B.

INCOME TAXATION
MOBIL PHILIPPINES, INC. v THE CITY TREASURER OF
MAKATI and the CHIEF OF THE LICENSE DIVISION OF THE
CITY OF MAKATI, G.R. No. 154092, July 14, 2005
FACTS:
Petitioner is a domestic corporation engaged in the
manufacturing, importing, exporting and wholesaling of
petroleum products, while respondents are the local government
officials of the City of Makati charged with the implementation of
the Revenue Code of the City of Makati, as well as the collection
and assessment of business taxes, license fees and permit fees
within said city. Prior to September 1998, petitioners principal
office was at the National Development Company Building, in 116
Tordesillas St., Salcedo Village, Makati City. On August 20, 1998,
petitioner filed an application with the City Treasurer of Makati for
the retirement of its business within the City of Makati as it moved
its principal place of business to Pasig City. In its application,
petitioner declared its gross sales/receipts. Upon evaluation of
petitioners application, then OIC of the License Division, Ms.
Jesusa E. Cuneta, issued to petitioner, a billing slip containing a
total assessed business taxes against petitioner in the amount of
P 1,898,106.96. On September 11, 1998, petitioner paid the
assessed amount under protest. The City Treasurer issued
therefor an Official Receipt and approved the petitioners
application for retirement of business from Makati to Pasig City.
On July 21, 1999, petitioner filed a claim for P1,331,638.84
refund. On August 11, 1999, petitioner received a letter denying
the claim for refund on the ground that petitioner was merely
transferring and not retiring its business, and that the gross sales
realized while petitioner still maintained office in Makati from
January 1 to August 31, 1998 should be taxed in the City of
Makati. Petitioner subsequently filed a petition with the Regional
Trial Court of Pasig City seeking the refund of business taxes
erroneously collected by the City of Makati where said trial court
DENIED the claim for refund and the case was dismissed for lack
of merit. Petitioner filed a Motion for Reconsideration which was
likewise denied.
ISSUE:
Are the business taxes paid by petitioner in 1998, business
taxes for 1997 or 1998?
HELD:
1

Prefatorily, it is necessary to distinguish between a business

tax vis--vis an income tax. Business taxes imposed in the
exercise of police power for regulatory purposes are paid for the
privilege of carrying on a business in the year the tax was paid. It
is paid at the beginning of the year as a fee to allow the business
to operate for the rest of the year. It is deemed a prerequisite to
the conduct of business. Income tax, on the other hand, is a tax
on all yearly profits arising from property, professions, trades or
offices, or as a tax on a persons income, emoluments, profits and
the like. It is tax on income, whether net or gross realized in one
taxable year. It is due on or before the 15th day of the 4th month
following the close of the taxpayers taxable year and is generally
regarded as an excise tax, levied upon the right of a person or
entity to receive income or profits.
The trial court erred when it said that the payments made by
petitioner in 1998 are payments for business tax incurred in 1997
which only accrued in January 1998. Likewise, it erred when it
ruled that petitioner was still liable for business taxes based on its
gross income/revenue for January to August 1998. Under the
Makati Revenue Code, it appears that the business tax, like
income tax, is computed based on the previous years figures.
This is the reason for the confusion. A newly-started business is
already liable for business taxes (i.e. license fees) at the start of
the quarter when it commences operations. In computing the
amount of tax due for the first quarter of operations, the business
capital investment is used as the basis. For the subsequent
quarters of the first year, the tax is based on the gross
sales/receipts for the previous quarter. In the following year(s),
the business is then taxed based on the gross sales or receipts of
the previous year. The business taxes paid in the year 1998 is for
the privilege of engaging in business for the same year, and not
for having engaged in business for 1997. For the year 1998,
petitioner paid a total of P2,262,122.48 to the City Treasurer of
Makati as business taxes for the year 1998. The amount of tax as
computed based on petitioners gross sales for 1998 is
only P1,331,638.84. Since the amount paid is more than the
amount computed based on petitioners actual gross sales for
1998, petitioner, upon its retirement is not liable for additional
taxes to the City of Makati. Thus, the Court found that the
respondent erroneously treated the assessment and collection of
business tax as if it were income tax, by rendering an additional
assessment of P1,331,638.84 for the revenue generated for the
year
1998.
WHEREFORE,
the
assailed
Decision
is
hereby REVERSED and respondents City Treasurer and Chief of
the License Division of Makati City are ordered to REFUND to
petitioner business taxes paid in the amount of P1,331,638.84.
Costs against respondents. SO ORDERED.
2

VICENTE MADRIGAL and his wife, SUSANA PATERNO vs.

JAMES J. RAFFERTY, Collector of Internal Revenue, and
VENANCIO CONCEPCION, Deputy Collector of Internal
Revenue, G.R. No. L-12287, August 7, 1918
FACTS:
Vicente Madrigal and Susana Paterno were legally married
prior to January 1, 1914. The marriage was contracted under the
provisions of law concerning conjugal partnerships (sociedad de
gananciales). On February 25, 1915, Vicente Madrigal filed sworn
declaration on the prescribed form with the Collector of Internal
Revenue, showing, as his total net income for the year 1914, the
sum of P296,302.73. Subsequently, Madrigal submitted the claim
that the said P296,302.73 did not represent his income for the
year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno, and that in
computing and assessing the additional income tax provided by
the Act of Congress of October 3, 1913, the income declared by
Vicente Madrigal should be divided into two equal parts, one-half
to be considered the income of Vicente Madrigal and the other
half of Susana Paterno. The Attorney-General of the Philippine
Islands, in an opinion dated March 17, 1915, held with petitioner
Madrigal. The revenue officers being still unsatisfied, the
correspondence together with this opinion was forwarded to
Washington for a decision by the United States Treasury
Department. The United States Commissioner of Internal Revenue
reversed the opinion of the Attorney-General, and thus decided
against the claim of Madrigal. After payment under protest, and
after the protest of Madrigal had been decided adversely by the
Collector of Internal Revenue, action was begun by Vicente
Madrigal and his wife Susana Paterno in the Court of First Instance
of the city of Manila against Collector of Internal Revenue and the
Deputy Collector of Internal Revenue for the recovery of the sum
of P3,786.08, alleged to have been wrongfully and illegally
collected by the defendants from the plaintiff, Vicente Madrigal,
under the provisions of the Act of Congress known as the Income
Tax Law. The burden of the complaint was that if the income tax
for the year 1914 had been correctly and lawfully computed there
would have been due payable by each of the plaintiffs the sum of
P2,921.09, which taken together amounts of a total of P5,842.18
instead of P9,668.21, erroneously and unlawfully collected from
the plaintiff Vicente Madrigal, with the result that plaintiff
Madrigal has paid as income tax for the year 1914, P3,786.08, in
excess of the sum lawfully due and payable.

The basis of defendants' stand is that the income of Vicente

Madrigal and his wife Susana Paterno of the year 1914 was made
up of three items: (1) the profits made by Vicente Madrigal in his
coal and shipping business; (2) the profits made by Susana
Paterno in her embroidery business; (3) the profits made by
Vicente Madrigal in a pawnshop company. The sum of these three
items is P383,181.97, the gross income of Vicente Madrigal and
Susana Paterno for the year 1914. General deductions were
claimed and allowed in the sum of P86,879.24. The resulting net
income was P296,302.73. For the purpose of assessing the normal
tax of one per cent on the net income, there were allowed as
specific deductions the following: (1) the tax upon which was to
be paid at source, and (2) the specific exemption granted to
Vicente Madrigal and Susana Paterno, husband and wife. The
remainder, P271,614.93 was the sum upon which the normal tax
of one per cent was assessed. The normal tax thus arrived at was
P2,716.15. The dispute between the plaintiffs and the defendants
concerned the additional tax provided for in the Income Tax Law.
The trial court found in favor of defendants.
ISSUES:
The contentions of plaintiffs and appellants having to do
solely with the additional income tax, is that it should be divided
into two equal parts, because of the conjugal partnership existing
between them. The learned argument of counsel is mostly based
upon the provisions of the Civil Code establishing the sociedad de
gananciales. The counter contentions of appellees are that the
taxes imposed by the Income Tax Law are as the name implies
taxes upon income tax and not upon capital and property; that
the fact that Madrigal was a married man, and his marriage
contracted under the provisions governing the conjugal
partnership, has no bearing on income considered as income, and
that the distinction must be drawn between the ordinary form of
commercial partnership and the conjugal partnership of spouses
resulting from the relation of marriage.

HELD:
From the point of view of test of faculty in taxation, no less
than five answers have been given the course of history. The final
stage has been the selection of income as the norm of taxation.
The Income Tax Law of the United States, extended to the
Philippine Islands, is the result of an effect on the part of the
legislators to put into statutory form this canon of taxation and of
social reform. The aim has been to mitigate the evils arising from
4

inequalities of wealth by a progressive scheme of taxation, which

places the burden on those best able to pay. To carry out this idea,
public considerations have demanded an exemption roughly
equivalent to the minimum of subsistence. With these exceptions,
the income tax is supposed to reach the earnings of the entire
non-governmental property of the country. Such is the
background of the Income Tax Law. Income as contrasted with
capital or property is to be the test. The essential difference
between capital and income is that capital is a fund; income is a
flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the
payment of money from it or any other benefit rendered by a fund
of capital in relation to such fund through a period of time is
called an income. Capital is wealth, while income is the service of
wealth. The Supreme Court of Georgia expresses the thought in
the following figurative language: "The fact is that property is a
tree, income is the fruit; labor is a tree, income the fruit; capital is
a tree, income the fruit." A tax on income is not a tax on property.
"Income," as here used, can be defined as "profits or gains."
In speaking of the conjugal partnership, "prior to the
liquidation the interest of the wife and in case of her death, of her
heirs, is an interest inchoate, a mere expectancy, which
constitutes neither a legal nor an equitable estate, and does not
ripen into title until there appears that there are assets in the
community as a result of the liquidation and settlement." Susana
Paterno, wife of Vicente Madrigal, has an inchoate right in the
property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as
income after such income has become capital. Susana Paterno
has no absolute right to one-half the income of the conjugal
partnership. Not being seized of a separate estate, Susana
Paterno cannot make a separate return in order to receive the
benefit of the exemption which would arise by reason of the
additional tax. As she has no estate and income, actually and
legally vested in her and entirely distinct from her husband's
property, the income cannot properly be considered the separate
income of the wife for the purposes of the additional tax.
Moreover, the Income Tax Law does not look on the spouses as
individual partners in an ordinary partnership. It has come to be a
well-settled rule that great weight should be given to the
construction placed upon a revenue law, whose meaning is
doubtful, by the department charged with its execution. We
conclude that the judgment should be as it is hereby affirmed
with costs against appellants. So ordered.

JOSE B. AZNAR, in his capacity as Administrator of the

Estate of the deceased, Matias H. Aznar vs. COURT OF TAX
APPEALS and COLLECTOR OF INTERNAL REVENUE, G.R. No.
L-20569, August 23, 1974
FACTS:
Petitioner, as administrator of the estate of the deceased,
Matias H. Aznar, seeks a review and nullification of the decision of
the Court of Tax Appeals, modifying the decision of respondent
Commissioner of Internal Revenue and ordering the petitioner to
pay the government deficiency income taxes for the years 1946
to 1951, inclusive, with the condition that if the said amount is not
paid within thirty days from the date the decision becomes final,
there shall be added to the unpaid amount the surcharge of 5%,
plus interest at the rate of 12% per annum from the date of
delinquency to the date of payment, in accordance with Section
51 of the National Internal Revenue Code.
The late Matias H. Aznar, during his lifetime, filed his income
tax returns on the cash and disbursement basis. The
Commissioner of Internal Revenue having his doubts on the
veracity of the reported income and pursuant to the authority
granted him by Section 38 of the National Internal Revenue Code,
caused BIR to ascertain the taxpayer's true income for said years
by using the net worth and expenditures method of tax
investigation. The assets and liabilities of the taxpayer during the
above-mentioned years were ascertained and it was discovered
that from 1946 to 1951, his net worth had increased every year,
which increases in net worth was very much more than the
income reported during said years. The findings clearly indicated
that the taxpayer did not declare correctly the income reported in
his income tax returns for the aforesaid years. Respondent
Commissioner notified the taxpayer (Matias H. Aznar) of the
assessed tax delinquency plus compromise penalty.
The taxpayer requested a reinvestigation which was granted
for the purpose of verifying the merits of the various objections of
the taxpayer to the deficiency income tax assessment. After the
reinvestigation, another deficiency assessment to the reduced
amount superseded the previous assessment and notice thereof
was received by Matias H. Aznar. Respondent Commissioner of
Internal Revenue placed the properties of Matias H. Aznar under
distraint and levy to secure payment of the deficiency income tax
6

in question. Matias H. Aznar filed his petition for review of the

case with the Court of Tax Appeals with a subsequent petition
immediately thereafter to restrain respondent from collecting the
deficiency tax by summary method, the latter petition being
granted by the CTA without requiring petitioner to file a bond.
Upon review, the SC set aside the CTA resolution and
required the petitioner to deposit with the CTA the amount
demanded by the Commissioner of Internal Revenue for the years
1949 to 1951 or furnish a surety bond for not more than double
the amount. The Court of Tax Appeals concluded that the tax
liability of the late Matias H. Aznar for the year 1946 to 1951,
inclusive should be P227,788.64 minus P96.87 representing the
tax credit for 1945, or P227,691.77.
ISSUE:
Whether or not the right of the Commissioner of Internal
Revenue to assess deficiency income taxes of the late Matias H.
Aznar for the years 1946, 1947, and 1948 had already prescribed
at the time the assessment was made on November 28, 1952.
HELD:
To our minds we can dispense with these controversial
arguments on facts, although we do not deny that the findings of
facts by the Court of Tax Appeals, supported as they are by very
substantial evidence, carry great weight, by resorting to a proper
interpretation of Section 332 of the NIRC. We believe that the
proper and reasonable interpretation of said provision should be
that in the three different cases of (1) false return, (2) fraudulent
return with intent to evade tax, (3) failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time within
ten years after the discovery of the (1) falsity, (2) fraud, (3)
omission. Our stand that the law should be interpreted to mean a
separation of the three different situations of false return,
fraudulent return with intent to evade tax, and failure to file a
return is strengthened immeasurably by the last portion of the
provision which segregates the situations into three different
classes, namely "falsity", "fraud" and "omission". That there is a
difference between "false return" and "fraudulent return" cannot
be denied. While the first merely implies deviation from the truth,
whether intentional or not, the second implies intentional or
deceitful entry with intent to evade the taxes due. The ordinary
period of prescription of 5 years within which to assess tax
liabilities under Sec. 331 of the NIRC should be applicable to
normal circumstances, but whenever the government is placed at
7

a disadvantage so as to prevent its lawful agents from proper

assessment of tax liabilities due to false returns, fraudulent return
intended to evade payment of tax or failure to file returns, the
period of ten years provided for in Sec. 332 (a) NIRC, from the
time of the discovery of the falsity, fraud or omission even seems
to be inadequate and should be the one enforced.
ISSUE:
The second issue which appears to be of vital importance in
this case centers on the lower court's imposition of the fraud
penalty (surcharge of 50% authorized in Section 72 of the Tax
Code).
HELD:
The lower court based its conclusion on a presumption that
fraud can be deduced from the very substantial disparity of
incomes as reported and determined by the inventory method
and on the similarity of consecutive disparities for six years. Such
a basis for determining the existence of fraud (intent to evade
payment of tax) suffers from an inherent flaw when applied to this
case. It is very apparent here that the respondent Commissioner
of Internal Revenue, when the inventory method was resorted to
in the first assessment, concluded the correct tax liability of Mr.
Aznar. After a reinvestigation the same respondent, in another
assessment, concluded that the tax liability should be reduced.
This is a crystal-clear, indication that even the respondent
Commissioner of Internal Revenue with the use of the inventory
method can commit a glaring mistake in the assessment of
petitioner's tax liability. When the respondent Court of Tax
Appeals reviewed this case on appeal, it concluded that
petitioner's tax liability should be only P227,788.64. The lower
court in three instances supported petitioner's stand on the wrong
inclusions in his lists of assets made by the respondent
Commissioner of Internal Revenue, resulting in the very
substantial reduction of petitioner's tax liability by the lower
court. The foregoing shows that it was not only Mr. Matias H.
Aznar who committed mistakes in his report of his income but
also the respondent Commissioner of Internal Revenue who
committed mistakes in his use of the inventory method to
determine the petitioner's tax liability. The mistakes committed by
the Commissioner of Internal Revenue which also involve very
substantial amounts were also repeated yearly, and yet we
cannot presume therefrom the existence of any taint of official
fraud.

From the above exposition of facts, we cannot but

emphatically reiterate the well established doctrine that fraud
cannot be presumed but must be proven. As a corollary thereto,
we can also state that fraudulent intent could not be deduced
from mistakes however frequent they may be, especially if such
mistakes emanate from erroneous entries or erroneous
classification of items in accounting methods utilized for
determination of tax liabilities. The predecessor of the petitioner
undoubtedly filed his income tax returns for "the years 1946 to
1951 and those tax returns were prepared for him by his
accountant and employees. It also appears that petitioner in his
lifetime and during the investigation of his tax liabilities
cooperated readily with the B.I.R. and there is no indication in the
record of any act of bad faith committed by him. The lower court's
conclusion regarding the existence of fraudulent intent to evade
payment of taxes was based merely on a presumption and not on
evidence establishing a willful filing of false and fraudulent returns
so as to warrant the imposition of the fraud penalty. The fraud
contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately
done or resorted to in order to induce another to give up some
legal right. Negligence, whether slight or gross, is not equivalent
to the fraud with intent to evade the tax contemplated by the law.
It must amount to intentional wrong-doing with the sole object of
avoiding the tax. It necessarily follows that a mere mistake cannot
be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax
liability, it would be unfair to treat the mistakes of the petitioner
as tainted with fraud and those of the respondent as made in
good faith. We conclude that the 50% surcharge as fraud penalty
authorized under Section 72 of the Tax Code should not be
imposed, but eliminated from the income tax deficiency for each
year from 1946 to 1951, inclusive. WHEREFORE, the decision of
the Court of Tax Appeals is modified insofar as the imposition of
the 50% fraud penalty is concerned, and affirmed in all other
respects.

LUZON STEVEDORING CORPORATION vs. COURT OF TAX

APPEALS and the HONORABLE COMMISSIONER OF
INTERNAL REVENUE, G.R. No. L-30232, July 29, 1988
FACTS:
9

Herein petitioner-appellant, in 1961 and 1962, for the repair

and maintenance of its tugboats, imported various engine parts
and other equipment for which it paid, under protest, the
assessed compensating tax. Unable to secure a tax refund from
the Commissioner of Internal Revenue, it filed a Petition for
Review with the Court of Tax Appeals praying, among others, that
it be granted the refund. The Court of Tax Appeals, however,
denied the various claims for tax refund. Petitioner-appellant filed
a Motion for Reconsideration but the same was denied.
ISSUE:
Whether or not petitioner's tugboats" can be interpreted to
be included in the term "cargo vessels" for purposes of the tax
exemption provided for in Section 190 of the National Internal
Revenue Code, as amended by Republic Act No. 3176.
HELD:
Said law provides: Sec. 190. Compensating tax. ... And
Provided further, That the tax imposed in this section shall not
apply to articles to be used by the importer himself in the
manufacture or preparation of articles subject to specific tax or
those for consignment abroad and are to form part thereof or to
articles to be used by the importer himself as passenger and/or
cargo vessel, whether coastwise or oceangoing, including engines
and spare parts of said vessel. .... This Court has laid down the
rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any
reduction or dimunition thereof with respect to its mode or its
rate, must be strictly construed, and the same must be coached
in clear and unmistakable terms in order that it may be applied."
More specifically stated, the general rule is that any claim for
exemption from the tax statute should be strictly construed
against the taxpayer. As correctly analyzed by the Court of Tax
Appeals, in order that the importations in question may be
declared exempt from the compensating tax, it is indispensable
that the requirements of the amendatory law be complied with,
namely: (1) the engines and spare parts must be used by the
importer himself as a passenger and/or cargo, vessel; and (2) the
said passenger and/or cargo vessel must be used in coastwise or
oceangoing navigation. As pointed out by the Court of Tax
Appeals, the amendatory provisions of Republic Act No. 3176 limit
tax exemption from the compensating tax to imported items to be
used by the importer himself as operator of passenger and/or
cargo vessel. As quoted in the decision of the Court of Tax
Appeals, a tugboat is defined as follows:
10

A tugboat is a strongly built, powerful steam or power vessel,

used for towing and, now, also used for attendance on vessel.
A tugboat is a diesel or steam power vessel designed primarily for
moving large ships to and from piers for towing barges and
lighters in harbors, rivers and canals. A tug is a steam vessel built
for towing, synonymous with tugboat. Under the foregoing
definitions, petitioner's tugboats clearly do not fall under the
categories of passenger and/or cargo vessels. Thus, it is a cardinal
principle of statutory construction that where a provision of law
speaks categorically, the need for interpretation is obviated, no
plausible pretense being entertained to justify non-compliance. All
that has to be done is to apply it in every case that falls within its
terms. And, even if construction and interpretation of the law is
insisted upon, following another fundamental rule that statutes
are to be construed in the light of purposes to be achieved and
the evils sought to be remedied, it will be noted that the
legislature in amending Section 190 of the Tax Code by Republic
Act 3176, as appearing in the records, intended to provide
incentives and inducements to bolster the shipping industry and
not the business of stevedoring. The Court of Tax Appeals found
that no evidence was adduced by petitioner-appellant that
tugboats are passenger and/or cargo vessels used in the shipping
industry as an independent business. On the contrary, petitionerappellant's own evidence supports the view that it is engaged as
a stevedore, that is, the work of unloading and loading of a vessel
in port; and towing of barges containing cargoes is a part of
petitioner's undertaking as a stevedore. In fact, even its trade
name is indicative that its sole and principal business is
stevedoring and lighterage, taxed under Section 191 of the
National Internal Revenue Code as a contractor, and not an entity
which transports passengers or freight for hire which is taxed
under Section 192 of the same Code as a common carrier by
water. PREMISES CONSIDERED, the instant petition is DISMISSED
and the decision of the Court of Tax Appeals is AFFIRMED. SO
ORDERED.
QUEZON CITY and THE CITY TREASURER OF QUEZON CITY
vs. ABS-CBN BROADCASTING CORPORATION, G.R. No.
166408, October 6, 2008
FACTS:
Under Section 31, Article 13 of the Quezon City Revenue
Code of 1993, a franchise tax was imposed on businesses
operating within its jurisdiction. ABS-CBN was granted the
franchise to install and operate radio and television broadcasting
stations in the Philippines under R.A. No. 7966. Section 8 of R.A.
No. 7966 provides the tax liabilities of ABS-CBN. ABS-CBN had
11

been paying local franchise tax imposed by Quezon City.

However, in view of the above provision in R.A. No. 9766 that it
"shall pay a franchise tax x x x in lieu of all taxes," the corporation
developed the opinion that it is not liable to pay the local
franchise tax imposed by Quezon City. Consequently, ABS-CBN
paid under protest the local franchise tax imposed by Quezon
City. ABS-CBN filed a written claim for refund for local franchise
tax paid to Quezon City for 1996 and for the first quarter of 1997.
In a letter to the Quezon City Treasurer, ABS-CBN reiterated its
claim for refund of local franchise taxes paid. For failure to obtain
any response from the Quezon City Treasurer, ABS-CBN filed a
complaint before the RTC in Quezon City seeking the declaration
of nullity of the imposition of local franchise tax by the City
Government of Quezon City for being unconstitutional. It likewise
prayed for the refund of local franchise tax. Quezon City argued
that the "in lieu of all taxes" provision in R.A. No. 9766 could not
have been intended to prevail over a constitutional mandate
which ensures the viability and self-sufficiency of local
government units. Further, that taxes collectible by and payable
to the local government were distinct from taxes collectible by
and payable to the national government, considering that the
Constitution specifically declared that the taxes imposed by local
government units "shall accrue exclusively to the local
governments." Lastly, the City contended that the exemption
claimed by ABS-CBN under R.A. No. 7966 was withdrawn by
Congress when the Local Government Code (LGC) was
passed. The RTC rendered judgment declaring as invalid the
imposition on and collection from ABS-CBN of local franchise tax
paid after the enactment of R.A. No. 7966, and ordered the refund
of all payments made. The City of Quezon and its Treasurer filed a
motion for reconsideration which was subsequently denied by the
RTC. Thus, appeal was made to the CA. The CA likewise dismissed
the petition of Quezon City and its Treasurer. Petitioner moved for
reconsideration which was also denied by the CA.
ISSUE:
Whether or not the phrase "in lieu of all taxes" indicated in
the franchise of the respondent appellee (Section 8 of RA 7966)
serves to exempt it from the payment of the local franchise tax
imposed by the petitioners-appellants.
HELD:
The "in lieu of all taxes" provision in its franchise
does not exempt ABS-CBN from payment of local franchise
tax. The present controversy essentially boils down to a dispute
between the inherent taxing power of Congress and the delegated
12

authority to tax of local governments under the 1987 Constitution

and effected under the LGC of 1991. The power of the local
government of Quezon City to impose franchise tax is based on
Section 151 in relation to Section 137 of the LGC, to wit: Section
137. Franchise Tax. - Notwithstanding any exemption granted by
any law or other special law, the province may impose a tax on
businesses enjoying a franchise, at the rate not exceeding fifty
percent (50%) of one percent (1%) of the gross annual receipts for
the preceding calendar year based on the incoming receipt, or
realized within its territorial jurisdiction. x x x x x x x Section
151. Scope of Taxing Powers. - Except as otherwise provided in
this Code, the city may levy the taxes, fees and charges which
the province or municipality may impose: Provided, however, That
the taxes, fees and charges levied and collected by highly
urbanized and component cities shall accrue to them and
distributed in accordance with the provisions of this Code. The
rates of taxes that the city may levy may exceed the maximum
rates allowed for the province or municipality by not more than
fifty percent (50%) except the rates of professional and
amusement taxes.
Such taxing power by the local government, however, is
limited in the sense that Congress can enact legislation granting
exemptions. In the case under review, the Philippine Congress
enacted R.A. No. 7966 on March 30, 1995, subsequent to the
effectivity of the LGC on January 1, 1992. Under it, ABS-CBN was
granted the franchise to install and operate radio and television
broadcasting stations in the Philippines. Likewise, Section 8
imposed on ABS-CBN the duty of paying 3% franchise tax. It bears
stressing, however, that payment of the percentage franchise tax
shall be "in lieu of all taxes" on the said franchise. Congress has
the inherent power to tax, which includes the power to grant tax
exemptions. On the other hand, the power of Quezon City to tax is
prescribed by Section 151 in relation to Section 137 of the LGC
which expressly provides that notwithstanding any exemption
granted by any law or other special law, the City may impose a
franchise tax. It must be noted that Section 137 of the LGC does
not prohibit grant of future exemptions.
Petitioners argue that the "in lieu of all taxes" provision in
ABS-CBN's franchise does not expressly exempt it from payment
of local franchise tax. They contend that a tax exemption cannot
be created by mere implication and that one who claims tax
exemptions must be able to justify his claim by clearest grant of
organic law or statute. Taxes are what civilized people pay for
civilized society. They are the lifeblood of the nation. Thus,
statutes granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of the taxing
13

authority. A claim of tax exemption must be clearly shown and

based on language in law too plain to be mistaken. Otherwise
stated, taxation is the rule, exemption is the exception. The
burden of proof rests upon the party claiming the exemption to
prove that it is in fact covered by the exemption so claimed.
The basis for the rule on strict construction to statutory
provisions granting tax exemptions or deductions is to minimize
differential treatment and foster impartiality, fairness and equality
of treatment among taxpayers. He who claims an exemption from
his share of common burden must justify his claim that the
legislature intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are they
presumed. They must be expressed in the clearest and most
unambiguous language and not left to mere implications. It has
been held that "exemptions are never presumed, the burden is on
the claimant to establish clearly his right to exemption and cannot
be made out of inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule and
exemption the exception, the intention to make an exemption
ought to be expressed in clear and unambiguous terms.
Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise
tax equivalent to three (3) percent of all gross receipts of the
radio/television business transacted under the franchise and the
franchise tax shall be "in lieu of all taxes" on the franchise or
earnings thereof. The "in lieu of all taxes" provision in the
franchise of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether the
exemption would include both local, whether municipal, city or
provincial, and national tax. What is clear is that ABS-CBN shall be
liable to pay three (3) percent franchise tax and income taxes
under Title II of the NIRC. But whether the "in lieu of all taxes
provision" would include exemption from local tax is not
unequivocal.
As adverted to earlier, the right to exemption from local
franchise tax must be clearly established and cannot be made out
of inference or implications but must be laid beyond reasonable
doubt. Verily, the uncertainty in the "in lieu of all taxes" provision
should be construed against ABS-CBN. ABS-CBN has the burden to
prove that it is in fact covered by the exemption so claimed. ABSCBN miserably failed in this regard. In the case under review, ABSCBN's franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether municipal,
provincial, or national. In fine, since ABS-CBN failed to justify its
claim for exemption from local franchise tax, by a grant expressed
in terms "too plain to be mistaken" its claim for exemption for
14

local franchise tax must fail. The "in lieu of all taxes" clause in the
franchise of ABS-CBN has become functus officio with the
abolition of the franchise tax on broadcasting companies with
yearly gross receipts exceeding Ten Million Pesos. The RTC ruling
is flawed. In keeping with the laws that have been passed since
the grant of ABS-CBN's franchise, the corporation should now be
subject to VAT, instead of the 3% franchise tax.
At the time of the enactment of its franchise on May 3, 1995,
ABS-CBN was subject to 3% franchise tax under Section 117(b) of
the 1977 National Internal Revenue Code (NIRC), as amended. On
January 1, 1996, R.A. No. 7716, otherwise known as the Expanded
Value Added Tax Law, took effect and subjected to VAT those
services rendered by radio and/or broadcasting stations. Notably,
under the same law, "telephone and/or telegraph systems,
broadcasting stations and other franchise grantees" were omitted
from the list of entities subject to franchise tax. The impression
was that these entities were subject to 10% VAT but not to
franchise tax. Only the franchise tax on "electric, gas and water
utilities" remained. Subsequently, R.A. No. 8241 took effect on
January 1, 1997 containing more amendments to the NIRC. Radio
and/or television companies whose annual gross receipts do not
exceed P10,000,000.00 were granted the option to choose
between paying 3% national franchise tax or 10% VAT. On the
other hand, radio and/or television companies with yearly gross
receipts exceeding P10,000,000.00 were subject to 10% VAT,
pursuant to Section 102 of the NIRC. On January 1, 1998, R.A. No.
8424 was passed confirming the 10% VAT liability of radio and/or
television
companies
with
yearly
gross
receipts
exceeding P10,000,000.00. R.A. No. 9337 was subsequently
enacted and became effective on July 1, 2005. The said law
further amended the NIRC by increasing the rate of VAT to 12%.
The effectivity of the imposition of the 12% VAT was later moved
from January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent laws on
the matter, ABS-CBN is subject to the payment of VAT. It does not
have the option to choose between the payment of franchise tax
or VAT since it is a broadcasting company with yearly gross
receipts exceeding Ten Million Pesos (P10,000,000.00). VAT is a
percentage tax imposed on any person whether or not a franchise
grantee, who in the course of trade or business, sells, barters,
exchanges, leases, goods or properties, renders services. It is also
levied on every importation of goods whether or not in the course
of trade or business. The tax base of the VAT is limited only to the
value added to such goods, properties, or services by the seller,
transferor or lessor. Further, the VAT is an indirect tax and can be
passed on to the buyer. The franchise tax, on the other hand, is a
15

percentage tax imposed only on franchise holders. It is imposed

under Section 119 of the Tax Code and is a direct liability of the
franchise grantee. The clause "in lieu of all taxes" does not
pertain to VAT or any other tax. It cannot apply when what is paid
is a tax other than a franchise tax. Since the franchise tax on the
broadcasting companies with yearly gross receipts exceeding ten
million pesos has been abolished, the "in lieu of all taxes" clause
has now become functus officio, rendered inoperative.
In sum, ABS-CBN's claims for exemption must fail on twin
grounds. First, the "in lieu of all taxes" clause in its franchise failed
to specify the taxes the company is sought to be exempted from.
Neither did it particularize the jurisdiction from which the taxing
power is withheld. Second, the clause has become functus
officio because as the law now stands, ABS-CBN is no longer
subject to a franchise tax. It is now liable for VAT. WHEREFORE,
the petition is GRANTED and the appealed Decision REVERSED
AND SET ASIDE. The petition in the trial court for refund of local
franchise tax is DISMISSED. SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE vs. ISABELA
CULTURAL CORPORATION, G.R. No. 172231, February 12,
2007
FACTS:
ICC, a domestic corporation, received from the BIR an
Assessment Notice for deficiency income tax and an Assessment
Notice for deficiency expanded withholding tax inclusive of
surcharges and interest. The deficiency income tax arose from
(1) The BIRs disallowance of ICCs claimed expense deductions for
professional and security services billed to and paid by ICC and
(2) The alleged understatement of ICCs interest income on the
three promissory notes due from Realty Investment, Inc. The
deficiency expanded withholding tax was allegedly due to the
failure of ICC to withhold 1% expanded withholding tax on its
claimed deduction for security services. ICC sought a
reconsideration of the subject assessments. However, it received
a final notice before seizure demanding payment of the amounts
stated in the said notices. Hence, it brought the case to the CTA
which held that the petition is premature because the final notice
of assessment cannot be considered as a final decision
appealable to the tax court. This was reversed by the Court of
Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax amounts to a final decision on the
protested assessment and may therefore be questioned before
the CTA. This conclusion was sustained by the SC. The case was
thus remanded to the CTA for further proceedings. The CTA
16

rendered a decision canceling and setting aside the assessment

notices issued against ICC. The CTA also held that ICC did not
understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said
income when it compounded the interest income receivable by
ICC from the promissory notes of Realty Investment, Inc., despite
the absence of a stipulation in the contract providing for a
compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application
of compounded interest. Likewise, the CTA found that ICC in fact
withheld 1% expanded withholding tax on its claimed deduction
for security services as shown by the various payment orders and
confirmation receipts it presented as evidence.
Petitioner filed a petition for review with the Court of
Appeals, which affirmed the CTA decision, holding that although
the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was
not yet determinable at that time, hence, it could be considered
as deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not
understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted
taxes on the payments for security services for the taxable year
1986.
Hence, petitioner, through the Office of the Solicitor General,
filed the instant petition contending that since ICC is using the
accrual method of accounting, the expenses for the professional
services that accrued in 1984 and 1985, should have been
declared as deductions from income during the said years and the
failure of ICC to do so bars it from claiming said expenses as
deduction for the taxable year 1986. As to the alleged deficiency
interest income and failure to withhold expanded withholding tax
assessment, petitioner invoked the presumption that the
assessment notices issued by the BIR are valid.
ISSUE:
Whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services
from ICCs gross income; and (2) held that ICC did not understate
its interest income from the promissory notes of Realty
Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services.
HELD:
17

The requisites for the deductibility of ordinary and necessary

trade, business, or professional expenses, like expenses paid for
legal and auditing services, are: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred
in carrying on the trade or business of the taxpayer; and (d) it
must be supported by receipts, records or other pertinent papers.
The requisite that it must have been paid or incurred during the
taxable year is further qualified by Section 45 of the National
Internal Revenue Code (NIRC) which states that: [t]he deduction
provided for in this Title shall be taken for the taxable year in
which paid or accrued or paid or incurred, dependent upon the
method of accounting upon the basis of which the net income
is computed x x x.
Accounting methods for tax purposes comprise a set of rules
for determining when and how to report income and
deductions. In the instant case, the accounting method used by
ICC is the accrual method. Revenue Audit Memorandum Order No.
1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as
deduction from income for the succeeding year. Thus, a taxpayer
who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct
the same for the next year. The accrual method relies upon the
taxpayers right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where
the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed
and determinable in amount, without regard to indeterminacy
merely of time of payment. For a taxpayer using the accrual
method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize
income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test
requires: (1) fixing of a right to income or liability to pay; and (2)
the availability of the reasonable accurate determination of such
income or liability.
The all-events test requires the right to income or liability be
fixed, and the amount of such income or liability be determined
with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only
that a taxpayer has at his disposal the information necessary to
compute the amount with reasonable accuracy. The all-events
test is satisfied where computation remains uncertain, if its basis
18

is unchangeable; the test is satisfied where a computation may be

unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be
determined exactly; it must be determined with
reasonable accuracy. Accordingly, the term reasonable
accuracy implies something less than an exact or
completely accurate amount. The propriety of an accrual
must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the
closing of its books for the taxable year. Accrual method of
accounting presents largely a question of fact; such that
the taxpayer bears the burden of proof of establishing the
accrual of an item of income or deduction.
Corollarily, it is a governing principle in taxation that tax
exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one
who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes
partakes of the nature of a tax exemption, then it must also be
strictly construed. In the instant case, the expenses for
professional fees consist of expenses for legal and auditing
services. The findings of the CTA and the Court of Appeals that
ICC truly withheld the required withholding tax from its claimed
deductions for security services and remitted the same to the BIR
is supported by payment order and confirmation receipts. Hence,
the Assessment Notice for deficiency expanded withholding tax
was properly cancelled and set aside.
In sum, the Assessment Notice for deficiency income tax
should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid
as to the BIRs disallowance of ICCs expenses for professional
services. The Court of Appeals cancellation of the Assessment
Notice for deficiency expanded withholding tax is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The
Decision of the Court of Appeals is AFFIRMED with the
MODIFICATION that the Assessment Notice disallowing the
expense deduction of Isabela Cultural Corporation for professional
and security services is declared valid only insofar as the
expenses for the professional fees of the auditing and of the law
firm are concerned. The decision is affirmed in all other respects.
SO ORDERED.

19

COMMISSIONER OF INTERNAL REVENUE vs. MIRANT

(PHILIPPINES) OPERATIONS, CORPORATION, G.R.
No. 171742, June 15, 2011
FACTS:
Petitioner is empowered to perform the lawful duties of his
office including, among others, the duty to act on and approve
claims for refund or tax credit as provided by law. Respondent
Mirant is a corporation duly organized and existing under and by
virtue of the laws of the Republic of the Philippines, with principal
office at Bo. Ibabang Pulo, Pagbilao Grande Island, Pagbilao,
Quezon. Mirant also operated under the names Southern Energy
Asia-Pacific Operations (Phils.), Inc., CEPA Operations (Philippines)
Corporation; CEPA Tileman Project Management Corporation; and
Hopewell Tileman Project Management Corporation. Mirant, duly
licensed to do business in the Philippines, is primarily engaged in
the design, construction, assembly, commissioning, operation,
maintenance, rehabilitation and management of gas turbine and
other power generating plants and related facilities using coal,
distillate, and other fuel provided by and under contract with the
Government of the Republic of the Philippines or any subdivision,
instrumentality or agency thereof, or any government-owned or
controlled corporations or other entities engaged in the
development, supply or distribution of energy. Mirant entered into
Operating and Management Agreements with Mirant Pagbilao
Corporation (formerly Southern Energy Quezon, Inc.) and Mirant
Sual Corporation (formerly Southern Energy Pangasinan, Inc.) to
provide these companies with maintenance and management
services in connection with the operation, construction and
commissioning of coal-fired power stations situated in Pagbilao,
Quezon, and Sual, Pangasinan respectively. On October 15, 1999,
Mirant filed with the BIR its income tax return for the fiscal year
ending June 30, 1999, declaring a net loss and unutilized tax
credits. On April 17, 2000, Mirant filed with the BIR an amended
income tax return (ITR) for the fiscal year ending June 30, 1999,
reporting an increased net loss but reporting the same unutilized
tax credits which it opted to carry over as a tax credit to the
succeeding taxable year. To synchronize its accounting period
with those of its affiliates, Mirant allegedly secured the approval
of the BIR to change its accounting period from fiscal year (FY) to
calendar year (CY) effective December 31, 1999. Thus, on April
17, 2000, Mirant filed its income tax return for the interim
period July 1, 1999 to December 31, 1999, declaring a net loss
and unutilized tax credits. Mirant indicated the excess amount as
20

to be carried over as tax credit next year/quarter. On April 10,

2001, it filed with the BIR its income tax return for the calendar
year ending December 31, 2000, reflecting a net loss and
unutilized tax credits. On September 20, 2001, Mirant wrote the
BIR a letter claiming a refund representing overpaid income tax
for the FY ending June 30, 1999, the interim period covering July
1, 1999 to December 31, 1999, and CY ending December 31,
2000.
As the two-year prescriptive period for the filing of a judicial
claim under Section 229 of the National Internal Revenue Code
(NIRC) of 1997 was about to lapse without action on the part of
the BIR, Mirant elevated its case to the CTA by way of Petition for
Review. The CTA First Division rendered judgment partially
granting Mirants claim for refund in a reduced amount
representing its duly substantiated unutilized creditable
withholding taxes for taxable year 2000 out of the total claim
therefor. It appears that the total claim was reduced for the
following reasons: the amount was deducted because the CTA
First Division found that it was not covered by the withholding tax
certificate issued by Southern Energy Quezon, Inc. for the
period October 1, 2000 to December 31, 2000. Moreover the
additional amount was also deducted because based on the
reconciliation schedule for the creditable taxes withheld by
Southern Energy Quezon, Inc. for the period October 1, 2000 to
December 31, 2000 on Mirants Philippine peso billings, the
corresponding creditable taxes claimed by Mirant in its 2000
income tax return was higher than that reflected in the certificate.
Additionally, Mirants claim for the refund of its unutilized tax
credits for the taxable year 1999 was denied as it exercised the
carry-over option with regard to the said unutilized tax credits,
which is irrevocable pursuant to the provisions of Section 76 of
the 1997 NIRC.
Both parties filed their respective motions for partial
reconsideration of the above decision, but these were both denied
for lack of merit. Both parties sought redress before the CTA En
Banc in two separate petitions for review. Acting on Mirants
motion for reconsideration, the CTA En Banc recalled its earlier
resolution and reinstated the case. Eventually, the CTA En Banc in
separate decisions, denied due course and dismissed the two
cases. The CIR and Mirant filed their respective motions for
reconsideration but both were denied. Thus, the CIR and Mirant
filed their respective petitions for review with this Court.
ISSUE:

21

Whether Mirant is entitled to a tax refund or to the issuance

of a tax credit certificate and, if it is, then what is the amount to
which it is entitled.
HELD:
The Court finds the assailed decisions and resolutions of the
CTA En Banc to be consistent with law and jurisprudence.
Once exercised, the option to
carry over is irrevocable.
Section 76 of the National Internal Revenue Code
(Presidential Decree No. 1158, as amended) provides: SEC. 76.
- Final Adjustment Return. - Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If
the sum of the quarterly tax payments made during the said
taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either: (A) Pay the
balance of tax still due; or (B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the
case may be. In case the corporation is entitled to a tax credit or
refund of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be
carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry-over and apply the excess
quarterly income tax against income tax due for the
taxable quarters of the succeeding taxable years has been
made, such option shall be considered irrevocable for that
taxable period and no application for cash refund
or issuance of a tax credit certificate shall be allowed
therefor. Having chosen to carry-over the excess quarterly
income tax, the corporation cannot thereafter choose to apply for
a cash refund or for the issuance of a tax credit certificate for the
amount representing such overpayment.
In this case, in its amended ITR for the year ended July 30,
1999 and for the interim period ended December 31, 1999, Mirant
clearly ticked the box signifying that the overpayment was to be
carried over as tax credit next year/quarter. Applying the
irrevocability rule in Section 76, Mirant having opted to carry over
its tax overpayment for the fiscal year ending July 30, 1999 and
for the interim period ending December 31, 1999, it is now barred
from applying for the refund of the said amount or for the
issuance of a tax credit certificate therefor, and for the unutilized
tax credits carried over from the fiscal year ended June 30, 1998.
22

Mirant is entitled to the refund

of its unutilized creditable
withholding
taxes
for
the
taxable year 2000.
It is apt to restate here the time-honored doctrine that the
findings and conclusions of the CTA are accorded the highest
respect and will not be lightly set aside. The CTA, by the very
nature of its functions, is dedicated exclusively to the resolution of
tax problems and has accordingly developed an expertise on the
subject unless there has been an abusive or improvident exercise
of authority.
In this case, having studied the applicable law and
jurisprudence, the Court agrees with the conclusion of the CTA
that Mirant complied with all the requirements for the refund of its
unutilized creditable withholding taxes for taxable year 2000.
In Commissioner of Internal Revenue v. Far East Bank & Trust
Company (now Bank of the Philippine Islands), the Court
enumerated the requisites for claiming a tax credit or a refund of
creditable withholding tax: 1) The claim must be filed with the CIR
within the two-year period from the date of payment of the tax; 2)
It must be shown on the return that the income received was
declared as part of the gross income; and 3) The fact of
withholding must be established by a copy of a statement duly
issued by the payor to the payee showing the amount paid and
the amount of the tax withheld.
First, Mirant clearly complied with the two-year period.
Mirant filed its income tax return for the taxable year
ending December 31, 2000 on April 10, 2001. Thus, from such
date of filing, petitioner had until April 10, 2003 within which to
file its claim for refund or for the issuance of a tax credit
certificate in its favor. Mirant filed its administrative claim with the
BIR on September 20, 2001. It thereafter filed its Petition for
Review with the CTA on October 12, 2001, or clearly within the
prescribed two-year period.
Second, Mirant was also able to establish that the income,
upon which the creditable withholding taxes were paid, was
declared as part of its gross income in its ITR. The CIR disagrees
but merely alleges without any clear argument or basis that
Mirant failed to prove that the income from which its creditable
taxes were withheld were duly declared as part of its income in its
annual ITR. Thus, there being no cogent reason presented to
reverse the findings and conclusions of the CTA, the Court affirms
23

its finding that the income received was declared as part of the
gross income, as shown in Mirants tax return.
Finally, Mirant was also able to establish the fact of
withholding of the creditable withholding tax. The CIR is of the
opinion that Mirants non-presentation of the various payors or
withholding agents to verify the Certificates of Creditable Tax
Withheld at Source (CWTs), the registered books of accounts and
the audited financial statements for the various periods covered
to corroborate its other allegations, and its failure to offer other
evidence to prove and corroborate the propriety of its claim for
refund and failure to establish the fact of remittance of the
alleged withheld taxes by various payors to the BIR, are all fatal to
its claim.
Therefore, as the CTA ruled, Mirant complied with all the
legal requirements and it is entitled, as it opted, to a refund of its
excess creditable withholding tax for the taxable year 2000. The
Court finds no abusive or improvident exercise of authority on the
part of the CTA. Since there is no showing of gross error or abuse
on the part of the CTA, and its findings are supported by
substantial evidence, there is no cogent reason to disturb its
findings
and
conclusions.
WHEREFORE,
the
petitions
are DENIED. SO ORDERED.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC. vs.
PROVINCE OF LAGUNA and MANUEL E. LEYCANO, JR., in his
capacity as the Provincial Treasurer of the Province of
Laguna, G.R. No. 151899, August 16, 2005
FACTS:
PLDT is a holder of a legislative franchise under Act No.
3436, as amended, to render local and international
telecommunications services. On August 24, 1991, the terms and
conditions of its franchise were consolidated under Republic Act
No. 7082, Section 12 of which embodies the so-called in-lieu-of-all
taxes clause, where under PLDT shall pay a franchise tax
equivalent to three percent (3%) of all its gross receipts, which
franchise tax shall be in lieu of all taxes. On January 1, 1992,
Republic Act No. 7160, otherwise known as the Local Government
Code, took effect. Section 137 of the Code, in relation to Section
151 thereof, grants provinces and other local government units
the power to impose local franchise tax on businesses enjoying a
franchise. By Section 193 of the same Code, all tax exemption
privileges then enjoyed by all persons, whether natural or
juridical, save those expressly mentioned therein, were
withdrawn, necessarily including those taxes from which PLDT is
exempted under the in-lieu-of-all taxes clause in its charter.
24

Invoking its authority under Section 137, of the Local Government

Code, the Province of Laguna, through its local legislative
assembly, enacted a Provincial Ordinance effective January 1,
1993 imposing a franchise tax upon all businesses enjoying a
franchise, PLDT included. On January 28, 1998, PLDT, in
compliance
with
the
aforementioned
Ordinance,
paid
the Province of Laguna its local franchise tax liability for the year
1998. Prior thereto, Congress, aiming to level the playing field
among telecommunication companies, enacted Republic Act No.
7925, otherwise known as the Public Telecommunications Policy
Act of the Philippines, which took effect on March 16, 1995. To
achieve the legislative intent, Section 23 thereof, also known as
the most-favored treatment clause, provides for an equality of
treatment in the telecommunications industry. Then, on June 2,
1998, the Department of Finance, thru its Bureau of Local
Government Finance (BLGF), issued a ruling to the effect that as
of March 16, 1995, the effectivity date of the Public
Telecommunications Policy Act of the Philippines, PLDT, among
other telecommunication companies, became exempt from local
franchise tax. On the basis of the ruling, PLDT refused to pay
the Province of Laguna its local franchise tax liability for 1999.
And, on December 22, 1999, it even filed with the Office of the
Provincial Treasurer a written claim for refund of the amount it
paid as local franchise tax for 1998. With no refund having been
made, PLDT instituted with the Regional Trial Court at Laguna a
petition therefor against the Province and its Provincial Treasurer.
In its decision of November 28, 2001, the trial court denied PLDTs
petition.
ISSUES:
Whether or not PLDT is exempt from the imposition of
franchise taxes.
HELD:
Section 23 of Rep. Act No. 7925 does not operate to exempt
PLDT from the payment of franchise tax. In sum, it does not
appear that, in approving 23 of R.A. No. 7925, Congress intended
it to operate as a blanket tax exemption to all
telecommunications entities. Applying the rule of strict
construction of laws granting tax exemptions and the rule that
doubts should be resolved in favor of municipal corporations in
interpreting statutory provisions on municipal taxing powers, we
hold that 23 of R.A. No. 7925 cannot be considered as having
amended petitioner's franchise so as to entitle it to exemption
from the imposition of local franchise taxes. When exemption is
claimed, it must be shown indubitably to exist. At the outset,
25

every presumption is against it. A well-founded doubt is fatal to

the claim. It is only when the terms of the concession are too
explicit to admit fairly of any other construction that the
proposition can be supported. In this case, the word exemption in
23 of R.A. No. 7925 could contemplate exemption from certain
regulatory or reporting requirements, bearing in mind the policy
of the law.
PLDT argues that because Smart Communications, Inc.
(SMART) and Globe Telecom (GLOBE) under whose respective
franchises granted after the effectivity of the Local Government
Code, are exempt from franchise tax, it follows that petitioner is
likewise exempt from the franchise tax sought to be collected by
the Province of Laguna, on the reasoning that the grant of tax
exemption to SMART and GLOBE ipso facto applies to PLDT,
consistent with the most-favored-treatment clause found in
Section 23 of the Public Telecommunications Policy Act of the
Philippines (Rep. Act No. 7925). The acceptance of petitioners
theory would result in absurd consequences. Petitioners theory
would require that, to level the playing field, any advantage,
favor, privilege, exemption, or immunity granted to Globe must
be extended to all telecommunications companies, including
Smart. If, later, Congress again grants a franchise to another
telecommunications company imposing, say, one percent (1%)
franchise tax, then all other telecommunications franchises will
have to be adjusted to level the playing field so to speak. This
could not have been the intent of Congress in enacting Section 23
of Rep. Act 7925. Petitioners theory will leave the Government
with the burden of having to keep track of all granted
telecommunications franchises, lest some companies be treated
unequally. It is different if Congress enacts a law specifically
granting uniform advantages, favor, privilege, exemption or
immunity to all telecommunications entities. Even as it is a state
policy to promote a level playing field in the communications
industry, Section 23 of Rep. Act No. 7925 does not refer to tax
exemption but only to exemption from certain regulations and
requirements imposed by the National Telecommunications
Commission.
The Court likewise rejected PLDTs contention that the inlieu-of-all-taxes clause does not refer to tax exemption but to tax
exclusion and hence, the strictissimi juris rule does not apply.
These two terms actually mean the same thing, such that the rule
that tax exemption should be applied in strictissimi juris against
the taxpayer and liberally in favor of the government applies
equally to tax exclusions.

26

PLDT also faults the trial court for not giving weight to the
ruling of the BLGF which, to petitioners mind, is an administrative
agency with technical expertise and mastery over the specialized
matters assigned to it. To be sure, the BLGF is not an
administrative agency whose findings on questions of fact are
given weight and deference in the courts. The authorities cited by
petitioner pertain to the Court of Tax Appeals, a highly specialized
court which performs judicial functions as it was created for the
review of tax cases. In contrast, the BLGF was created merely to
provide consultative services and technical assistance to local
governments and the general public on local taxation, real
property assessment, and other related matters, among others.
The question raised by petitioner is a legal question, to wit, the
interpretation of 23 of R.A. No. 7925. There is, therefore, no basis
for claiming expertise for the BLGF that administrative agencies
are said to possess in their respective fields. WHEREFORE, the
petition is DENIED and the assailed decision of the trial
court AFFIRMED. With treble costs against petitioner. SO
ORDERED.
ALFREDO S. PAGUIO vs. PHILIPPINE LONG DISTANCE
TELEPHONE CO., INC., ENRIQUE D. PEREZ, RICARDO P.
ZARATE, ISABELO FERIDO, and RODOLFO R. SANTOS, G.R.
No. 154072, December 3, 2002
(This a labor case yet included in the list of cases under Income
Taxation Weird)
FACTS:
Petitioner Alfredo S. Paguio was appointed Head of PLDTs
Garnet Exchange. He reported to the Head of the Greater Metro
Manila (GMM) East Center, Rodolfo R. Santos, one of the
respondents herein. PLDT implemented the Greater Metro Manila
Network Performance Assessment program covering 27
exchanges of the 5 centers. Petitioner wrote respondent Santos a
memorandum criticizing the performance ranking of the GMM
Exchanges. He pointed out that the old historical data applicable
to a fifty-year old facility should not be used in determining the
performance of a division with newly-installed facilities because of
the discrepancies between old and new facilities in terms of
output, performance, and manpower required. Ironically, despite
these observations, petitioners Garnet Exchange, the oldest plant
in the GMM East Center, placed in the top 10 Exchanges and
ranked
number
one
in
the
GMM
performance
assessment. Nonetheless, petitioner again sent a memorandum
to respondent Santos criticizing the East Exchanges performance
ranking for being based only on the attainment of objectives,
without considering other relevant factors that contributed to the
27

attainment of the same. Respondent PLDT implemented the East

Center OPSIM Manpower Rebalancing. Petitioner again wrote
respondent Santos requesting reconsideration, claiming that the
scheme was not fair to an old exchange like Garnet. Respondent
Santos denied petitioners request and instructed petitioner to
submit the rebalancing schedules. Petitioner thus elevated the
matter to respondent Ferido, the FVP-GMM Network Services,
through a memorandum. Respondent Santos announced the
performance assessment rating of the Exchanges. Petitioner
wrote respondent Santos, complaining that the rating and ranking
of the Exchanges were unfair. Respondent Santos issued a
memorandum reassigning petitioner to a position in the Office of
the GMM East Center Head for Special Assignments. Protesting
the said transfer, petitioner asked respondent Ferido for a formal
hearing on the charges against him and for the deferment of his
re-assignment pending resolution of the charges. As no
immediate action was taken by respondent Ferido, petitioner
elevated the matter to respondent Enrique Perez, Senior
Executive Vice-President and Chief Operating Officer of PLDT. In
his memorandum to petitioner, respondent Ferido affirmed the
action of respondent Santos transferring him to any group in the
company that may need his services. Respondent Ferido further
indicated that the reassignment is based on respondent Santos
well-founded conclusion that petitioner is not a team player and
cannot accept decisions of management already arrived at, short
of insubordination. In a memorandum dated May 23, 1997,
respondent Perez affirmed the action taken by respondent Ferido
and explained to petitioner that his transfer was not in the nature
of a disciplinary action that required compliance with the process
of investigation, confrontation, and evaluation before it can be
implemented and that the same was not done in bad faith. As a
result, petitioner filed a complaint for illegal demotion and
damages against respondents. The Labor Arbiter dismissed the
complaint on the ground that petitioners transfer was an exercise
of a management prerogative and there was no showing that the
same amounted to a demotion in rank and privileges. Petitioner
appealed to the NLRC, which reversed the decision of the Labor
Arbiter. As the NLRC likewise denied its motion for
reconsideration, respondent PLDT filed a special civil action for
certiorari in the Court of Appeals, seeking a reversal of the
decision of the NLRC. The appeals court upheld the NLRC decision
that petitioners transfer was not justified by the circumstances. It
noted that petitioner was well intentioned in criticizing the
management of the company and that even as he criticized the
management decisions petitioner nevertheless complied with
them. Petitioner moved for reconsideration, but the Court of
Appeals denied his motion. Petitioner now seeks review of the
28

decision of the Court of Appeals, insofar as it deleted the original

award of his salary increase.
ISSUE:
Whether petitioner is entitled to an amount equal to 16% of his
monthly salary representing his salary increase during the period
of his demotion.
HELD:
Petitioner bases his right to the award on the fact that,
throughout his employment until his illegal transfer, he had been
consistently given by the company annual salary increases on
account of his above average or outstanding performance. He
claims that his contemporaries now occupy higher positions as
they had been promoted several times during the course of this
case. Thus, even if he ranked higher and performed better than
they during the past years, petitioner has now been left behind
career-wise. Petitioner averred that this would not have taken
place had he not been illegally transferred. He argues that justice
and equity requires that he be given the monetary award deleted
by the Court of Appeals from the decision of the NLRC.
Undeniably, this particular award which petitioner is seeking is not
based on any wage order or decree but on an employees
performance during a certain period, as evaluated according to a
specified criteria. Petitioner claims that there is a high probability
that he would have been granted the increase had he not been
transferred
from the Garnet Exchange of respondent
PLDT. Petitioner likens his claim to that for backwages in illegal
dismissal cases.
Backwages are granted on grounds of equity to workers for
earnings lost due to their illegal dismissal from work. They are a
reparation for the illegal dismissal of an employee based on
earnings which the employee would have obtained, either by
virtue of a lawful decree or order, as in the case of a wage
increase under a wage order, or by rightful expectation, as in the
case of ones salary or wage. The outstanding feature of
backwages is thus the degree of assuredness to an employee that
he would have had them as earnings had he not been illegally
terminated from his employment. Petitioners claim, however, is
based simply on expectancy or his assumption that, because in
the past he had been consistently rated for his outstanding
performance and his salary correspondingly increased, it is
probable that he would similarly have been given high ratings and
salary increases but for his transfer to another position in the
company. In contrast to a grant of backwages or an award
of lucrum cessans in the civil law, this contention is based merely
29

on speculation. Furthermore, it assumes that in the other position

to which he had been transferred petitioner had not been given
any performance evaluation. As held by the Court of Appeals,
however, the mere fact that petitioner had been previously
granted salary increases by reason of his excellent performance
does not necessarily guarantee that he would have performed in
the same manner and, therefore, qualify for the said increase
later. What is more, his claim is tantamount to saying that he had
a vested right to remain as Head of the Garnet Exchange and
given salary increases simply because he had performed well in
such position, and thus he should not be moved to any other
position where management would require his services.
Notwithstanding the foregoing, we hold that petitioner is entitled
to damages. Under Article 21 of the Civil Code, any person who
wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall
compensate the latter for the damage. The illegal transfer of
petitioner to a functionless office was clearly an abuse by
respondent PLDT of its right to control the structure of its
organization. The right to transfer or reassign an employee is
decidedly an employers exclusive right and prerogative. In
several cases, however, we have ruled that such managerial
prerogative must be exercised without grave abuse of discretion,
bearing in mind the basic elements of justice and fair play. Having
the right should not be confused with the manner by which such
right is to be exercised. As found by both the NLRC and the Court
of Appeals, there is no clear justification for the transfer of
petitioner except that it was done as a result of petitioners
disagreement with his superiors with regard to company policies.
Petitioner is entitled to an award of moral and exemplary
damages. The Court has held that in determining entitlement to
moral damages, it suffices to prove that the claimant has suffered
anxiety, sleepless nights, besmirched reputation and social
humiliation by reason of the act complained of. Exemplary
damages, on the other hand, are granted in addition to moral
damages by way of example or correction for the public good.
Furthermore, as petitioner was compelled to litigate and incur
expenses to enforce and protect his rights, he is entitled to an
award of attorneys fees. The amount of damages recoverable is,
in turn, determined by the business, social and financial position
of the offended parties and the business and financial position of
the offender. With the finding that the transfer was illegal,
petitioner is entitled to be reinstated to his former, or a
substantially equivalent, position without loss of seniority rights.
Reinstatement contemplates a restoration to a position from
which one has been removed or separated so that the employee
concerned may resume the functions of the position he already
30

held. WHEREFORE, the decision of the Court of Appeals is

AFFIRMED with the MODIFICATION that respondents are hereby
ORDERED to pay petitioner moral damages, exemplary damages
and attorneys fees. Costs against respondents. SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF
APPEALS and EFREN P. CASTANEDA, G.R. No. 96016
October 17, 1991
FACTS:
Private respondent Efren P. Castaneda retired from the
government service as Revenue Attache in the Philippine
Embassy in London, England. Upon retirement, he received,
among other benefits, terminal leave pay from which petitioner
Commissioner
of
Internal
Revenue
withheld,
allegedly
representing income tax thereon. Castaneda filed a formal written
claim with petitioner for a refund, contending that the cash
equivalent of his terminal leave is exempt from income tax. To
comply with the two-year prescriptive period within which claims
for refund may be filed, Castaneda filed with the Court of Tax
Appeals a Petition for Review, seeking the refund of income tax
withheld from his terminal leave pay. The Court of Tax Appeals
found for private respondent Castaneda and ordered the
Commissioner of Internal Revenue to refund Castaneda the sum
withheld as income tax. Petitioner appealed the above-mentioned
Court of Tax Appeals decision to this Court. In turn, we referred
the case to the Court of Appeals for resolution. The Court of
Appeals dismissed the petition for review and affirmed the
decision of the Court of Tax Appeals. The Solicitor General, acting
on behalf of the Commissioner of Internal Revenue, contends that
the terminal leave pay is income derived from employeremployee relationship, citing in support of his stand Section 28 of
the National Internal Revenue Code; that as part of the
compensation for services rendered, terminal leave pay is actually
part of gross income of the recipient.
ISSUE:
Whether or not terminal leave pay received by a government
official or employee on the occasion of his compulsory retirement
from the government service is subject to withholding (income)
tax.
HELD:
The Court has already ruled that the terminal leave pay
received by a government official or employee is not subject to
31

withholding (income) tax. In the recent case of Jesus N. Borromeo

vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31
July 1991, the Court explained the rationale behind the
employee's entitlement to an exemption from withholding
(income) tax on his terminal leave pay as follows: . . .
commutation of leave credits, more commonly known as terminal
leave, is applied for by an officer or employee who retires, resigns
or is separated from the service through no fault of his own.
(Manual on Leave Administration Course for Effectiveness
published by the Civil Service Commission, pages 16-17). In the
exercise of sound personnel policy, the Government encourages
unused leaves to be accumulated. The Government recognizes
that for most public servants, retirement pay is always less than
generous if not meager and scrimpy. A modest nest egg which the
senior citizen may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but also for the
same policy considerations governing retirement benefits. In fine,
not being part of the gross salary or income of a government
official or employee but a retirement benefit, terminal leave pay is
not subject to income tax. ACCORDINGLY, the petition for review
is hereby DENIED. SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE vs. PROCTER &
GAMBLE PHILIPPINE MANUFACTURING CORPORATION and
THE COURT OF TAX APPEALS, G.R. No. L-66838, December
2, 1991
FACTS:
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&GPhil.") declared dividends payable to its parent company and sole
stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"),
from which dividends 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 claiming, among other things, that
pursuant to Section 24 (b) (1) of the National Internal Revenue
Code ("NIRC"), 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"). On 31
January 1984, the CTA rendered a decision ordering petitioner
Commissioner to refund or grant the tax credit. On appeal by the
Commissioner, the Court through its Second Division reversed the
32

decision of the CTA. These holdings were questioned in P&G-Phil.'s

Motion for Re-consideration.
ISSUE:
1. Whether or not P&G-Phil. had the capacity to bring the

present claim for refund or tax credit.

2. Whether the fifteen percent (15%) tax rate is applicable to
the dividend remittances by P&G-Phil. to P&G-USA.
HELD:
(1)
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. 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) Since the claim for
refund was filed by P&G-Phil., the question which arises is: is P&GPhil. a "taxpayer" under Section 309 (3) of the NIRC? The term
"taxpayer" is defined in our NIRC as referring to "any person
subject to tax imposed by the Title [on Tax on Income]." 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 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." The terms liable for tax" and
"subject to tax" both connote legal obligation or duty to pay a tax.
33

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.

(2)
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&G-USA 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
34

fifteen percent (15%). In other words, our NIRC does not require
that the US tax law deem the parent-corporation 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&GUSA a "deemed paid" tax credit in an amount equivalent to the
twenty (20) percentage points waived by the Philippines.
The parent-corporation P&G-USA is "deemed to have paid" a
portion of the Philippine corporate income tax although 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.
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. Clearly, the
"deemed paid" tax credit which, under Section 24 (b) (1), NIRC,
must be allowed by US law to P&G-USA, 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.
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
35

Motion for Reconsideration, to SET ASIDE the Decision of the and

Division of the Court, and in lieu thereof, to REINSTATE and
AFFIRM the Decision of the Court of Tax Appeals and to DENY the
Petition for Review for lack of merit. No pronouncement as to
costs.
THE MANILA BANKING CORPORATION vs. COMMISSIONER
OF INTERNAL REVENUE, G.R. No. 168118, August 28, 2006
FACTS:
The
Manila
Banking
Corporation,
petitioner,
was
incorporated in 1961 and since then had engaged in the
commercial banking industry until 1987. On May 22, 1987, the
Monetary Board of the Bangko Sentral ng Pilipinas (BSP) issued a
Resolution pursuant to Section 29 of Republic Act (R.A.) No. 265
(the Central Bank Act), prohibiting petitioner from engaging in
business by reason of insolvency. Thus, petitioner ceased
operations that year and its assets and liabilities were placed
under the charge of a government-appointed receiver. Meanwhile,
R.A. No. 8424, otherwise known as the Comprehensive Tax Reform
Act of 1997, became effective on January 1, 1998. One of the
changes introduced by this law is the imposition of the minimum
corporate income tax on domestic and resident foreign
corporations. Implementing this law is Revenue Regulations No. 998 stating that the law allows a four (4) year period from the time
the corporations were registered with the Bureau of Internal
Revenue (BIR) during which the minimum corporate income tax
should not be imposed. On June 23, 1999, after 12 years since
petitioner stopped its business operations, the BSP authorized it
to operate as a thrift bank. The following year, specifically
on April 7, 2000, it filed with the BIR its annual corporate income
tax return and paid the corresponding tax for taxable year
1999.
Prior to the filing of its income tax return, or on December
28, 1999, petitioner sent a letter to the BIR requesting a ruling on
whether it is entitled to the four (4)-year grace period reckoned
from 1999. In other words, petitioners position is that since it
resumed operations in 1999, it will pay its minimum corporate
income tax only after four (4) years thereafter. On February 22,
2001, the BIR issued a Ruling stating that petitioner is entitled to
the four (4)-year grace period. Since it reopened in 1999, the
minimum corporate income tax may be imposed not earlier than
2002, i.e. the fourth taxable year beginning 1999. Pursuant to the
above Ruling, petitioner filed with the BIR a claim for refund
erroneously paid as minimum corporate income tax for taxable
year 1999. Due to the inaction of the BIR on its claim, petitioner
filed with the Court of Tax Appeals (CTA) a petition for review. The
36

CTA denied the petition finding that petitioners payment

corresponding to its minimum corporate income tax for taxable
year 1999 is in order. The CTA held that petitioner is not entitled
to the four (4)-year grace period because it is not a new
corporation. It has continued to be the same corporation,
registered with the Securities and Exchange Commission (SEC)
and the BIR, despite being placed under receivership. On June 11,
2003, petitioner filed with the Court of Appeals a petition for
review. On May 11, 2005, the appellate court rendered a Decision
affirming the assailed judgment of the CTA.
ISSUE:
Whether petitioner is entitled to a refund of its minimum
corporate income tax paid to the BIR for taxable year 1999.
HELD:
The intent of Congress relative to the minimum corporate
income tax is to grant a four (4)-year suspension of tax payment
to newly formed corporations. Corporations still starting their
business operations have to stabilize their venture in order to
obtain a stronghold in the industry. It does not come as a surprise
then when many companies reported losses in their initial years
of operations. Thus, in order to allow new corporations to grow
and develop at the initial stages of their operations, the
lawmaking body saw the need to provide a grace period of four
years from their registration before they pay their minimum
corporate income tax. Significantly, on February 23, 1995,
Congress enacted R.A. No. 7906, otherwise known as the Thrift
Banks Act of 1995. It took effect on March 18, 1995. This law
provides for the regulation of the organization and operations of
thrift banks. Under Section 3, thrift banks include savings and
mortgage banks, private development banks, and stock savings
and loans associations organized under existing laws. On June 15,
1999, the BIR issued Revenue Regulation No. 4-95 implementing
certain provisions of the said R.A. No. 7906. Section 6 provides:
Sec. 6. Period of exemption. All thrift banks created and organized
under the provisions of the Act shall be exempt from the payment
of all taxes, fees, and charges of whatever nature and
description, except the corporate income tax imposed under
Title II of the NIRC and as specified in Section 2(A) of these
regulations, for a period of five (5) years from the date of
commencement of operations; while for thrift banks which are
already existing and operating as of the date of effectivity of the
Act (March 18, 1995), the tax exemption shall be for a period of
five (5) years reckoned from the date of such effectivity. For
purposes of these regulations, date of commencement of
37

operations shall be understood to mean the date when the thrift

bank was registered with the Securities and Exchange
Commission or the date when the Certificate of Authority to
Operate was issued by the Monetary Board of the Bangko Sentral
ng Pilipinas, whichever comes later.
As mentioned earlier, petitioner bank was registered with the
BIR in 1961. However, in 1987, it was found insolvent by the
Monetary Board of the BSP and was placed under
receivership. After twelve (12) years, or on June 23, 1999, the BSP
issued to it a Certificate of Authority to Operate as a thrift
bank. Earlier, or on January 21, 1999, it registered with the
BIR. Then it filed with the SEC its Articles of Incorporation which
was approved on June 22, 1999. It is clear from the above-quoted
provision of Revenue Regulations No. 4-95 that the date of
commencement of operations of a thrift bank is the date it
was registered with the SEC or the date when the Certificate of
Authority to Operate was issued to it by the Monetary Board of
the BSP, whichever comes later.
Let it be stressed that Revenue Regulations No. 9-98,
implementing R.A. No. 8424 imposing the minimum corporate
income tax on corporations, provides that for purposes of this tax,
the date when business operations commence is the year in
which the domestic corporation registered with the BIR. However,
under Revenue Regulations No. 4-95, the date of commencement
of operations of thrift banks, such as herein petitioner, is the
date the particular thrift bank was registered with the SEC or the
date when the Certificate of Authority to Operate was issued to it
by the Monetary Board of the BSP, whichever comes later.
Clearly then, Revenue Regulations No. 4-95, not Revenue
Regulations No. 9-98, applies to petitioner, being a thrift bank. It
is, therefore, entitled to a grace period of four (4) years counted
from June 23, 1999 when it was authorized by the BSP to operate
as a thrift bank. Consequently, it should only pay its minimum
corporate income tax after four (4) years from 1999.
WHEREFORE,
we GRANT the
petition. The
assailed
Decision
of
the
Court
of
Appeals
is
hereby REVERSED. Respondent
Commissioner
of
Internal
Revenue is directed to refund to petitioner bank the sum
prematurely paid as minimum corporate income tax. SO
ORDERED.
CYANAMID PHILIPPINES, INC. vs. THE COURT OF APPEALS,
THE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, G.R. No. 108067, January 20, 2000
38

FACTS:
Petitioner, Cyanamid Philippines, Inc., a corporation
organized under Philippine laws, is a wholly owned subsidiary of
American Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to
petitioner and demanded the payment of deficiency income tax
for taxable year 1981. On March 4, 1985, petitioner protested the
assessments particularly, (1) the 25% Surtax Assessment; (2)
1981 Deficiency Income Assessment; and 1981 Deficiency
Percentage
Assessment. Petitioner,
through
its
external
accountant, claimed, among others, that the surtax for the undue
accumulation of earnings was not proper because the said profits
were retained to increase petitioners working capital and it would
be used for reasonable business needs of the company. Petitioner
contended that it availed of the tax amnesty under Executive
Order No. 41, hence enjoyed amnesty from civil and criminal
prosecution granted by the law. On October 20, 1987, the CIR
refused to allow the cancellation of the assessment notices.
Petitioner appealed to the Court of Tax Appeals. During the
pendency of the case, however, both parties agreed to
compromise the 1981 deficiency income tax assessment.
Petitioner paid a reduced amount as compromise settlement.
However, the surtax on improperly accumulated profits remained
unresolved. Petitioner claimed that CIRs assessment representing
the 25% surtax on its accumulated earnings for the year 1981
had no legal basis for the following reasons: (a) petitioner
accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of
indebtedness; (b) petitioner is a wholly owned subsidiary of
American Cyanamid Company, a corporation organized under the
laws of the State of Maine, in the United States of America, whose
shares of stock are listed and traded in New York Stock Exchange.
This being the case, no individual shareholder of petitioner could
have evaded or prevented the imposition of individual income
taxes by petitioners accumulation of earnings and profits, instead
of distribution of the same. The CTA denied the appeal which was
subsequently affirmed by the CA.
ISSUE:
Whether respondent court erred in holding that petitioner is
liable for the accumulated earnings tax for the year 1981.
HELD:
39

When corporations do not declare dividends, income taxes

are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders
could, in turn, be taxed. The amendatory provision of Section 25
of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly
accumulated tax: (a) banks; (b) non-bank financial intermediaries;
(c) insurance companies; and (d) corporations organized primarily
and authorized by the Central Bank of the Philippines to hold
shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the rule on enumeration is that the
express mention of one person, thing, act, or consequence is
construed to exclude all others. Laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally
in favor of the taxing power. Taxation is the rule and exemption is
the exception. The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so
claimed, a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the
assessment, is that increase of working capital by a corporation
justifies accumulating income. Petitioner asserts that respondent
court erred in concluding that Cyanamid need not infuse
additional working capital reserve because it had considerable
liquid funds based on the 2.21:1 ratio of current assets to current
liabilities. Petitioner relies on the so-called "Bardahl" formula,
which allowed retention, as working capital reserve, sufficient
amounts of liquid assets to carry the company through one
operating cycle. The "Bardahl" formula was developed to measure
corporate liquidity. The formula requires an examination of
whether the taxpayer has sufficient liquid assets to pay all of its
current liabilities and any extraordinary expenses reasonably
anticipated, plus enough to operate the business during one
operating cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into inventory, and
inventory into sales, including the time it takes to collect payment
for the sales. Petitioner asserts that Cyanamid had a working
capital deficit. Therefore, the accumulated income as of 1981 may
be validly accumulated to increase the petitioners working
capital for the succeeding year. We note, however, that the
companies where the "Bardahl" formula was applied, had
operating cycles much shorter than that of petitioner. In the case
of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a
year, reflecting that petitioner will need sufficient liquid funds, of
at least three quarters of the year, to cover the operating costs of
40

the business. There are variations in the application of the

"Bardahl" formula, such as average operating cycle or peak
operating cycle. In times when there is no recurrence of a
business cycle, the working capital needs cannot be predicted
with accuracy. As stressed by American authorities, although the
"Bardahl" formula is well-established and routinely applied by the
courts, it is not a precise rule. It is used only for administrative
convenience. Petitioners application of the "Bardahl" formula
merely creates a false illusion of exactitude.
If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate, and
the taxpayer contested such a determination, the burden of
proving the determination wrong, together with the corresponding
burden of first going forward with evidence, is on the taxpayer.
This applies even if the corporation is not a mere holding or
investment company and does not have an unreasonable
accumulation of earnings or profits. In order to determine whether
profits are accumulated for the reasonable needs of the business
to avoid the surtax upon shareholders, it must be shown that the
controlling intention of the taxpayer is manifested at the time of
accumulation, not intentions declared subsequently, which are
mere afterthoughts. In the instant case, petitioner did not
establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the
business. WHEREFORE, the instant petition is DENIED, and the
decision of the Court of Appeals, sustaining that of the Court of
Tax Appeals, is hereby AFFIRMED. Costs against petitioner. SO
ORDERED.

BENGUET CORPORATION vs. COMMISSIONER OF INTERNAL

REVENUE, G.R. No. 141212, June 22, 2006
FACTS:
Petitioner Benguet Corporation is a domestic corporation
duly organized and existing under Philippine laws. On January 16,
1992, it received from respondent Commissioner of Internal
Revenue a letter demanding payment of unremitted withholding
taxes on compensation of petitioners executives for specified
months from 1988 to 1991, excluding penalties for late payment.
Respondent stated that all the payment orders (POs) and
confirmation receipts (CRs) reflected in petitioners annual return
41

submitted to respondents Accounting Division were found to be

fake, that is, not issued by the Bureau of Internal Revenue (BIR).
In a letter dated January 24, 1992 filed on the same date with the
BIR, petitioner protested the assessment by stating that it had
promptly remitted its withholding taxes within their due
dates. Without answering petitioners protest, the BIR Collection
Service issued and served a warrant of distraint and/or levy to
enforce collection of the assessment in the increased amount, this
time including penalties for late payment and a warrant of
garnishment of the proceeds of the sale of petitioners gold bars
to the Central Bank and its deposits at the Metropolitan Bank and
Trust Company (MBTC). Petitioner subsequently filed a written
request for the lifting of the warrants and posted a surety bond to
guarantee payment of the assessment. Consequently, the
warrants were lifted. Respondent informed petitioner in a letter
dated April 3, 1992 that the demand letter previously sent was
considered final and unappealable. Thus, on April 23, 1992,
petitioner filed a petition for review with urgent petition for
issuance of injunction to restrain tax collection pending appeal
before the CTA. The CTA granted petitioners request for the
issuance of injunction. Petitioner alleged that it was not
delinquent in the payment of the withholding taxes on the
compensation of its executives, as in fact the same had been duly
remitted to the BIR through its confidential payroll agent. It
stressed that these payments were evidenced by official POs
and CRs issued by the BIRs authorized employees and agent
banks. The amounts covered by the MBTC checks were admittedly
paid to the BIR for the account of petitioner and credited to the
account of the BIR and/or the national treasury. Respondent, on
the other hand, aside from asserting that the POs
and CRs reflected in petitioners annual return were spurious,
argued that the checks issued by petitioner for the payment of
the withholding taxes on compensation were actually used for the
purchase of loose documentary stamps by various taxpayers
other than the petitioner as discovered by respondents Special
Projects Team. The CTA dismissed the petition and ordered
petitioner to pay the respondent. The CA affirmed the decision of
the CTA.
ISSUE:
Were there valid remittances to respondent by petitioner of
its withholding taxes during the specified period? Stated
otherwise, the question is what should be considered as the best
evidence of payment (or non-payment) of the withholding taxes:
the POs and CRs which indicated that payment was made as
insisted by petitioner, or the dorsal notes on the checks and
42

reports of the BIR team that no such payments were made (as
ruled by the CTA and CA)?
HELD:
Petitioner contends that no witness ever identified the notes
on the checks nor testified as to their veracity; therefore they
were hearsay evidence with no probative value. It avers that
whatever anomaly occurred with the checks happened while they
were already in the possession of the BIR or its agent banks. It
also denounces the BIR reports as hearsay. There is no merit in
the petition. Under our tax system, the CTA acts as a highly
specialized body specifically created for the purpose of reviewing
tax cases. Accordingly, its findings of fact are generally regarded
as final, binding and conclusive on this Court, especially if these
are substantially similar to the findings of the CA which is
normally the final arbiter of questions of fact. Thus, such findings
will not ordinarily be reviewed nor disturbed on appeal when
supported by substantial evidence and in the absence of gross
error or abuse on its part. By arguing that the POs and CRs should
be believed over the BIR reports and the annotations at the back
of the checks, petitioner is actually raising before us questions of
fact. This is not allowed. A question of fact involves an
examination of the probative value of the evidence presented. It
exists when doubt arises as to the truth or falsehood of alleged
facts. It bears emphasis that questions on whether certain items
of evidence should be accorded probative value or weight, or
rejected as feeble or spurious, or whether the proofs on one side
or the other are clear and convincing and adequate to establish a
proposition in issue, are without doubt questions of fact. This is
true regardless of whether the body of proofs presented by a
party, weighed and analyzed in relation to contrary evidence
submitted by the adverse party, may be said to be strong, clear
and convincing. Whether certain documents presented by one
side should be accorded full faith and credit in the face of protests
as to their spurious character by the other side; whether
inconsistencies in the body of proofs of a party are of such gravity
as to justify refusing to give said proofs weight all these are issues
of fact. Questions like these are not reviewable by us. As a rule,
we confine our review of cases decided by the CA only to
questions of law raised in the petition and therein distinctly set
forth.
The CTA and CA gave credence to the annotations and
reports and, these being questions of fact, we hold that their
findings are conclusive. This Court is not mandated to examine
and appreciate anew any evidence already presented
below. Petitioner has not advanced strong reasons why we should
43

delve into the facts. The findings of the CTA, as affirmed by the
CA, are supported by substantial evidence.
Petitioner, as a withholding agent, is burdened by law with a
public duty to collect the tax for the government. However, its
payroll agent failed to remit to the BIR the withholding taxes on
compensation. Hence, no valid payment of the withholding taxes
was actually made by petitioner. Codal provisions on withholding
tax are mandatory and must be complied with by the withholding
agent. It follows that petitioner is liable to pay the disputed
assessment. WHEREFORE, the petition is hereby DENIED. Costs
against petitioner. SO ORDERED.

44