COMMISSIONER OF INTERNAL REVENUE VS. TOURS SPECIALISTS, INC.

FACTS: -- petition to review on certiorari the decision of the CTA From 1974 to 1976, Tours Specialists, Inc. had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for their lodging and board needs; transporting these foreign tourists from the airport to their respective hotels, and from the latter to the airport upon their departure from the Philippines, transporting them from their hotels to various embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and arranging their cultural entertainment, shopping and recreational activities. In order to ably supply these services to the foreign tourists, TOURS and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. . Although the fee to be paid by said tourists is quoted by the petitioner, the payments of the hotel room accommodations, food and other personal expenses of said tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the local hotels and restaurants or shops, as the case may be. Some tour agencies abroad request the local tour agencies that the hotel room charges be paid through them. By this arrangement, the foreign tour agency entrusts to Tours, the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The billing hotel sends the bill to Tours. The local hotel identifies the individual tourist, or the particular groups of tourists by code name or group designation and also the duration of their stay for purposes of payment. Upon receipt of the bill, Tours then pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency. Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976. In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise penalty of P500.00. During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the Accounting Department of Tours, had testified, that the amounts entrusted to it by the foreign tourist agencies intended for payment of hotel room charges, were paid entirely to the hotel concerned, without any portion thereof being diverted to its own funds. And that the reason why tourists pay their room charge, or through their foreign tourists agencies, is the fact that the room charge is exempt from hotel room tax under P.D. 31 ISSUE/S: WON amounts received by a local tourist and travel agency included in a package fee from tourists or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3% contractor's tax. HELD: NO. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. The room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies. Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides: Sec. 1. Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire period of their stay in the country. If the hotel room charges entrusted to Tours will be subjected to 3% contractor's tax as what CIR would want to do in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although, CIR may claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of the tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different, it nonetheless imposes a tax actually on room charges. One way or the other, it would not have the effect of promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists. Commissioner vs. JavierGR 78953, 31 July 1991 Second Division, Sarmiento (J): 3 concur, 1took no part Facts:In 1977, Victoria Javier (wife of Melchor), received from the Prudential Bank and Trust Co.US$999,973.70 remitted by her sister, Dolores Ventosa, through some banks in the United States, among themMellon Bank NA. Mellon Bank filed suit to recover the excess amount of US$9999,000 as the remittance ofUS$ 1 million was a clerical error and should have been US $1,000 only (Compare facts in Mellon Bank vs.Magsino, GR 71479, 18 October 1990). In 1978, Melchor Javier filed his income tax return for 1977showinga gross income of P53,053.38 and a net income of P48,053.38 and stating in the footnote of the return thattaxpayer was recepient of some money received from abroad which he presumed to be a gift but turned outto be an error and is now subject of litigation. In 1980, the Commissioner assessed and demanded from Javierdeficiency assessment of P9,287,297.51 for 1977. Javier protested such assessment, where the Commissionerin turn imposed a 50% fraud penalty against Javier. Issue: Whether Javier is liable for the 50% fraud penalty.

Held: Under the then Section 72 of the Tax Code, a taxpayer who files a false return is liable to pay the fraudpenalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basisof the return filed before the discovery of the falsity or fraud. The fraud contemplated by law is actual and notconstructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resortedto in order to induce another to give up some legal right. Fraud is never imputed and the courts never sustainfindings of fraud upon circumstances which, at most created only suspicion. A fraudulent return is always anattempt to evade a tax, but a merely false return may not be. Herein, there was no actual and intentional fraud Digests (Berne Guerrero) through willful and deliberate misleading of the government agency concerned (BIR) committed by Javire.Javier did not conceal anything to induce the government to give some legal right and place itself at adisadvantage. Error or mistake of law is not fraud. As ruled by the Court of Tax Appeals, the 50% surchargeimposed as fraud penalty in the deficiency assessment should be deleted. Roxas y Cia vs CTA 23 SCRA 276Facts: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren byhereditary succession several properties. To manage the above-mentioned properties, said children,namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania.At the conclusion of the WW2, the tenants who have all been tilling the lands in Nasugbu for generationsexpressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates andapportion them among landless tenantsfarmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a priceof P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that theGovernment did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan.Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxasy Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with theRehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid bythe farmers. The CIR demanded from Roxas y Cia the payment of deficiency income taxes resulting from theinclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derivedfrom the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from grossincome of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers.For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers oninstallment, the Commissioner considered the partnership as engaged in the business of real estate, hence,100% of the profits derived therefrom was taxed. The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the CTA which sustained theassessment. Hence, this appeal. Issue: Is Roxas y Cia. liable for the payment of deficiency income for the sale of Nasugbu farmlands? Ruling: NO. The proposition of the CIR cannot be favorably accepted in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of 10 years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the 10-year amortization period. It should be borne in mind thatthe sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only inconsonance with, but more in obedience to the request and pursuant to the policy of our Government toallocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensationafter it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among thefarmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and soldlands directly to the farmers in the same way and under the same terms as would have been the case hadthe Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed aresolution expressing the people's gratitude.In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant toSection 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from thesale thereof is capital gain, taxable only to the extent of 50% Fisher v. Trinidad (Definition of Income Tax,Realization Test of Determining Income) Fisher was a stockholder in Phil-Am Drug Company. Thecompany declared a stock dividend with Fishers share of thedividend amounting to P24,800. Collector of Internal RevenueTrinidad demanded P889 income tax on said dividend, whichFisher protested against but voluntarily paid.Issue: WON stock dividends can be classified as income andtaxable under Act No. 2833 providing for tax upon income?Held: No, the receipt of stock dividends merely represents anincrease in value of the assets of a corporation. The courtdefines stock dividends as increase in capital of corps, firms,partnerships, etc for a particular period. They represent theincrease in the proportional share of each stockholder in thecompanys capital. It is not a distribution of the corps profits tothe stockholder. It only increases the stockholders SOURCEof income (capital), but does not increase income itself. Issue: Definition of income tax

Held: Act No. 2833 taxed any distribution by a corporation outof its earnings or profits. From the various definitions of incometax cited, an income tax is a tax on the yearly profits arisingfrom property, salary, private revenue, capital invested, and allother sources of income. What is taxed is the profit, not thesource. Limpan Investment Corp. v. CIR (Actual v.Constructive receipt) BIR assessed deficiency taxes on Limpan Corp, a companythat leases real property, for underdeclaring its rental incomefor years 1956-57 by around P20K and P81K respectively.Petitioner appeals on the ground that portions of theseunderdeclared rents are yet to be collected by the previousowners and turned over or received by the corporation.Petitioner cited that some rents were deposited with the court,such that the corporation does not have actual nor constructivecontrol over them.The sole witness for the petitioner, Solis (Corporate Secretary-Treasurer) admitted to some undeclared rents in 1956 and1957, and that some balances were not collected by thecorporation in 1956 because the lessees refused to recognizeand pay rent to the new owners and that the corps presidentIsabelo Lim collected some rent and reported it in his personalincome statement, but did not turn over the rent to thecorporation. He also cites lack of actual or constructive controlover rents deposited with the court.Issue: WON the BIR was correct in assessing deficiency taxesagainst Limpan Corp. for undeclared rental incomeHeld: Yes. Petitioner admitted that it indeed had undeclaredincome (although only a part and not the full amount assessedby BIR). Thus, it has become incumbent upon them to provetheir excuses by clear and convincing evidence, which it hasfailed to do.Issue: When is there constructive receipt of rent?With regard to 1957 rents deposited with the court, andwithdrawn only in 1958, the court viewed the corporation ashaving constructively received said rents. The noncollectionwas the petitioners fault since it refused to refused to acceptthe rent, and not due to non-payment of lessees. Hence,although the corporation did not actually receive the rent, it isdeemed to have constructively received them. CIR vs. HANTEX TRADING CO., INC. G.R. No. 136975; March 31, 2005 Facts: Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hentex receive a subpoena to present its books of account which it failed to do. The bureau cannot find any original copies of the products Hentex imported since the originals were eaten by termites. Thus, the Bureau relied on the certified copies of the respondents Profit and Loss Statement for 1987 and 1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer, as well as excerpts from the entries certified by Tomas and Danganan. The case was submitted to the CTA which ruled that Hentex have tax deficiency and is ordered to pay, per investigation of the Bureau. The CA ruled that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators. Issue: Whether or not the final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latters 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law. Held: Central to the second issue is Section 16 of the NIRC of 1977, as amended which provides that the Commissioner of Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b), which provides that Failure to submit required returns, statements, reports and other documents. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayers failure to file one, or to amend a return already filed in the BIR. The best evidence envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer.

CIR v. Benguet Corp G.R. Nos. 134587 and 134588; January 8, 2005 Facts: Benguet Corporation is a domestic corporation engaged in the exploration, development and operation of mineral resources, and the sale or marketing thereof to various entities. It is a VAT registered enterprise. The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of NIRC as amended by E.O. 273 s. 1987 then in effect, any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (zero-rated) depending on the classification of the transaction under Sec. 100 of the NIRC. In January of 1988, Benguet applied for and was granted by the BIR zero-rated status on its sale of gold to Central Bank. On 28 August 1988 VAT Ruling No. 3788-88 was issued which declared that the sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to Section 100 of the Tax Code, as amended by EO 273. Relying on its zero-rated status and the above issuances, Benguet sold gold to the Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT. However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued subsequent to the consummation of the subject sales of gold to the Central Ban`k which provides that sales of gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances. Both petitioner and Benguet agree that the retroactive application of VAT Ruling No. 008-92 is valid only if such application would not be prejudicial to the Benguet pursuant Sec. 246 of the NIRC. Issues: (1) WON Benguets sale of gold to the Central Bank during the period when such was classified by BIR issuances as zerorated could be taxed validly at a 10% rate after the consummation of the transactions involved; (2) WON there was prejudice to Benguet Corp due to the new BIR VAT Ruling. Held: (1) NO. At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by Benguet ordained that gold sales to the Central Bank were zero-rated. Benguet should not be faulted for relying on the BIRs interpretation of the said laws and regulations. While it is true, as CIR alleges, that government is not estopped from collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of justice and fair play. (then the Court cited the ABS-CBN case). (2) YES. The adverse effect is that Benguet Corp became the unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that Benguet suffered economic prejudice when it consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT rating of Benguets transactions with the Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sansthe option to pass on this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank. Even assuming that the right to recover Benguets excess payment of income tax has not yet prescribed, this relief would only address Benguets overpayment of income tax but not the other burdens discussed above. Verily, this remedy is not a feasible option for Benguet because the very reason why it was issued a deficiency tax assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an unnecessary and cumbersome refund process is prejudice enough. Garrison vs CA (NOT YET DIGESTED) Sought to be overturned in these appeals is the judgment of the Court of Appeals, 1 which affirmed the decision of the Court of First Instance of Zambales at Olongapo City convicting the petitioners "of violation of Section 45 (a) (1) (b) of the National Internal Revenue Code, as amended, by not filing their respective income tax returns for the year 1969" and sentencing "each of them to pay a fine of Two Thousand (P2,000.00) Pesos, with subsidiary imprisonment in case of insolvency, and to pay the costs proportionately. 2 The petitioners have adopted the factual findings of the Court of Appeals, 3 viz.:

1. JOHN L. GARRISON "was born in the Philippines and . . . lived in this country since birth up to 1945, when he was repatriated and returned to the United States. He stayed in the United States for the following twenty years until May 5, 1965, when he entered the Philippines through the Clark Air Base. The said accused lived in the Philippines since his return on May 6, 1965. He lives with his Filipino wife and their children at No. 4 Corpus Street, West Tapinac, Olongapo City, and they own the house and lot on which they are presently residing. His wife acquired by inheritance six hectares of agricultural land in Quezon Province." 2. JAMES W. ROBERTSON "was born on December 22, 1915 in Olongapo, Zambales and he grew up in this country. He and his family were repatriated to the United States in 1945. They stayed in Long Beach, California until the latter part of 1946 or the early part of 1947, when he was re-assigned overseas, particularly to the Pacific area with home base in Guam. His next arrival in the Philippines was in 1958 and he stayed in this country from that time up to the present. He is presently residing at No. 25 Elicao, Street, East Bajac-Bajac, Olongapo City, and his house and lot are declared in his name for tax purposes." 3. FRANK W. ROBERTSON "was born in the Philippines and he lived in this country up to 1945, when he was repatriated to the United States along with his brother, his co-accused James W. Robertson. He stayed in the United States for about one year, during which time he resided in Magnolia Avenue, Long Beach, California. Sometime in 1946 or early 1947, he was assigned to work in the Pacific Area, particularly Hawaii. At that time he had been visiting the Philippines off and on in connection with his work. In 1962, he returned once more to the Philippines and he has been residing here ever since. He is married to a Filipino citizen named Generosa Juico and they live at No. 3 National Road, Lower Kalaklan, Olongapo City. The residential lot on which they are presently residing is declared in his wife's name for tax purposes, while the house constructed thereon was originally declared in his name and the same was transferred in his wife's name only in February, 1971." 4. ROBERT H. CATHEY was born in Tennessee, United States, on April 8, 1917; his first arrival in the Philippines, as a member of the liberation forces of the United States, was in 1944. He stayed in the Philippines until April, 1950, when he returned to the United States, and he came back to the Philippines in 1951. He stayed in the Philippines since 1951 up to the present." 5. FELICITAS DE GUZMAN "was born in the Philippines in 1935 and her father was a naturalized American citizen. While she was studying at the University of Sto. Tomas, Manila, she was recruited to work in the United States Naval Base, Subic Bay, Philippines. Afterwards, she left the Philippines to work in the United States Naval Base, Honolulu, Hawaii, and she returned to the Philippines on or about April 21, 1967. The said accused has not left the Philippines since then. She is married to Jose de Guzman, a Filipino citizen, and they and their children live at No. 96 Fendler Street, East Tapinac, Olongapo City. Her husband is employed in the United States Naval Base, Olongapo City, and he also works as an insurance manager of the Traveller's Life." 6. EDWARD McGURK "came to the Philippines on July 11, 1967 and he stayed in this country continuously up to the present time." ALL THE PETITIONERS "are United States citizens, entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended, and presently employed in the United States Naval Base, Olongapo City. For the year 1969 John L. Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey, $9,855.20; James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and Edward McGurk $12,407.99 . . . ALL SAID PETITIONERS "received separate notices from Ladislao Firmacion, District Revenue Officer, stationed at Olongapo City, informing them that they had not filed their respective income tax returns for the year 1969, as required by Section 45 of the National Internal Revenue Code, and directing them to file the said returns within ten days from receipt of the notice. But the accused refused to file their income tax returns, claiming that they are not resident aliens but only special temporary visitors, having entered this country under Section 9 (a) of the Philippine Immigration Act of 1940, as amended. The accused also claimed exemption from filing the return in the Philippines by virtue of the provisions of Article XII, paragraph 2 of the US-RP Military Bases Agreement." The petitioners contend that given these facts, they may not under the law be deemed resident aliens required to file income tax returns. Hence, they argue, it was error for the Court of Appeals 1) to consider their "physical or bodily presence" in the country as "sufficient by itself to qualify . . (them) as resident aliens despite the fact that they were not 'residents' of the Philippines immediately before their employment by the U.S. Government at Subic Naval Base and their presence here during the period concerned was dictated by their respective work as employees of the United States Naval Base in the Philippines," and 2) to refuse to recognize their "tax-exempt status . . under the pertinent provisions of the RP-US Military Bases Agreement." The provision alleged to have been violated by the petitioners, Section 45 of the National Internal Revenue Code, as amended, reads as follows: SEC. 45. Individual returns. (a) Requirements. (1) The following individuals are required to file an income tax return, if they have a gross income of at least One Thousand Eight Hundred Pesos for the taxable year; . . . (b) If alien residing in the Philippines, regardless of whether the gross income was derived from sources within or outside the Philippines. The sanction for breach thereof is prescribed by Section 73 of the same code, to wit: SEC. 73. Penalty for failure to file return nor to pay tax. Anyone liable to pay the tax, to make a return or to supply information required under this code, who refuses or neglects to pay such tax, to make such return or to supply such information at the time or times herein specified each year, shall be punished by a fine of not more than Two Thousand Pesos or by imprisonment for not more than six months, or both . . . The provision under which the petitioners claim exemption, on the other hand, is contained in the Military Bases Agreement between the Philippines and the United States, 4 reading as follows:

2. No national of the United States serving in or employed in the Philippines in connection with construction, maintenance, operation or defense of the bases and reside in the Philippines by reason only of such employment, or his spouse and minor children and dependents, parents or her spouse, shall be liable to pay income tax in the Philippines except in regard to income derived from Philippine sources or sources other than the US sources. The petitioners claim that they are covered by this exempting provision of the Bases Agreement since, as is admitted on all sides, they are all U.S. nationals, all employed in the American Naval Base at Subic Bay (involved in some way or other in "construction, maintenance, operation or defense" thereof), and receive salary therefrom exclusively and from no other source in the Philippines; and it is their intention, as is shown by the unrebutted evidence, to return to the United States on termination of their employment. That claim had been rejected by the Court of Appeals with the terse statement that the Bases Agreement "speaks of exemption from the payment of income tax, not from the filing of the income tax returns . ." 5 To be sure, the Bases Agreement very plainly Identifies the persons NOT "liable to pay income tax in the Philippines except in regard to income derived from Philippine sources or sources other than the US sources." They are the persons in whom concur the following requisites, to wit: 1) nationals of the United States serving in or employed in the Philippines; 2) their service or employment is "in connection with construction, maintenance, operation or defense of the bases;" 3) they reside in the Philippines by reason only of such employment; and 4) their income is derived exclusively from "U.S. sources." HELD: Quite apart from the evidently distinct and different character of the requirement to pay income tax in contrast to the requirement to file a tax return, it appears that the exemption granted to the petitioners by the Bases Agreement from payment of income tax is not absolute. By the explicit terms of the Bases Agreement, it exists only as regards income derived from their employment "in the Philippines in connection with construction, maintenance, operation or defense of the bases;" it does not exist in respect of other income, i.e., "income derived from Philippine sources or sources other than the US sources." Obviously, with respect to the latter form of income, i.e., that obtained or proceeding from "Philippine sources or sources other than the US sources," the petitioners, and all other American nationals who are residents of the Philippines, are legally bound to pay tax thereon. In other words, so that American nationals residing in the country may be relieved of the duty to pay income tax for any given year, it is incumbent on them to show the Bureau of Internal Revenue that in that year they had derived income exclusively from their employment in connection with the U.S. bases, and none whatever "from Philippine sources or sources other than the US sources." They have to make this known to the Government authorities. It is not in the first instance the latter's duty or burden to make unaided verification of the sources of income of American residents. The duty rests on the U.S. nationals concerned to invoke and prima facie establish their taxexempt status. It cannot simply be presumed that they earned no income from any other sources than their employment in the American bases and are therefore totally exempt from income tax. The situation is no different from that of Filipino and other resident income-earners in the Philippines who, by reason of the personal exemptions and permissible deductions under the Tax Code, may not be liable to pay income tax year for any particular year; that they are not liable to pay income tax, no matter how plain or irrefutable such a proposition might be, does not exempt them from the duty to file an income tax return. These considerations impel affirmance of the judgments of the Court of Appeals and the Trial Court. Ona vs CIR Facts: Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A civil case was instituted for the settlement of her state, in which Oa was appointed administrator and later on the guardian of the three heirs who were still minors when the project for partition was approved. This shows that the heirs have undivided interest in 10 parcels of land, 6 houses and money from the War Damage Commission. Although the project of partition was approved by the Court, no attempt was made to divide the properties and they remained under the management of Oa who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners properties and investments gradually increased. Petitioners returned for income tax purposes their shares in the net income but they did not actually receive their shares because this left with Oa who invested them. Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for reconsideration, which was denied hence this petition for review from CTAs decision. Issue: W/N the petitioners are liable for the deficiency corporate income tax Held: Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition, the heirs allowed their properties to remain under the management of Oa and let him use their shares as part of the common fund for their ventures, even as they paid corresponding income taxes on their respective shares. Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be

held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed, for the purpose, for tax purposes, at least, an unregistered partnership is formed. For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on (8 Mertens Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.) with the exception only of duly registered general copartnerships within the purview of the term corporation. It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for corporations. Judgment affirmed. Reyes vs. CIR (24 SCRA 198) FACTS: 1. Petitioners Florencio and Angel Reyes, father and son, purchased a lot and building for P 835,000.00. 2. The amount of P 375,000.00 was paid. 3. The balance of P 460,000.00 was left, which represents the mortgage obligation of the vendors with the China Banking Corporation, which mortgage obligations were assumed by the vendees. 4. The initial payment of P 375,000.00 was shared equally by the petitioners. 5. At the time of the purchase, the building was leased to various tenants, whose rights under the lease contracts with the original owners, the purchaser, petitioners herein, agreed to respect. 6. Petitioners divided equally the income of operation and maintenance. 7. The gross income from rentals of the building amounted to about P 90,000.00 annually. 8. An assessment was made against petitioners by the CIR. 9. The assessment sought to be reconsidered was futile. 10. On appeal to the Court of Tax Appeals, the CTA ruled that petitioners are liable for the income tax due from the partnership formed by petitioners. ISSUE: Are petitioners subject to the tax on corporations provided for in the National Internal Revenue Code? HELD: After referring to another section of the NIRC, which explicitly provides that the term corporations includes partnerships and then to Article 1767 of the Civil Code of the Philippines, defining what a contract of partnership is, the opinion goes on to state that the essential elements of a partnership are two, namely: a) an agreement to contribute money, property or industry to a common fund; and b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case, for, admittedly, petitioners have agreed to , and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, it was determined that their purpose was to engage in real estate transaction for monetary gain and then divide the same among themselves, hence taxable. EVANGELISTA vs CIR G.R. No. L-9996, October 15, 1957 Facts: Petitioners borrowed sum of money from their father and together with their own personal funds theyused said money to buy several real properties. They then appointed their brother (Simeon) as manager of thesaid real properties with powers and authority to sell, lease or rent out said properties to third persons. Theyrealized rental income from the said properties for the period 1945-1949.On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax oncorporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949. The letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon theyinstituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from thepayment of the taxes in question. CTA denied their petition and subsequent MR and New Trials were denied.Hence this petition. Issue: Whether or not petitioners have formed a partnership and consequently, are subject to the tax oncorporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the NationalInternal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. Held: YES. The essential elements of a partnership are two, namely: (a) an agreement to contribute money,property or industry to a common fund ; and (b) intent to divide the profits among the contractingparties . The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to,and did, contribute money and property to a common fund. Upon consideration of all the facts andcircumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estatetransactions for monetary gain and then divide the same among themselves, because of the followingobservations, among others: (1) Said common fund was not something they found already in existence; (2)They invested the same, not merely in one transaction, but in a series of transactions; (3) The aforesaid lotswere not devoted to residential purposes, or to other personal uses, of petitioners herein.Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, thecollective effect of these circumstances is such as to leave no room for doubt on the existence of said intent inpetitioners herein.For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships with the exception only of duly registered general copartnerships within the purview of the term"corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as saidCode is concerned and are subject to the income tax for corporations. GATCHALIAN (UNDIGESTED) Come now the parties to the above-mentioned case, through their respective undersigned attorneys, and hereby agree to respectfully submit to this Honorable Court the case upon the following statement of facts:

1. That plaintiff are all residents of the municipality of Pulilan, Bulacan, and that defendant is the Collector of Internal Revenue of the Philippines; 2. That prior to December 15, 1934 plaintiffs, in order to enable them to purchase one sweepstakes ticket valued at two pesos (P2), subscribed and paid therefor the amounts 3. That immediately thereafter but prior to December 15, 1934, plaintiffs purchased, in the ordinary course of business, from one of the duly authorized agents of the National Charity Sweepstakes Office one ticket bearing No. 178637 for the sum of two pesos (P2) and that the said ticket was registered in the name of Jose Gatchalian and Company; 4. That as a result of the drawing of the sweepstakes on December 15, 1934, the above-mentioned ticket bearing No. 178637 won one of the third prizes in the amount of P50,000 and that the corresponding check covering the above-mentioned prize of P50,000 was drawn by the National Charity Sweepstakes Office in favor of Jose Gatchalian & Company against the Philippine National Bank, which check was cashed during the latter part of December, 1934 by Jose Gatchalian & Company; 5. That on December 29, 1934, Jose Gatchalian was required by income tax examiner Alfredo David to file the corresponding income tax return covering the prize won by Jose Gatchalian & Company and that on December 29, 1934, the said return was signed by Jose Gatchalian, a copy of which return is enclosed as Exhibit A and made a part hereof; 6. That on January 8, 1935, the defendant made an assessment against Jose Gatchalian & Company requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan, giving to said Jose Gatchalian & Company until January 20, 1935 within which to pay the said amount of P1,499.94, a copy of which letter marked Exhibit B is enclosed and made a part hereof; 7. That on January 20, 1935, the plaintiffs, through their attorney, sent to defendant a reply, a copy of which marked Exhibit C is attached and made a part hereof, requesting exemption from payment of the income tax to which reply there were enclosed fifteen (15) separate individual income tax returns filed separately by each one of the plaintiffs, copies of which returns are attached and marked Exhibit D-1 to D-15, respectively, in order of their names listed in the caption of this case and made parts hereof; a statement of sale signed by Jose Gatchalian showing the amount put up by each of the plaintiffs to cover up the attached and marked as Exhibit E and made a part hereof; and a copy of the affidavit signed by Jose Gatchalian dated December 29, 1934 is attached and marked Exhibit F and made part thereof; 8. That the defendant in his letter dated January 28, 1935, a copy of which marked Exhibit G is enclosed, denied plaintiffs' request of January 20, 1935, for exemption from the payment of tax and reiterated his demand for the payment of the sum of P1,499.94 as income tax and gave plaintiffs until February 10, 1935 within which to pay the said tax; 9. That in view of the failure of the plaintiffs to pay the amount of tax demanded by the defendant, notwithstanding subsequent demand made by defendant upon the plaintiffs through their attorney on March 23, 1935, a copy of which marked Exhibit H is enclosed, defendant on May 13, 1935 issued a warrant of distraint and levy against the property of the plaintiffs, a copy of which warrant marked Exhibit I is enclosed and made a part hereof; 10. That to avoid embarrassment arising from the embargo of the property of the plaintiffs, the said plaintiffs on June 15, 1935, through Gregoria Cristobal, Maria C. Legaspi and Jesus Legaspi, paid under protest the sum of P601.51 as part of the tax and penalties to the municipal treasurer of Pulilan, Bulacan, as evidenced by official receipt No. 7454879 which is attached and marked Exhibit J and made a part hereof, and requested defendant that plaintiffs be allowed to pay under protest the balance of the tax and penalties by monthly installments; 11. That plaintiff's request to pay the balance of the tax and penalties was granted by defendant subject to the condition that plaintiffs file the usual bond secured by two solvent persons to guarantee prompt payment of each installments as it becomes due; 12. That on July 16, 1935, plaintiff filed a bond, a copy of which marked Exhibit K is enclosed and made a part hereof, to guarantee the payment of the balance of the alleged tax liability by monthly installments at the rate of P118.70 a month, the first payment under protest to be effected on or before July 31, 1935; 13. That on July 16, 1935 the said plaintiffs formally protested against the payment of the sum of P602.51, a copy of which protest is attached and marked Exhibit L, but that defendant in his letter dated August 1, 1935 overruled the protest and denied the request for refund of the plaintiffs; 14. That, in view of the failure of the plaintiffs to pay the monthly installments in accordance with the terms and conditions of bond filed by them, the defendant in his letter dated July 23, 1935, copy of which is attached and marked Exhibit M, ordered the municipal treasurer of Pulilan, Bulacan to execute within five days the warrant of distraint and levy issued against the plaintiffs on May 13, 1935; 15. That in order to avoid annoyance and embarrassment arising from the levy of their property, the plaintiffs on August 28, 1936, through Jose Gatchalian, Guillermo Tapia, Maria Santiago and Emiliano Santiago, paid under protest to the municipal treasurer of Pulilan, Bulacan the sum of P1,260.93 representing the unpaid balance of the income tax and penalties demanded by defendant as evidenced by income tax receipt No. 35811 which is attached and marked Exhibit N and made a part hereof; and that on September 3, 1936, the plaintiffs formally protested to the defendant against the payment of said amount and requested the refund thereof, copy of which is attached and marked Exhibit O and made part hereof; but that on September 4, 1936, the defendant overruled the protest and denied the refund thereof; copy of which is attached and marked Exhibit P and made a part hereof; and 16. That plaintiffs demanded upon defendant the refund of the total sum of one thousand eight hundred and sixty three pesos and forty-four centavos (P1,863.44) paid under protest by them but that defendant refused and still refuses to refund the said amount notwithstanding the plaintiffs' demands. 17. The parties hereto reserve the right to present other and additional evidence if necessary. Exhibit E referred to in the stipulation is of the following tenor: To whom it may concern:

I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age, hereby certify, that on the 11th day of August, 1934, I sold parts of my shares on ticket No. 178637 to the persons and for the amount indicated below and the part of may share remaining is also shown . The legal questions raised in plaintiffs-appellants' five assigned errors may properly be reduced to the two following: (1) Whether the plaintiffs formed a partnership, or merely a community of property without a personality of its own; in the first case it is admitted that the partnership thus formed is liable for the payment of income tax, whereas if there was merely a community of property, they are exempt from such payment; and (2) whether they should pay the tax collectively or whether the latter should be prorated among them and paid individually. The Collector of Internal Revenue collected the tax under section 10 of Act No. 2833, as last amended by section 2 of Act No. 3761, reading as follows: SEC. 10. (a) There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation, joint-stock company, partnership, joint account (cuenta en participacion), association or insurance company, organized in the Philippine Islands, no matter how created or organized, but not including duly registered general copartnership (compaias colectivas), a tax of three per centum upon such income; and a like tax shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources within the Philippine Islands by every corporation, joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance company organized, authorized, or existing under the laws of any foreign country, including interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise: Provided, however, That nothing in this section shall be construed as permitting the taxation of the income derived from dividends or net profits on which the normal tax has been paid. The gain derived or loss sustained from the sale or other disposition by a corporation, joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance company, or property, real, personal, or mixed, shall be ascertained in accordance with subsections (c) and (d) of section two of Act Numbered Two thousand eight hundred and thirty-three, as amended by Act Numbered Twenty-nine hundred and twenty-six. The foregoing tax rate shall apply to the net income received by every taxable corporation, joint-stock company, partnership, joint account (cuenta en participacion), association, or insurance company in the calendar year nineteen hundred and twenty and in each year thereafter. There is no doubt that if the plaintiffs merely formed a community of property the latter is exempt from the payment of income tax under the law. But according to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000 (article 1665, Civil Code). The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of property only. Having organized and constituted a partnership of a civil nature, the said entity is the one bound to pay the income tax which the defendant collected under the aforesaid section 10 (a) of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit in plaintiff's contention that the tax should be prorated among them and paid individually, resulting in their exemption from the tax. In view of the foregoing, the appealed decision is affirmed, with the costs of this instance to the plaintiffs appellants. So ordered. PASCUAL v. Commissioner of InternalRevenue #10 BUSORG FACTS: On June 22, 1965, petitioners bought two (2)parcels of land from Santiago Bernardino, et al.and on May 28, 1966, they bought anotherthree (3) parcels of land from Juan Roque. Thefirst two parcels of land were sold by petitionersin 1968 to Marenir Development Corporation,while the three parcels of land were sold bypetitioners to Erlinda Reyes and Maria Samsonon March 19,1970. Petitioner realized a netprofit in the sale made in 1968 in the amount of P165, 224.70, while they realized a net profit of P60,000 in the sale made in 1970. Thecorresponding capital gains taxes were paid bypetitioners in 1973 and 1974 .Respondent Commissioner informed petitionersthat in the years 1968 and 1970, petitioners asco-owners in the real estate transactions formedan unregistered partnership or joint venturetaxable as a corporation under Section 20(b)and its income was subject to the taxesprescribed under Section 24, both of theNational Internal Revenue Code; that theunregistered partnership was subject tocorporate income tax as distinguished fromprofits derived from the partnership by themwhich is subject to individual income tax. ISSUE: Whether petitioners formed an unregisteredpartnership subject to corporate income tax(partnership vs. coownership) RULING: Article 1769 of the new Civil Code lays down therule for determining when a transaction shouldbe deemed a partnership or a co-ownership.Said article paragraphs 2 and 3, provides:(2) Co-ownership or copossession does not itself establish a partnership, whether such co-ownersor co-possessors do or do not share any profitsmade by the use of the property; (3) Thesharing of gross returns does not of itself establish a partnership, whether or not thepersons sharing them have a joint or commonright or interest in any property from which thereturns are derived;The sharing of returns does not in itself establish a partnership whether or not thepersons sharing therein have a joint or commonright or interest in the property. There must bea clear intent to form a partnership, theexistence of a juridical personality different fromthe individual partners, and the freedom of eachparty to transfer or assign the whole property.In the present case, there is clear evidence of co-ownership between the petitioners. There isno adequate basis to support the propositionthat they thereby formed an unregisteredpartnership. The two isolated transactionswhereby they purchased properties and sold thesame a few

years thereafter did not therebymake them partners. They shared in the grossprofits as co- owners and paid their capital gainstaxes on their net profits and availed of the taxamnesty thereby. Under the circumstances, theycannot be considered to have formed anunregistered partnership which is thereby liablefor corporate income tax, as the respondentcommissioner proposes. And even assuming for the sake of argumentthat such unregistered partnership appears tohave been formed, since there is no suchexisting unregistered partnership with a distinctpersonality nor with assets that can be heldliable for said deficiency corporate income tax,then petitioners can be held individually liable aspartners for this unpaid obligation of thepartnership. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents. Facts: SC JOHNSON AND SON, USA a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 . For the use of the trademark or technology, SC JOHNSON AND SON, USA was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which respondent paid for the period covering July 1992 to May 1993.00 On October 29, 1993, SC JOHNSON AND SON, USA filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the respondent. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty Issue: WHETHER OR NOT SC JOHNSON AND SON,USA IS ENTITLED TO THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY. Ruling : In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source.Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. The Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid At the same time, the intention behind the adoption of the provision on relief from double taxation in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause. The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the most favored among other countries. The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the

clearest grant of organic or statute law. Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. N.V REEDERIJ AMSTERDAM AND ROYAL INTEROCEAN LINES VS. COMMISSIONER OF INTERNAL REVENUE FACTS: Both vessels of petitioner N.V. Reederij Amsterdam called on Philippine ports to load cargoes for foreign destinations. The freight fees for these transactions were paid in abroad. In these two transactions, petition Royal Interocean Lines acted as husbanding agent for a fee or commission on said vessels. No income tax has been paid by Amsterdam on the freight receipts. As a result, Commissioner of Internal Revenue filed the corresponding income tax returns for the petitioner. Commissioner assessed petitioner for deficiency of income tax, as a non-resident foreign corporation NOT engaged in trade or business. On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels and paid the tax in pursuant to their supposed classification. On the same date, petitioner Royal Interocean Lines, as the husbanding agent of Amsterdam, filed a written protest against the abovementioned assessment made by the respondent Commissioner. The protest was denied. On appeal, CTA modified the assessment by eliminating the 50% fraud compromise penalties imposed upon petitioners. Petitioner still was not satisfied and decided to appeal to the SC. ISSUE: Whether or not N.V. Reederij Amsterdam should be taxed as a foreign corporation not engaged in trade or business in the Philippines? HELD: Petitioner is a foreign corporation not authorized or licensed to do business in the Philippines. It does not have a branch in the Philippines, and it only made two calls in Philippine ports, one in 1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or business, its business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation does not amount to engaging in trade or business in the Philippines for income tax purposes. A foreign corporation doing business in the Philippines is taxable on income solely from sources within the Philippines. It is permitted to claim deductions from gross income but only to the extent connected with income earned in the Philippines. On the other hand, foreign corporations not doing business in the Philippines are taxable on income from all sources within the Philippines . The tax is 30% (now 35% for non-resident foreign corp which is also known as foreign corp not engaged in trade or business) of such gross income. (*take note that in a resident foreign corp, what is being taxed is the taxable income, which is with deductions, as compared to a non-resident foreign corp which the tax base is gross income) Petiioner Amsterdam is a non-resident foreign corporation, organized and existing under the laws of the Netherlands with principal office in Amsterdam and not licensed to do business in the Philippines. CIR vs YMCA 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. YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants and canteen operators, and from parking fees collected from non-members. Petitioner issued an assessment to private respondent for deficiency taxes. Private respondent formally protested the assessment. In reply, the CIR denied the claims of YMCA. Issue: Whether or not the income derived from rentals of real property owned by YMCA subject to income tax Held: Yes. Income of whatever kind and character of non-stock non-profit 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 the NIRC. Rental income derived by a tax-exempt organization from the lease of its properties, real or personal, is not 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 (Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA 605, 613, April 18, 1997). 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 ( Davao Gulf Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, G.R. No. 117359, p. 15 July 23, 1998). Verba legis non est recedendum. The law does not make a distinction. The rental income is taxable regardless of whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither should we. Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it 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. This is without merit since the exemption provided lies on the payment of property tax, and not on the income tax on the rentals of its property.

The bare allegation alone that one is a non-stock, non-profit educational institution is insufficient to justify its exemption from the payment of income tax. For the YMCA to be granted the exemption it claims under the above 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. Unfortunately for respondent, the Court noted that not a scintilla of evidence was submitted to prove that it met the said requisites. The Court appreciates the nobility of respondents cause. However, the Courts power and function are limited merely to applying the law fairly and objectively. It cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation. The Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the political departments of government. CIR vs CA 298 SCRA 38 Facts: Young Mens Christian Association of the Philippines, Inc. (YMCA), a non-stock, non-profit institution, whichconducts various programs and activities that are beneficial to the public pursuant to its religious, educational, andcharitable objectives, is contesting the tax assessment made upon it by the Commissioner of Internal Revenue, citing Article VI, Section 28, paragraph 3 of the 1987 Constitution. Issue and Ruling: 1. W/N YMCA is exempt from the payment of taxes. NO. What is exempted by Article VI, Section 28, paragraph 3 of the 1987 Constitution is not the institution itself; theexemption pertains only to property taxes. Moreover, Section 27 of the National Internal Revenue Code expressly disallows the exemption claimed by YMCA, as it mandates that the income of exempt organizations from any of theirproperties, real or personal, be subject to the tax imposed by the same Code. Thus, YMCA is exempt from the paymentof 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. COCONUT OIL REFINERS ASSOCIATION, INC. et al vs. RUBEN TORRES, as Executive Secretary, et al G.R. No. 132527. July 29, 2005 Facts: On March 13, 1992, RA No. 7227 was enacted, providing for, among other things, the sound and balanced conversion of the Clark and Subic military reservations and their extensions into alternative productive uses in the form of special economic zones in order to promote the economic and social development of Central Luzon in particular and the country in general. The law contains provisions on tax exemptions for importations of raw materials, capital and equipment. After which the President issued several Executive Orders as mandated by the law for the implementation of RA 7227. Herein petitioners contend the validity of the tax exemption provided for in the law. Issue: Whether or not the Executive Orders issued by President for the implementation of the tax exemptions constitutes executive legislation. Held: To limit the tax-free importation privilege of enterprises located inside the special economic zone only to raw materials, capital and equipment clearly runs counter to the intention of the Legislature to create a free port where the free flow of goods or capital within, into, and out of the zones is insured. The phrase tax and duty-free importations of raw materials, capital and equipment was merely cited as an example of incentives that may be given to entities operating within the zone. Public respondent SBMA correctly argued that the maxim expressio unius est exclusio alterius, on which petitioners impliedly rely to support their restrictive interpretation, does not apply when words are mentioned by way of example. It is obvious from the wording of RA No. 7227, particularly the use of the phrase such as, that the enumeration only meant to illustrate incentives that the SSEZ is authorized to grant, in line with its being a free port zone. The Court finds that the setting up of such commercial establishments which are the only ones duly authorized to sell consumer items tax and duty-free is still well within the policy enunciated in Section 12 of RA No. 7227 that . . .the Subic Special Economic Zone shall be developed into a selfsustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments. However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive Order No. 97-A, allowing tax and duty-free removal of goods to certain individuals, even in a limited amount, from the Secured Area of the SSEZ, are null and void for being contrary to Section 12 of RA No. 7227. Said Section clearly provides that exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines. COMMISSIONER OF CUSTOMSvs. PHILIPPINE PHOSPHATE FERTILIZER CORP (UNDIGESTED) The financial planners of the State are often confounded by the precarious balance between the need to provide a conducive investment climate and the need to enhance revenue collections. In the present Petition for Review, the Court is called upon to interpret the provisions of a law designed to benefit investors with tax exemptions. Tax exemptions are generally construed strictly against the taxpayer; yet, when the purported ambiguities in the law are more imagined than real, there should be no hesitation to rule for the taxpayer. The factual backdrop of the case is uncomplicated. Respondent Philippine Phosphate Fertilizer Corporation (Philphos) is a domestic corporation engaged in the manufacture and production of fertilizers for domestic and international distribution. Its base of operations is in the

Leyte Industrial Development Estate, an export processing zone.[1] It is also registered with the Export Processing Zone Authority (EPZA), now known as the Philippine Export Zone Authority (PEZA). [2] The manufacture of fertilizers required Philphos to purchase fuel and petroleum products for its machineries. These fuel supplies are considered indispensable by Philphos, as they are used to run the machines and equipment and in the transformation of raw materials into fertilizer.[3] The fuel supplies are secured domestically from local distributors, in this case, Petron Corporation (Petron), which imports the same and pays the corresponding customs duties to the Bureau of Customs; and, the ad valorem and specific taxes to the Bureau of Internal Revenue. When the fuel and petroleum products are delivered at Philphoss manufacturing plant inside the Leyte Industrial Development Estate, Philphos is billed by Petron the corresponding customs duties imposed on these products. Effectively thus, Philphos reimburses Petron for the customs duties on the purchased fuels and petroleum products which are passed on by the Petron as part of the selling price.[4] Under this arrangement, Philphos made several purchases from Petron of fuels and other petroleum products used directly or indirectly in the manufacture of fertilizers for the period of October 1991 until June 1992.[5] During the period in question, Philphos indirectly paid as customs duties, the amount of Twenty Million One Hundred Forty Nine Thousand Four Hundred Seventy Three Pesos and Seventy Seven Centavos (P20,149,473.77).[6] In a letter to the Bureau of Customs, dated 18 September 1992, Philphos sought the refund of customs duties it had paid for the period covering the months of October to December 1991, and January to June, 1992.[7] It pointed out that Philphos, being an enterprise registered with the export processing zone, is entitled to tax incentives under Presidential Decree No. 66 (EPZA Law), referring specifically to Section 17 thereof which exempts from customs and internal revenue laws, supplies brought into the export processing zone. Consequently, Philphos argued that the customs duties billed by Petron on Philphos should be refunded. The Bureau of Customs denied the claim for refund in a letter dated 4 January 1993.[8] Hence, a Petition for Review was filed with the Court of Tax Appeals (CTA), assailing the denial of the refund. The CTA ruled for Philphos in a Decision[9] dated 5 October 1995, ordering the issuance of a Tax Credit Certificate in the amount of Twenty Million One Hundred Forty Nine Thousand Four Hundred Seventy Three Pesos and Seventy Seven Centavos (P20,149,473.77) in favor of Philphos. The matter was elevated by the Commissioner of Customs (Commissioner) to the Court of Appeals (CA), which eventually affirmed the CTAs Decision in toto.[10] Both the CTA and the CA relied upon Section 17(1) of the EPZA Law to justify the conclusion that Philphos is entitled to the refund. Before this Court, the Commissioner argues that since the importation of the subject products, made by the seller Petron, had already been finally terminated, all future claims for refund are thus barred. It likewise insists that controlling in this case is Section 18(i) of the EPZA Law, under which claims for refunds similar to Philphoss are precluded. Finally, the Commissioner posits that since a refund on tax credit partakes the nature of an exemption, the grant thereof must be explicit. There is no need to inquire into the factual basis for the amount sought to be refunded. [11] Petitioner does not dispute the amount, but only the legal basis for the exemption. Moreover, since the Court itself is not a trier of facts it will respect primarily the findings of the ultimate trier of facts, namely: the CA. In this case, however, there is coalescence in the findings of the two courts below. The EPZA Law, promulgated in 1972, has since been superseded by Republic Act No. 7916, or The Special Economic Zone Act of 1995. However, since the claim for exemption covers the years 1991 and 1992, or before the enactment of Republic Act No. 7916, the provisions of the EPZA Law are applicable in the present petition. Consideration of the general philosophy and thrust of the EPZA Law cannot be evaded. The export processing zone is intended to be a viable commercial, industrial and investment area. [12] The enunciated policy of the EPZA Law is to encourage and promote foreign commerce as a means of making the Philippines a center of international trade; strengthening our export trade and foreign exchange position; hastening industrialization; reducing domestic unemployment; and accelerating the development of the country, by establishing export processing zones in strategic locations in the Philippines.[13] As noted by the CTA, the basic policy in establishing export processing zones is to attract enterprises, especially foreign investors, who will be manufacturing products primarily for export and be able to do so without their supplies and raw materials entering, and the export products leaving, the Philippine territory within the context of customs and revenue regulations.[14] From a macro-perspective though, export processing zones are not intended to solely benefit investors. These zones are scattered throughout the country in remote areas and have the patent benefit of creating employment opportunities within their localities. It is the presence of tangible tax benefits attached to these zones which make them viable as investment locations, areas which ordinarily would be overlooked. The incentives offered to enterprises duly registered with the PEZA consist, among others, of tax exemptions. These benefits may, at first blush, place the government at a disadvantage as they preclude the collection of revenue. Still, the expectation is that the tax breaks ultimately redound to the benefit of the national economy, enticing as they do more enterprises to invest and do business within the zones; thus creating more employment opportunities and infusing more dynamism to the vibrant interplay of market forces. Section 17 of the EPZA Law particularizes the tax benefits accorded to duly registered enterprises. It states: SEC. 17. Tax Treatment of Merchandize in the Zone. (1) Except as otherwise provided in this Decree, foreign and domestic merchandise, raw materials,supplies, articles, equipment, machineries, spare parts and wares of every description, except those prohibited by law, brought into the Zone to be sold, stored, broken up, repacked, assembled, installed, sorted, cleaned, graded, or otherwise processed, manipulated, manufactured, mixed with foreign or domestic merchandise or used whether directly or indirectly in such activity, shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the following provisions of law to the contrary notwithstanding. (emphasis supplied) The cited provision certainly covers petroleum supplies used, directly or indirectly, by Philphos to facilitate its production of fertilizers, subject to the minimal requirement that these supplies are brought into the zone. The

supplies are not subject to customs and internal revenue laws and regulations, nor to local tax ordinances. It is clear that Section 17(1) considers such supplies exempt even if they are used indirectly, as they had been in this case. Since Section 17(1) treats these supplies for tax purposes as beyond the ambit of customs laws and regulations, the arguments of the Commissioner invoking the provisions of the Tariff and Customs Code must fail. Particularly, his point that the importation of the petroleum products by Petron was deemed terminated under Section 1202[15] of the Tariff and Customs Code, and that the termination consequently barred any future claim for refund under Section 1603[16] of the same law is misplaced and inconsequential. Moreover, the cited provisions of the Tariff and Customs Code if related to Section 17(1) of the EPZA Law would significantly render the argument strained and, if upheld, obviate many of the benefits granted by Section 17(1), for the provision does not limit the tax exemption only to direct taxes. Following the Commissioners interpretation, any duly registered enterprise sought to be held liable for the controverted customs duty because the importer had shifted the duty to the buyer would forever be precluded from challenging the duty, which it is not in the first place obliged to pay under the law. Hand in hand with its patent noxiousness to the spirit of the EPZA Law, the approach calls for the unwarranted application of the Tariff and Customs Code to investors and players in the zones, which under the EPZA Law are beyond the reach of domestic customs and tax laws, as well as regulations. Neither would the prescriptive periods or procedural requirements provided under the Tariff and Customs Code serve as a bar for the claim for refund. The holding of the CTA on this point is illuminating: Contrary to the allegation of the Respondent that Section 17(1) does not provide for duty and tax exemption privilege, this Court disagrees. That phrase shall not be subject to customs and internal revenue laws and regulations nor to local tax ordinances, the provisions of law to the contrary notwithstanding cannot be interpreted in any other manner than to mean that merchandise or supplies brought into the zone are exempt from customs duties and taxes. The incentive given under Section 17(1) is broader than a mere tax exemption. The phrase is so broad to include not only the exemption from customs duties and taxes but everything required in the enforcement of the customs and internal revenue laws save on the exceptions and conditions specified in the EPZA law itself. Considering that the customs and internal revenue laws are primarily enacted to impose duties and taxes, the phrase cannot be interpreted to exclude these impositions. More so, the phrase will also include exemption from other rules and regulations which are normally followed in the discharge of importation such as the filing of import entries, examinations and other requirements attendant to the importation of goods into the country.[17] Even our recent ruling in Nestle Philippines, Inc. v. Court of Appeals,[18] to the effect that the claim for refund of customs duties in protestable cases may be foreclosed by the failure to file a written protest, is not apropos in the case at bar because petitioner therein was not a duly registered enterprise under the EPZA Law and thus not entitled to the exemptions therein.[19] This leads to another question well-worth resolving what is the prescriptive period which a duly registered enterprise should observe in applying for a refund to which it is entitled under the EPZA Law? The EPZA Law itself is silent on the matter, and the prescriptive periods under the Tariff and Customs Code and other revenue laws are inapplicable, by specific mandate of Section 17(1) of the EPZA Law. This does not mean though that prescription will not lie, as the Civil Code provisions on solutio indebiti[20] may find application. The Civil Code is not a customs and internal revenue law. The Court has in the past sanctioned the application of the provisions on solutio indebiti in cases when taxes were collected thru error or mistake. [21] Solutio indebiti is a quasi-contract, thus the claim for refund must be commenced within six (6) years from date of payment pursuant to Article 1145(2) of the New Civil Code.[22] Clearly then, Philphoss right to refund has not yet prescribed. Still, the Commissioner insists that it is Section 18(i) of the EPZA Law that is applicable, and precludes Philphoss claim for refund. The provision reads: SEC. 18. Additional Incentives. A zone registered enterprise shall also enjoy the following incentives: xxx (i)Tax credit. Every registered zone enterprise shall enjoy a tax credit equivalent to the sales, compensating and specific taxes and duties on supplies, raw materials and semi-manufactured products used in the manufacture, processing or production of its export products and forming part thereof; x x x. (emphasis supplied)[23] Indubitably, Section 18 does not exclude or otherwise limit the broad grant of benefits accorded by Section 17. These additional incentives under Section 18 are to be enjoyed in conjunction with the incentives under Section 17. This is indicated by the use of the words additional and shall also in the first paragraph of Section 18. Even the Commissioner admits the distinct character of Section 18.[24] The divergent natures of the benefits under Sections 17 and 18 become readily apparent upon examination of the additional incentives enumerated under Section 18. They include allowance of net-operating loss carry-over, accelerated depreciation, exemption from export tax, foreign exchange assistance, financial assistance, exemptions for local taxes and licenses, deductions for labor training services, and deductions for organizational and pre-operating expenses.[25] Section 18 does not serve the purpose of qualifying the benefits provided under Section 17. Instead, it enumerates another class of incentives also available to registered enterprises, in addition to, and apart from, the general benefits accorded under Section 17. There can be no doubt that the additional incentives under Section 18 are separate and distinct from those under the preceding section. Still, the Commissioner argues that Section 18(i) of the EPZA Law specifically controls the issuance of a tax credit equivalent to duties on supplies purchased, and that the provision clearly states that such supplies must form part of the export products, particularly fertilizer. A plain reading of Section 18(i) unmistakably indicates that the tax credit as an additional incentive avails only if the supplies actually form part of the export products. There is an apparent distinction between this provision and Section 17(1) which exempts from taxation supplies used indirectly by the registered enterprise. It is apparent that the petroleum supplies in question, which physically do not form part of the exportable fertilizers, are exempt from taxation under Section 17(1), but no tax credit could be claimed on them under Section 18(i).

Still, this acknowledged distinction is not a cause for abject reversal of the assailed decisions, as it does not affect the key disposition. For Section 17(1) is determinative of the fundamental question whether there is legal basis for the claim of exemption. On the other hand, Section 18(i) does not impose limitations on the exemptions granted in the preceding provisions, but would only affect, if at all, the modality by which the exemption takes form. Obviously, the relief sought for erroneously paid taxes would be a return to the taxpayer of the amount paid to the government. The Tax Reform Act of 1997 authorizes either a refund or credit as a means of recovery of tax erroneously or illegally collected.[26] It may be that there is no essential difference between a tax refund and a tax credit since both are modes of recovering taxes erroneously or illegally paid to the government.[27] Yet, there are unmistakable formal and practical differences between the two modes. Formally, a tax refund requires a physical return of the sum erroneously paid by the taxpayer, while a tax credit involves the application of the reimbursable amount against any sum that may be due and collectible from the taxpayer.[28] On the practical side, the taxpayer to whom the tax is refunded would have the option, among others, to invest for profit the returned sum, an option not proximately available if the taxpayer chooses instead to receive a tax credit. It should be noted that in its initial letter to the Commissioner dated 18 September 1992, Philphos specifically requested the refund of Twenty Million One Hundred Forty Nine Thousand Four Hundred Seventy Three Pesos and Seventy Seven Centavos (P20,149,473.77). However, in its Petition for Review before the CTA, Philphos prayed for the issuance of corresponding tax credits in the same amount. Still, there is no vehement insistence on the part of Philphos that the return of the amount paid should come in the form of a refund or a credit.[29] The CTA, as affirmed by the CA, ordered the issuance of a Tax Credit Certificate in favor of Philphos. No elaboration was made as to why the relief granted was a tax credit and not a refund, but we can deduce that such was the relief afforded as it was the relief prayed for by Philphos in its Petition before the tax court. However, a slight modification of the award is necessary so as not to render nugatory the proscription under Section 18(i) that a tax credit avails only if the supplies form part of the export product. Instead of awarding a Tax Credit Certificate to Philphos, a refund of the same amount is warranted under the circumstances. The grant of exemption under Section 17(1) is clear and unambiguous. There is neither logic nor need to cast a speck of uncertainly on a doubt-free situation to resolve the resulting forced question in favor of the government. The disposition arises not out of a blind solicitude towards the concerns of business, but from the duty to affirm and enforce a crystal-clear legislative policy and initiative intent. Indeed, the revenue collectors of the government should be cautious before attempting to gut away at concessions the State itself has deemed worthy of award to deserving investors. It is unsound practice and uncouth behaviour to invite over guests to dinner at home, then charge them for the use of the silverware before allowing them to dine. WHEREFORE, the Petition for Review is DENIED. The assailed Decisions of the Court of Appeals dated 4 August 2000 and of the Court of Tax Appeals dated 5 October 1995 are AFFIRMED, with modification that in lieu of the issuance of a Tax Credit Certificate, the amount of Twenty Million One Hundred Forty Nine Thousand Four Hundred Seventy Three Pesos and Seventy Seven Centavos (P20,149,473.77) be refunded to respondent Philippine Phosphate Fertilizer Corporation. No costs. SO ORDERED. CIR vs SINCO Facts: The VG Sinco Educational Institution is a non-stock, nonprofit corporation which was established to operate the Foundation College of Dumaguete. CIR assessed the College an income tax on the following grounds: 1) Sinco personally received benefits from it; 2) Community Publishers, a stockholder, profits from it; 3) It charges tuition fee; 4) It acquired buildings and other property which will redound to the benefit of stockholders after dissolution of the corporation. Sinco argued that under the NIRC, corporation organized and maintained exclusively for educational purposes and no part of its net income inures to the benefit of any private individual Decision: VG Sinco Educational Institution is tax exempt. The corporation has never distributed any dividends to its stockholders. Remuneration for services rendered to the College is allowed by law. This covers the money given to Sinco (as salary) and Community Publishers (for services). Tuition fee is the only source of income to ensure that the College will keep its operations goingallowed by law. That the buildings and other property acquired by the corporation will benefit the stockholders upon dissolution too speculative CIR v. Estate of Benigno Toda Facts: CIC authorized Benigno P. Toda, Jr., President andowner of 99.991% of its issued and outstanding capital stock,to sell the Cibeles Building and the two parcels of land onwhich the building stands for an amount of not less than P90million.30 August 1989, Toda purportedly sold the property for P100million to Altonaga, who, in turn, sold the same property on thesame day to Royal Match Inc. (RMI) for P200 million. Thesetwo transactions were evidenced by Deeds of Absolute Salenotarized on the same day by the same notary public.For the sale of the property to RMI, Altonaga paid capital gainstax in the amount of P10 million.On 16 April 1990, CIC filed its corporate annual income taxreturn for the year 1989, declaring, among other things, its gainfrom the sale of real property in the amount of P75,728.021.After crediting withholding taxes of P254,497.00, it paidP26,341,207 for its net taxable income of P75,987,725.On 12 July 1990, Toda sold his entire shares of stocks in CICto Le Hun T. Choa for P12.5 million, as evidenced by a Deedof Sale of Shares of Stocks. Issue: WON this is a case of tax evasion or tax avoidance.Held/Ratio: Tax avoidance and tax evasion are the two mostcommon ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the meanssanctioned by law. It should be used by the taxpayer in goodfaith and at arms length . Tax evasion is a scheme usedoutside of those lawful means and when availed of, it usuallysubjects the taxpayer to further or additional civil or criminalliabilities. Tax evasion connotes the integration of three factors :(1)the end to be achieved, i.e., the payment of less than thatknown by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due;(2)an accompanying state of mind which is

described as being"evil," in "bad faith," "willfull," or "deliberate and not accidental";(3)a course of action or failure of action which is unlawful. All these factors are present in the instant case. That Altonaga was a mere conduit finds support in theadmission of respondent .Estate that the sale to him was partof the tax planning scheme of CIC.The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., fromCIC to Altonaga, and then from Altonaga to RMI cannot beconsidered a legitimate tax planning. It is tainted with fraud.Here, it is obvious that the objective of the sale toAltonaga was to reduce the amount of tax to be paid. Thetransfer from him to RMI would result to 5% individual capitalgains tax, instead of 35% corporate income tax. Altonagassole purpose of acquiring and transferring title of the propertieson the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefitsand burdens of ownership. The sale to him was merely a taxploy, a sham, and without business purpose and economicsubstance. Doubtless, the execution of the two sales wascalculated to mislead the BIR with the end in view of reducingthe consequent income tax liability.In a nutshell, the intermediary transaction, i.e., thesale of Altonaga, which was prompted more on the mitigationof tax liabilities than for legitimate business purposesconstitutes tax evasion Tan v Del Rosario Facts: 1. Two consolidated cases assail the validity of RA 7496 or the Simplified Net Income Taxation Scheme ("SNIT"), which amended certain provisions of the NIRC, as well as the Rules and Regulations promulgated by public respondents pursuant to said law. 2. Petitioners posit that RA 7496 is unconstitutional as it allegedlyviolates the following provisions of the Constitution: -Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof. - Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation. - Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws. 3. Petitioners contended that public respondents exceeded their rule-making authority in applying SNIT to general professional partnerships. Petitioner contends that the title of HB 34314, progenitor of RA 7496, is deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289) when the full text of the title actually reads, 'An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code,' as amended. Petitioners also contend it violated due process. 5. The Solicitor General espouses the position taken by public respondents. 6. The Court has given due course to both petitions. ISSUE: Whether or not the tax law is unconstitutional for violating due process NO. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident in herein case. 1. Uniformity of taxation, like the concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities. Uniformity does not violate classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class. 2. What is apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations. The Court does not view this classification to be arbitrary and inappropriate. ISSUE 2: Whether or not public respondents exceeded their authority in promulgating the RR No. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership. CIR vs Procter & Gamble FACTS: Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax

credit, claiming that pursuant to Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only 15%. MAIN ISSUE: Whether or not P&G Philippines is entitled to the refund or tax credit. HELD: YES. P&G Philippines is entitled. Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he country of domicile of the foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However, such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to 20 percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the test is if USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met. CIR vs PAL FACTS: PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate Income Tax using as basis its franchise which exempts it from all other taxes upon payment of whichever is lower of either (a) the basic corporate income tax based on the net taxable income or (b) a franchise tax of 2%. ISSUE: Is PAL liable for Minimum Corporate Income Tax? HELD: NO. PHILIPPINE AIRLINES, INC.s franchise clearly refers to "basic corporate income tax" which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code between taxable income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax under Section 27 (E). The two terms have their respective technical meanings and cannot be used interchangeably. Not being covered by the Charter which makes PAL liable only for basic corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes" from which PHILIPPINE AIRLINES, INC. is exempted. The CIR also can not point to the Substitution Theory which states that Respondent may not invoke the in lieu of all other taxes provision if it did not pay anything at all as basic corporate income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts Respondent but the exercise of its option. The Court even pointed out the fallacy of the argument in that a measly sum of one peso would suffice to exempt PAL from other taxes while a zero liability would not and said that there is really no substantial distinction between a zero tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does more than just clarify a previous regulation and goes beyond mere internal administration and thus cannot be given effect without previous notice or publication to those who will be affected thereby. CIR VS. ANTONIO TUASON INC. FACTS: CTA set aside petitioners revenue commissioners assessment of 1.1 M as the 25% surtax on private respondents unreasonable accumulation of surplus for the year 1975-1978. Private respondent protested the assessment on the ground that the accumulation of surplus profits during the years in question was solely for the purpose of expanding its business operations as a real estate broker. Private res. Filed a petition that pending determination of the case, an order be issued restraining the commissioner and/or his reps from enforcing the warrants of distraint and levy. Writ of injunction was issued by tax court. Due to the reversal of CTA of the commissioners decision, CIR appeals to the SC. ISSUES:1. Whether or not private respondent is a holding company and/or investment company? 2. Whether or not Antonio accumulated surplus for years 75-78 3. Whether or not Tuason Inc. is liable for the 25% surtax on undue accumulation of surplus for 75-78 HELD: Yes to all. Antionio is liable for the 25% surtax assessed. Sec. 25. Additional tax on corporation improperly accumulating profits or surplus. (a) Imposition of tax. If any corporation, except banks, insurance companies, or personal holding companies, whether domestic or foreign, is formed or availed of for the purpose of preventing the imposition of the tax upon its shareholders or members or the shareholders or members of another corporation, through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by section twentyfour, and shall be computed, collected and paid in the same manner and subject to the same provisions of law, including penalties, as that tax. (b) Prima facie evidence. The fact that any corporation is a mere holding company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in the case of an investment company where at any time during the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by one person. In this case, Tuason Inc, a mere holding company for the corporation did not involve itself in the development of

subdivisions but merely subdivided its own lots and sold them for bigger profits. It derived its income mostly from interest, dividends, and rentals realized from the sale of realty. Tuason Inc is also owned by Antonio himself. While these profits were actually made, the commissioner points out that the corp. did not use up its surplus profits. Antonio claims that he spent the money to build an apartment in urdaneta but theres a large discrepancy bet. The market value and the alleged investment cost. The importance of liability is the purpose behind the accumulation of the income and not the consequences of the accumulation. Thus, if the failure to pay dividends were for the purpose of using the undistributed earnings & profits for the reasonable needs of the business, that purpose would not fall to overcome the presumption and correctness of CIR. BASILAN ESTATES, INC. v. CIR.R. No. L-22492 September 5, 1967 Facts: Basilan Estates, Inc. claimed deductions for the depreciation of its assets on the basis of their acquisition cost. As of January 1, 1950 it changed the depreciable value of said assets by increasing it to conform with the increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation computed on the reappraised value. CIR disallowed the deductions claimed by petitioner, consequently assessing the latter of deficiency income taxes. Issue: Whether or not the depreciation shall be determined on the acquisition cost rather than the reappraised value of the assets Held: Yes. The following tax law provision allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated: (1)In general. A reasonable allowance for deterioration of property arising out of its use or employment in the business or trade, or out of its not being used: Provided, That when the allowance authorized under this subsection shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . . The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from gross income are privileges, not matters of right. They are not created by implication but upon clear expression in the law [ Gutierrez v. Collector of Internal Revenue, L-19537, May 20, 1965]. Depreciation is the gradual diminution in the useful value of tangible property resulting from wear and tear and normal obsolescense. It commences with the acquisition of the property and its owner is not bound to see his property gradually waste, without making provision out of earnings for its replacement. The recovery, free of income tax, of an amount more than the invested capital in an asset will transgress the underlying purpose of a depreciation allowance. For then what the taxpayer would recover will be, not only the acquisition cost, but also some profit. Recovery in due time thru depreciation of investment made is the philosophy behind depreciation allowance; the idea of profit on the investment made has never been the underlying reason for the allowance of a deduction for depreciation.