Tax Cases Batch 1

Exemption to Estate taxes
Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-22734
September 15, 1967
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.
BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom
is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of Manila (Case No. 71129)
wherein the surviving widow was appointed administratrix. The estate was divided among and awarded to the heirs
and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax liability of the
estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income tax returns were not filed.
Thereupon, the representative of the Collector of Internal Revenue filed said returns for the estate on the basis of
information and data obtained from the aforesaid estate proceedings and issued an assessment for the following:
1. Deficiency income tax
1945
P135.83
1946
436.95
1947
1,206.91
Add: 5% surcharge
1% monthly interest
from November 30,
1953 to April 15, 1957
Compromise for late
filing
Compromise for late
payment
Total amount due
P1,779.69
88.98
720.77
80.00
40.00
P2,707.44
===========
P14.50
===========
Additional residence tax for

1945
3. Real Estate dealer's tax for the
fourth quarter of 1946 and the
P207.50
whole year of 1947
===========
Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the Court of Tax
Appeals alleging that he was appealing "only that proportionate part or portion pertaining to him as one of the heirs."
2.
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the Commissioner on
the ground that his right to assess and collect the tax has prescribed. The Commissioner appealed and this Court
affirmed the findings of the Tax Court in respect to the assessment for income tax for the year 1947 but held that the
right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and 1946 the returns were filed on
August 24, 1953; assessments for both taxable years were made within five years therefrom or on October 19, 1953;
and the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For taxable year
1947, however, the return was filed on March 1, 1948; the assessment was made on October 19, 1953, more than five
years from the date the return was filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly,
We remanded the case to the Tax Court for further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for the payment
corresponding to his share of the following taxes:
Deficiency income tax
1945
P135.83
1946
436.95
Real estate dealer's
fixed tax 4th quarter
of 1946 and whole
year of 1947
P187.50
The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the
payment of all the taxes found by the Tax Court to be due from the estate in the total amount of P760.28 instead of
only for the amount of taxes corresponding to his share in the estate.
1awphl.nt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the
estate only up to the extent of and in proportion to any share he received. He relies on Government of the Philippine
Islands v. Pamintuan2 where We held that "after the partition of an estate, heirs and distributees are liable individually
for the payment of all lawful outstanding claims against the estate in proportion to the amount or value of the property
they have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer.
As an heir he is individually answerable for the part of the tax proportionate to the share he received from the
inheritance.3 His liability, however, cannot exceed the amount of his share.4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his
possession. The reason is that the Government has a lien on the P2,500.00 received by him from the estate as his share
in the inheritance, for unpaid income taxes 4a for which said estate is liable, pursuant to the last paragraph of Section
315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance
company liable to pay the income tax, neglects or refuses to pay the same after demand, the amount shall be a
lien in favor of the Government of the Philippines from the time when the assessment was made by the
Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue in addition
thereto upon all property and rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500.00,
to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will have a right of
contribution from his co-heirs,5 to achieve an adjustment of the proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and
collecting from each one of them the amount of the tax proportionate to the inheritance received. This remedy was
adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the Government filed an action
against all the heirs for the collection of the tax. This action rests on the concept that hereditary property consists only
of that part which remains after the settlement of all lawful claims against the estate, for the settlement of which the
entire estate is first liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate is
levied proportionately against them is to achieve thereby two results: first, payment of the tax; and second, adjustment
of the shares of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property
belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of
an heir or transferee to the payment of the tax due, the estate. This second remedy is the very avenue the Government
took in this case to collect the tax. The Bureau of Internal Revenue should be given, in instances like the case at bar,
the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt
and certain availability is an imperious need. 7 And as afore-stated in this case the suit seeks to achieve only one
objective: payment of the tax. The adjustment of the respective shares due to the heirs from the inheritance, as
lessened by the tax, is left to await the suit for contribution by the heir from whom the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and real estate
dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice to his right of
contribution for his co-heirs. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
Lifeblood Theory and benefits protection theory

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-28896 February 17, 1988

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other
hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from the petitioner assessing it in the total amount of
P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On
March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto
Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the
case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred
service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the
Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of
distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9being
"tantamount to an outright denial thereof and makes the said request deemed rejected." 10 But there is a special
circumstance in the case at bar that prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its
letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued;
indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a
copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant
was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary
period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only
on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the
warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with
Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered.
The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of
the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the
Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact,
as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has
been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent,
authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr.,
Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil
Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as
agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals. 16
There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid
the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no
distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the same family in
control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or
in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and
the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in
different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict
business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year,
when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the
total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in
view of the close relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21After deducting the
said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60%
of the total commission. This was a reasonable proportion, considering that it was the payees who did practically
everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate
properties. This finding of the respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--All the 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; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or
incurred in carrying on any trade or business may be included a reasonable allowance for salaries or
other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for service.
This test and deductibility in the case of compensation payments is whether they are reasonable and
are, in fact, payments purely for service. This test and its practical application may be further stated
and illustrated as follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close relationship to the stockholdings of
the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated
Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by
the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently
recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of
the government. The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes
that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a
right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
Teehankee, C.J., Narvasa, Gancayco and Grio-Aquino, JJ., concur.
Necessity Theory
SUPREME COURT
Manila
EN BANC
G.R. No. L-22074
April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance contracts, on various
dates, with foreign insurance companies not doing business in the Philippines namely: Imperio Compaia de Seguros,
La Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza, Tokio
Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd., Swiss Reinsurance Company and Tariff
Reinsurance Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a portion of the
premiums on insurance it has originally underwritten in the Philippines, in consideration for the assumption by the
latter of liability on an equivalent portion of the risks insured. Said reinsurrance contracts were signed by Philippine
Guaranty Co., Inc. in Manila and by the foreign reinsurers outside the Philippines, except the contract with Swiss
Reinsurance Company, which was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability simultaneous with that of Philippine
Guaranty Co., Inc. under the original insurance. Philippine Guaranty Co., Inc. was required to keep a register in
Manila where the risks ceded to the foreign reinsurers where entered, and entry therein was binding upon the
reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the original assured were to be
paid for by the foreign reinsurers. The foreign reinsurers further agreed, in consideration for managing or
administering their affairs in the Philippines, to compensate the Philippine Guaranty Co., Inc., in an amount equal to
5% of the reinsurance premiums. Conflicts and/or differences between the parties under the reinsurance contracts
were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss Reinsurance Company stipulated that their
contract shall be construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to the foreign reinsurers the
following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .
P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . .
721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income when it file its income tax
returns for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, per letter dated April
13, 1959, the Commissioner of Internal Revenue assessed against Philippine Guaranty Co., Inc. withholding tax on
the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .
P768,580.00
Withholding tax due thereon at 24% . . . . . . . .
P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
Compromise for non-filing of withholding
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . .
46,114.00
100.00
P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . .
P780.880.68
Withholding tax due thereon at 24% . . . . . . . .
P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .
P184,411.00
Compromise for non-filing of withholding

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
100.00
TOTAL AMOUNT DUE & COLLECTIBLE . . . .

P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are not subject to withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal Revenue the respective sums of P202,192.00 and P173,153.00
or the total sum of P375,345.00 as withholding income taxes for the years 1953 and 1954, plus the statutory
delinquency penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the Commissioner of Internal Revenue's
assessment for withholding tax on the reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not constitute income from sources within the
Philippines because the foreign reinsurers did not engage in business in the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that constituted the undertaking to reinsure
Philippine Guaranty Co., Inc. against loses arising from the original insurances in the Philippines were performed in
the Philippines. The liability of the foreign reinsurers commenced simultaneously with the liability of Philippine
Guaranty Co., Inc. under the original insurances. Philippine Guaranty Co., Inc. kept in Manila a register of the risks
ceded to the foreign reinsurers. Entries made in such register bound the foreign resinsurers, localizing in the
Philippines the actual cession of the risks and premiums and assumption of the reinsurance undertaking by the foreign
reinsurers. Taxes on premiums imposed by Section 259 of the Tax Code for the privilege of doing insurance business
in the Philippines were payable by the foreign reinsurers when the same were not recoverable from the original
assured. The foreign reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the ceded premiums,
in consideration for administration and management by the latter of the affairs of the former in the Philippines in
regard to their reinsurance activities here. Disputes and differences between the parties were subject to arbitration in
the City of Manila. All the reinsurance contracts, except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later signed by the foreign reinsurers abroad. Although the
contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company was signed by both parties in
Switzerland, the same specifically provided that its provision shall be construed according to the laws of the
Philippines, thereby manifesting a clear intention of the parties to subject themselves to Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income from sources within the Philippines.
The word "sources" has been interpreted as the activity, property or service giving rise to the income. 1 The
reinsurance premiums were income created from the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking, as explained
above, took place in the Philippines. These insurance premiums, therefore, came from sources within the Philippines
and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of activity. Business should not be
continuity and progression of transactions 2 while activity may consist of only a single transaction. An activity may
occur outside the place of business. Section 24 of the Tax Code does not require a foreign corporation to engage in
business in the Philippines in subjecting its income to tax. It suffices that the activity creating the income is performed
or done in the Philippines. What is controlling, therefore, is not the place of business but the place ofactivity that
created an income.
Petitioner further contends that the reinsurance premiums are not income from sources within the Philippines because
they are not specifically mentioned in Section 37 of the Tax Code. Section 37 is not an all-inclusive enumeration, for
it merely directs that the kinds of income mentioned therein should be treated as income from sources within the
Philippines but it does not require that other kinds of income should not be considered likewise.
1wph1.t
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to give the citizenry an army to resist an aggression, a navy to defend its
shores from invasion, a corps of civil servants to serve, public improvement designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection which a government is
supposed to provide. Considering that the reinsurance premiums in question were afforded protection by the
government and the recipient foreign reinsurers exercised rights and privileges guaranteed by our laws, such
reinsurance premiums and reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the Commissioner of Internal Revenue
requiring no withholding of the tax due on the reinsurance premiums in question relieved it of the duty to pay the
corresponding withholding tax thereon. This defense of petitioner may free if from the payment of surcharges or
penalties imposed for failure to pay the corresponding withholding tax, but it certainly would not exculpate if from
liability to pay such withholding tax The Government is not estopped from collecting taxes by the mistakes or errors
of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines are subject to withholding tax under Section 53 and 54 of the Tax Code, suffice it to state that this question
has already been answered in the affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal Revenue, L19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the amount actually remitted to the
foreign reinsurers instead of from the total amount ceded. And since it did not remit any amount to its foreign insurers
in 1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of foreign corporations subject to
taxation under this Title not engaged in trade or business within the Philippines and not having any office or
place of business therein, there shall be deducted and withheld at the source in the same manner and upon the
same items as is provided in Section fifty-three a tax equal to twenty-four per centum thereof, and such tax
shall be returned and paid in the same manner and subject to the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general copartnerships (compaias colectivas), in
what ever capacity acting, including lessees or mortgagors of real or personal property, trustees acting in any
trust capacity, executors, administrators, receivers, conservators, fiduciaries, employers, and all officers and
employees of the Government of the Philippines having the control, receipt, custody, disposal, or payment of
interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and income of any nonresident alien
individual, not engaged in trade or business within the Philippines and not having any office or place of
business therein, shall (except in the case provided for in subsection [a] of this section) deduct and withhold
from such annual or periodical gains, profits, and income a tax equal to twelveper
centum thereof: Provided That no deductions or withholding shall be required in the case of dividends paid by
a foreign corporation unless (1) such corporation is engaged in trade or business within the Philippines or has
an office or place of business therein, and (2) more than eighty-five per centum of the gross income of such
corporation for the three-year period ending with the close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the corporation has been in existence)was derived from
sources within the Philippines as determined under the provisions of section thirty-seven: Provided, further,
That the Collector of Internal Revenue may authorize such tax to be deducted and withheld from the interest
upon any securities the owners of which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income therein enumerated in determining the amount to be
withheld. According, in computing the withholding tax due on the reinsurance premium in question, no deduction
shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty Co., Inc. is hereby ordered to pay to
the Commissioner of Internal Revenue the sums of P202,192.00 and P173,153.00, or a total amount of P375,345.00,
as withholding tax for the years 1953 and 1954, respectively. If the amount of P375,345.00 is not paid within 30 days
from the date this judgement becomes final, there shall be collected a surcharged of 5% on the amount unpaid, plus
interest at the rate of 1% a month from the date of delinquency to the date of payment, provided that the maximum
amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years.
With costs againsts petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon and Regala, JJ., concur.
Makalintal and Zaldivar, JJ., took no part.
Double taxation
SUPREME COURT
Manila
EN BANC
G.R. No. L-26521
December 28, 1968
EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

vs.
CITY OF ILOILO, defendants-appellants.
Pelaez, Jalandoni and Jamir for plaintiff-appellees.
Assistant City Fiscal Vicente P. Gengos for defendant-appellant.
CASTRO, J.:
Appeal by the defendant City of Iloilo from the decision of the Court of First Instance of Iloilo declaring illegal
Ordinance 11, series of 1960, entitled, "An Ordinance Imposing Municipal License Tax On Persons Engaged In The
Business Of Operating Tenement Houses," and ordering the City to refund to the plaintiffs-appellees the sums of
collected from them under the said ordinance.
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86, imposing license tax fees as follows:
(1) tenement house (casa de vecindad), P25.00 annually; (2) tenement house, partly or wholly engaged in or dedicated
to business in the streets of J.M. Basa, Iznart and Aldeguer, P24.00 per apartment; (3) tenement house, partly or
wholly engaged in business in any other streets, P12.00 per apartment. The validity and constitutionality of this
ordinance were challenged by the spouses Eusebio Villanueva and Remedies Sian Villanueva, owners of four
tenement houses containing 34 apartments. This Court, in City of Iloilo vs. Remedios Sian Villanueva and Eusebio
Villanueva, L-12695, March 23, 1959, declared the ordinance ultra vires, "it not appearing that the power to tax
owners of tenement houses is one among those clearly and expressly granted to the City of Iloilo by its Charter."
On January 15, 1960 the municipal board of Iloilo City, believing, obviously, that with the passage of Republic Act
2264, otherwise known as the Local Autonomy Act, it had acquired the authority or power to enact an ordinance
similar to that previously declared by this Court as ultra vires, enacted Ordinance 11, series of 1960, hereunder quoted
in full:
AN ORDINANCE IMPOSING MUNICIPAL LICENSE TAX ON PERSONS ENGAGED IN THE
BUSINESS OF OPERATING TENEMENT HOUSES
Be it ordained by the Municipal Board of the City of Iloilo, pursuant to the provisions of Republic Act No.
2264, otherwise known as the Autonomy Law of Local Government, that:
Section 1. A municipal license tax is hereby imposed on tenement houses in accordance with the schedule
of payment herein provided.
Section 2. Tenement house as contemplated in this ordinance shall mean any building or dwelling for
renting space divided into separate apartments or accessorias.
Section 3. The municipal license tax provided in Section 1 hereof shall be as follows:
I. Tenement houses:
(a) Apartment house made of strong materials
P20.00 per door p.a.
(b) Apartment house made of mixed materials
II Rooming house of strong materials
Rooming house of mixed materials
P5.00 per door p.a.
III. Tenement house partly or wholly engaged in or dedicated to business

in the following streets: J.M. Basa, Iznart, Aldeguer, Guanco and
Ledesma from Plazoleto Gay to Valeria. St.
IV. Tenement house partly or wholly engaged in or dedicated to business

in any other street
V. Tenement houses at the streets surrounding the super market as soon

as said place is declared commercial
Section 4. All ordinances or parts thereof inconsistent herewith are hereby amended.
Section 5. Any person found violating this ordinance shall be punished with a fine note exceeding Two
Hundred Pesos (P200.00) or an imprisonment of not more than six (6) months or both at the discretion of the
Court.
Section
6
This
ENACTED, January 15, 1960.
ordinance
shall
take
effect
upon
approval.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five tenement houses,
aggregately containing 43 apartments, while the other appellees and the same Remedios S. Villanueva are owners of
ten apartments. Each of the appellees' apartments has a door leading to a street and is rented by either a Filipino or
Chinese merchant. The first floor is utilized as a store, while the second floor is used as a dwelling of the owner of the
store. Eusebio Villanueva owns, likewise, apartment buildings for rent in Bacolod, Dumaguete City, Baguio City and
Quezon City, which cities, according to him, do not impose tenement or apartment taxes.
By virtue of the ordinance in question, the appellant City collected from spouses Eusebio Villanueva and Remedios S.
Villanueva, for the years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza, Teresita S.
Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of P1,317.00. Eusebio Villanueva has
likewise been paying real estate taxes on his property.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended complaint,
respectively, against the City of Iloilo, in the aforementioned court, praying that Ordinance 11, series of 1960, be
declared "invalid for being beyond the powers of the Municipal Council of the City of Iloilo to enact, and
unconstitutional for being violative of the rule as to uniformity of taxation and for depriving said plaintiffs of the
equal protection clause of the Constitution," and that the City be ordered to refund the amounts collected from them
under the said ordinance.
On March 30, 1966,1 the lower court rendered judgment declaring the ordinance illegal on the grounds that (a)
"Republic Act 2264 does not empower cities to impose apartment taxes," (b) the same is "oppressive and
unreasonable," for the reason that it penalizes owners of tenement houses who fail to pay the tax, (c) it constitutes not
only double taxation, but treble at that and (d) it violates the rule of uniformity of taxation.
The issues posed in this appeal are:
1. Is Ordinance 11, series of 1960, of the City of Iloilo, illegal because it imposes double taxation?
2. Is the City of Iloilo empowered by the Local Autonomy Act to impose tenement taxes?
3. Is Ordinance 11, series of 1960, oppressive and unreasonable because it carries a penal clause?
4. Does Ordinance 11, series of 1960, violate the rule of uniformity of taxation?
1. The pertinent provisions of the Local Autonomy Act are hereunder quoted:
SEC. 2. Any provision of law to the contrary notwithstanding, all chartered cities, municipalities and
municipal districts shall have authority to impose municipal license taxes or fees upon persons engaged in any
occupation or business, or exercising privileges in chartered cities, municipalities or municipal districts by
requiring them to secure licences at rates fixed by the municipal board or city council of the city, the
municipal council of the municipality, or the municipal district council of the municipal district; to collect
fees and charges for services rendered by the city, municipality or municipal district; to regulate and impose
reasonable fees for services rendered in connection with any business, profession or occupation being
conducted within the city, municipality or municipal district and otherwise to levy for public purposes, just
and uniform taxes, licenses or fees; Provided, That municipalities and municipal districts shall, in no case,
impose any percentage tax on sales or other taxes in any form based thereon nor impose taxes on articles
subject to specific tax, except gasoline, under the provisions of the National Internal Revenue Code;Provided,
however, That no city, municipality or municipal district may levy or impose any of the following:
(a) Residence tax;
(b) Documentary stamp tax;
(c) Taxes on the business of persons engaged in the printing and publication of any newspaper, magazine,
review or bulletin appearing at regular intervals and having fixed prices for for subscription and sale, and
which is not published primarily for the purpose of publishing advertisements;
(d) Taxes on persons operating waterworks, irrigation and other public utilities except electric light, heat and
power;
(e) Taxes on forest products and forest concessions;
(f) Taxes on estates, inheritance, gifts, legacies, and other acquisitions mortis causa;
(g) Taxes on income of any kind whatsoever;
(h) Taxes or fees for the registration of motor vehicles and for the issuance of all kinds of licenses or permits
for the driving thereof;
(i) Customs duties registration, wharfage dues on wharves owned by the national government, tonnage, and
all other kinds of customs fees, charges and duties;
(j) Taxes of any kind on banks, insurance companies, and persons paying franchise tax; and
(k) Taxes on premiums paid by owners of property who obtain insurance directly with foreign insurance
companies.
A tax ordinance shall go into effect on the fifteenth day after its passage, unless the ordinance shall provide
otherwise: Provided, however, That the Secretary of Finance shall have authority to suspend the effectivity of
any ordinance within one hundred and twenty days after its passage, if, in his opinion, the tax or fee therein
levied or imposed is unjust, excessive, oppressive, or confiscatory, and when the said Secretary exercises this
authority the effectivity of such ordinance shall be suspended.
In such event, the municipal board or city council in the case of cities and the municipal council or municipal
district council in the case of municipalities or municipal districts may appeal the decision of the Secretary of
Finance to the court during the pendency of which case the tax levied shall be considered as paid under
protest.
It is now settled that the aforequoted provisions of Republic Act 2264 confer on local governments broad taxing
authority which extends to almost "everything, excepting those which are mentioned therein," provided that the tax so
levied is "for public purposes, just and uniform," and does not transgress any constitutional provision or is not
repugnant to a controlling statute.2 Thus, when a tax, levied under the authority of a city or municipal ordinance, is
not within the exceptions and limitations aforementioned, the same comes within the ambit of the general rule,
pursuant to the rules of expressio unius est exclusio alterius, and exceptio firmat regulum in casibus non excepti.
Does the tax imposed by the ordinance in question fall within any of the exceptions provided for in section 2 of the
Local Autonomy Act? For this purpose, it is necessary to determine the true nature of the tax. The appellees strongly
maintain that it is a "property tax" or "real estate tax," 3 and not a "tax on persons engaged in any occupation or
business or exercising privileges," or a license tax, or a privilege tax, or an excise tax. 4 Indeed, the title of the
ordinance designates it as a "municipal license tax on persons engaged in the business of operating tenement houses,"
while section 1 thereof states that a "municipal license tax is hereby imposed on tenement houses." It is the
phraseology of section 1 on which the appellees base their contention that the tax involved is a real estate tax which,
according to them, makes the ordinance ultra vires as it imposes a levy "in excess of the one per centum real estate tax
allowable under Sec. 38 of the Iloilo City Charter, Com. Act 158."5.
It is our view, contrary to the appellees' contention, that the tax in question is not a real estate tax. Obviously, the
appellees confuse the tax with the real estate tax within the meaning of the Assessment Law, 6 which, although not
applicable to the City of Iloilo, has counterpart provisions in the Iloilo City Charter. 7 A real estate tax is a direct tax on
the ownership of lands and buildings or other improvements thereon, not specially exempted, 8 and is payable
regardless of whether the property is used or not, although the value may vary in accordance with such factor. 9 The
tax is usually single or indivisible, although the land and building or improvements erected thereon are assessed
separately, except when the land and building or improvements belong to separate owners. 10 It is a fixed
proportion11 of the assessed value of the property taxed, and requires, therefore, the intervention of assessors. 12 It is
collected or payable at appointed times, 13 and it constitutes a superior lien on and is enforceable against the
property14 subject to such taxation, and not by imprisonment of the owner.
The tax imposed by the ordinance in question does not possess the aforestated attributes. It is not a tax on the land on
which the tenement houses are erected, although both land and tenement houses may belong to the same owner. The
tax is not a fixed proportion of the assessed value of the tenement houses, and does not require the intervention of
assessors or appraisers. It is not payable at a designated time or date, and is not enforceable against the tenement
houses either by sale or distraint. Clearly, therefore, the tax in question is not a real estate tax.
"The spirit, rather than the letter, or an ordinance determines the construction thereof, and the court looks less to its
words and more to the context, subject-matter, consequence and effect. Accordingly, what is within the spirit is within
the ordinance although it is not within the letter thereof, while that which is in the letter, although not within the spirit,
is not within the ordinance."15 It is within neither the letter nor the spirit of the ordinance that an additional real estate
tax is being imposed, otherwise the subject-matter would have been not merely tenement houses. On the contrary, it is
plain from the context of the ordinance that the intention is to impose a license tax on the operation of tenement
houses, which is a form of business or calling. The ordinance, in both its title and body, particularly sections 1 and 3
thereof, designates the tax imposed as a "municipal license tax" which, by itself, means an "imposition or exaction on
the right to use or dispose of property, to pursue a business, occupation, or calling, or to exercise a privilege." 16.
"The character of a tax is not to be fixed by any isolated words that may beemployed in the statute creating it,
but such words must be taken in the connection in which they are used and the true character is to be deduced
from the nature and essence of the subject." 17 The subject-matter of the ordinance is tenement houses whose
nature and essence are expressly set forth in section 2 which defines a tenement house as "any building or
dwelling for renting space divided into separate apartments or accessorias." The Supreme Court, in City of
Iloilo vs. Remedios Sian Villanueva, et al., L-12695, March 23, 1959, adopted the definition of a tenement
house18 as "any house or building, or portion thereof, which is rented, leased, or hired out to be occupied,
or is occupied, as the home or residence of three families or more living independently of each other and
doing their cooking in the premises or by more than two families upon any floor, so living and cooking, but
having a common right in the halls, stairways, yards, water-closets, or privies, or some of them." Tenement
houses, being necessarily offered for rent or lease by their very nature and essence, therefore constitute
a distinct form of business or calling, similar to the hotel or motel business, or the operation of lodging houses
or boarding houses. This is precisely one of the reasons why this Court, in the said case of City of Iloilo vs.
Remedios Sian Villanueva, et al., supra, declared Ordinance 86 ultra vires, because, although the municipal
board of Iloilo City is empowered, under sec. 21, par. j of its Charter, "to tax, fix the license fee for, and
regulate hotels, restaurants, refreshment parlors, cafes, lodging houses, boarding houses, livery garages,
public warehouses, pawnshops, theaters, cinematographs," tenement houses, which constitute a different
business enterprise,19 are not mentioned in the aforestated section of the City Charter of Iloilo. Thus, in the
aforesaid case, this Court explicitly said:.
"And it not appearing that the power to tax owners of tenement houses is one among those clearly and
expressly granted to the City of Iloilo by its Charter, the exercise of such power cannot be assumed and hence
the ordinance in question is ultra vires insofar as it taxes a tenement house such as those belonging to
defendants." .
The lower court has interchangeably denominated the tax in question as a tenement tax or an apartment tax. Called by
either name, it is not among the exceptions listed in section 2 of the Local Autonomy Act. On the other hand, the
imposition by the ordinance of a license tax on persons engaged in the business of operating tenement houses finds
authority in section 2 of the Local Autonomy Act which provides that chartered cities have the authority to impose
municipal license taxes or fees upon persons engaged in any occupation or business, or exercising privileges within
their respective territories, and "otherwise to levy for public purposes, just and uniform taxes, licenses, or fees." .
2. The trial court condemned the ordinance as constituting "not only double taxation but treble at that," because
"buildings pay real estate taxes and also income taxes as provided for in Sec. 182 (A) (3) (s) of the National Internal
Revenue Code, besides the tenement tax under the said ordinance." Obviously, what the trial court refers to as
"income taxes" are the fixed taxes on business and occupation provided for in section 182, Title V, of the National
Internal Revenue Code, by virtue of which persons engaged in "leasing or renting property, whether on their account
as principals or as owners of rental property or properties," are considered "real estate dealers" and are taxed
according to the amount of their annual income.20.
While it is true that the plaintiffs-appellees are taxable under the aforesaid provisions of the National Internal Revenue
Code as real estate dealers, and still taxable under the ordinance in question, the argument against double taxation may
not be invoked. The same tax may be imposed by the national government as well as by the local government. There
is nothing inherently obnoxious in the exaction of license fees or taxes with respect to the same occupation, calling or
activity by both the State and a political subdivision thereof.21.
The contention that the plaintiffs-appellees are doubly taxed because they are paying the real estate taxes and the
tenement tax imposed by the ordinance in question, is also devoid of merit. It is a well-settled rule that a license tax
may be levied upon a business or occupation although the land or property used in connection therewith is subject to
property tax. The State may collect an ad valorem tax on property used in a calling, and at the same time impose a
license tax on that calling, the imposition of the latter kind of tax being in no sensea double tax. 22.
"In order to constitute double taxation in the objectionable or prohibited sense the same property must be
taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subjectmatter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction
or taxing district, during the same taxing period, and they must be the same kind or character of tax." 23 It has
been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the
sametaxing authority, are not of the same kind or character.
At all events, there is no constitutional prohibition against double taxation in the Philippines. 24 It is something not
favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the
requirement that taxes must be uniform."25.
3. The appellant City takes exception to the conclusion of the lower court that the ordinance is not only oppressive
because it "carries a penal clause of a fine of P200.00 or imprisonment of 6 months or both, if the owner or owners of
the tenement buildings divided into apartments do not pay the tenement or apartment tax fixed in said ordinance," but
also unconstitutional as it subjects the owners of tenement houses to criminal prosecution for non-payment of an
obligation which is purely sum of money." The lower court apparently had in mind, when it made the above ruling,
the provision of the Constitution that "no person shall be imprisoned for a debt or non-payment of a poll tax." 26 It is
elementary, however, that "a tax is not a debt in the sense of an obligation incurred by contract, express or implied,
and therefore is not within the meaning of constitutional or statutory provisions abolishing or prohibiting
imprisonment for debt, and a statute or ordinance which punishes the non-payment thereof by fine or imprisonment is
not, in conflict with that prohibition." 27 Nor is the tax in question a poll tax, for the latter is a tax of a fixed amount
upon all persons, or upon all persons of a certain class, resident within a specified territory, without regard to their
property or the occupations in which they may be engaged. 28 Therefore, the tax in question is not oppressive in the
manner the lower court puts it. On the other hand, the charter of Iloilo City 29 empowers its municipal board to "fix
penalties for violations of ordinances, which shall not exceed a fine of two hundred pesos or six months'
imprisonment, or both such fine and imprisonment for each offense." In Punsalan, et al. vs. Mun. Board of Manila,
supra, this Court overruled the pronouncement of the lower court declaring illegal and void an ordinance imposing an
occupation tax on persons exercising various professions in the City of Manilabecause it imposed a penalty of fine and
imprisonment for its violation.30.
4. The trial court brands the ordinance as violative of the rule of uniformity of taxation.
"... because while the owners of the other buildings only pay real estate tax and income taxes the ordinance
imposes aside from these two taxes an apartment or tenement tax. It should be noted that in the assessment of
real estate tax all parts of the building or buildings are included so that the corresponding real estate tax could
be properly imposed. If aside from the real estate tax the owner or owners of the tenement buildings should
pay apartment taxes as required in the ordinance then it will violate the rule of uniformity of taxation.".
Complementing the above ruling of the lower court, the appellees argue that there is "lack of uniformity" and "relative
inequality," because "only the taxpayers of the City of Iloilo are singled out to pay taxes on their tenement houses,
while citizens of other cities, where their councils do not enact a similar tax ordinance, are permitted to escape such
imposition." .
It is our view that both assertions are undeserving of extended attention. This Court has already ruled that tenement
houses constitute a distinct class of property. It has likewise ruled that "taxes are uniform and equal when imposed
upon all property of the same class or character within the taxing authority." 31 The fact, therefore, that the owners of
other classes of buildings in the City of Iloilo do not pay the taxes imposed by the ordinance in question is no
argument at all against uniformity and equality of the tax imposition. Neither is the rule of equality and uniformity
violated by the fact that tenement taxesare not imposed in other cities, for the same rule does not require that taxes for
the same purpose should be imposed in different territorial subdivisions at the same time. 32So long as the burden of
the tax falls equally and impartially on all owners or operators of tenement houses similarly classified or situated,
equality and uniformity of taxation is accomplished. 33 The plaintiffs-appellees, as owners of tenement houses in the
City of Iloilo, have not shown that the tax burden is not equally or uniformly distributed among them, to overthrow
the presumption that tax statutes are intended to operate uniformly and equally.34.
5. The last important issue posed by the appellees is that since the ordinance in the case at bar is a mere reproduction
of Ordinance 86 of the City of Iloilo which was declared by this Court in L-12695, supra, as ultra vires, the decision
in that case should be accorded the effect of res judicata in the present case or should constitute estoppel by judgment.
To dispose of this contention, it suffices to say that there is no identity of subject-matter in that case andthis case
because the subject-matter in L-12695 was an ordinance which dealt not only with tenement houses but also
warehouses, and the said ordinance was enacted pursuant to the provisions of the City charter, while the ordinance in
the case at bar was enacted pursuant to the provisions of the Local Autonomy Act. There is likewise no identity of
cause of action in the two cases because the main issue in L-12695 was whether the City of Iloilo had the power under
its charter to impose the tax levied by Ordinance 11, series of 1960, under the Local Autonomy Act which took effect
on June 19, 1959, and therefore was not available for consideration in the decision in L-12695 which was promulgated
on March 23, 1959. Moreover, under the provisions of section 2 of the Local Autonomy Act, local governments may
now tax any taxable subject-matter or object not included in the enumeration of matters removed from the taxing
power of local governments.Prior to the enactment of the Local Autonomy Act the taxes that could be legally levied
by local governments were only those specifically authorized by law, and their power to tax was construed
in strictissimi juris. 35.
ACCORDINGLY, the judgment a quo is reversed, and, the ordinance in questionbeing valid, the complaint is hereby
dismissed. No pronouncement as to costs..
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez,Fernando and Capistrano, JJ., concur..
Tax Sparing Rule

SUPREME COURT
Manila
EN BANC
G.R. No. L-66838 December 2, 1991

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS,respondents.
T.A. Tejada & C.N. Lim for private respondent.
RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private respondent
Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to its parent
company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30,
from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%) withholding tax at
source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for
refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1)
of the National Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends
remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for
review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984,
the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held
that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim
the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%) which represents the
difference between the regular tax of thirty-five percent (35%) on corporations and
the tax of fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order
that "the dividends received by its non-resident parent company in the US (P&GUSA) may be subject to the preferential tax rate of 15% instead of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in
this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for
refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The question
was not raised by the Commissioner on the administrative level, and neither was it raised by him before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for
refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a
matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to
run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole stockholder.
It is commonplace that in the absence of explicit statutory provisions to the contrary, the government must follow the
same rules of procedure which bind private parties. It is, for instance, clear that the government is held to compliance
with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants are held to such
compliance, save only in respect of the matter of filing fees from which the Republic of the Philippines is exempt by
the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to raise
for the first time on appeal questions which had not been litigated either in the lower court or on the administrative
level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level, demanded that P&GPhil. produce an express authorization from its parent corporation to bring the claim for refund, then P&G-Phil. would
have been able forthwith to secure and produce such authorization before filing the action in the instant case. The
action here was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which,
as will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is
essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of
Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax, penalty, or
sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun
after the expiration of two years from the date of payment of the tax or penalty regardless of any
supervening cause that may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.
The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or
penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the tax or penalty. (As amended by P.D.
No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under
Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to
taximposed by the Title [on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent who is
"required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims and demands which the stockholder might wish
to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly
and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to be less than the amount that should have been withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer."
4 The terms
liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is statutorily
made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to
bring a suit for refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in fact
the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to attach. The reason is
to compel the withholding agent to withhold the tax under all circumstances. In effect, the
responsibility for the collection of the tax as well as the payment thereof is concentrated upon the
person over whom the Government has jurisdiction. Thus, the withholding agent is constituted the
agent of both the Government and the taxpayer. With respect to the collection and/or withholding of
the tax, he is the Government's agent. In regard to the filing of the necessary income tax return and
the payment of the tax to the Government, he is the agent of the taxpayer. The withholding agent,
therefore, is no ordinary government agent especially because under Section 53 (c) he is held
personally liable for the tax he is duty bound to withhold; whereas the Commissioner and his
deputies are not made liable by law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax to
the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring
an action for recovery of such claim. This implied authority is especially warranted where, is in the instant case, the
withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times, under the
effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal to deny the
implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or
telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the
proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and any
deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did not
demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer"
within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to
recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil.
to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the
NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade and
business in the Philippines, . . ., shall pay a tax equal to 35% of the gross income
receipt during its taxable year from all sources within the Philippines, as . . .
dividends . . .Provided, still further, that on dividends received from a domestic
corporation liable to tax under this Chapter, the tax shall be 15% of the dividends,
which shall be collected and paid as provided in Section 53 (d) of this Code, subject
to the condition that the country in which the non-resident foreign corporation, is
domiciled shall allow a credit against the tax due from the non-resident foreign
corporation, taxes deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on corporations and
the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign
stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines,"
applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words, in
the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&GUSA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC
specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent
(35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax credit
for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred divided tax
rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the parentcorporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The NIRC only
requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the twenty (20)
percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US Intemal
Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the benefits of this
subpart,the tax imposed by this chapter shall, subject to the applicable limitation of
section 904, be credited with the amounts provided in the applicable paragraph of
subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid
under sections 902 and 960. Such choice for any taxable year may be made or
changed at any time before the expiration of the period prescribed for making a
claim for credit or refund of the tax imposed by this chapter for such taxable year.
The credit shall not be allowed against the tax imposed by section 531 (relating to
the tax on accumulated earnings), against the additional tax imposed for the taxable
year under section 1333 (relating to war loss recoveries) or under section 1351
(relating to recoveries of foreign expropriation losses), or against the personal
holding company tax imposed by section 541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the
following amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen
of the United States and of a domestic corporation, the amount of
any income,war profits, and excess profits taxes paid or accrued
during the taxable year to any foreign country or to any possession
of the United States; and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this
subject, a domestic corporation which owns at least 10 percent of the voting stock
of a foreign corporation from which it receives dividends in any taxable year shall
xxx xxx xxx

(2) to the extent such dividends are paid by such foreign
corporation out of accumulated profits [as defined in subsection (c)
(1) (b)] of a year for which such foreign corporation is a less
developed country corporation, be deemed to have paid the same
proportion of any income, war profits, or excess profits taxes
paid or deemed to be paid by such foreign corporation to any
foreign country or to any possession of the United States on or with
respect to such accumulated profits, which the amount of such

dividends bears to the amount of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section, the term
"accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its
gains, profits, or income computed without reduction by the amount
of the income, war profits, and excess profits taxes imposed on or
with respect to such profits or income by any foreign country. . . .;
and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of
its gains, profits, or income in excess of the income, war profits, and
excess profitstaxes imposed on or with respect to such profits
or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction shows
otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earning. . . . (Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of
the dividend tax actually paid (i.e., withheld) from the dividend remittances to P&GUSA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax
credit 8for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough
that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept
merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words,
US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a part
of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil. and here
earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but instead Philippine
corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax
credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax
credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed
because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or
preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the
Philippine government under Section 24 (b) (1), NIRC, and which hence goes to
P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must
allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is
at least equal to the amount of the dividend tax waived by the Philippine
Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in
the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate
P35.00 Paid to the BIR by P&G-Phil. as Philippine

corporate income tax.
P100.00
-35.00
P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC
P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC
P13.00 Amount of dividend tax waived by Philippine

===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also
the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the
reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax
Code, may be computed arithmetically as follows:
- 9.75 Dividend tax withheld at the reduced (15%) rate
P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax
Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US
parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax
"deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section
902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with
the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of
Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal
Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of
Section 901 and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our
computation of the credit which the U.S. tax law allows in such cases is erroneous as the amount of
tax "deemed paid" to the Philippine government for purposes of credit against the U.S. tax by the
recipient of dividends includes a portion of the amount of income tax paid by the corporation
declaring the dividend in addition to the tax withheld from the dividend remitted. In other words, the
U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to
the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring
the dividend. Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income
of P100,000, it will pay P25,000 Philippine income tax thereon in accordance with Section 24(a) of
the Tax Code. The net income, after income tax, which is P75,000, will then be declared as dividend
to the U.S. corporation at 15% tax, or P11,250, will be withheld therefrom. Under the aforementioned
sections of the U.S. Internal Revenue Code, U.S. corporation receiving the dividend can utilize as
credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived
at as follows:
P75,000 x P25,000 = P18,750
100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250
P30,000
The amount of P18,750 deemed paid and to be credited against the U .S. tax on the dividends
received by the U.S. corporation from a Philippine subsidiary is clearly more than 20% requirement
ofPresidential Decree No. 369 as 20% of P75,000.00 the dividends to be remitted under the above
example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in
the sense that the dividends to be remitted by your client to its parent company shall be subject to the
withholding tax at the rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S.
Federal Tax Code, which are the bases of the ruling, are not revoked, amended and modified, the
effect of which will reduce the percentage of tax deemed paid and creditable against the U.S. tax on
dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and
BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976 Ruling
of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902, US
Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to
Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income
taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall
be allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. If the
taxpayer signifies in his return his desire to have the benefits of this
paragraphs, the tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of
the Philippines and of domestic corporation, the amount of net
income, war profits or excess profits, taxes paid or accrued during
the taxable year to any foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes actually
paid by it to the US governmente.g., for taxes collected by the US government on dividend remittances to the
Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which
owns a majority of the voting stock of a foreign corporation from which it receives dividends in any
taxable year shall be deemed to have paid the same proportion of any income, war-profits, or excessprofits taxes paid by such foreign corporation to any foreign country, upon or with respect to the
accumulated profits of such foreign corporation from which such dividends were paid, which the
amount of such dividends bears to the amount of such accumulated profits: Provided, That the
amount of tax deemed to have been paid under this subsection shall in no case exceed the same
proportion of the tax against which credit is taken which the amount of such dividends bears to the
amount of the entire net income of the domestic corporation in which such dividends are
included.The term "accumulated profits" when used in this subsection reference to a foreign
corporation, means the amount of its gains, profits, or income in excess of the income, war-profits,
and excess-profits taxes imposed upon or with respect to such profits or income; and the
Commissioner of Internal Revenue shall have full power to determine from the accumulated profits
of what year or years such dividends were paid; treating dividends paid in the first sixty days of any
year as having been paid from the accumulated profits of the preceding year or years (unless to his
satisfaction shown otherwise), and in other respects treating dividends as having been paid from the
most recently accumulated gains, profits, or earnings. In the case of a foreign corporation, the
income, war-profits, and excess-profits taxes of which are determined on the basis of an accounting
period of less than one year, the word "year" as used in this subsection shall be construed to mean
such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent
corporation for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a
Philippine-parent corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRCto
have paid a proportionate part of the US corporate income tax paid by its US subsidiary , although such US
tax was actually paid by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&GUSA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or
majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax
Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8),
NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the regular
thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had failed to
prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit in the
amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions of
administrative implementation arising after the legal question has been answered. The basic legal issue is of course,
this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or the
reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax
authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the
applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have
actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen
percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the
USA
"shall
allow a
credit
against
the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory
provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid"
tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend rate
becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax credit; it is a
provision which specifies when a particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical problem of
administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until
the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal
Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities unless
dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate here
applicable, was actually imposed and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues rulings that
the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC,
for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing
regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR the
amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US
parent corporation for the taxable year involved. Since the US tax laws can and do change, such implementing
regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task
of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We should leave
details relating to administrative implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to
trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the
statute even if, as in the case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent
(35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended
Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing
economy foremost of which is the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their
earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need
be imposed on dividends received by non-resident foreign corporations in the same manner as the tax
imposed on interest on foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the
Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the
investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate
unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would
simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax
credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1),
NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least
equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption
that a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.
P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate
P25.415US corporate tax payable by P&G-USA

without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
P15.66 US corporate income tax payable after Section 901

tax credit.
P55.25
- 15.66
P39.59 Amount received by P&G-USA net of R.P. and U.S.

===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)
- 0 - US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25 Amount received by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate
income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after
US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine
taxes. In the calculation of the Philippine Government, this should encourage additional investment or re-investment
in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of dividends paid
to US parent corporations:
Art 11. Dividends

xxx xxx xxx
(2) The rate of tax imposed by one of the Contracting States on dividends derived
from sources within that Contracting State by a resident of the other Contracting
State shall not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the
dividend ifduring the part of the paying corporation's taxable year which precedes
the date of payment of the dividend and during the whole of its prior taxable year (if
any), at least 10 percent of the outstanding shares of the voting stock of the paying
corporation was owned by the recipient corporation.
xxx xxx xxx
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] . 16 This is, of course, precisely the "deemed paid"
tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce the regular dividend
tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of US law (Section 902)
with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.
We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration
dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and
in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated
31 January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.
Separate Opinions
CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.
As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this country by
reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to
their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective tax
"take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the total
taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend tax only,
both payable to the Philippines, with the US tax liability being offset wholly or substantially by the US "deemed paid"
tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate
income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden
of the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.
It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues but it
will be realized later, and in greater measure, in terms of a more stable and robust economy.
BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some
observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v. Wander
Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that
sought to be reached in the instant Motion for Reconsideration.
1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner
of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that moreover,
the government can never be in estoppel, especially in matters involving taxes. In a word, the dissenting opinion
insists that errors of its agents should not jeopardize the government's position.
The above rule should not be taken absolutely and literally; if it were, the government would never lose any litigation
which is clearly not true. The issue involved here is not merely one of procedure; it is also one of fairness: whether the
government should be subject to the same stringent conditions applicable to an ordinary litigant. As the Court had
declared in Wander:
. . . To allow a litigant to assume a different posture when he comes before the court and challenge
the position he had accepted at the administrative level, would be to sanction a procedure whereby
the
Court which is supposed to review administrative determinations would not review, but
determine and decide for the first time, a question not raised at the administrative forum. . . . (160
SCRA at 566-577)
Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless have
been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require
petitioner to submit such proof.
2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual
amount credited by the US government against the income tax due from P & G USA on the dividends received from
private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and
(3) to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid in
the Philippines.
I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid" credit to
be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P &
G USA, is still unknown. Stated in other words, until dividends have actually been remitted to the US (which
presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax authorities
cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private respondent to
show documentary proof of its parent corporation having actually received the "deemed paid" tax credit from the
proper tax authorities, would be like putting the cart before the horse. The only way of cutting through this (what
Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the effect that the tax
laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code for applicability of
the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a reasonable period,
proof of the amount of "deemed paid" tax credit actually granted by the foreign tax authority. Imposing such a
resolutory condition should resolve the knotty problem of circularity.
3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax exemptions,
are to be construed strictissimi juris against the person or entity claiming the exemption; and that refunds cannot be
permitted to exist upon "vague implications."
Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and give
effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax statute reducing a
certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied without
interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose of Pres.
Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal Revenue
Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more inward foreign
investment. The same dissenting opinion hastens to add, however, that the granting of a reduced dividend tax rate "is
premised on reciprocity."
4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find
reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC.
Upon the other hand, where the law-making authority intended to impose a requirement of reciprocity as a condition
for grant of a privilege, the legislature does so expressly and clearly. For example, the gross estate of non-citizens and
non-residents of the Philippines normally includes intangible personal property situated in the Philippines, for
purposes of application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as amended by P.D.
1457), no taxes will be collected by the Philippines in respect of such intangible personal property if the law or the
foreign country of which the decedent was a citizen and resident at the time of his death allows a similar exemption
from transfer or death taxes in respect of intangible personal property located in such foreign country and owned by
Philippine citizens not residing in that foreign country.
There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax rate of
15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the basic policy
underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the
inflow of foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the U.S.
grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiaries of Philippine corporations,
would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the
U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words, to require
dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest
outside the Philippines, which would be inconsistent with the notion of attracting foreign capital into the Philippines
in the first place.
5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:
Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only
15%. The mere fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates
that the BIR ruling cited in Wander has been obviously discarded today by the BIR. Clearly, there has
been a change of mind on the part of the BIR.
As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax
Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the
"deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by
the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.
Tax Avoidance
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right of
first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of
real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela),
Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same
property and providing that during the existence or after the term of this lease the lessor should he
decide to sell the property leased shall first offer the same to the lessee and the letter has the priority
to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title, as per
stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco
and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased
property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate,
Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a
total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095
in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision
reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to
acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is
27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I; Rec.,
pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition
and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a
parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the
Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private respondent
will acquire the land not under "similar conditions" by which it was transferred to petitioner Delpher
Trades Corporation, as provided in the same contractual provision invoked by private respondent.
(pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which,
in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of
exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the
parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties,
Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that
the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there
was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in
exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of
interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even
spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art.
1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art.
1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and
distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's
same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a
separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same
was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from
the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton
[1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay
for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the issuing
corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot
sharer in the assets of the corporation. But this character of proportionate interest is not hidden
beneath a false appearance of a given sum in money, as in the case of par value shares. The capital
stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money,
but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no
matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value
of shares, the attention of persons interested in the financial condition of a corporation is focused
upon the value of assets and the amount of its debts. (Agbayani, Commentaries and Jurisprudence on
the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx

ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of exchange on
the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of
this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation
in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free
exchange of property, they were able to execute the deed of exchange free from
income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par.
(2) Exceptions regarding the provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as
a result of such exchange said person alone or together with others not exceeding
four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value
share in the defendant corporation was for the purpose of flexibility. Can you
explain flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the
board of directors in increasing capitalization. The board can fix the value of the
shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is
held by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular
person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not
die.
Q So the benefit you are talking about are inheritance taxes?

A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence,
the private respondent has no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then
Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79
of the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
Fernan (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.

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Exemption to Estate taxes

Republic of the Philippines

September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

BENGZON, J.P., J.:

Additional residence tax for

Lifeblood Theory and benefits protection theory

COMMISSIONER OF INTERNAL REVENUE, petitioner,

April 30, 1965

THE PHILIPPINE GUARANTY CO., INC., petitioner,

Withholding tax due thereon at 24% . . . . . . . .

Withholding tax due thereon at 24% . . . . . . . .

Compromise for non-filing of withholding

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

December 28, 1968

EUSEBIO VILLANUEVA, ET AL., plaintiff-appellee,

P20.00 per door p.a.

(b) Apartment house made of mixed materials

P10.00 per door p.a.

II Rooming house of strong materials

P10.00 per door p.a.

Rooming house of mixed materials

P5.00 per door p.a.

III. Tenement house partly or wholly engaged in or dedicated to business

P30.00 per door p.a.

IV. Tenement house partly or wholly engaged in or dedicated to business

P12.00 per door p.a.

V. Tenement houses at the streets surrounding the super market as soon

P24.00 per door p.a.

Tax Sparing Rule

G.R. No. L-66838 December 2, 1991

xxx xxx xxx

respect to such accumulated profits, which the amount of such

P35.00 Paid to the BIR by P&G-Phil. as Philippine

P65.00 Available for remittance as dividends to P&G-USA

P9.75 Reduced dividend tax

P13.00 Amount of dividend tax waived by Philippine

P55.25 Dividends actually remitted to P&G-USA

A requirement relating to administrative implementation is not properly imposed as a condition for

P55.25 Dividends actually remitted to P&G-USA

P25.415US corporate tax payable by P&G-USA

P15.66 US corporate income tax payable after Section 901

P39.59 Amount received by P&G-USA net of R.P. and U.S.

Art 11. Dividends

CRUZ, J., concurring:

BIDIN, J., concurring:

GUTIERREZ, JR., J.:

xxx xxx xxx

Q So the benefit you are talking about are inheritance taxes?

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