholding tax. St. Luke's filed an
administrative protest with the BIR against the deficiency tax assessments. St. Luke's
maintained that it is a non-stock and non-profit institution for charitable and social
welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the making of
profit per se does not destroy its income tax exemption.

The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. The BIR claimed that St. Luke's was actually operating for profit
in 1998 because only 13% of its revenues came from charitable purposes. Moreover,
the hospital's board of trustees, officers and employees directly benefit from its profits
and assets.

ISSUE
Whether St. Luke's is liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC, which imposes a preferential tax rate of 10% on the income of proprietary non-
profit hospitals.

RULING

Yes. The Court partly grants the petition of the BIR but on a different ground. We hold
that Section 27(B) of the NIRC
does not remove the income tax exemption of proprietary non-profit hospitals under
Section 30(E) and (G). Section
27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of
such tax exemption. The effect of the introduction of Section 27(B) is to subject the
taxable income of two specific
institutions, namely, proprietary non-profit educational institutions 36 and proprietary
non-profit hospitals, among the
institutions covered by Section 30, to the 10% preferential rate under Section 27(B)
instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).

"Non-profit" does not necessarily mean "charitable." The Court defined "charity" in Lung
Center of the Philippines v. Quezon City as "a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting them to
establish themselves in life or [by] otherwise lessening the burden of government."
 A non-profit club for the benefit of its members fails this test. An organization may be
considered as non-profit if it
does not distribute any part of its income to stockholders or members. However, despite
its being a tax exempt
institution, any income such institution earns from activities conducted for profit is
taxable, as expressly provided in
the last paragraph of Section 30.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption
are specified by the law granting it.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes
simply because it derives income from paying patients, whether out-patient, or confined
in the hospital, or receives
subsidies from the government, so long as the money received is devoted or used
altogether to the charitable object
which it is intended to achieve; and no money inures to the private benefit of the
persons managing or operating the
institution.

For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that "[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly,
and exclusively used for religious, charitable, or educational purposes shall be exempt
from taxation." The test of exemption is not strictly a requirement on the intrinsic nature
or character of the institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center
of the Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes.
Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The operations of the charitable institution
generally refer to its regular activities. Section 30(E) of the NIRC requires that these
operations be exclusive to charity. There is also a specific requirement that "no part of
[the] net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person." The use of lands, buildings and improvements
of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes.
In 1998, St. Luke's had total revenues of ₱1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱1.73 billion
from paying patients is not an institution "operated exclusively" for charitable purposes.
Clearly, revenues from paying patients are income received from "activities conducted
for profit."
The Court cannot expand the meaning of the words "operated exclusively" without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a "purpose to make profit over and above
the cost" of services. 55 The ₱1.73 billion total revenues from paying patients is not
even incidental to St. Luke's charity expenditure of ₱218,187,498 for non-paying
patients.

The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be "operated exclusively"
for charitable or social welfare purposes to be completely exempt from income tax. An
institution under Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, under the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its
profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990
by the BIR, which opined that St. Luke's is "a corporation for purely charitable and social
welfare purposes"59 and thus exempt from income tax. In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief
that one is not subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest."

03- CIR V ST LUKES

G.R. No. 203514, February 13, 2017

The respondent St. Luke’s Medical Center, Inc. (SLMC) received a tax payment
assessment from the Large Taxpayers Service-Documents Processing and Quality
Assurance Division of the Bureau of Internal Revenue Audit Result/Assessment Notice
on December 14, 2007. Based on the assessment the respondent SLMC has a
deficiency income tax under Section 27 (B) of the 1997 National Internal Revenue Code
(NIRC), as amended for the taxable year 2005 in the amount of P78, 617,434.54 and for
taxable year 2006 in the amount of P57, 119,867.33.

In response to the received assessment from NIRC on January 14, 2008, SLMC filed
with the petitioner Commission on Internal Revenue (CIR) an administrative protest
assailing the assessments. The SLMC alleged that they are exempted from paying the
income tax since SLMC is a non-stock, non-profit, charitable and social welfare
organization under Section 30 (E) and (G) of the 1997 NIRC as amended.

However, on April 25, 2008, SLMC received the petitioner CIR’s Final Decision on the
Disputed Assessment dated April 9, 2008 increasing the deficiency income from P78,
617, 434.54 to P82,419,522.21 for taxable year 2005 and from P57,119,867.33 to P60,
259,885.94 for taxable year 2006.

The aggrieved SLMC elevated the matter to Court of Tax Appeal (CTA) finding the
decision that SLMC is not liable for the deficiency income tax under Section 27 (B) of
the 1997 NIRC, as amended and exempt from paying the income under Section 30 (E)
and (G) of the same code.

Consequently, the CIR moved for reconsideration, but the CTA Division denied which
the CIR prompted to file a petition for review before the CTA En Banc which eventually
denied and affirmed the first decision of the CTA Division.

Moreover, the CIR filed an instant petition contending that the CTA erred in exempting
SLMC from payment of income tax, where the CIR petition is partly granted. SLMC
ordered to pay the deficiency income tax in 1998 based on the 10% preferential income
tax. The CIR argues that under the doctrine of Stare Decisis SLMC is subject to 10%
income tax under Section 27 (B) of the 1997 NIRC, and liable to pay the compromise
penalty. SLMC argues that the income derives from operating a hospital is not income
from activities conducted for profit. And the case should be dismissed since payment to
BIR for the basic taxes due for taxable years 1998, 2000-2002 and 2004-2007 has been
made.

ISSUES:

1. Whether or not SLMC is liable for income tax under Section 27 (B) of the 1997 NIRC.

2. Whether or not SLMC is not liable for compromise penalty.

3. Whether or not the petition is rendered moot by payment made by SLMC on April 30,
2013.
HELD:

1. Yes. Based on Section 27 (B) of the NIRC imposes 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are they must be proprietary and non-
profit. Proprietary means private, following the definition of a proprietary educational
institution, as any other private school maintained and administered by private
individuals or groups with government permit. While non-profit means no net income or
asset accrues to or benefits any member or specific person with all the net income or
asset devoted to the institution’s purposes and all its activities conducted not for profit.

2. Yes. Under Sections 248 and 249 of the 1997 NIRC the imposition of surcharges and
interests were deleted on the basis of good faith and honest belief on the part of SLMC
that it is not subject to tax so therefore, SLMC is not liable to pay the compromise
penalty.

3. Yes. The payment of basic taxes made by the SLMC has become moot even the
court agrees with the CIR that the payment confirmation from the BIR is not competent
proof as presented by SLMC due to no specific taxable period for payments that it
covers. However, the court finds sufficient proof of payment based on the Certification
of Payment issued by the Large Taxpayers Service of the BIR since CIR never question
for its document’s authenticity. The court dismissed the petition and lowered the basic
taxes for taxable year 2005 and 2006, in the amounts of P49, 919,496.40 and P41,
525,608.40.

04. PACGOR V BIR

G.R. No. 215427 December 10, 2014

FACTS: The Philippine Amusement and Gaming Corporation (PAGCOR) assailed the
validity of Section 1 of Republic Act 9337, amending Section 27(C) of the National
Internal Revenue Code (NIRC). The amendment omitted PAGCOR from the list of
government owned or controlled corporations, consequently eliminating its exemption
from income taxes.

As such, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular
(RMC) No. 33-2013, subjecting PAGCOR to a corporate income tax which will be
derived from the income of its operations and licensing of gambling casinos, gaming
clubs, gaming pools, and other similar recreation and amusement parks.

The circular also subjected PAGCOR to a 5% franchise tax derived from the gross
revenue from its operations and licensing of gambling casinos, gaming clubs and other
similar recreation or amusement places.

PAGCOR requested a consideration, but the BIR commissioner denied this. PAGCOR
now contends that RMC No. 33-2013 is an erroneous application of the law, because
under their charter (P.D. 1869 as amended by R.A. 9487), they can only be subjected to
5% franchise tax from related services. The BIR however contends that P.D. 1869 is
already deemed repealed because of R.A. 9337.

ISSUE: Whether or not PAGCOR’s charter (P.D. 1869 as amended) is deemed

repealed or amended because of R.A. 9337.

RULING: No, PAGCOR’s charter is not deemed repealed or amended by R.A. 9337.

It is an established rule in statutory construction that every effort should be exerted to

avoid conflict between two statutes, and if possible, come up with a construction where
the two laws can be reconciled in a reasonable manner.

In this case, there is no real conflict between P.D. 1869 as amended and R.A. 9337.
The former lays down the taxes imposable upon petitioner, which includes a 5%
franchise tax of the gross revenues or earnings derived from its operations. The
enactment of R.A. No. 9337, which withdrew PAGCOR’s income tax exemption under
R.A. No. 8424, only reinstated their liability for such tax.

There is also no express repeal of P.D. 1869 under the repealing clause of R.A. 9337.
Hence, P.D. 1869 should not be deemed impliedly repealed as well, seeing that it is not
in conflict or irreconcilable with the provisions of R.A. 9337.

When petitioner’s franchise was extended on June 20, 2007 without revoking or
withdrawing itstax exemption, it
effectively reinstated and reiterated all of petitioner’s rights, privileges and authority
granted under its Charter.
Otherwise, Congress would have painstakingly enumerated the rights and privileges
that it wants to withdraw, given
that a franchise is a legislative grant of a special privilege to a person. Thus, the
extension of petitioner’s franchise
under the same terms and conditions means a continuation of its tax exempt status with
respect to its income from
gaming operations.

Given that petitioner’s Charter is not deemed repealed or amended by R.A. No. 9337,
petitioner’s income derived
from gaming operations is subject only to the five percent (5%) franchise tax, in
accordance with P.D. 1869, as
amended. With respect to petitioner’s income from operation of other related services,
the same is subject to income
tax only.

More, it is settled that in case of discrepancy between the basic law and a rule or
regulation issued
to implement said law, the basic law prevails, because the said rule or regulation cannot
go beyond the terms and
provisions of the basic law.

WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is

ORDERED to cease and desist the
implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate income tax on
petitioner's income derived
from its gaming operations; and (2) franchise tax on petitioner's income from other
related services.

04- BLOOMBERRY RESORTS V BIR

FACTS:

In 2014 Bloomberry sued the Bureau of Internal Revenue (BIR), then headed by
Kim Henares, and sought to annul the agency’s Revenue Memorandum Circular 33-
2013, which subjected contractees and licensees of the Philippine Amusement and
Gaming Corp. (Pagcor) to income tax. Thus, being one of its licensees, petitioner only
pays PAGCOR license fees, in lieu of all taxes, as contained in its provisional license
and consistent with the PAGCOR Charter or Presidential Decree (PD) No. 1869,3 which
provides the exemption from taxes of persons or entities contracting with PAGCOR in
casino operations.
The High Court ordered the BIR to cease and desist from implementing the
memorandum order “insofar as it imposes corporate-income tax on petitioner
Bloomberry Resorts and Hotels Inc.’s income derived from its gaming operations.”

Facts:

Bloomberry Resorts is the Operator of Solaire; A Casino and Hotel. Bloomberry is

questioning the legality of Revenue Memorandum Circular 33-2013 pursuant to RA
9337 saying that all income from gaming operations need to pay Corporate income tax
at 30% on top of the franchise tax which is 5%.  Bloomberry is relying on the provisions
of PD1869 when it said that income from gaming operation is subject only to 5%
franchise tax on top of any other tax.

Aggrieved, as it is now being considered liable to pay corporate income tax in addition
to the 5% franchise
tax, petitioner immediately elevated the matter through a petition for certiorari and
prohibition with the SC

Respondent, in her Comment filed on 18 December 2014,8 counters that there was no
grave abuse of
discretion on her part when she issued the subject revenue memorandum circular since
it did not alter,
modify or amend the intent and meaning of Section 13(2)(b) of PD No. 1869, as
amended, insofar as the
imposition is concerned, considering that it merely clarified the taxability of PAGCOR
and its contractees
and licensees for income tax purposes as well as other franchise grantees similarly
situated under prevailing
laws; that prohibition will not lie to restrain a purely administrative act, nor enjoin acts
already done, being
a preventive remedy; and that tax exemptions are strictly construed against the
taxpayer.

issue:

Whether or not Bloomberry should pay Corporate income tax.

whether or not Bloombery along with other operators can be exempted from its
payment.

was there any inconsistency with RA 9337 and PD 1869

(i) whether or not

the assailed provision of RMC No. 33-2013 subjecting
the contractees and licensees of PAGCOR to income tax under the NIRC of 1997, as
amended, was issued by
respondent CIR with grave abuse of discretion
amounting to lack or excess of jurisdiction; and
(ii)
whether or not said provision is valid or constitutional
considering that Section 13(2)(b) of PD No. 1869, as
amended (PAGCOR Charter), grants tax exemptions to
such contractees and licensees.

RULING
Bearing in mind the parties involved and the similarities
of the issues submitted in the present case, we are
now presented with the prospect of finally resolving the
confusion caused by the amendments introduced by RA No. 9337 to the NIRC of 1997,
and the subsequent
issuance of RMC No. 33-2013, affecting the tax regime not only of PAGCOR but also its
contractees and
licensees under the existing laws and prevailing jurisprudence. Section 13 of PD No.
1869 evidently states that payment of the 5% franchise tax by PAGCOR and its
contractees and licensees exempts them from payment of any other taxes, including
corporate income tax

Guided by the doctrinal teachings in resolving the case at bench, it is without a doubt
that, like PAGCOR, its contractees and licensees remain exempted from the payment of
corporate income tax and other taxes since the law is clear that said exemption inures
to their benefit.

As the PAGCOR Charter states in unequivocal terms that exemptions granted for
earnings derived from the
operations conducted under the franchise specifically from the payment of any tax,
income or otherwise, as
well as any form of charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom the PAGCOR or
operator has any contractual relationship in connection with the operations of the
casino(s) authorized to be conducted under this Franchise, so it must be that all
contractees and licensees of PAGCOR, upon payment of the 5% franchise tax, shall
likewise be exempted from all other taxes, including corporate income tax realized from
the operation of casinos.

Plainly, too, upon payment of the 5% franchise tax, petitioner's income from its gaming
operations of
gambling casinos, gaming clubs and other similar recreation or amusement places, and
gaming pools, defined within the purview of the aforesaid section, is not subject to
corporate income tax. WHEREFORE, the petition is GRANTED.

05. CIR V BCDA

FACTS

Respondent Bases Conversion and Development Authority (BCDA) owned four real
properties in BGC, Tgauig City which were collectively referred to as the Expanded Big
Delta Lots. It entered into a contract to sell with the Net Group, an unincorporated joint
venture of different corporations.

The Net Group committed not to remit to the BIR the amount of 101M as creditable tax
withheld at source (CWT) to give time to respondents to present a certification of tax
exemption. BCDA sought from CIR the certification but the latter did not respond.

A deed of absolute sale was executed by the respondent and Net group. And Net Group
deducted the 101M amount as Creditable Tax Withheld and it issued to BCDA the
certificates of the creditable tax withheld at source.

The respondent claimed for tax refund. But the BIR did not respond. BCDA sought an
affirmative relief from the Court of Tax Appeals. It claimed that it was exempted from all
taxes and fees arising from or in relation to the sale as provided under its charter , RA
7227 as amended by RA 7917.

The petitioner countered that BCDA failed to support its claim for tax refund. It failed to
show that the CWT was erroneously or illegally withheld. Also, respondent’s claim for
tax refund did not comply with the procedural requirements.

CTA ruled in favor of BCDA and ordered the petitioner to refund the amount.

ISSUE

WON BCDA exempt from Creditable Withholding Tax (CWT) on the sale of its
properties in Global City.

RULING

Yes, BCDA is exempt from CWT. Section 8 of RA 7227 as amended by RA

7917,provides that proceeds of the sale of a Conversion Authority such as BCDA shall
not be diminished and therefore, exempt from all forms of taxes and fees. This law
governs BCDA’s disposition of the properties enumerated therein and their sale
proceeds. The law exempts these sales proceed from all kinds of fees and taxes as the
same law has already appropriated them for specific purposes and for designated
beneficiaries.

The sale proceeds are not BCDA income but the public funds subject to the distribution
scheme and purposes provided in the law itself.

The court has invariably ruled that when the law speaks in clear and categorical
language there is no occasion for interpretation; there is only room for application.

In light of the foregoing considerations, the standard procedural and documentary

requirement for tax refund applicable to GOCC’s in general do not apply to BCDA vis-à-
vis the properties and the sale proceeds specified under Section 8 of RA 7227, as
amended. There is no income to speak of here, only the sale proceeds of specific
properties which the legislature itself exempts from all taxes and fees.

Decision: Petition denied. CTA’s decision is affirmed.

06. Cyanamid Philippines, Inc. vs. CA

FACTS

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine

laws, is a wholly owned subsidiary of American Cyanamid Co. based in Maine, USA. It
is engaged in the manufacture of pharmaceutical products and chemicals, a wholesaler
of imported finished goods, and an importer/indentor. The CIR sent an assessment
letter to petitioner and demanded the payment of deficiency income tax for taxable year
1981.

Petitioner protested the assessments and claimed, among others, that the surtax
for the undue accumulation of earnings was not proper because the said profits were
retained to increase petitioner's working capital and it would be used for reasonable
business needs of the company. They contended that it availed of the tax amnesty
under Executive Order No. 41, hence enjoyed amnesty from civil and criminal
prosecution granted by the law.

On the other hand, CIR refused to allow the cancellation of the assessment notices and
rendered its resolution. The CIR averred that the availment of the tax amnesty under
Executive Order No. 41, as amended is sufficient basis, in appropriate cases, for the
cancellation of the assessment issued after August 21, 1986. (Revenue Memorandum
Order No. 4-87) Said availment does not, therefore, result in cancellation of
assessments issued before August 21, 1986. as in the instant case.

Petitioner appealed to the Court of Tax Appeals. During the pendency of the
case, however, both parties agreed to compromise the 1981 deficiency income tax
assessment of P119,817.00. Petitioner paid a reduced amount — twenty-six thousand,
five hundred seventy-seven pesos (P26,577.00) — as compromise settlement.
However, the surtax on improperly accumulated profits remained unresolved.

Petitioner claimed that CIR's assessment representing the 25% surtax on its
accumulated earnings for the year 1981 had no legal basis for the following reasons:

(a) petitioner accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of indebtedness;

(b) petitioner is a wholly owned subsidiary of American Cyanamid Company, a

corporation organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York Stock Exchange.

This being the case, no individual shareholder income taxes by petitioner's

accumulation of earnings and profits, instead of distribution of the same.

The CTA denied the petition. Petitioners appealed the CTA decision with CA but
CA affirmed CTA’s decision. Hence this present petition.

ISSUE

Whether petitioner is liable for the accumulated earnings tax for the year 1981.

RULING
The amendatory provision of Sec. 25 of the 1977 NIRC, which was PD1739,
enumerated the corporations exempt from the imposition of improperly accumulated tax:
(a) banks, (b) non-bank financial intermediaries; (c) insurance companies; and (d)
corporations organized primarily and authorized by the Central Bank to hold shares of
stocks of banks. Petitioner does not fall among those exempt classes. Besides, the laws
granting exemption form tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The burden of proof rests upon the party claiming the exemption to prove
that it is, in fact, covered by the exemption so claimed; a burden which petitioner here
has failed to discharge.

Unless rebutted, all presumptions generally are indulged in favor of the correctness of
the CIR’s assessment against the taxpayer. With petitioner’s failure to prove the CIR
incorrect, clearly and conclusively, this court is constrained to uphold the correctness of
tax court’s ruling as affirmed by the CA.

ALTERNATE:

Held:

In order to determine whether profits are accumulated for the reasonable needs of the
business to avoid the surtax upon the shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts. The accumulated profits must
be used within reasonable time after the close of the taxable year. In the instant case,
petitioner did not establish by clear and convincing evidence that such accumulated was
for the immediate needs of the business.

To determine the reasonable needs of the business, the United States Courts have
invented the “Immediacy Test” which construed the words “reasonable needs of the
business” to mean the immediate needs of the business, and it is held that if the
corporation did not prove an immediate need for the accumulation of earnings and
profits such was not for reasonable needs of the business and the penalty tax would
apply. (Law of Federal Income Taxation Vol 7) The working capital needs of a business
depend on the nature of the business, its credit policies, the amount of inventories, the
rate of turnover, the amount of accounts receivable, the collection rate, the availability of
credit and other similar factors. The Tax Court opted to determine the working capital
sufficiency by using the ration between the current assets to current liabilities. Unless,
rebutted, the presumption is that the assessment is correct. With the petitioner’s failure
to prove the CIR incorrect, clearly and conclusively, the Tax Court’s ruling is upheld.

07 . Manila Bankers’ Life Insurance Corp. vs. CIR, GR Nos. 199729-30, 27 Feb 2019
FACTS

MBLIC received a Preliminary Assessment Notice from the Bureau of Internal Revenue
(BIR), assessing the deficiency taxes for the year 2001. Essentially, according to the
CIR, premium taxes and DSTs on insurance policies are not deemed "costs of service"
that can be deducted from gross receipts for purposes of computing MCIT.

MBLIC filed its letter protest before the LTS, contesting the assessment of the subject
deficiencies. In turn, the CIR filed his Amended Answer alleging that the assessments
were issued in accordance with existing law and regulations, and that they were issued
within the prescriptive period. In any event, issues and defenses not raised in the
administrative level, such as prescription herein, cannot be raised for the first time on
appeal.

Lastly, the CIR argued that claims for tax exemption ought to be construed strictissimi
juris against the claimant MBLIC, and that the assessments are prima facie correct and
presumed to have been made in good faith. Absent proof of irregularities in the
performance of official duties, an assessment should not be disturbed.

ISSUE

Whether or not the CIR erred in assessing MBLIC for deficiency taxes

RULING

The provision allows the government to collect from corporations MCIT equivalent to 2%
of "gross income" in lieu of the 30% of "gross income" basic income tax for domestic
corporations, whenever the former is higher. It must be borne in mind, however, that
although both rates of taxes are applied to "gross income" as tax base, the definition of
"gross income," for purposes of MCIT and basic corporate income tax, varies.

Under Section 27(E)(4) above-quoted, "gross income" as used in determining MCIT

means "gross receipts less sales returns, allowances, discounts and cost of services."
This definition is much more limited in terms of inclusions, exclusions, and deductions,
compared to the definition of "gross income" for purposes for computing basic corporate
tax under Sections 32[29] and 34[30] of the NIRC

In ruling that premium taxes are deductible from gross receipts, the CTA relied on the
permissive wording of the provision. It held that the phrase "including" meant that "cost
of services" could pertain to expenses other than salaries and production costs. On the
premise that premium taxes are expenses incurred by MBLIC to further its business, the
CTA then ruled that the same can be considered as part of its cost of services, though
not specifically mentioned.

Measured against this standard, it is then easy to discern that premium taxes, though
payable by MBLIC, are not direct costs within the contemplation of the phrase "cost of
services," incurred as they are after the sale of service had already transpired. This
cannot therefore be considered as the equivalent of raw materials, labor, and
manufacturing cost of deductible "cost of sales" in the sale of goods.

Contrarily, to accede to the CTA's rationalization would virtually allow all expenses to be
deductible from gross receipts, erasing the distinction between "gross income" for
purposes of MCIT and "gross income" for purposes of basic corporate taxes. The CIR's
contention - that premium taxes are not deductions from gross receipts when
determining the MCIT, but from "gross income" in calculating corporate taxes - should
therefore be given due credence.

DSTs are NOT deductible costs of services

The CTA did not, however, err in holding that DSTs are not deductible costs of services.
As can be gleaned, DST is incurred "by the person making, signing, issuing, accepting,
or transferring" the document subject to the tax. And since a contract of insurance is
mutual in character, either the insurer or the insured may shoulder the cost of the DST.

In this case, it was duly noted by the CTA that MBLIC never disputed charging DSTs
from its clients as part of their premiums. Hence, it cannot readily be said that it was
MBLIC who "necessarily incurred" the expense.[36] Moreover, DSTs cannot also qualify
as direct costs "to provide the services required by the customers and clients" since,
just like premium taxes, they are incurred after the service had been rendered. No error
is then attributable to the CTA in this regard.

Liability for DST

The imposition of DST on insurance policies is sourced on Section 183 of the NIRC.
Synthesized with Section 173 earlier quoted, DST becomes due at the same time the
insurance policy is executed or had.

Plainly, an insurance contract may again attract DST at the same rate when it is

(a) assigned or transferred, or

(b) renewed or continued by alteration or otherwise.

Under the latter circumstance, an alteration of the policy may result in attracting DST,
though no new policy is issued. MBLIC is then mistaken in its claim that it can only be
liable under Section 183 whenever a new policy is issued. For the pivotal question is not
the issuance or non-Issuance of a new policy. but whether or not an increase in the
assured amount amounted to a renewal or continuance by alteration or otherwise.
Increases in the amount fixed in the policy by virtue of the automatic increase clause
necessarily altered or affected the subject policies, and therefore, created or granted
existing policyholders new and additional rights

DECISION:
Accordingly, Manila Bankers' Life insurance Corporation is hereby ORDERED TO PAY
the Commissioner of Internal Revenue the amount of FOURTEEN MILLION SIX
HUNDRED NINETY-FIVE THOUSAND FOUR HUNDRED SEVENTY-FOUR PESOS
AND 93/100 (P14,695,474.93) representing the deficiency MCIT for taxable year 2001
and deficiency DST for taxable years 2001, 2002, and 2003.

08. CIR VS. Philippine Airlines, Inc G.R. No. 179259, September 25, 2013

FACTS

ALTER:
PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have
been liable for Minimum Corporate Income Tax based on its gross income.
However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate Income
Tax using as basis its franchise which exempts it from “all other taxes” upon
payment of whichever is lower of either (a) the basic corporate income tax based
on the net taxable income or (b) a franchise tax of 2%.

For the fiscal year that ended 31 March 2000, respondent filed its Tentative
Corporate Income Tax Return, reflecting a creditable tax withheld for the fourth quarter
amounting and a zero taxable income for said year. Hence, respondent written claim for
refund before the petitioner.

Respondent received on 10 September 2001, the Letter of Authority No. from the
Bureau of Internal Revenue (BIR) Large Taxpayers Service, authorizing the revenue
officers named therein to examine respondent’s books of accounts and other
accounting records for the purpose of evaluating respondent’s "Claim for Refund on
Creditable Withholding Tax – Income Tax" covering the fiscal year ending 31 March
2000.

Respondent received a Formal Letter of Demand and Details of Assessment

dated 1 December 2003 from the Large Taxpayers Service demanding the payment of
the total amount of ₱326,778,723.35, inclusive of interest, as contained in Assessment
Notice No. INC-FY-99-2000-000085. In response thereto, respondent filed its formal
written protest on 13 January 2004 reiterating the following defenses:(1) that it is
exempt from, or is not subject to, the 2% MCIT by virtue of its charter, Presidential
Decree No. (PD) 1590;3 and (2) that the three-year period allowed by law for the BIR to
assess deficiency internal revenue taxes for the taxable year ending 31 March 2000 had
already lapsed on 15July 2003.

ISSUE

Whether or not the CTA En Banc erred when it affirmed the cancellation of Assessment
Notice No. INC-FY-99-2000-000085 and Formal Letter of Demand issued by petitioner
against respondent for the payment of deficiency MCIT in the amount of
₱326,778,723.35, covering the fiscal year ending 31 March 2000.

RULING

No. It is clear that PD 1590 intended to give respondent the option to avail itself of
Subsection (a) or (b) as consideration for its franchise. Either option excludes the
payment of other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in lower taxes. It
is not the fact of tax payment that exempts it, but the exercise of its option.

Notably, PAL was owned and operated by the government at the time the franchise was
last amended. It can reasonably be contemplated that PD 1590 sought to assist the
finances of the government corporation in the form of lower taxes.
When respondent operates at a loss (as in the instant case), no taxes are due; in this
instance, it has a lower tax liability than that provided by Subsection (b).
The fallacy of the CIR’s argument is evident from the fact that the payment of a measly
sum of one peso would suffice to exempt PAL from other taxes, whereas a zero-liability
arising from its losses would not. There is no substantial distinction between a zero tax
and a one-peso tax liability. (Emphasis theirs)

A domestic corporation must pay whichever is the higher of: (1) the income tax under
Section 27(A) of the NIRC of 1997,as amended, computed by applying the tax rate
therein to the taxable income of the corporation; or (2) the MCIT under Section 27(E),
also of the same Code, equivalent to 2% of the gross income of the corporation. The
Court would like to underscore that although this may be the general rule in determining
the income tax due from a domestic corporation under the provisions of the NIRC of
1997, as amended, such rule can only be applied to respondent only as to the extent
allowed by the provisions of its franchise.

From the foregoing provisions, during the lifetime of the franchise of respondent, its
taxation shall be strictly governed by two fundamental rules, to wit:
(1) respondent shall pay the Government either the basic corporate income tax or
franchise tax, whichever is lower; and
(2) the tax paid by respondent, under either of these alternatives, shall be in lieu of all
other taxes, duties, royalties, registration, license, and other fees and charges,
except only real property tax.
Consequently, the insistence of the CIR to subject PAL to MCIT cannot be done without
contravening [PD] 1520.
The MCIT was a new tax introduced by Republic Act No.8424. Under the doctrine of
strict interpretation, the burden
is upon the CIR to primarily prove that the new MCIT provisions of the NIRC of 1997,
clearly, expressly, and
unambiguously extend and apply to PAL, despite the latter’s existing tax exemption. To
do this, the CIR must
convince the Court that the MCIT is a basic corporate income tax, and is not covered by
the "in lieu of all other taxes" clause of [PD] 1590. Since the CIR failed in this regard,
the Court is left with no choice but to consider the MCIT as one of "all other taxes," from
which PAL is exempt under the explicit provisions of its charter. (Emphasis
supplied)

Based on the foregoing pronouncements, it is clear that respondent is exempt from the
MCIT imposed under Section 27(E) of the NIRC of 1997,as amended. Thus, respondent
cannot be held liable for the assessed deficiency MCIT of ₱326,778,723.35 for fiscal
year ending 31 March 2000.

By way of, reiteration, although it appears that respondent is not completely exempt
from all forms of taxes under PD 1590 considering that Section 13 thereof requires it to
pay, either the lower amount of the basic corporate income tax or franchise tax (which
are both direct taxes), at its option, mere exercise of such option already relieves
respondent of liability for all other taxes and/or duties, whether direct or indirect taxes.

Parenthetically, the basic corporate income tax of respondent shall be based on its
annual net taxable income, computed in accordance with the NIRC of 1997, as
amended. PD 1590 also explicitly authorizes respondent, in the computation of its basic
corporate income tax, to: (1) depreciate its assets twice as fast the normal rate of
depreciation;19 and (2) carry over deduction from taxable income any net loss incurred
in any year up to five years following the year of such loss.

The franchise tax, on the other hand, shall be 2% of the gross revenues derived by
respondent from all sources, whether transport or non-transport operations. However,
with respect to international air-transport service, the franchise tax shall only be
imposed on the gross passenger, mail, and freight revenues of respondent from its
outgoing flights.

09. CIR vs. Interpublic Group of companies, Inc., GR No. 207039, 14 August 2019
ISSUE
Whether the IGC was doing business in the Philippines when it collected dividend earnings from sources
within the Philippines.

RULING

Mere investment as a shareholder by a foreign corporation in a duly registered domestic corporation shall not
be deemed "doing business" in the Philippines. It is clear then that the IGC's act of subscribing shares of stocks
from McCann, a duly registered domestic corporation, maintaining investments therein, and deriving dividend
income therefrom, does not qualify as "doing business" contemplated under R.A. No. 7042. Hence, the IGC is
not required to secure a license before it can file a claim for tax refund.

Having made an independent investment, then it is the ICG that should face the tax consequence and avail of
tax reliefs (i.e., refund, credit, preferential tax rate) appurtenant to such investment.

As it is recognized, the application of the provisions of the National Internal Revenue Code (NIRC) must be
subject to the provisions of tax treaties entered into by the Philippines with foreign countries. 16 It remains only
to note that under the Philippines-US Convention "With Respect to Taxes on Income," the Philippines, by a
treaty commitment, reduced the regular rate of dividend tax to a maximum of 20% of the gross amount of
dividends paid to US parent corporations.

For this reason, it was established on the part of the Philippines a deliberate undertaking to reduce the
regular dividend tax rate of 35%.20 This goes to show that the IGC, being a non-resident
US corporation is qualified to avail of the aforesaid 15% preferential tax rate on the dividends it earned from
the Philippines. It was proven that the country which it was domiciled shall grant similar tax relief/credit
against the tax due upon the dividends earned from sources within the Philippines. Clearly, the IGC has
made an overpayment of its tax due of FWT by using the 35% tax rate.
2. whether the IGC, by failing to file a Tax Treaty Relief Application (TTRA) with the International Tax
Affairs Division (ITAD) of the BIR pursuant to RMO No. 1-2000, was effectively deprived of its right to
claim a tax refund based on the said overpayment.

Specifically, the RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has
entered into and to which we are expected to observe compliance therewith in good faith. As explained by the
Court, the purpose of these international agreements is to reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 23
More precisely, the tax conventions are drafted with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods.

At any rate, the application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.28 This is only applicable to taxes paid on the basis of international
agreements and treaties. Once it was settled that the taxpayer is entitled to the relief under the tax treaty,
then by all means it could pay its tax liabilities using the tax relief provided by the treaty. In other words,
the requirements under RMO No. 1-2000 applies only to a taxpayer who is about to pay their taxes on the
basis of tax reliefs provided by international agreements and treaties and to confirm its entitlement to the said
reliefs.

The application for tax treaty relief is not applicable on claims for tax refund.

it would be illogical for the IGC to comply with the prior requirement under RMO No.1-2000 before it paid
the FWT on the dividends earned. At the time of the payment transaction, the IGC was not availing of the 15%
preferential tax rate as prescribed pursuant to the treaty, but it was applying the 35% regular tax rate. RMO No.
1-2000 is clear that application must be filed 15 days before the transaction (time of payment). It appears then
that the prior application requirement under RMO No. 1-2000 is no longer a condition precedent to refund an
erroneously paid tax on the basis of the regular tax rate under the Tax Code.

The fact of payment of the tax sought to be refunded is essentially a factual finding of the CTA and as such,
the same must be accorded weight and respect especially if supported by substantial evidence. Here, it was
proven that on June 13, 2006, McCann withheld FWT on the dividends earned by the IGC at the rate of 35% in
the amount of P21,593,111.93 and remitted the same on June 15, 2006. To prove this, the IGC submitted the
Monthly Remittance Return of the Final Income Taxes Withheld of McCann and the accompanying payment
transaction.

It bears stressing that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the
exemption.37 The burden of proof is upon him who claims the exemption in his favor and he must be able to
justify his claim by the clearest grant of organic or statute law.38 The IGC was able to discharge such burden
of proof required by law.

DECISION:

WHEREFORE, the Petition is DENIED.

10. Afisco Insurance Corp., et al. vs. CA et al.

DOCTRINE:
Unregistered Partnerships and associations are considered as corporations for tax purposes
– Under the old internal revenue code, “A tax is hereby imposed upon the taxable net
income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, no matter how created
or organized, xxx.” Ineludibly, the Philippine legislature included in the concept of
corporations those entities that resembled them such as unregistered partnerships and
associations.

Insurance pool in the case at bar is deemed a partnership or association taxable as a

corporation – In the case at bar, petitioners-insurance companies formed a Pool Agreement,
or an association that would handle all the insurance businesses covered under their quota-
share reinsurance treaty and surplus reinsurance treaty with Munich is considered a
partnership or association which may be taxed as a ccorporation.

Double Taxation is not Present in the Case at Bar – Double taxation means “taxing the same
person twice by the same jurisdiction for the same thing.” In the instant case, the insurance
pool is a taxable entity distince from the individual corporate entities of the ceding
companies. The tax on its income is obviously different from the tax on the dividends
received by the companies. There is no double taxation.
FACTS:

The petitioners are 41 non-life domestic insurance corporations. They issued risk insurance
policies for machines. The petitioners in 1965 entered into a Quota Share Reinsurance
Treaty and a Surplus Reinsurance Treaty with the Munchener Ruckversicherungs-
Gesselschaft (hereafter called Munich), a non-resident foreign insurance corporation.  The
reinsurance treaties required petitioners to form a pool, which they complied with.

In 1976, the pool of machinery insurers submitted a financial statement and filed an
“Information Return of Organization Exempt from Income Tax” for 1975. On the basis of
this, the CIR assessed a deficiency of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners,
respectively.

The Court of Tax Appeal sustained the petitioner's liability. The Court of Appeals dismissed
their appeal.

The CA ruled in that the pool of machinery insurers was a partnership taxable as a
corporation, and that the latter’s collection of premiums on behalf of its members, the
ceding companies, was taxable income. 
ISSUE/S:

1. Whether or not the pool is taxable as a corporation.

2. Whether or not there is double taxation.

HELD:

1) Yes: Pool taxable as a corporation

Argument of Petitioner: The reinsurance policies were written by them “individually and
separately,” and that their liability was limited to the extent of their allocated share in the
original risks thus reinsured. Hence, the pool did not act or earn income as a reinsurer. Its
role was limited to its principal function of “allocating and distributing the risk(s) arising
from the original insurance among the signatories to the treaty or the members of the pool
based on their ability to absorb the risk(s) ceded[;] as well as the performance of incidental
functions, such as records, maintenance, collection and custody of funds, etc.”

Argument of SC: According to Section 24 of the NIRC of 1975:

“SEC. 24.  Rate of tax on corporations.  --  (a)  Tax on domestic corporations.  --  A tax is

hereby imposed upon the taxable net income received during each taxable year from all
sources by every corporation organized in, or existing under the laws of the Philippines, no
matter how created or organized, but not including duly registered general co-partnership
(compañias colectivas), general professional partnerships, private educational institutions,
and building and loan associations xxx.”

Ineludibly, the Philippine legislature included in the concept of corporations those

entities that resembled them such as unregistered partnerships and associations.
Interestingly, the NIRC’s inclusion of such entities in the tax on corporations was made even
clearer by the Tax Reform Act of 1997 Sec. 27 read together with Sec. 22 reads:

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

(A)  In General.  --  Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in
Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.”
“SEC. 22.  --  Definition.  --  When used in this Title:
xxx  xxx                                    xxx
(B)  The term ‘corporation’ shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government.  ‘General
professional partnerships’ are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.
Thus, the Court in Evangelista v. Collector of Internal Revenue held that Section 24 covered
these unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from their individual members.
Furthermore, Pool Agreement or an association that would handle all the insurance
businesses covered under their quota-share reinsurance treaty and surplus reinsurance
treaty with Munich may be considered a partnership because it contains the following
elements: (1) The pool has a common fund, consisting of money and other valuables that
are deposited in the name and credit of the pool. This common fund pays for the
administration and operation expenses of the pool. (2) The pool functions through an
executive board, which resembles the board of directors of a corporation, composed of one
representative for each of the ceding companies. (3) While, the pool itself is not a reinsurer
and does not issue any policies; its work is indispensable, beneficial and economically useful
to the business of the ceding companies and Munich, because without it they would not
have received their premiums pursuant to the agreement with Munich. Profit motive or
business is, therefore, the primordial reason for the pool’s formation.

2) No: There is no double taxation.

Argument of Petitioner: Remittances of the pool to the ceding companies and Munich are
not dividends subject to tax. Imposing a tax “would be tantamount to an illegal double
taxation, as it would result in taxing the same premium income twice in the hands of the
same taxpayer.” Furthermore, even if such remittances were treated as dividends, they
would have been exempt under tSections 24 (b) (I) and 263 of the 1977 NIRC , as well as
Article 7 of paragraph 1and Article 5 of paragraph 5 of the RP-West German Tax Treaty.

Argument of Supreme Court: Double taxation means “taxing the same person twice by the
same jurisdiction for the same thing.” In the instant case, the insurance pool is a taxable
entity distince from the individual corporate entities of the ceding companies. The tax on its
income is obviously different from the tax on the dividends received by the companies.
There is no double taxation.

Tax exemption cannot be claimed by non-resident foreign insurance corporattion; tax

exemption construed strictly against the taxpayer - Section 24 (b) (1) pertains to tax on
foreign corporations; hence, it cannot be claimed by the ceding companies which are
domestic corporations. Nor can Munich, a foreign corporation, be granted exemption based
solely on this provision of the Tax Code because the same subsection specifically taxes
dividends, the type of remittances forwarded to it by the pool. The foregoing interpretation
of Section 24 (b) (1) is in line with the doctrine that a tax exemption must be construed
strictissimi juris, and the statutory exemption claimed must be expressed in a language too
plain to be mistaken.