CIR vs British Overseas Airways Corporation

G.R. No. L-65773-74 April 30, 1987

Facts:

(First Case) ​On 7 May 1968, CIR assessed BOAC the aggregate amount of P2,498,358.56 for
deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC. Subsequent
investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years
1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was
denied by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition
for review with the Tax Court on 27 January 1972, assailing the assessment and praying for the
refund of the amount paid.

(Second Case) On 17 November 1971, BOAC was once again assessed deficiency income taxes,
interests, and penalty for the fiscal years 1968-1969 to 1970-1971 in the aggregate amount of
P549,327.43, and the additional amounts of P1,000.00 and P1,800.00 as compromise penalties for
violation of Section 46 (requiring the filing of corporation returns) penalized under Section 74 of the
National Internal Revenue Code (NIRC).

BOAC requested that the assessment be countermanded and set aside. In a letter however, the CIR
not only denied the BOAC request for refund in the First Case but also re-issued in the Second Case
the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for
reconsideration was denied by the CIR. This prompted BOAC to file the Second Case before the
Tax Court praying that it be absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.

Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that the
proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd.,
and later by Qantas Airways, during the period in question, do not constitute BOAC income from
Philippine sources "since no service of carriage of passengers or freight was performed by BOAC
within the Philippines" and, therefore, said income is not subject to Philippine income tax. The CTA
position was that income from transportation is income from services so that the place where
services are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax
Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency
income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to
1970-71.

Issues:
1. Whether or not BOAC is a foreign corporation doing business in the Philippines
2. Whether or not the revenue from sales in the tickets of BOAC in the Philippines constitute
“income derived from the Philippines”, thus taxable under the Tax Code

Ruling:
1. Yes, BOAC is a resident foreign corporation. There is no specific criterion as to what
constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in
the light of its peculiar environmental circumstances. The term implies a continuity of
commercial dealings and arrangements, and contemplates, to that extent, the performance
of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be regarded as doing business within
a State, there must be continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary character.
 BOAC, during the periods covered by the subject - assessments, maintained a general sales
agent in the Philippines, That general sales agent "was engaged in (1) selling and issuing
tickets; (2) breaking down the whole trip into series of trips — each trip in the series
corresponding to a different airline company; (3) receiving the fare from the whole trip; and
(4) consequently allocating to the various airline companies on the basis of their participation
in the services rendered through the mode of interline settlement as prescribed by Article VI
of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the
functions which are normally incident to, and are in progressive pursuit of, the purpose and
object of its organization as an international air carrier. In fact, the regular sale of tickets, its
main activity, is the very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was "engaged in" business
in the Philippines through a local agent during the period covered by the assessments.
Accordingly, it is a resident foreign corporation subject to tax upon its total net income
received in the preceding taxable year from all sources within the Philippines

2. Yes. "The words 'income from any source whatever' disclose a legislative policy to include all
income not expressly exempted within the class of taxable income under our laws." Income
means "cash received or its equivalent"; it is the amount of money coming to a person within
a specific time ...; it means something distinct from principal or capital. For, while capital is a
fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth.

The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting
the government.

Section 37(a) of the Tax Code, which enumerates items of gross income from sources within
the Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5)
sale of real property, and (6) sale of personal property, does not mention income from the
sale of tickets for international transportation. However, that does not render it less an
income from sources within the Philippines. Section 37, by its language, does not intend the
enumeration to be exclusive. It merely directs that the types of income listed therein be
treated as income from sources within the Philippines. The test of taxability is the "source";
and the source of an income is that activity ... which produced the income.

CIR vs. Air India

G.R. No. 72443 January 29, 1988

Facts:
Air India is a foreign corporation organized under the laws of India, not licensed to do business in the
Philippines as an international carrier nor operate within Philippine territory nor service passengers
embarking from Philippine ports. It is represented in the Philippines by Philippine Airlines, Inc. Air
India sells airplane tickets in the Philippine through this agent. These tickets are serviced by Air India
airplanes outside the Philippines. In sum, Air India's status in the Philippines is that of an off-line
international carrier ​not engaged in the business of air transportation in the Philippines. The total
sales of airplane tickets transacted by Philippine Air Lines, Inc. for the Air India during the fiscal year
ending March 31, 1976 amounted to P2,968,156.00. CIR held Air India liable for the payment of
2.5% income tax on the private respondent's gross Philippine billings for the said fiscal year pursuant
to Section 24 (b) (2) of the National Internal Revenue Code, as amended, inclusive of the 50%
surcharge and interest for willful neglect to file a return as provided under Section 72 of the same
code. Due to this, Air India brought an Appeal to the Court of Tax Appeals on the premise that it
cannot be held liable to pay the said imposition because it did not derive any income from sources
with the Philippines during the said fiscal year. The Court of Tax Appeals ruled in favor of the private
respondent and set aside the decision of the petitioner.

Issue:
Whether or not the revenue derived by an international air carrier from sales of tickets in the
Philippines for air transportation, while having no landing rights in the country, constitutes income of
the said international air carrier from Philippine sources and, accordingly, taxable.

Ruling:
Yes. Gross Income" includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from profession,
vocations, trades, ​business, commerce, sales,​ or dealings in property, whether real or personal,
growing out of the ownership or use of or interest in such property; also from interests, rents,
dividends, securities or the ​transactions of any business carried on for gain or profit​, or gains, profits,
and ​income derived from any source whatever​. …

The definition is broad and comprehensive to include proceeds from sales of transport documents.
"The words "income from any source whatever" disclose a legislative policy to include all income not
expressly exempted within the class of taxable income under our laws." Income means "cash
received or its equivalent"; it is the amount of money coming to a person within a specific time ...; it
means something distinct from principal or capital. For, while capital is a fund, income is a flow. As
used in our income tax law, "income" refers to the flow of wealth.

The source of an income is the property, activity or service that produced the income. For the source
of income to be considered as coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines.

On the basis of the doctrine announced in ​British Overseas Airways Corporation​, the revenue
derived by the private respondent Air India from the sales of airplane tickets through its agent
Philippine Air Lines, Inc., here in the Philippines, must be considered taxable income. As correctly
assessed by the petitioner, such income is subject to a 2.5% tax pursuant to Presidential Decree No.
1355, amending Section 24 (b) (2) of the tax code. The total Philippine billings of the private
respondent for the taxable year in question amounts to P2,968,156.00. 2.5% of this amount or
P74,203.90 constitutes the income tax due from the private respondent.

CIR vs. CA and Efren Castaneda

G.R. No. 96016 October 17, 1991

Facts:
Efren Castaneda retired from gov’t service as Revenue Attache in the Philippine Embassy, London,
England. Upon retirement, he received benefits such as the terminal leave pay. The Commissioner of
Internal Revenue withheld P12,557 allegedly representing that it was tax income.

Castaneda filed for a refund, contending that the cash equivalent of his terminal leave is exempt from
income tax.
The Solicitor General contends that the terminal leave is based from an employer-employee relationship
and that as part of the services rendered by the employee, the terminal leave pay is part of the gross
income of the recipient.

The Court of Tax Appeals found for private respondent Castaneda and ordered the Commissioner of
Internal Revenue to refund Castaneda the sum of P12,557.13 withheld as income tax. CIR appealed
the case to the CA, which dismissed the same and affirmed CTA’s decision.

Issue: ​Whether or not terminal leave pay (on occasion of his compulsory retirement) is subject to income
tax.

Ruling: No. ​Terminal leave pay received by a government official or employee is not subject to
withholding (income) tax. case of ​Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al.​,
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.

National Development Corporation vs. CIR

G.R. No. L-53961 June 30, 1987

Facts:
The National Development Company (NDC) entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of twelve ocean-going vessels. The purchase price was
to come from the proceeds of bonds issued by the Central Bank. Initial payments were made in cash
and through irrevocable letters of credit. Fourteen promissory notes were signed for the balance by
the NDC and, as required by the shipbuilders, guaranteed by the Republic of the Philippines.
Pursuant thereto, the remaining payments and the interests thereon were remitted in due time by the
NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in Tokyo.

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70 as interest on
the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable
on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. The BIR thereupon
served on the NDC a warrant of distraint and levy to enforce collection of the claimed amount. The
NDC went to the Court of Tax Appeals.

The BIR was sustained by the CTA except for a slight reduction of the tax deficiency in the sum of
P900.00, representing the compromise penalty.

Issue: Whether or not NDC is liable for taxes

Ruling: Yes. The petitioner argues that the Japanese shipbuilders were not subject to tax under the
above provision because all the related activities — the signing of the contract, the construction of
the vessels, the payment of the stipulated price, and their delivery to the NDC — were done in
Tokyo. The law, however, does not speak of activity but of "source," which in this case is the NDC.
This is a domestic and resident corporation with principal offices in Manila.

It is quite apparent, under the terms of the law, that the Government's right to levy and collect
income tax on interest received by foreign corporations not engaged in trade or business within the
Philippines is not planted upon the condition that 'the activity or labor — and the sale from which the
(interest) income flowed had its situs' in the Philippines. The law specifies: 'Interest derived from
sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.Nothing there speaks of the 'act or activity' of non-resident
corporations in the Philippines, or place where the contract is signed. The ​residence of the obligor
who pays the interest rather than the physical location of the securities, bonds or notes or the place
of payment, is the determining factor of the source of interest income. Accordingly, if the obligor is a
resident of the Philippines the interest payment paid by him can have no other source than within the
Philippines. The interest is paid not by the bond, note or other interest-bearing obligations, but by the
obligor. The law is clear. Our plain duty is to apply it as written. The residence of the obligor which
paid the interest under consideration, petitioner herein, is Calle Pureza, Sta. Mesa, Manila,
Philippines; and as a corporation duly organized and existing under the laws of the Philippines, it is a
domestic corporation, resident of the Philippines.

There is no basis for saying that the interest payments were obligations of the Republic of the
Philippines and that the promissory notes of the NDC were government securities exempt from
taxation under Section 29(b)[4] of the Tax Code, reading as follows:

SEC. 29. ​Gross Income. — ​xxxx xxx xxx xxx

(b) Exclusion from gross income. — ​ The following items shall not be included in
gross income and shall be exempt from taxation under this Title:
xxx xxx xxx
(4) Interest on Government Securities. ​— Interest upon the obligations of the
Government of the Republic of the Philippines or any political subdivision thereof, but
in the case of such obligations issued after approval of this Code, only to the extent
provided in the act authorizing the issue thereof. (​ As amended by Section 6, R.A. No.
82; emphasis supplied)

The law invoked by the petitioner as authorizing the issuance of securities is R.A. No. 1407, which in
fact is silent on this matter. C.A. No. 182 as amended by C.A. No. 311 does carry such authorization
but, like R.A. No. 1407, does not exempt from taxes the interests on such securities.

It is also incorrect to suggest that the Republic of the Philippines could not collect taxes on the
interest remitted because of the undertaking signed by the Secretary of Finance in each of the
promissory notes that:

Upon authority of the President of the Republic of the Philippines, the undersigned,
for value received, hereby absolutely and unconditionally guarantee (sic), on behalf
of the Republic of the Philippines, the due and punctual payment of both principal
and interest of the above note

There is nothing in the above undertaking exempting the interests from taxes. Petitioner has not
established a clear waiver therein of the right to tax interests. Tax exemptions cannot be merely
implied but must be categorically and unmistakably expressed. Any doubt concerning this question
must be resolved in favor of the taxing power.
The petitioner also forgets that it is not the NDC that is being taxed. The tax was due on the interests
earned by the Japanese shipbuilders. It was the income of these companies and not the Republic of
the Philippines that was subject to the tax the NDC did not withhold.

Arthur Henderson vs. Collector of Internal Revenue

G.R. No. L-12954 February 28, 1961

Facts:
The spouses Arthur Henderson and Marie B. Henderson filed with the Bureau of Internal Revenue
returns of annual net income for the years 1948 to 1952, inclusive of their net incomes and
declaration of personal exemptions. In due time the taxpayers received from the Bureau of Internal
Revenue assessment notices Nos. 15804-48, 25450-49, 15255-50, 25705-51 and 22527-52 and
paid the amounts assessed. On 28 November 1953, after investigation and verification, the Bureau
of Internal Revenue reassessed the taxpayers' income for the years 1948 to 1952 and demanded
payment of the deficiency taxes on or before 28 February 1954 with respect to those due for the
years 1948, 1949, 1950 and 1952. In the foregoing assessments, the Bureau of Internal Revenue
considered as part of their taxable income the taxpayer-husband's allowances for rental, residential
expenses,subsistence, water, electricity and telephone; bonus paid to him; withholding tax and
entrance fee to the Marikina Gun and Country Club paid by his employer for his account; and
travelling allowance of his wife. The Hendersons argue that they are not income, but are rather
expenses of the company. The Collector of Internal Revenue merely allowed the entrance fee as
nontaxable. The rent expense and travel expenses were still held to be taxable. Then, The Court of
Tax Appeals ruled in favor of the taxpayers, that such expenses must not be considered part of
taxable income. The SC appreciated the pieces of evidence submitted by the Hendersons in proving
that neither of the allowance given to them redounded to their personal benefit, thus they are not
taxable.

Issue: Whether or not the rental allowances and travel allowances furnished and given by the
employer-corporation are part of taxable income

Ruling: No, as the claims are substantially backed up with evidence. The husband-taxpayer "is the
president of the American International Underwriters for the Philippines, Inc., a domestic corporation
engaged in insurance business;" that the taxpayers "entertained officials, guests and customers of
his employer-corporation, in apartments furnished by the latter and successively occupied by him as
president thereof; that "In 1952, petitioner's wife, Mrs. Marie Henderson, upon request o Mr. C. V.
Starr, chairman of the parent corporation of the American International Underwriters for the
Philippines, Inc., undertook a trip to New York in connection with the purchase of a lot in Dewey
Boulevard By petitioner's employer-corporation, the construction of a building thereon, the drawing of
prospectus and plans for said building, and other related matters." The exigencies of the
husband-taxpayer's high executive position, not to mention social standing, demanded and
compelled them to live in a more spacious and pretentious quarters like the ones they had occupied.
Although entertaining and putting up houseguests and guests of the husband-taxpayer's
employer-corporation were not his predominant occupation as president, yet he and his wife had to
entertain and put up houseguests in their apartments. That is why his employer-corporation had to
grant him allowances for rental and utilities in addition to his annual basic salary to take care of
those extra expenses for rental and utilities in excess of their personal needs. Hence, the fact that
the taxpayers had to live or did not have to live in the apartments chosen by the husband-taxpayer's
employer-corporation is of no moment, for no part of the allowances in question redounded to their
personal benefit or was retained by them. Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors. Nevertheless, as correctly held by the Court of Tax Appeals,
the taxpayers are entitled only to a rateable value of the allowances in question, and only the
amount of P4,800 annually, the reasonable amount they would have spent for house rental and
utilities such as light, water, telephone, etc., should be the amount subject to tax, and the excess
considered as expenses of the corporation.

Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer had to make the trip to New
York at the behest of her husband's employer-corporation to help in drawing up the plans and
specifications of a proposed building, is also supported by the evidence. The parts of the letters
written by the wife-taxpayer to her husband while in New York and the letter written by the
husband-taxpayer to Mr. C. V. Starr support the said findings. No part of the allowance for travelling
expenses redounded to the benefit of the taxpayers. Neither was a part thereof retained by them.
The fact that she had herself operated on for tumors while in New York was but incidental to her stay
there and she must have merely taken advantage of her presence in that city to undergo the
operation.

Philippine Long Distance Telephone Company vs. CIR

G.R. No. 157264 January 31, 2008

Facts: ​Petitioner, the Philippine Long Distance Telephone Company (PLDT), claiming that it
terminated in 1995 the employment of several rank-and-file, supervisory, and executive employees
due to redundancy; that in compliance with labor law requirements, it paid those separated
employees separation pay and other benefits; and that as employer and withholding agent, it
deducted from the separation pay withholding taxes in the total amount of P23,707,909.20 which it
remitted to the Bureau of Internal Revenue (BIR), filed on November 20, 1997 with the BIR a claim
for tax credit or refund of the P23,707,909.20, invoking Section 28(b)(7)(B) of the 1977 National
Internal Revenue Code​ ​which excluded from gross income

[a]ny amount ​received by an official or employee or by his heirs from the

employer as a consequence of separation of such official or employee from
the service of the employer due to death, sickness or other physical disability
or for any cause beyond the control of the said official or employee.
As the BIR took no action on its claim, PLDT filed a claim for judicial refund before the Court of Tax
Appeals (CTA). Commissioner of Internal Revenue, contended that PLDT failed to show proof of
payment of separation pay and remittance of the alleged withheld taxes. By Decision ​the CTA
denied PLDT's claim on the ground that it "failed to sufficiently prove that the terminated employees
received separation pay and that taxes were withheld therefrom and remitted to the BIR." PLDT filed
a Petition for Review in the Court of Appeals, on the premise that it is ​not essential to prove that the
separation pay benefits were actually received ​by the terminated employees, but the same was
denied.

Issue: Whether or not ​the withholding taxes, which petitioner remitted to the BIR, should be refunded for
having been erroneously withheld and paid to the later

Ruling: No. PLDT failed to establish that the redundant employees actually received separation pay and
it withheld taxes therefrom and remitted the same to the BIR. ​While the records of the case contain the
Alphabetical List of Employee from Whom Taxes Were Withheld for the year 1995 and the Monthly
Remittance Returns of Income Taxes Withheld for December 1995, the documents from which SGV
"traced" the former to the latter have not been presented.

A taxpayer must do two (2) things to be able to be able to successfully make a claim for the tax refund:
1. Declare the income payment it received as part of its gross income.
2. Establish the fact of withholding.

On this score, the relevant revenue regulations provides as follows:

 Sec. 10. Claims for tax credit or refund - claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is
shown on the return that the income payment received was declared as part of the gross
income and the fact of withholding is established by a copy of the statement duly issued
by the payer to the payee showing the amount paid and the amount of tax withheld
therefrom.

Jaime N. Soriano, et al. vs. Secretary of Finance and CIR

G.R. No. 184450 January 24, 2017

Facts:
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and 79
of Republic Act No. 8424, as Amended, Otherwise Known as the National Internal Revenue
Code of 1997," was approved and signed into law by President Arroyo.

The following are the salient features of the new law: It increased the basic personal
exemption from P20,000 for a single individual, P25,000 for the head of the family, and
P32,000 for a married individual to P50,000 for each individual.It increased the additional
exemption for each dependent not exceeding four from P8,000 to P25,000.It raised the
Optional Standard Deduction (OSD) for individual taxpayers from 10% of gross income to
40% of the gross receipts or gross sales.It introduced the OSD to corporate taxpayers at no
more than 40% of their gross income.It granted MWEs exemption from payment of income
tax on their minimum wage, holiday pay, overtime pay, night shift differential pay and
hazard pay.

Then, ​BIR issued RR 10-2008, dated 08 July 2008, implementing the provisions of R.A. 9504,
limiting the de minimis benefits which are not taxable to those not exceeding P30,000, just like an
employee receiving compensation income beyond the Statutory Minimum Wage (SMW), and that
“an employee who receives/earns additional compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable statutory amount of ₱30,000.00, taxable allowances and
other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift
differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings
are not exempt from income tax, and consequently, from withholding tax.”

Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for the
prorated application of the personal and additional exemptions for taxable year 2008 to
begin only effective 6 July 2008 for being contrary to Section 4 of Republic Act No. 9504.
Petitioners argue that the prorated application of the personal and additional exemptions
under RR 10-2008 is not "the legislative intendment in this jurisdiction." They stress that
Congress has always maintained a policy of "full taxable year treatment" as regards the
application of tax exemption laws. They allege further that R.A. 9504 did not provide for a
prorated application of the new set of personal and additional exemptions.

Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A. 9504
provide for the application of the tax exemption for the full calendar year 2008. It also
espouses the interpretation that R.A. 9504 provides for the unqualified tax exemption of the
income of MWEs regardless of the other benefits they receive. In conclusion, it says that
RR 10-2008, which is only an implementing rule, amends the original intent of R.A. 9504,
which is the substantive law, and is thus null and void.

Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as well as increased personal and
additional exemptions for other individual taxpayers, for the whole year 2008. They note that
the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and provides
that those MWEs who received "other benefits" in excess of P30,000 are not exempt from
income taxation. Petitioners believe this RR is a "patent nullity" and therefore void

The Office of the Solicitor General (OSG) filed a Consolidated Comment and took the
position that the application of R.A. 9504 was intended to be prospective, and not
retroactive. This was supposedly the general rule under the rules of statutory construction:
law will only be applied retroactively if it clearly provides for retroactivity, which is not
provided in this instance

The OSG further argues that the legislative intent of non-retroactivity was effectively
confirmed by the "Conforme" of Senator Escudero, Chairperson of the Senate Committee
on Ways and Means, on the draft revenue regulation that became RR 10-2008.

Issues:

1. Whether the increased personal and additional exemptions provided by R.A. 9504 should be
applied to the entire taxable year 2008 or prorated, considering that R.A. 9504 took effect
only on 6 July 2008
2. Whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008 only
3. Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing that an
MWE who receives other benefits in excess of the statutory limit of ₱30,000 is no longer
entitled to the exemption provided by R.A. 9504.

Ruling:

1. The personal and additional exemptions established by R.A. 9504 should be applied to the
entire taxable year 2008. R.A. 9504, like R.A. 7167 in ​Umali, ​was a piece of social legislation
clearly intended to afford ​immediate t​ ax relief to individual taxpayers, particularly low-income
compensation earners. Indeed, if R.A. 9504 was to take effect beginning taxable year 2009
or half of the year 2008 only, then the intent of Congress to address the increase in the cost
of living in 2008 would have been negated.

Therefore, following ​Umali, t​ he test is whether the new set of personal and additional
exemptions was available at the time of the filing of the income tax return. In other words,
while the status of the individual taxpayers is determined at the close of the taxable year,
their personal and additional exemptions - and consequently the computation of their taxable
income - are reckoned when the tax becomes due, and not while the income is being earned
or received.

The NIRC is clear on these matters. The taxable income of an individual taxpayer shall be
computed on the basis of the calendar year.The taxpayer is required to file an income tax
return on the 15​th of April of each year covering income of the preceding taxable year. The
tax due thereon shall be paid at the time the return is filed.
 It stands to reason that the new set of personal and additional exemptions, adjusted as a
form of social legislation to address the prevailing poverty threshold, should be given effect
at the most opportune time as the Court ruled in ​Umali.

The increased exemptions were already available much earlier than the required time of
filing of the return on 15 April 2009. R.A. 9504 came into law on 6 July 2008, more than nine
months before the deadline for the filing of the income tax return for taxable year 2008.
Hence, individual taxpayers were entitled to claim the increased amounts for the entire year
2008. This was true despite the fact that incomes were already earned or received prior to
the law's effectivity on 6 July 2008.

Even more compelling is the fact that R.A. 9504 became effective during the taxable year in
question. In ​Umali, ​the Court ruled that the application of the law was prospective, even if the
amending law took effect after the close of the taxable year in question, but before the
deadline for the filing of the return and payment of the taxes due for that year. Here, not only
did R.A. 9504 take effect before the deadline for the filing of the return and payment for the
taxes due for taxable year 2008, it took effect way before the close of that taxable year.
Therefore, the operation of the new set of personal and additional exemption in the present
case was all the more prospective.

2. The MWE is exempt for the entire taxable year 2008. As in the case of the adjusted personal
and additional exemptions, the MWE exemption should apply to the entire taxable year 2008,
and not only from 6 July 2008 onwards. As it stands, the calendar year 2008 remained as
one taxable year for an individual taxpayer. Therefore, RR 10-2008 cannot declare the
income earned by a minimum wage earner from 1 January 2008 to 5 July 2008 to be taxable
and those earned by him for the rest of that year to be tax-exempt. To do so would be to
contradict the NIRC and jurisprudence, as taxable income would then cease to be
determined on a yearly basis.

Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment of
the MWE's tax exemption and the increased personal and additional exemptions beginning
only on 6 July 2008 is in contravention of the law it purports to implement.

A clarification is proper at this point. Our ruling that the MWE exemption is available for the
entire taxable year 2008 is premised on the fact of one's status as an MWE; that is, whether
the employee during the entire year of 2008 was an MWE as defined by R.A. 9504. When
the ​wages ​received exceed the minimum wage anytime during the taxable year, the
employee necessarily loses the MWE qualification. Therefore, wages become taxable as the
employee ceased to be an MWE. But the exemption of the employee from tax on the income
previously earned as ​an MWE ​remains.

Additionally, on the question of whether one who ceases to be an MWE may still be entitled
to the personal and additional exemptions, the answer must necessarily be yes. The MWE
exemption is separate and distinct from the personal and additional exemptions. One's
status as an MWE does not preclude enjoyment of the personal and additional exemptions.
Thus, when one is an MWE during a part of the year and later earns higher than the
minimum wage and becomes a non-MWE, only earnings for that period when one is a
non-MWE is subject to tax. It also necessarily follows that such an employee is entitled to the
personal and additional exemptions that any individual taxpayer with taxable gross income is
entitled.

A different interpretation will actually render the MWE exemption a totally oppressive
legislation. It would be a total absurdity to disqualify an MWE from enjoying as much as
₱150,000 in personal and additional exemptions just because sometime in the year, he or
she ceases to be an MWE by earning a little more in wages. Laws cannot be interpreted with
 such absurd and unjust outcome. It is axiomatic that the legislature is assumed to intend
right and equity in the laws it passes.

3. Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively
declaring that an MWE who receives other benefits in excess of the statutory limit of ₱30,000
is no longer entitled to the exemption provided by R.A. 9504.

Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed by
the assailed provisions of RR 10-2008. The provisions of the law are clear and precise; they
leave no room for interpretation - they do not provide or require any other qualification as to
who are MWEs.

To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says
he/she must be one who is paid the statutory minimum wage if he/she works in the private
sector, or not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned, if he/she is a government employee. Thus, one is either an MWE or
he/she is not. Simply put, MWE is the status acquired upon passing the litmus test - whether
one receives wages not exceeding the prescribed minimum wage.

The minimum wage referred to in the definition has itself a clear and definite meaning. The
law explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity Board,
62
which is a creation of the Labor Code.​ The Labor Code clearly describes wages and
Minimum Wage under Title II of the Labor Code. Specifically, Article 97 defines "wage" as
follows:

(f) "Wage" paid to any employee shall mean the remuneration or earnings,
however designated, capable of being expressed in terms of money, whether
fixed or ascertained on a time, task, piece, or commission basis, or other
method of calculating the same, which is payable by an employer to an
employee under a written or unwritten contract of employment for work done
or to be done, or for services rendered or to be rendered and includes the fair
and reasonable value, as determined by the Secretary of Labor and
Employment, of board, lodging, or other facilities customarily furnished by the
employer to the employee. "Fair and reasonable value" shall not include any
profit to the employer, or to any person affiliated with the employer.

While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage is
distinct."Minimum wage" is wage mandated; one that employers may not freely choose on
their own to designate in any which way. The minimum wage exempted by R.A. 9504 is that
which is referred to in the Labor Code. It is distinct and different from other payments
including allowances, honoraria, commissions, allowances or benefits that an employer may
pay or provide an employee.

Likewise, the other compensation incomes an MWE receives that are also exempted by R.A.
9504 are all mandated by law and are based on this minimum wage. Additional
compensation in the form of overtime pay is mandated for work beyond the normal hours
based on the employee's regular wage.Those working between ten o'clock in the evening
and six o'clock in the morning are required to be paid a night shift differential based on their
regular wage.Holiday/premium pay is mandated whether one works on regular holidays or on
one's scheduled rest days and special holidays. In all of these cases, additional
compensation is mandated, and computed based on the employee's regular wage.
 R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess of
the minimum wage as determined by the wage boards, including the corresponding holiday,
overtime, night differential and hazard pays.

In other words, the law exempts from income taxation the most basic compensation an
employee receives - the amount afforded to the lowest paid employees by the mandate of
law. In a way, the legislature grants to these lowest paid employees additional income by no
longer demanding from them a contribution for the operations of government. This is the
essence of R.A. 9504 as a social legislation. The government, by way of the tax exemption,
affords increased purchasing power to this sector of the working class. What the legislature
is exempting is the MWE's minimum wage and other forms statutory compensation like
holiday pay, overtime pay, night shift differential pay, and hazard pay. These are not
bonuses or other benefits; these are wages. Respondents seek to frustrate this exemption
granted by the legislature.

In respondents' view, anyone receiving 13​th month pay and other benefits in excess of
₱30,000 cannot be an MWE. They seek to impose their own definition of "MWE" by arguing
thus:

It should be noted that the intent of the income tax exemption of MWEs is to
free the low-income earner from the burden of tax. R.A. No. 9504 and R.R.
No. 10-2008 define who are the low-income earners. Someone who earns
beyond the incomes and benefits above-enumerated is definitely not a
low-income earner.

We do not agree.

As stated before, nothing to this effect can be read from R.A. 9504. The amendment is silent
on whether compensation-related benefits exceeding the ₱30,000 threshold would make an
MWE lose exemption. R.A. 9504 has given definite criteria for what constitutes an MWE, and
R.R. 10-2008 cannot change this.

An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to
the requirements provided by law. To do so constitutes lawmaking, which is generally
reserved for Congress. We are not persuaded that RR 10-2008 merely clarifies the law. The
CIR' s clarification is not warranted when the language of the law is plain and clear.

Given the foregoing, the treatment of bonuses and other benefits that an employee receives
from the employer in excess of the ₱30,000 ceiling cannot but be the same as the prevailing
treatment prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no more, no less.

In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs will not lose their exemption
as such. Workers who receive the statutory minimum wage their basic pay remain MWEs.
The receipt of any other income during the year does not disqualify them as MWEs. They
remain MWEs, entitled to exemption as such, but the taxable income they receive other than
as MWEs may be subjected to appropriate taxes.

CONCLUSION

The foregoing considered, we find that respondents committed grave abuse of discretion in
promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the prorated
application of the personal and additional exemptions for taxable year 2008 and for the period of
applicability of the MWE exemption for taxable year 2008 to begin only on 6 July 2008; and (b) the
disqualification of MWEs who earn purely compensation income, whether in the private or public
sector, from the privilege of availing themselves of the MWE exemption in case they receive
compensation-related benefits exceeding the statutory ceiling of ₱30,000.

As an aside, we stress that the progressivity of the rate structure under the present Tax Code has
lost its strength. In the main, it has not been updated since its revision in 1997, or for a period of
almost 20 years. The phenomenon of "bracket creep" could be prevented through the inclusion of an
indexation provision, in which the graduated tax rates are adjusted periodically without need of
amending the tax law. The 1997 Tax Code, however, has no such indexation provision. It should be
emphasized that indexation to inflation is now a standard feature of a modern tax code.

We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other benefits, in
consideration of the effect of inflation thereon, as provided under Section 32(B)(7)(e) entitled" ​13​th
Month Pay and Other Benefits":

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the
ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and regulations issued by
the Secretary of Finance, upon recommendation of the Commissioner, after considering among
others, the effect on the same of the inflation rate at the end of the taxable year.

​ e minimis
This same positive duty, which is also imposed upon the same officials regarding the d
benefits provided under Section 33(C)(4), is a duty that has been exercised several times. The
provision reads:

(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:

(l) x x x

xxxx

(4) ​De minimis ​benefits as defined in the rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.

Supreme Transliner Inc., et. al. vs. BPI Family Savings Bank Inc.

G.R. No. 165617 February 25, 2011

Facts: ​Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and
Paulita S. Alvarez, obtained a loan in the amount of ₱9,853,000.00 from BPI Family Savings Bank
with a 714-square meter lot covered by Transfer Certificate of Title No. T-79193 in the name of
Moises C. Alvarez and Paulita S. Alvarez, as collateral. For non-payment of the loan, the mortgage
was extrajudicially foreclosed and the property was sold to the bank as the highest bidder in the
public auction conducted by the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a
Certificate of Sale ​was issued in favor of the bank and the same was registered on October 1, 1996.
Before the expiration of the one-year redemption period, the mortgagors notified the bank of their
intention to redeem the property. The bank agreed upon payment of assessed value of P
15,704,249.12.

The mortgagors requested for the elimination of liquidated damages and reduction of attorney’s fees
and interest (1% per month) but the bank refused. On May 21, 1997, the mortgagors redeemed the
property by paying the sum of ₱15,704,249.12. A Certificate of Redemption was issued by the bank
on May 27, 1997.
On June 11, 1997, the mortgagors filed a complaint against the bank to recover the allegedly
unlawful and excessive charges totaling ₱5,331,237.77. The trial court rendered its decision
dismissing the complaint, arguing that the plaintiffs-mortgagors are estopped from questioning the
correctness of the redemption price as they had freely and voluntarily signed the letter-agreement
prepared by the defendant bank, and along with Orient Bank expressed their conformity to the terms
and conditions therein. The mortgagors appealed to the CA which reversed the trial court’s decision,
saying that attorney’s fees and liquidated damages were already included in the bid price.

Issue: Whether or not the foreclosing mortgagee should pay capital gains tax upon execution of the
certificate of sale, and if paid by the mortgagee, whether the same should be shouldered by the
redemptioner.

Ruling: Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors’
argument that there is no legal basis for the inclusion of this charge in the redemption price. Under
Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other
disposition of real property classified as capital asset under Section 34(a)​17 of the ​Tax Code shall be
subject to the final capital gains tax. The term sale includes pacto de retro and other forms of
conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86 (as amended by
RMO No. 16-88 and as further amended by RMO Nos. 27-89 and 6-92) states that these conditional
sales "necessarily include mortgage foreclosure sales (judicial and extrajudicial foreclosure sales)."
Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax
and documentary stamp tax must be paid before title to the property can be consolidated in favor of
the bank.

Under Section 63 of Presidential Decree No. 1529 otherwise known as the ​Property Registration
Decree​, if no right of redemption exists, the certificate of title of the mortgagor shall be cancelled,
and a new certificate issued in the name of the purchaser. But where the right of redemption exists,
the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order
confirming the sale shall be registered by brief memorandum thereof made by the Register of Deeds
upon the certificate of title. In the event the property is redeemed, the certificate or deed of
redemption shall be filed with the Register of Deeds, and a brief memorandum thereof shall be made
by the Register of Deeds on the certificate of title.

It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property
until after the expiration of the one-year redemption period as provided in Act No. 3135 and title
thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the
mortgagor is given the option whether or not to redeem the real property. The issuance of the
Certificate of Sale does not by itself transfer ownership.

RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of
Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital assets
initiated by banks, finance and insurance companies. Although the subject foreclosure sale and
redemption took place before the effectivity of RR No. 4-99, its provisions may be given retroactive
effect in this case. In this case, the retroactive application of RR No. 4-99 is more consistent with the
policy of aiding the exercise of the right of redemption. As the Court of Tax Appeals concluded in
one case, RR No. 4-99 "has curbed the inequity of imposing a capital gains tax even before the
expiration of the redemption period [since] there is yet no transfer of title and no profit or gain is
realized by the mortgagor at the time of foreclosure sale but only upon expiration of the redemption
period." In his commentaries, De Leon expressed the view that while revenue regulations as a
general rule have no retroactive effect, if the revocation is due to the fact that the regulation is
erroneous or contrary to law, such revocation shall have retroactive operation as to affect past
transactions, because a wrong construction of the law cannot give rise to a vested right that can be
invoked by a taxpayer.
Considering that herein petitioners-mortgagors exercised their right of redemption before the
expiration of the statutory one-year period, petitioner bank is not liable to pay the capital gains tax
due on the extrajudicial foreclosure sale. There was no actual transfer of title from the
owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the total
redemption price was unwarranted and the corresponding amount paid by the
petitioners-mortgagors should be returned to them.