#8 CIR v.

PAL
TOPIC: Exemption from taxation
DOCTRINE: The franchise exempts PAL from paying
any tax other than the option it choses: either the
basic corporate income tax or the 2 percent gross
revenue tax. Hence, not liable to pay final withholding
tax.
FACTS:
1. Respondent PAL filed with the office of the CIR a
written request for refund of the total amount of
20% final withholding tax withheld from the
respondent by various withholding tax agent banks.
(UCPB and RCBC)
2. In addition, the same request was again filed by PAL
representing the total amount of 20% final
withholding tax withheld by various depository
banks of the respondent. (PNB, EBC, JPSMB)
3. Petitioner CIR failed to act on the respondents
request for refund thus, a petition was filed before
the CTA.
4. CTA PAL is not entitled to refund.
5. PD 1590, PALs franchise, gave respondent the
option to pay either the corporate income tax or a
franchise tax of 2% of its gross revenues. Payment
of either tax would be in lieu of all other taxes.
6. Since, respondent chose to pay its corporate
income tax, payment of the final withholding tax is
deemed part of its liability and therefore not
refundable.
7. CA reversed the decision of the CTA.
8. PAL was bound to pay only the corporate income
tax or the franchise tax.
9. PD 1590 exempts respondent from payment of
other taxes, duties, royalties, and other fees of any

kind. Hence, respondent is exempt from paying the

final withholding tax.
10.When respondent chose to pay its basic corporate
income tax, it resulted to zero tax liability.
ISSUE: WON the respondent is entitled to a tax refund
YES.
HELD:
1. Section 13, PD 1590 states that PAL is liable to pay
either its basic corporate income tax based on its
net taxable income or a franchise tax of 2% based
on its gross revenues, whichever is lower.
2. Moreover, the tax paid is in lieu of all other taxes
imposed by all government entities in the country.
3. [Petitioners argument] CIR argues that the in lieu
of all other taxes proviso is a mere incentive that
applies only when PAL actually pays something
(basic corporate income tax or franchise tax).
Because of the zero tax liability of the respondent,
it was not eligible for exemption from other taxes.
4. A corporate income tax liability comprises of a
general rate of 35% and the specific final rates of
certain passive incomes. PALs request for a refund
in the present case pertains to the passive income
on bank deposits subject to 20% specific final tax.
5. Taxable income does not include passice income
subjected to final withholding taxes.
6. Therefore, basic corporate income tax relates to the
general rate of 35%. The final 20% taxes disputed
in this case is not covered by PD 1590. Thus, a
refund is in order.
7. The Court recognizes the general rule that the grant
of tax exemptions is strictly construed against the
tax payer and in favor of the taxing power.

8. PALs franchise exempts it from paying any tax

other than the option it choses: either the basic
corporate income tax or the 2 percent gross
revenue tax.

DISPOSITIVE: Respondent won. Petition denied.