COMMISSIONER OF INTERNAL REVENUE
vs. ST. LUKE’S MEDICAL CENTER, INC.
G.R. No. 203514 February 13, 2017 DEL
CASTILLO, J.:
Under Section 30 (E) and (G) of the 1997 NIRC,
a charitable institution will be exempted from
tax if it has the following qualifications: a non-
stock corporation or association; organized
exclusively for charitable purposes; operated
exclusively for charitable purposes; and no part
of its net income or asset shall belong to or inure
to the benefit of any member, organizer, officer,
or any specific person.
FACTS:
On December 2007 St. Luke’s Medical
Center, Inc. (SLMC) received from the Large
Taxpayers Service-Documents Processing and
Quality Assurance Division of the (BIR) Audit
Results/Assessment Notice Nos. QA-07-
000096 and QA-07-000097, assessing SLMC
deficiency income tax under Section 27(B)7 of
the 1997 National Internal Revenue Code
(NIRC), as amended, for taxable year 2005 in
the amount of ₱78,617,434.54 and for taxable
year 2006 in the amount of ₱57,119,867.33.
SLMC then filed with petitioner (CIR) an
administrative protest assailing the
assessments. They claimed that as a non-stock,
non-profit charitable and social welfare
organization under Section 30(E) and (G) of
the 1997 NIRC, as amended, it is exempt from
paying income tax.
On April 25, 2008, SLMC received petitioner
CIR's Final Decision on the Disputed
Assessment dated April 9, 2008 increasing the
deficiency income for the taxable year 2005
tax to ₱82,419,522.21 and for the taxable year
2006 to ₱60,259,885.94. Aggrieved, SLMC
elevated the matter to the CTA via a Petition
for Review.
Ruling of the Court of Tax Appeals Division
On August 26, 2010, the CTA Division
rendered a Decision finding SLMC not liable for
deficiency income tax under Section 27(B) of
the 1997 NIRC, as amended, since it is exempt
from paying income tax under Section 30(E)
and (G) of the same Code.
CIR moved for reconsideration but the CTA
Division denied the same. This prompted CIR
to file a Petition for Review before the CTA En
Banc.
Ruling of the Court of Tax Appeals En Banc
On May 9, 2012, the CTA En Banc affirmed the
cancellation and setting aside of the Audit
Results/Assessment Notices issued against
SLMC. It sustained the findings of the CTA
Division that SLMC complies with all the
requisites under Section 30(E) and (G) of the
1997 NIRC and thus, entitled to the tax
exemption provided therein. The CTA En Banc
denied CIR's Motion for Reconsideration.
ISSUE: Whether or not SLMC is exempted from
the payment of income tax.
NOTE: During the pendency of this case in
2012, SC rendered a decision between the
same parties and involving the same issue –
whether or not SLMC is entitled to tax
exemption under Section 30 (E) and (G) of the
1997 NIRC. It ruled that SLMC is not entitled
to tax exemption under Section 30 (E) and (G)
of the 1997 NIRC because it does not operate
exclusively for charitable or social purposes
insofar as its revenues from paying patients
are concerns. SLMC was ordered to pay the
deficiency taxes in 1998 based on the 10
percent preferential income tax under Section
27 (B) of the 1997 NIRC. In April 2013, SLMC
paid the amount of basic taxes due for taxable
years 1998, 2000-2002, and 2004-2007. It
informed the Court of such payments through
a Manifestation and Motion and thereafter
moved for the dismissal of the instant case on
the ground of mootness. The CIR, however,
opposed the motion claiming that the payment
confirmation submitted by the SLMC is not a
competent proof of payment.
RULING:
The Supreme Court ruled that SLMC is not
entitled to tax exemption under Section 30 (E)
and (G) of the 1997 NIRC and applied the
doctrine of stare decisis - "absent any powerful
countervailing considerations, like cases
ought to be decided alike."
Under Section 30 (E) and (G) of the 1997 NIRC,
a charitable institution will be exempted from
tax if it has the following qualifications: a non-
stock corporation or association; organized
exclusively for charitable purposes; operated
exclusively for charitable purposes; and no
part of its net income or asset shall belong to
or inure to the benefit of any member,
organizer, officer, or any specific person.
Although there is no question that SLMC is
organized as a non-stock, non-profit charitable
institution, it is not automatically exempted
from paying taxes. To be exempted from
paying real property taxes, Section 28 (3) of
the 1987 Constitution requires that a
charitable institution use the property
‘actually, directly and exclusively for
charitable purposes.’ To be exempted from
income taxes, Section 30 (E) of the 1997 NIRC
requires that a charitable institution must be
‘organized and operated exclusively’ for
charitable purposes. Likewise to qualify as
exempted in income tax, Section 30 (G) of the
1997 NIRC requires that the institution be
‘operated exclusively’ for social welfare.
The Court defined ‘exclusive’ as ‘possessed
and enjoyed to the exclusion of others;
debarred from participation or enjoyment.
Given that SLMC has an income of P1.73
billion, it cannot be disputed that it is not an
institution ’operated exclusively’ for
charitable purposes.
The Court found that SLMC is a corporation
that is not ‘operated exclusively’ for charitable
purposes or social welfare purposes insofar as
its revenues from paying clients are
concerned. On the clear and plain text of
Section 30 (E) and (G) of the 1997 NIRC, an
institution must be ‘operated exclusively’ for
charitable and social welfare purposes to be
completely exempt from tax. However,
earning income from for-profit activities does
not revoke or remove a charitable institution’s
tax exemption under the same provision. It
merely subjects the earnings for profit by the
charitable institution to 10 percent income tax
pursuant to section 27(B) of the 1997 NIRC.
SLMC is liable for the deficiency income taxes.
With regard to whether or not SLMC is liable
for surcharges, interest, and compromise
penalty, the Court ruled that: ‘good faith and
honest belief, that one is not subject to tax on
the basis of previous interpretation of
government agencies tasked to implement the
tax law, are sufficient justification to delete
[such] imposition(s).’
The Court dismissed the petition by CIR since
the case was rendered moot by the payments
made by SLMC of the basic taxes for the
taxable years 2005 and 2006, in the amounts
of P49,919,496.40 and P41,525,608.40,
respectively.
G.R. No. 196596, November 09, 2016
COMMISSIONER OF INTERNAL REVENUE,
Petitioner, v. DE LA SALLE UNIVERSITY, INC.,
Respondent.
G.R. No. 198841
DE LA SALLE UNIVERSITY INC., Petitioner, v.
COMMISSIONER OF INTERNAL
REVENUE,Respondent.
G.R. No. 198941
COMMISSIONER OF INTERNAL REVENUE,
Petitioner, v. DE LA SALLE UNIVERSITY, INC.,
Respondent.
DECISION
SECOND DIVISION
BRION, J.:
Factual Antecedents
Sometime in 2004, the Bureau of Internal
Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its
revenue officers to examine the latter's books
of accounts and other accounting records for
all internal revenue taxes for the period Fiscal
Year Ending 2003 and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary
Assessment Notice to DLSU.6
Subsequently on August 18, 2004, the BIR
through a Formal Letter of Demand assessed
DLSU the following deficiency taxes: (1)
income tax on rental earnings from
restaurants/canteens and bookstores
operating within the campus; (2) value-added
tax (VAT) on business income; and (3)
documentary stamp tax (DST) on loans and
lease contracts. The BIR demanded the
payment of P17,303,001.12, inclusive of
surcharge, interest and penalty for taxable
years 2001, 2002 and 2003.7
DLSU protested the assessment. The
Commissioner failed to act on the protest;
thus, DLSU filed on August 3, 2005 a petition
for review with the CTA Division.8
DLSU, a non-stock, non-profit educational
institution, principally anchored its petition
on Article XIV, Section 4 (3) of the
Constitution, which reads:
(3) All revenues and assets of non-stock,
non-profit educational institutions
used actually, directly, and exclusively
for educational purposes shall be
exempt from taxes and duties. xxx.
On January 5, 2010, the CTA Division partially
granted DLSU's petition for review. The
dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is
PARTIALLY GRANTED. The DST assessment
on the loan transactions of [DLSU] in the
amount of P1,1681,774.00 is hereby
CANCELLED. However, [DLSU] is ORDERED
TO PAY deficiency income tax, VAT and DST
on its lease contracts, plus 25% surcharge for
the fiscal years 2001, 2002 and 2003 in the
total amount of P18,421,363.53...xxx.
In addition, [DLSU] is hereby held liable to
pay 20% delinquency interest on the total
amount due computed from September 30,
2004 until full payment thereof pursuant to
Section 249(C)(3) of the [National Internal
Revenue Code]. Further, the compromise
penalties imposed by [the Commissioner]
were excluded, there. being no compromise
agreement between the parties.
Both the Commissioner and DLSU moved for
the reconsideration of the January 5, 2010
decision.10 On April 6, 2010, the CTA Division
denied the Commissioner's motion for
reconsideration while it held in abeyance the
resolution on DLSU's motion for
reconsideration.11
On May 13, 2010, the Commissioner appealed
to the CTA En Banc (CTA En Banc Case No.
622) arguing that DLSU's use of its revenues
and assets for non-educational or commercial
purposes removed these items from the
exemption coverage under the Constitution.12
On May 18, 2010, DLSU formally offered to
the CTA Division supplemental pieces of
documentary evidence to prove that its rental
income was used actually, directly and
exclusively for educational purposes.13The
Commissioner did not promptly object to the
formal offer of supplemental evidence despite
notice.14
On July 29, 2010, the CTA Division, in view of
the supplemental evidence submitted,
reduced the amount of DLSU's tax
deficiencies. The dispositive portion of the
amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial
Reconsideration is hereby PARTIALLY
GRANTED. [DLSU] is hereby ORDERED TO
PAY for deficiency income tax, VAT and DST
plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total adjusted amount
of P5,506,456.71...xxx.
In addition, [DLSU] is hereby held liable to
pay 20% per annum deficiency interest on
the...basic deficiency taxes...until full payment
thereof pursuant to Section 249(B) of the
[National Internal Revenue Code]...xxx.
Further, [DLSU] is hereby held liable to pay
20% per annum delinquency interest on the
deficiency taxes, surcharge and deficiency
interest which have accrued...from September
30, 2004 until fully paid.
Consequently, the Commissioner
supplemented its petition with the CTA En
Banc and argued that the CTA Division erred
in admitting DLSU's additional evidence.16
Dissatisfied with the partial reduction of its
tax liabilities, DLSU filed a separate petition
for review with the CTA En Banc (CTA En
Banc Case No. 671) on the following grounds:
(1) the entire assessment should have been
cancelled because it was based on an invalid
LOA; (2) assuming the LOA was valid, the CTA
Division should still have cancelled the entire
assessment because DLSU submitted
evidence similar to those submitted by
Ateneo De Manila University (Ateneo) in a
separate case where the CTA cancelled
Ateneo's tax assessment;17 and (3) the CTA
Division erred in finding that a portion of
DLSU's rental income was not proved to have
been used actually, directly and exclusively
for educational
purposes.18chanroblesvirtuallawlibrary
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the
Commissioner's petition for review and
sustained the findings of the CTA Division.19
Tax on rental income
Relying on the findings of the court-
commissioned Independent Certified Public
Accountant (Independent CPA), the CTA En
Banc found that DLSU was able to prove that
a portion of the assessed rental income was
used actually, directly and exclusively for
educational purposes; hence, exempt from
tax.20 The CTA En Banc was satisfied with
DLSU's supporting evidence confirming that
part of its rental income had indeed been
used to pay the loan it obtained to build the
university's Physical Education - Sports
Complex.21
Parenthetically, DLSU's unsubstantiated claim
for exemption, i.e., the part of its income that
was not shown by supporting documents to
have been actually, directly and exclusively
used for educational purposes, must be
subjected to income tax and VAT.22
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following
arguments:
First, DLSU's rental income is taxable
regardless of how such income is derived,
used or disposed of.35 DLSU's operations of
canteens and bookstores within its campus
even though exclusively serving the
university community do not negate income
tax liability.36
The Commissioner contends that Article XIV,
Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax
Code, which states among others, that the
income of whatever kind and character of [a
non-stock and non-profit educational
institution] from any of [its] properties, real
or personal, or from any of (its] activities
conducted for profit regardless of the
disposition made of such income, shall be
subject to tax imposed by this Code.37
The Commissioner argues that the CTA En
Banc misread and misapplied the case of
Commissioner of Internal Revenue v.
YMCA38 to support its conclusion that
revenues however generated are covered by
the constitutional exemption, provided that,
the revenues will be used for educational
purposes or will be held in reserve for such
purposes.39
On the contrary, the Commissioner posits that
a tax-exempt organization like DLSU is
exempt only from property tax but not from
income tax on the rentals earned from
property.40 Thus, DLSU's income from the
leases of its real properties is not exempt
from taxation even if the income would be
used for educational purposes.41
Issues
Although the parties raised a number of
issues, the Court shall decide only the pivotal
issues, which we summarize as follows:
1. Whether DLSU's income and revenues
proved to have been used actually,
directly and exclusively for
educational purposes are exempt
from duties and taxes;
Our Ruling
As we explain in full below, we rule that:
1. The income, revenues and assets of
non-stock, non-profit educational
institutions proved to have been used
actually, directly and exclusively for
educational purposes are exempt
from duties and taxes.
I. The revenues and assets of non-stock,
non-profit educational institutions proved
to have been used actually, directly, and
exclusively for educational purposes are
exempt from duties and taxes.
DLSU rests it case on Article XIV, Section 4 (3)
of the 1987 Constitution, which reads:
(3) All revenues and assets of non-stock,
non-profit educational institutions
used actually, directly, and
exclusively for educational purposes
shall be exempt from taxes and
duties. Upon the dissolution or
cessation of the corporate existence of
such institutions, their assets shall be
disposed of in the manner provided by
law. Proprietary educational
institutions, including those
cooperatively owned, may likewise be
entitled to such exemptions subject
to the limitations provided by law
including restrictions on dividends and
provisions for reinvestment
[underscoring and emphasis supplied]
Before fully discussing the merits of the case,
we observe that:
First, the constitutional provision refers to
two kinds of educational institutions: (1) non-
stock, non-profit educational institutions and
(2) proprietary educational institutions.69
Second, DLSU falls under the first category.
Even the Commissioner admits the status of
DLSU as a non-stock, non-profit educational
institution.70
Third, while DLSU's claim for tax exemption
arises from and is based on the Constitution,
the Constitution, in the same provision, also
imposes certain conditions to avail of the
exemption. We discuss below the import of
the constitutional text vis-a-vis the
Commissioner's counter-arguments.
Fourth, there is a marked distinction
between the treatment of nonstock, non-
profit educational institutions and
proprietary educational institutions. The
tax exemption granted to non-stock, non-
profit educational institutions is conditioned
only on the actual, direct and exclusive use of
their revenues and assets for educational
purposes. While tax exemptions may also be
granted to proprietary educational
institutions, these exemptions may be subject
to limitations imposed by Congress.
As we explain below, the marked
distinction between a non-stock, non-
profit and a proprietary educational
institution is crucial in determining the
nature and extent of the tax exemption
granted to non-stock, non-profit
educational institutions.
The Commissioner opposes DLSU's claim for
tax exemption on the basis of Section 30 (H)
of the Tax Code. The relevant text reads:
The following organizations shall not be
taxed under this Title [Tax on Income] in
respect to income received by them as such:
xxxx
(H) A non-stock and non-profit
educational institution
xxxx
Notwithstanding the provisions in the
preceding paragraphs, the income of
whatever kind and character of the
foregoing organizations from any of their
properties, real or personal, or from any of
their activities conducted for profit
regardless of the disposition made of such
income shall be subject to tax imposed
under this Code. [underscoring and
emphasis supplied]
The Commissioner posits that the 1997 Tax
Code qualified the tax exemption granted to
non-stock, non-profit educational institutions
such that the revenues and income they
derived from their assets, or from any of their
activities conducted for profit, are taxable
even if these revenues and income are used
for educational purposes.
Did the 1997 Tax Code qualifY the tax
exemption constitutionally-granted to
non-stock, non-profit educational
institutions?
We answer in the negative.
While the present petition appears to be a
case of first impression,71 the Court in the
YMCA case had in fact already analyzed and
explained the meaning of Article XIV, Section
4 (3) of the Constitution. The Court in that
case made doctrinal pronouncements that are
relevant to the present case.
The issue in YMCA was whether the income
derived from rentals of real property owned
by the YMCA, established as a "welfare,
educational and charitable non-profit
corporation," was subject to income tax under
the Tax Code and the Constitution.72
The Court denied YMCA's claim for exemption
on the ground that as a charitable institution
falling under Article VI, Section 28 (3) of the
Constitution,73 the YMCA is not tax-exempt
per se; "what is exempted is not the
institution itself...those exempted from real
estate taxes are lands, buildings and
improvements actually, directly and
exclusively used for religious, charitable or
educational purposes."74
The Court held that the exemption claimed by
the YMCA is expressly disallowed by the last
paragraph of then Section 27 (now Section
30) of the Tax Code, which mandates that the
income of exempt organizations from any of
their properties, real or personal, are subject
to the same tax imposed by the Tax Code,
regardless of how that income is used. The
Court ruled that the last paragraph of Section
27 unequivocally subjects to tax the rent
income of the YMCA from its property.75
In short, the YMCA is exempt only from
property tax but not from income tax.
As a last ditch effort to avoid paying the taxes
on its rental income, the YMCA invoked the
tax privilege granted under Article XIV,
Section 4 (3) of the Constitution.
The Court denied YMCA's claim that it falls
under Article XIV, Section 4 (3) of the
Constitution holding that the term
educational institution, when used in laws
granting tax exemptions, refers to the school
system (synonymous with formal education);
it includes a college or an educational
establishment; it refers to the hierarchically
structured and chronologically graded
learnings organized and provided by the
formal school system.76
The Court then significantly laid down the
requisites for availing the tax exemption
under Article XIV, Section 4 (3), namely: (1)
the taxpayer falls under the classification
non-stock, non-profit educational
institution; and (2) the income it seeks to be
exempted from taxation is used actually,
directly and exclusively for educational
purposes.77
We now adopt YMCA as precedent and hold
that:
1. The last paragraph of Section 30 of
the Tax Code is without force and
effect with respect to non-stock, non-
profit educational institutions,
provided, that the non-stock, non-
profit educational institutions prove
that its assets and revenues are used
actually, directly and exclusively for
educational purposes.
2. The tax-exemption constitutionally-
granted to non-stock, non profit
educational institutions, is not subject
to limitations imposed by law.
The tax exemption granted by the
Constitution to non-stock, non-profit
educational institutions is conditioned
only on the actual, direct and exclusive use
of their assets, revenues and income78for
educational purposes.
We find that unlike Article VI, Section 28 (3)
of the Constitution (pertaining to charitable
institutions, churches, parsonages or
convents, mosques, and non-profit
cemeteries), which exempts from tax only the
assets, i.e., "all lands, buildings, and
improvements, actually, directly, and
exclusively used for religious, charitable, or
educational purposes...," Article XIV, Section
4 (3) categorically states that "[a]ll revenues
and assets... used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties."
The addition and express use of the word
revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.
We find that the text demonstrates the policy
of the 1987 Constitution, discernible from the
records of the 1986 Constitutional
Commission79 to provide broader tax
privilege to non-stock, non-profit educational
institutions as recognition of their role in
assisting the State provide a public good. The
tax exemption was seen as beneficial to
students who may otherwise be charged
unreasonable tuition fees if not for the tax
exemption extended to all revenues and
assets of non-stock, non-profit educational
institutions.80
Further, a plain reading of the Constitution
would show that Article XIV, Section 4 (3)
does not require that the revenues and
income must have also been sourced from
educational activities or activities related to
the purposes of an educational institution.
The phrase all revenues is unqualified by any
reference to the source of revenues. Thus, so
long as the revenues and income are used
actually, directly and exclusively for
educational purposes, then said revenues and
income shall be exempt from taxes and
duties.81
We find it helpful to discuss at this point the
taxation of revenues versus the taxation of
assets.
Revenues consist of the amounts earned by a
person or entity from the conduct of business
operations.82 It may refer to the sale of goods,
rendition of services, or the return of an
investment. Revenue is a component of the
tax base in income tax,83 VAT,84 and local
business tax (LBT).85
Assets, on the other hand, are the tangible and
intangible properties owned by a person or
entity.86 It may refer to real estate, cash
deposit in a bank, investment in the stocks of
a corporation, inventory of goods, or any
property from which the person or entity may
derive income or use to generate the same. In
Philippine taxation, the fair market value of
real property is a component of the tax base
in real property tax (RPT).87 Also, the landed
cost of imported goods is a component of the
tax base in VAT on importation88 and tariff
duties.89
Thus, when a non-stock, non-profit
educational institution proves that it uses its
revenues actually, directly, and exclusively for
educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other
hand, when it also shows that it uses its assets
in the form of real property for educational
purposes, it shall be exempted from RPT.
To be clear, proving the actual use of the
taxable item will result in an exemption, but
the specific tax from which the entity shall be
exempted from shall depend on whether the
item is an item of revenue or asset.
To illustrate, if a university leases a portion of
its school building to a bookstore or cafeteria,
the leased portion is not actually, directly and
exclusively used for educational purposes,
even if the bookstore or canteen caters only
to university students, faculty and staff.
The leased portion of the building may be
subject to real property tax, as held in Abra
Valley College, Inc. v. Aquino.90 We ruled in
that case that the test of exemption from
taxation is the use of the property for
purposes mentioned in the Constitution. We
also held that the exemption extends to
facilities which are incidental to and
reasonably necessary for the accomplishment
of the main purposes.
In concrete terms, the lease of a portion of a
school building for commercial purposes,
removes such asset from the property tax
exemption granted under the Constitution.91
There is no exemption because the asset is not
used actually, directly and exclusively for
educational purposes. The commercial use of
the property is also not incidental to and
reasonably necessary for the accomplishment
of the main purpose of a university, which is
to educate its students.
However, if the university actually, directly
and exclusively uses for educational purposes
the revenues earned from the lease of its
school building, such revenues shall be
exempt from taxes and duties. The tax
exemption no longer hinges on the use of the
asset from which the revenues were earned,
but on the actual, direct and exclusive use of
the revenues for educational purposes.
Parenthetically, income and revenues of non-
stock, non-profit educational institution not
used actually, directly and exclusively for
educational purposes are not exempt from
duties and taxes. To avail of the exemption,
the taxpayer must factually prove that it
used actually, directly and exclusively for
educational purposes the revenues or income
sought to be exempted.
The crucial point of inquiry then is on the use
of the assets or on the use of the revenues.
These are two things that must be viewed and
treated separately. But so long as the assets
or revenues are used actually, directly and
exclusively for educational purposes, they are
exempt from duties and taxes.
The tax exemption granted by the
Constitution to non-stock, non-profit
educational institutions, unlike the
exemption that may be availed of by
proprietary educational institutions, is not
subject to limitations imposed by law.
That the Constitution treats non-stock, non-
profit educational institutions differently
from proprietary educational institutions
cannot be doubted. As discussed, the privilege
granted to the former is conditioned only on
the actual, direct and exclusive use of their
revenues and assets for educational purposes.
In clear contrast, the tax privilege granted to
the latter may be subject to limitations
imposed by law.
We spell out below the difference in
treatment if only to highlight the privileged
status of non-stock, non-profit educational
institutions compared with their proprietary
counterparts.
While a non-stock, non-profit educational
institution is classified as a tax-exempt entity
under Section 30 (Exemptions from Tax on
Corporations) of the Tax Code, a proprietary
educational institution is covered by Section
27 (Rates of Income Tax on Domestic
Corporations).
To be specific, Section 30 provides that
exempt organizations like non-stock, non-
profit educational institutions shall not be
taxed on income received by them as such.
Section 27 (B), on the other hand, states that
[p]roprietary educational institutions...which
are nonprofit shall pay a tax of ten percent
(10%) on their taxable income...Provided, that
if the gross income from unrelated trade,
business or other activity exceeds fifty
percent (50%) of the total gross income
derived by such educational institutions...[the
regular corporate income tax of 30%] shall be
imposed on the entire taxable income...92
By the Tax Code's clear terms, a proprietary
educational institution is entitled only to the
reduced rate of 10% corporate income tax.
The reduced rate is applicable only if: (1) the
proprietary educational institution is non
profit and (2) its gross income from unrelated
trade, business or activity does not exceed
50% of its total gross income.
Consistent with Article XIV, Section 4 (3) of
the Constitution, these limitations do not
apply to non-stock, non-profit educational
institutions.
Thus, we declare the last paragraph of Section
30 of the Tax Code without force and effect
for being contrary to the Constitution insofar
as it subjects to tax the income and revenues
of non-stock, non-profit educational
institutions used actually, directly and
exclusively for educational purpose. We make
this declaration in the exercise of and
consistent with our duty93 to uphold the
primacy of the Constitution.94
Finally, we stress that our holding here
pertains only to non-stock, non-profit
educational institutions and does not cover
the other exempt organizations under Section
30 of the Tax Code.
For all these reasons, we hold that the income
and revenues of DLSU proven to have been
used actually, directly and exclusively for
educational purposes are exempt from duties
and taxes.
Finally, it is true that educational institutions
are not included in the class of taxpayers who
can pay and remit DST through the On-Line
Electronic DST Imprinting Machine under RR
No. 9-2000. As correctly held by the CTA, this
is irrelevant because it was not DLSU who
used the On-Line Electronic DST Imprinting
Machine but the bank that handled its
mortgage and loan transactions. RR No. 9-
2000 expressly includes banks in the class of
taxpayers that can use the On-Line Electronic
DST Imprinting Machine.
Thus, the Court sustains the finding of the
CTA that DLSU proved the payment of the
assessed DST deficiency, except for the
unpaid balance of P13,265.48.152
WHEREFORE, premises considered, we
DENY the petition of the Commissioner of
Internal Revenue in G.R. No. 196596 and
AFFIRM the December 10, 2010 decision and
March 29, 2011 resolution of the Court of Tax
Appeals En Banc in CTA En Banc Case No. 622,
except for the total amount of deficiency tax
liabilities of De La Salle University, Inc., which
had been reduced.
We also DENY both the petition of De La Salle
University, Inc. in G.R. No. 198841 and the
petition of the Commissioner of Internal
Revenue in G.R. No. 198941 and thus AFFIRM
the June 8, 2011 decision and October 4, 2011
resolution of the Court of Tax Appeals En
Banc in CTA En Banc Case No. 671, with the
MODIFICATION that the base for the
deficiency income tax and VAT for taxable
year 2003 is P343,576.70.
CIR v. CA and YMCA (Young Men’s
Christian Association of the Philippines,
Inc.)
Main issue to be resolved:
Is the income derived from rentals of real
property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) —
established as "a welfare, educational and
charitable non-profit corporation" — subject
to income tax under the National Internal
Revenue Code (NIRC) and the Constitution?
RULE: Tax Exemption if claimed must be
expressly granted in a statute stated in a
language TOO CLEAR TO BE MISTAKEN
Tax Exemptions are Strictly construed
(Doctrine of Strict Interpretation in
construing tax exemptions.)
Facts:
• Private Respondent YMCA is a non-
stock, non-profit institution, which conducts
various programs and activities that are
beneficial to the public, especially the young
people, pursuant to its religious, educational
and charitable objectives.
• In 1980, private respondent earned,
among others, an income of P676,829.80
from leasing out a portion of its premises to
small shop owners, like restaurants and
canteen operators, and P44,259.00 from
parking fees collected from non-members.
• On July 2, 1984, the commissioner of
internal revenue (CIR) issued an assessment
to private respondent, in the total amount of
P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and
professional fees and deficiency withholding
tax on wages.
• Private respondent formally
protested the assessment and, as a
supplement to its basic protest, filed a letter
dated October 8, 1985.
• CIR denied the claims of YMCA.
• Due to such denial of its protest,
YMCA filed to CTA Pet. for review.
• CTA ruled in favor of YMCA
• CIR contested the ruling of the CTA to
the CA
• CA reversed ruling of CTA that "the
leasing of petitioner's (herein respondent's)
facilities to small shop owners, to restaurant
and canteen operators and the operation of
the parking lot are reasonably incidental to
and reasonably necessary for the
accomplishment of the objectives of the
petitioners, and the income derived
therefrom are tax exempt.”
• YMCA opposed arguing that its rental
income is not subject to tax mainly because of
the provisions of Section 27 of the NIRC
(National Internal Revenue Code) which
provides that “civic leagues or organizations
not organized for profit but operate
exclusively for promotion of social welfare
and those organized exclusively for pleasure,
recreation and other non-profitable
businesses SHALL NOT BE TAXED.”
Issues:
A. W/N the contention of YMCA on their tax
exemption tenable?
B. Is the YMCA an educational institution
within the purview of Article XIV, Section 4,
par. 3 of the Constitution?
Ruling: Petition of the CIR was
granted.
a. No. The contention of YMCA on their
tax exemption is not tenable. The rental
income of the YMCA made for profit is
taxable.
Sec. 27. Exemptions from tax on corporations.
— The following organizations shall not be
taxed under this Title in respect to income
received by them as such —
xxx xxx xxx
(g) Civic league or organization not
organized for profit but operated
exclusively for the promotion of social
welfare;
(h) Club organized and operated
exclusively for pleasure, recreation,
and other non-profitable purposes, no
part of the net income of which inures
to the benefit of any private
stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the
preceding paragraphs, the income of
whatever kind and character of the
foregoing organizations from any of
their properties, real or personal, or
from any of their activities conducted
for profit, regardless of the
disposition made of such income, shall
be subject to the tax imposed under
this Code.
• While the income received by the
organizations enumerated in Section 27 (now
Section 26) of the NIRC is, as a rule, exempted
from the payment of tax "in respect to income
received by them as such," the exemption
does not apply to income derived ". . . from
any of their properties, real or personal, or
from any of their activities conducted for
profit, regardless of the disposition made of
such income . . . ."
• SC agrees with the petitioner that
"rental income derived by a tax-exempt
organization from the lease of its properties,
real or personal, [is] not, therefore, exempt
from income taxation, even if such income [is]
exclusively used for the accomplishment of its
objectives."
• Because taxes are the lifeblood of the
nation, the Court has always applied the
doctrine of strict in interpretation in
construing tax exemptions. Furthermore, a
claim of statutory exemption from taxation
should be manifest. and unmistakable from
the language of the law on which it is based.
Thus, the claimed exemption "must expressly
be granted in a statute stated in a language
too clear to be mistaken."
• In the instant case, the exemption
claimed by the YMCA is expressly disallowed
by the very wording of the last paragraph of
then Section 27 of the NIRC which mandates
that the income of exempt organizations
(such as the YMCA) from any of their
properties, real or personal, be subject to the
tax imposed by the same Code. Because the
last paragraph of said section unequivocally
subjects to tax the rent income of the YMCA
from its real property, the Court is duty-
bound to abide strictly by its literal meaning
and to refrain from resorting to any
convoluted attempt at construction.
• It is axiomatic that where the
language of the law is clear and unambiguous,
its express terms must be applied. 21
Parenthetically, a consideration of the
question of construction must not even begin,
particularly when such question is on
whether to apply a strict construction or a
liberal one on statutes that grant tax
exemptions to "religious, charitable and
educational propert[ies] or institutions."
• Private respondent also invokes
Article XIV, Section 4, par. 3 of the Character,
36 claiming that the YMCA "is a non-stock,
non-profit educational institution whose
revenues and assets are used actually,
directly and exclusively for educational
purposes so it is exempt from taxes on its
properties and income." 37 We reiterate that
private respondent is exempt from the
payment of property tax, but not income tax
on the rentals from its property. The bare
allegation alone that it is a non-stock, non-
profit educational institution is insufficient to
justify its exemption from the payment of
income tax.
• As previously discussed, laws
allowing tax exemption are construed
strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the
aforecited provision, it must prove with
substantial evidence that (1) it falls under the
classification non-stock, non-profit
educational institution; and (2) the income it
seeks to be exempted from taxation is used
actually, directly, and exclusively for
educational purposes. However, the Court
notes that not a scintilla of evidence was
submitted by private respondent to prove
that it met the said requisites.
b. Is the YMCA an educational institution
within the purview of Article XIV, Section 4,
par. 3 of the Constitution?
We rule that it is not. The term
"educational institution" or "institution of
learning" has acquired a well-known
technical meaning, of which the members of
the Constitutional Commission are deemed
cognizant.
SMI-ED Technology v. CIR
G.R. No. 175410, November 12, 2014,
LEONEN, J.
Doctrines:
 In an action for the refund of taxes
allegedly erroneously paid, the Court of
Tax Appeals (CTA) may determine
whether there are taxes that should
have been paid in lieu of the taxes paid.
Determining the proper category of tax
that should have been paid is not an
assessment. It is incidental to
determining whether there should be a
refund.
 A Philippine Economic Zone Authority
(PEZA)-registered corporation that has
never commenced operations may not
avail the tax incentives and preferential
rates given to PEZA-registered
enterprises. Such corporation is subject
to ordinary tax rates under the NIRC.
Facts:
· SMI-Ed Philippines is a PEZA-registered
corporation authorized "to engage in the
business of manufacturing ultra high-density
microprocessor unit package."
· After its registration on June 29, 1998,
SMI-Ed constructed buildings and purchased
machineries and equipment.
· SMI-Ed "failed to commence operations."
Its factory was temporarily closed, effective
October 15, 1999. On August 1, 2000, it sold its
buildings and some of its installed machineries
and equipment to Ibiden Philippines, Inc.,
another PEZA-registered enterprise. SMI-Ed
was dissolved on Nov. 30, 2000.
· In its quarterly income tax return for year
2000, SMI-Ed subjected the entire gross sales
of its properties to 5% final tax on PEZA
registered corporations. SMI-Ed paid taxes
amounting to P44,677,500.00.
· On February 2, 2001, after requesting the
cancellation of its PEZA registration and
amending its articles of incorporation to
shorten its corporate term, SMI-Ed filed an
administrative claim for the refund of
P44,677,500.00 with the Bureauof Internal
Revenue (BIR). SMIEd alleged that the amount
was erroneously paid.
· The BIR did not act on SMI-Ed Philippines’
claim, which prompted the latter to file a
petition for review before the Court of Tax
Appeal.
CTA denied SMI-ED claim for refund. It held
that:
1. fiscal incentives given to
PEZA-registered enterprises may be
availed only by PEZA-registered
enterprises that had already
commenced operations. Since SMI-Ed
had not commenced operations, it was
not entitled to the incentives of either
the income tax holiday or the 5%
preferential tax rate. Payment of the
5% preferential tax amounting to
P44,677,500.00 was erroneous.
2. It found that the properties
sold by SMI-ED were capital assets
under Sec. 39(A)(1) of the NIRC, hence
it subjected the sale of SMIEd
Philippines’ assets to 6% capital gains
tax. It was found liable for capital gains
tax amounting to
P53,613,000.00.20. Therefore, SMIEd
must still pay the balance of
P8,935,500.00 as deficiency tax.
· SMI-ED filed a peitition for review with
the CTA en banc.
· CTA en banc affirmed the CTA second
division.
· SMI-Ed filed a petition for review before
the Supreme Court praying for the grant of its
claim for refund and the reversal of the CTA En
Banc’s decision.
SMI-ED’s Arguments:
· It argued that the CTA Second Division
erroneously assessed the 6% capital gains tax
on the sale of SMI-Ed Philippines’ equipment,
machineries, and buildings. It also argued that
the CTA Second Division cannot make an
assessment at the first instance. Even if the
CTAS econd Division has such power, the
period to make an assessment had already
prescribed.
Issues:
1. WON CTA En Banc grievously erred
and acted beyond its jurisdiction when
it assessed for deficiency tax in the first
instance
2. WON SMI-ED is entitled to the benefits
given to PEZA-registered enterprises
including the 5% preferential tax rate
3. WON SMI-ED is entitled to the benefits
given to PEZA-registered enterprises
including the 5% preferential tax rate
4. WON the government can still collect
for the deficiency taxes (kay 5%
preferential tax rate raman tu ya
gibayran when it should have been 6%
capital gains tax rate)
Ruling:
1. WON CTA En Banc grievously erred and
acted beyond its jurisdiction when it
assessed for deficiency tax in the first
instance
No. The term "assessment" refers to
the determination of amounts due from a
person obligated to make payments. In the
context of national internal revenue collection,
it refers the determination of the taxes due
from a taxpayer under the NIRC of 1997. The
power and duty to assess national internal
revenue taxes are lodged with the BIR.
The CTA has no powerto make an
assessment at the first instance. On matters
such as tax collection, tax refund, and others
related to the national internal revenue taxes,
the CTAs’ jurisdiction is appellate in nature.
Based on the law, the following must
be present for the CTA to have jurisdiction
over a case involving the BIR’s decisions or
inactions:
a) A case involving any of the
following:
i. Disputed assessments;
ii. Refunds of internal revenue taxes,
fees, or other charges, penalties in
relation thereto; &
iii. Other matters arising under the
NIRC.
b) CIR’s decision or inaction in a case
submitted to him or her

Thus, the BIR first has to make an assessment
of the taxpayer’s liabilities. When the BIR
makes the assessment, the taxpayer is allowed
to dispute that assessment before the BIR. If
the BIR issues a decision that is unfavorable to
the taxpayer or if the BIR fails to act on a
dispute brought by the taxpayer, the BIR’s
decision or inaction may be brought on appeal
to the CTA. The CTA then acquires jurisdiction
over the case.
When the BIR’s unfavorable decision is
brought on appeal to the CTA, the CTA reviews
the correctness of the BIR’s assessment and
decision. In reviewing the BIR’s assessment
and decision, the CTA had to make its own
determination of the taxpayer’s tax liabilities.
The CTA may not make such determination
before the BIR makes its assessment and
before a dispute involving such assessment is
brought to the CTA on appeal.
In this case, the CTAs’ jurisdiction was
acquired because petitioner brought the case
on appeal before the CTA after the BIR had
failed to act on petitioner’s claim for refund of
erroneously paid taxes. The CTA did not
acquire jurisdiction as a result of a disputed
assessment of a BIR decision.
As earlier established, the CTA has no
assessment powers. In stating that petitioner’s
transactions are subject to capital gains tax,
however, the CTA was not making an
assessment. It was merely determining the
proper category of tax that petitioner should
have paid, in view of its claim that it
erroneously imposed upon itself and paid the
5% final tax imposed upon PEZA-registered
enterprises.
The determination of the proper
category of tax that petitioner should have
paid is an incidental matter necessary for the
resolution of the principal issue, which is
whether petitioner was entitled to a refund.
The issue of petitioner’s claim for tax
refund is intertwined with the issue of the
proper taxes that are due from petitioner. A
claim for tax refund carries the assumption
that the tax returns filed were correct. If the
tax return filed was not proper, the
correctness of the amount paid and, therefore,
the claim for refund become questionable. In
that case, the court must determine if a
taxpayer claiming refund of erroneously paid
taxes is more properly liable for taxes other
than that paid.
In this case, petitioner’s claim that it
erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed
in 2000 was improper. Hence, to determine if
petitioner was entitled to the refund being
claimed, the CTA has the duty to determine if
petitioner was indeed not liable for the 5%
final tax and, instead, liable for taxes other
than the 5% final tax. As in South African
Airways, petitioner’s request for refund can
neither be granted nor denied outright
without such determination.
Any liability in excess of the
refundable amount, however, may not be
collected in a case involving solely the issue of
the taxpayer’s entitlement to refund. The
question of tax deficiencyis distinct and
unrelated to the question of petitioner’s
entitlement to refund. Tax deficiencies should
be subject to assessment procedures and the
rules of prescription. The court cannot be
expected to perform the BIR’s duties
whenever it fails to do so either through
neglect or oversight. Neither can court
processes be used as a tool to circumvent laws
protecting the rights of taxpayers.
2. WON SMI-ED is entitled to the
benefits given to PEZA-registered
enterprises including the 5% preferential
tax rate.
NO. This is because it never began its
operation.
Essentially, the purpose of RA 7916 is to
promote development and encourage
investments and business activities that will
generate employment. Giving fiscal incentives
to businesses is one of the means devised to
achieve this purpose. It comes with the
expectation that persons who will avail these
incentives will contribute to the purpose’s
achievement. Hence, to avail the fiscal
incentives under RA 7916, the law did not say
that mere PEZA registration is sufficient.
The fiscal incentives and the 5%
preferential tax rate are available only to
businesses operating within the Ecozone. A
business is considered in operation when it
starts entering into commercial transactions
that are not merely incidental to but are
related to the purposes of the business. It is
similar to the definition of "doing business," as
applied in actions involvingthe right of foreign
corporations to maintain court actions. The
terms "doing" or "engaging in" or
"transacting" business": impl[y] 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, the purpose and
object of its organization. Petitioner never
started its operations since its registration on
June 29, 1998 because of the Asian financial
crisis. It is not entitled to the preferential tax
rate of 5% on gross income in lieu of all taxes.
Because petitioner is not entitled to a
preferential rate, it is subject to ordinary tax
rates under the NIRC.
3. WON CTA erred in imposing the
capital gains tax on the sale of SMI-Ed’s
buildings, equipments, and machineries-
With respect to the sale of buildings
and and land, CA was mistaken
With respect to the sale of machineries
and equipments, CA was not mistaken
For petitioner’s properties to be subjected to
capital gains tax, the properties must form
part of petitioner’s capital assets. The
properties involved in this case include
petitioner’s buildings, equipment, and
machineries. They are not among the
exclusions enumerated in Sec. 39(A)(1) of the
NIRC. None of the properties were used in
petitioner’s trade or ordinary course of
business because petitioner never
commenced operations. They were not part of
the inventory. None of themwere stocks in
trade. Based on the definition of capital assets
under Sec. 39 of the NIRC, they are capital
assets.
As regards machineries and equipments, these
should not be subjected to the capital gains tax
since these are not real properties. Only the
presumed gain from the sale of petitioner’s
land and/or building may be subjected to the
6% capital gains tax. The income from the sale
of petitioner’s machineries and equipment is
subject to the provisions on normal corporate
income tax.
To determine, therefore, if petitioner is
entitled to refund, the amount of capital gains
tax for the sold land and/or building of
petitioner and the amount of corporate
income tax for the sale of petitioner’s
machineries and equipment should be
deducted from the total final tax paid.
Petitioner indicated, however, in its March 1,
2001 income tax return for the 11-month
period ending on Nov. 30, 2000 that it suffered
a net loss of P2,233,464,538.00.69 This
declaration was made under the pain of
perjury. The BIR did not make a deficiency
assessment for this declaration. Neither did
the BIR dispute this statement in its pleadings
filed before this court. There is, therefore, no
reason todoubt the truth that petitioner
indeed suffered a net loss in 2000. Since
petitioner had not started its operations, it
was also not subject to the minimum
corporate income tax of 2% on gross income.
Therefore, petitioner is not liable for any
income tax.
4. WON the government can still collect
for the deficiency taxes (kay 5%
preferential tax rate raman tu ya gibayran
when it should have been 6% capital gains
tax rate)- NOT ANYMORE
Sec. 203 of the NIRC provides that as a
general rule, the BIR has three (3) years from
the last day prescribed by law for the filing of
a return to make an assessment. If the return
is filed beyond the last day prescribed by law
for filing, the three-year period shall run from
the actual date of filing.
 The prescriptive period to make an
assessment of internal revenue taxes is
provided "primarily to safeguard the interests
of taxpayers from unreasonable
investigation." This SC explained in CIR v. FMF
Development Corporation the reason behind
the provisions on prescriptive periods for tax
assessments: Accordingly, the government
must assess internal revenue taxes on time so
as not to extend indefinitely the period of
assessment and deprive the taxpayer of the
assurance that it will no longer be subjected to
further investigation for taxes after the
expiration of reasonable period of time.
Thus, the law on prescription, being a
remedial measure, should be liberally
construed in order to afford such protection.
As a corollary, the exceptions to the law on
prescription should perforce be strictly
construed.
The BIR had three years from the filing
of petitioner’s final tax return in 2000 to assess
petitioner’s taxes. Nothing stopped the BIR
from making the correct assessment. The
elevation of the refund claim with the CTA was
not a bar against the BIR’s exercise of its
assessment powers.
The BIR, however, did not initiate any
assessment for deficiency capital gains tax.
Since more than a decade have lapsed from the
filing of petitioner's return, the BIR can no
longer assess petitioner for deficiency capital
gains taxes, if petitioner is later found to have
capital gains tax liabilities in excess of the
amount claimed for refund.
CTA should not be expected to perform
the BIR's duties of assessing and collecting
taxes whenever the BIR, through neglect or
oversight, fails to do so within the prescriptive
period allowed by law.
DISPOSITION:
· BIR is ordered to refund petitioner SMI-
Ed Philippines Technology, Inc. the amount of
5% final tax paid to the BIR, less the 6% capital
gains tax on the sale of petitioner SMI-Ed
Philippines Technology, Inc. 's land and
building.
· In view of the lapse of the prescriptive
period for assessment, any capital gains tax
accrued from the sale of its land and building
that is in excess of the 5% final tax paid to the
Bureau of Internal Revenue may no longer be
recovered from petitioner SMI-Ed Philippines
Technology, Inc.
REPUBLIC v. SORIANO
GR No. 211666
February 25, 2015
TOPIC:
Who pays the capital gains tax and
documentary stamp tax
(Both in the nature of transfer taxes) in case of
expropriation by the national government?
FACTS:
· Petitioner Republic of the Philippines
(represented by DPWH) filed a complaint for
expropriation against the property of Arlene
Soriano (respondent).
· The property sought to be expropriated
shall be used in implementing the construction
of the North Luzon Expressway (NLEX) –
Harbor Link Project
· Republic duly deposited with the court
the amount of P420,000 representing the
100% of the zonal value of the expropriated
property.
· Thereafter, the RTC issued a Writ of
Possession and Writ of Expropriation for
failure of Soriano to appear, despite notice,
during the hearing.
· RTC then appointed the Board of
Commissioners for the determination of just
compensation. However, the trial court
subsequently revoked the appointment of the
Commissioners for their failure to submit a
report as to the FMV (fair market value) of
the property and instead, the Court directed
the parties to submit their respective position
papers.
· Republic adduced evidence to show that
the P420,000 it deposited was just, fair and
equitable. Accordingly, RTC considered
Soriano to have waived her right to adduce
evidence due to her continued absence. (Wala
ra siguro ni pakialam si ate kung ma-
expropriate iyang property..hahaha)
· So RTC rendered its decision:
1. Declared that Republic had the lawful
right to acquire possession of and title to the
expropriated property
2. Ordered Republic to pay Soriano
P420,000 as just compensation with legal
interest at 12% per annum from the taking
of the property
3. Ordered Republic to pay Soriano
consequential damages (remember katong
discussion ni Judge P. sa Poli on expropriation
cases) which include: value of the transfer
tax (CGT and DST) for the transfer of the
property in the name of Soriano to that of
the Republic
· Of course, Republic filed an MR on the
decision arguing that pursuant to BSP Circular
No. 799 (Series of 2013), the interest rate by
the RTC on the just compensation should be
lowered to 6% since the case falls under a loan
or forbearance of money (queue again,
remember our lessons on interest sa Credit
Transactions).
· So RTC reduced the interest rate to 6%
per annum, however not on the basis of the
BSP Circular but on the basis of Art. 2209:
"If the obligation consists in the payment of a
sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no
stipulation to the contrary, shall be the
payment of the interest agreed upon, and in
the absence of stipulation, the legal interest,
which is six per cent per annum."
· So, Republic filed the instant petition
before the Supreme Court based on the
following arguments:
1. That is not entitled to pay the legal
interest of 6% per annum on the amount of
just compensation since there was no delay on
its part
- ang reason ni Republic is because legal
interest applies only when the property was
taken prior to the deposit of payment and only
to the extent that there was delay. In this case,
petitioner was able to deposit with the court
the amount representing the zonal value of the
property before its taking hence it cannot be
said that there was delay. Thus, there can be
no interest due on the payment of just
compensation.
2. That based on the NIRC and LGC, it is
respondent’s (Soriano) obligation to pay the
transfer taxes (CGT and DST)
- ang reason ni Republic is because transfer
taxes, in the nature of CGT and DST, necessary
for the transfer of the expropriated property
are the liabilities of Soriano and not petitioner
NB: I will skip the other portions of the
decision pertaining to Credit Transactions and
will instead focus on the tax-related matters.
Kindly refer to the full-text below nalang.
ISSUE:
WON the payment of the transfer taxes
(CGT and DST) is a liability of petitioner
(buyer) or of respondent (seller)?
RULING:
IT DEPENDS.
Let’s tackle first on CAPITAL GAINS TAX:
In this aspect, Court found merit in petitioner’s
argument that pursuant to Sections 24(D) and
56(A)(3) of the 1997 National Internal
Revenue Code (NIRC), capital gains tax due on
the sale of real property is a liability for the
account of the SELLER
Since capital gains tax is a Tax on PASSIVE
INCOME, it is the SELLER, not the buyer, who
generally would shoulder the tax. Accordingly,
the BIR, in its BIR Ruling No. 476-2013, dated
December 18, 2013, constituted the DPWH as
a withholding agent to withhold the six
percent (6%) final withholding tax in the
expropriation of real property for
infrastructure projects.
Hence, as far as the government is concerned,
the CGT remains the liability of the seller
since it is a tax on the seller’s gain from the
sale of real estate property.
In application to this case, correct si Republic
in arguing that it should have been Soriano
(seller) who will shoulder the payment of the
capital gains tax.
Now, let’s proceed with respect to the
DOCUMENTARY STAMP TAX:
In this aspect, the Court found it inconsistent
for petitioner to deny its liability for the
payment of DST.
Petitioner cites Section 196 of the 1997 NIRC
as its basis in saying that the documentary
stamp tax is the liability of the seller. Yet, a
perusal of the provision cited above does not
explicitly impute the obligation to pay the
documentary stamp tax on the seller. In fact,
according to the BIR, all the parties to a
transaction are primarily liable for the
documentary stamp tax, as provided by
Section 2 of BIR Revenue Regulations No. 9-
2000:
SEC. 2. Nature of the
Documentary Stamp Tax and Persons Liable
for the Tax. –
(a) In General. - The documentary stamp
taxes under Title VII of the Code is a tax on
certain transactions. It is imposed against
"the person making, signing, issuing,
accepting, or transferring" the document
or facility evidencing the aforesaid
transactions.
Thus, in general, it may be imposed on the
transaction itself or upon the document
underlying such act. Any of the parties
thereto shall be liable for the full amount of
the tax due: Provided, however, that as
between themselves, the said parties may
agree on who shall be liable or how they
may share on the cost of the tax.
(b) Exception. - Whenever one of the parties
to the taxable transaction is exempt from the
tax imposed under Title VII of the Code, the
other party thereto who is not exempt shall be
the one directly liable for the tax.
As a general rule, therefore, any of the parties
to a transaction shall be liable for the full
amount of the documentary stamp tax due,
unless they agree among themselves on who
shall be liable for the same.
In this case, there is no agreement as to the
party liable for the documentary stamp tax
due on the sale of the land to be expropriated.
But while petitioner rejects any liability for the
same, this Court must take note of petitioner’s
Citizen’s Charter, which functions as a guide
for the procedure to be taken by the DPWH in
acquiring real property through expropriation
under RA 8974.
The Citizen’s Charter, issued by petitioner
DPWH itself on December 4,2013, explicitly
provides that the
a. documentary stamp tax,
b. transfer tax, and
c. registration fee due on the
transfer of the title of land in the
name of the Republic
shall be shouldered by the
implementing agency of the DPWH,
 while the capital gains tax shall be
paid by the affected property
owner.
Thus, while there is no specific agreement
between petitioner and respondent,
petitioner's issuance of the Citizen's Charter
serves as its notice to the public as to the
procedure it shall generally take in cases of
expropriation under RA 8974. Accordingly, it
will be rather unjust for this Court to blindly
accede to petitioner's vague rejection of
liability in the face of its issuance of the
Citizen's Charter, which contains a clear and
unequivocal assumption of accountability for
the documentary stamp tax. Had petitioner
provided this Court with more convincing
basis, apart from a mere citation of an
indefinite provision of the 1997 NIRC,
showing that it should be respondent-seller
who shall be liable for the documentary
stamp tax due on the sale of the subject
property, its rejection of the payment of the
same could have been sustained.
Supreme Transliner v. BPI Savings
G.R. No. 165617, February 25, 2011,
VILLARAMA, JR., J.
FACTS:
Supreme Transliner, Inc. represented
by its Managing Director, Moises C. Alvarez,
and Paulita S. Alvarez, obtained a loan in the
amount of P9,853,000.00 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.
Due to non-payment of the loan, the
mortgage was extrajudicially foreclosed and
the property was sold to the bank as the
highest bidder. Before the expiration of the
one-year redemption period, the mortgagors
notified the bank of their intention to redeem
the property.
The mortgagors filed a complaint
against the bank to recover the allegedly
unlawful and excessive charges of
P5,331,237.77, with prayer for damages and
attorney's fees. The bank asserted that the
redemption price reflecting the stipulated
interest, charges and/or expenses, is valid,
legal and in accordance with documents duly
signed by the mortgagors. The bank further
contended that the claims are deemed waived
and the mortgagors are already estopped from
questioning the terms and conditions of their
contract.
ISSUE:
Is the mortgagee-bank liable to pay the
capital gains tax upon the execution of the
certificate of sale and before the expiry of the
redemption period?
HELD:
NO. It is clear that in foreclosure sale
there is no actual transfer of the mortgaged
real property until after the expiration of the
one-year period and title is consolidated in the
name of the mortgagee in case of non-
redemption. This is because before the period
expires there is yet no transfer of title and no
profit or gain is realized by the mortgagor.
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 the National
Internal Revenue Code (NIRC) shall be subject
to 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 Nos. 16-88, 27-89 and 6-92,
states that these conditional sales “necessarily
includes 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, or Should there have been a simultaneous sale to
the Property Registration Decree, if no right of 20 or more lenders/investors, the PEACE Bonds
redemption exists, the certificate of title of the are deemed deposit substitutes within the
mortgagor shall be cancelled, and a new meaning of Section 22(Y) of the 1997 National
certificate issued in the name of the purchaser. Internal Revenue Code and RCBC
But where the right of redemption exists, the Capital/CODE-NGO would have been obliged to
certificate of title of the mortgagor shall not be pay the 20% final withholding tax on the
cancelled, but the certificate of sale and the interest or discount from the PEACE Bonds.
order confirming the sale shall be registered
by brief memorandum thereof made by the
FACTS:
Register of Deeds on the certificate of title.
A notice by the Bureau of Treasury (BTr) to all
It is therefore clear that in foreclosure
Government Securities Eligible Dealer (GSED)
sale, there is no actual transfer of the
entitled Public Offering of Treasury Bonds
mortgaged real property until after the
denominated as the Poverty Eradication and
expiration of the one-year redemption period
Alleviation Certificates or the PEACE Bonds,
as provided in Act No. 3135, or An Act or
announced that P30 Billion worth of 10-year
Regulate the Sale of Property Under Special
Zero-Coupon Bonds will be auctioned on Oct.
Powers Inserted In or Annexed to Real Estate
16, 2011. The notice stated that the Bonds
Mortgages, and title thereto is consolidated in
“shall be issued to not more than 19
the name of the mortgagee in case of non-
buyers/lenders. Lastly, it stated that “while
redemption. In the interim, the mortgagor is
taxable shall not be subject to the 20% final
given the option whether or not to redeem the
withholding tax” pursuant to the BIR Revenue
real property. The issuance of the Certificate of
Regulation No. 020 2001. After the auction,
Sale does not by itself transfer ownership. RR
RCBC which participated on behalf of CODE-
No. 4-99 (March 16, 1999), further amends
NGO was declared as the winning bidder
RMO No. 6-92 relative to the payment of
having tendered the lowest bids. On October 7,
capital gains tax and documentary stamp tax
2011, “the BIR issued the assailed 2011 BIR
on extrajudicial foreclosure sale of capital
Ruling imposing a 20% FWT on the
assets initiated by banks, finance and
Government Bonds and directing the BTr to
insurance companies. Under this RMO, in case
withhold said final tax at the maturity thereof.
the mortgagor exercises his right of
Furthermore the Bureau of Internal Revenue
redemption within one year from the issuance
issued BIR Ruling No. DA 378-201157
of the certificate of sale, no capital gains tax
clarifying that the final withholding tax due on
shall be imposed because no capital gain has
the discount or interest earned on the PEACE
been derived by the mortgagor and no sale or
Bonds should “be imposed and withheld not
transfer of real property was realized.
only on RCBC/CODE NGO but also on all
Moreover, the transaction will be subject to
subsequent holders of the Bonds.
documentary stamp tax of only PhP 15 no land
or realty was sold or transferred for a
consideration. Banco de Oro, et al. filed a petition for
Certiorari, Prohibition and Mandamus under
Rule 65 to the Supreme Court contending that
the assailed 2011 BIR Ruling which ruled that
“all treasury bonds are ‘deposit substitutes’
BANCO DE ORO, et al. v.REPUBLIC OF THE
regardless of the number of lenders, in clear
PHILIPPINES AND THE COMMISSIONER OF
disregard of the requirement of twenty (20) or
INTERNAL REVENUE G.R. No. 198756, 13
more lenders mandated under the NIRC.
January 2015, EN BANC (Leonen, J.)
Furthermore it will cause substantial
impairment of their vested rights under the
Bonds since the ruling imposes new
conditions by “subjecting the PEACE Bonds to
the twenty percent (20%) final withholding
tax notwithstanding the fact that the terms
and conditions thereof as previously
represented by the Government, through
respondents BTr and BIR, expressly state that
it is not subject to final withholding tax upon
their maturity.”
The Commissioner of the Internal
Revenue countered that the BTr has no power
to contractually grant a tax exemption in
favour of Banco de Oro, et al.. Moreover, they
contend that the word “any” in Section 22(Y)
of the National Internal Revenue Code plainly
indicates that the period contemplated is the
entire term of the bond and not merely the
point of origination or issuance.
ISSUE:
Is the 10-year zero-coupon treasury bonds
issued by the Bureau of Treasury subject to
20% Final Withholding Tax?
RULING:
Under Sections 24(B)(1), 27(D)(1), and
28(A)(7) of the 1997 National Internal
Revenue Code, a final withholding tax at the
rate of 20% is imposed on interest on any
currency bank deposit and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements.
Under Section 22(Y), deposit substitute is an
alternative form of obtaining funds from the
public (the term 'public' means borrowing
from twenty (20) or more individual or
corporate lenders at any one time).
Hence, the number of lenders is
determinative of whether a debt instrument
should be considered a deposit substitute and
consequently subject to the 20% final
withholding tax. Furthermore the phrase “at
any one time” for purposes of determining the
“20 or more lenders” would mean every
transaction executed in the primary or
secondary market in connection with the
purchase or sale of securities.
In the case at bar, it may seem that
there was only one lender — RCBC on behalf
of CODE-NGO — to whom the PEACE Bonds
were issued at the time of origination.
However, a reading of the underwriting
agreement and RCBC term sheet reveals that
the settlement dates for the sale and
distribution by RCBC Capital (as underwriter
for CODE-NGO) of the PEACE Bonds to various
undisclosed investors.
At this point, however, we do not know
as to how many investors the PEACE Bonds
were sold to by RCBC Capital. Should there
have been a simultaneous sale to 20 or more
lenders/investors, the PEACE Bonds are
deemed deposit substitutes within the
meaning of Section 22(Y) of the 1997 National
Internal Revenue Code and RCBC
Capital/CODE-NGO would have been obliged
to pay the 20%final withholding tax on the
interest or discount from the PEACE Bonds.
Further, the obligation to withhold the 20%
final tax on the corresponding interest from
the PEACE Bonds would likewise be required
of any lender/investor had the latter turned
around and sold said PEACE Bonds, whether in
whole or part, simultaneously to 20 or more
lenders or investors.
DUMAGUETE CATHEDRAL CREDIT
COOPERATIVE [DCCCO], Represented by
Felicidad L. Ruiz, its General Manager vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
G.R. No. 182722, January 22, 2010, Del
Castillo, J.
FACTS:
Petitioner Dumaguete Cathedral Credit
Cooperative (DCCCO) is a credit cooperative
duly registered with and regulated by the
Cooperative Development Authority (CDA).
BIR Operations Group Deputy Commissioner,
Lilian B. Hefti, issued Letters of Authority
authorizing BIR Officers to examine
petitioner’s books of accounts and other
accounting records for all internal revenue
taxes for the taxable years 1999 and 2000.
On 2002, DCCCO received two Pre-Assessment
Notices for deficiency withholding taxes for
taxable years 1999 and 2000 which were
protested by petitioner. Thereafter, on
October 16, 2002, petitioner received two
other Pre-Assessment Notices for deficiency
withholding taxes also for taxable years 1999
and 2000. The deficiency withholding taxes
cover the payments of the honorarium of the
Board of Directors, security and janitorial
services, legal and professional fees, and
interest on savings and time deposits of its
members.
DCCCO informed BIR that it would ONLY pay
the deficiency withholding taxes
corresponding to the honorarium of the Board
of Directors, security and janitorial services,
legal and professional fees for the year 1999
and 2000, EXCLUDING penalties and interest.
On November 29, 2002, petitioner availed of
the Voluntary Assessment and Abatement
Program and paid the amounts corresponding
to the withholding taxes on the payments for
the compensation, honorarium of the Board of
Directors, security and janitorial services, and
legal and professional services, for the years
1999 and 2000. Thereafter, petitioner
received from the BIR Regional Director
Letters of Demand to pay the deficiency
withholding taxes, inclusive of penalties, for
the same years, which petitioners protested.
BIR: Failed to act on the protest within the
prescribed 180-day period; hence petitioner
filed a Petition for Review before the CTA.
CTA: Cancelled the assessment for deficiency
withholding taxes on the honorarium and per
diems of petitioners Board of Directors,
security and janitorial services, commissions
and legal and professional fee and affirmed the
assessments for deficiency withholding taxes
on interests.
CTA en banc: Affirmed CTA.
ISSUE: Whether or not DCCCO is liable to pay
the deficiency withholding taxes on interest
from savings and time deposits of its
members, as well as the delinquency interest
of 20% per annum.
Petitioner (DCCCO): The savings and time
deposits of members of cooperatives are not
included in the enumeration under Sec.
24(B)(1) of the NIRC which imposes tax on
certain passive income, and thus not subject to
the 20% final tax.
“Sec. 24(B)(1) of the NIRC — A final tax at the
rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any
currency bank deposit and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements; x x
x”
It applies only to banks and not to
cooperatives, since the phrase "similar
arrangements" is preceded by terms referring
to banking transactions that have deposit
peculiarities.
Respondent: Section 24(B)(1) of the NIRC
applies to cooperatives as the phrase similar
arrangements is not limited to banks, but
includes cooperatives that are depositaries of
their members. Respondent likewise points
out that the deficiency tax assessments were
issued against petitioner not as a taxpayer but
as a withholding agent.
RULING: No, petitioner is not liable to pay the
deficiency withholding taxes on interest from
savings and time deposits of its members, as
well as the delinquency interest of 20% per
annum.
BIR declared in BIR Ruling No. 551-888 that
cooperatives are not required to withhold
taxes on interest from savings and time
deposits of their members. CTA en banc ruled
that the BIR Ruling was based on the premise
that the savings and time deposits were placed
by the members of the cooperative in the bank
and consequently, it does not apply when the
deposits are maintained in the cooperative
such as the instant case. This is incorrect.
corresponding tax on the interest from savings
and time deposits of their members, which
was reiterated in BIR Ruling [DA-591-2006],
applies to the instant case.
Members of the cooperative also deserve a
preferential tax treatment pursuant to RA
6938, as amended by RA 9520 (Cooperative
Code of the Philippines) which exempts
transactions of members with the cooperative
from any taxes and fees, including but not
limited to final taxes on members deposits and
documentary tax.

There is nothing in the ruling to suggest that it Therefore, DCCCO is not liable to pay
applies only when deposits are maintained in deficiency withholding taxes.
a bank. Rather, the ruling clearly states,
without any qualification, that since interest
from any Philippine currency bank deposit
and yield or any other monetary benefit from
deposit substitutes are paid by banks,
cooperatives are not required to withhold the
corresponding tax on the interest from savings
and time deposits of their members.

It bears stressing that interpretations of

administrative agencies in charge of enforcing
a law are entitled to great weight and
consideration by the courts, unless such
interpretations are in a sharp conflict with the
governing statute or the Constitution and
other laws.

In this case, BIR Ruling No. 551-888 and BIR

Ruling [DA-591-2006] are in perfect harmony
with the Constitution and the laws they seek to
implement. In BIR Ruling [DA-591-2006], the
BIR opined that since members’ deposits with
the cooperatives are not currency bank
deposits nor deposit substitutes, Section
24(B)(1) and Section 27(D)(1), therefore, do
not apply to members of cooperatives and to
deposits of primaries with federations,
respectively. Accordingly, the interpretation
in BIR Ruling No. 551-888 that cooperatives
are not required to withhold the