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III. ESCAPE FROM TAXATION
a.) Shifting Diago Philippines vs Commissioner FACTS: Petitioner Diageo Philippines, Inc. (Diageo) is a domestic corporation organized and existing under the laws of the Republic of Philippines and is primarily engaged in the business of importing, exporting, manufacturing, marketing, distributing, buying and selling, by wholesale, all kinds of beverages and liquors and in dealing in any material, article, or thing required in connection with or incidental to its principal business.3rll It is registered with the Bureau of Internal Revenue (BIR) as an excise tax taxpayer November 1, 2003 to December 31, 2004, Diageo purchased raw alcohol from its supplier for use in the manufacture of its beverage and liquor products. The supplier imported the raw alcohol and paid the related excise taxes thereon before the same were sold to the petitioner.5rll The purchase price for the raw alcohol included, among others, the excise taxes paid by the supplierin the total amount of P12,007,528.83 Diageo exported its locally manufactured liquor products to Japan, Taiwan, Turkey and Thailand and received the corresponding foreign currency proceeds Diageo filed with the BIR Large Taxpayers Audit and Investigation Division II applications for tax refund/issuance of tax credit certificates corresponding to the excise taxes which its supplier paid but passed on to it as part of the purchase price of the subject raw alcohol invoking Section 130(D) of the Tax Code ISSUE: WON Diageo is entitled to the claim. Held: No. Tax Code Sec. 130 (1) Persons Liable to File a Return. Every person liable to pay excise tax imposed under this Title shall file a separate return for each place of production setting forth, among others, the description and quantity or volume of products to be removed, the applicable tax base and the amount of tax due thereon (D) Credit for Excise tax on Goods Actually Exported.- When goods locally produced or manufactured are removed and actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment A reading of the foregoing provision, however, reveals that contrary to the position of Diageo, the right to claim a refund or be credited with the excise taxes belongs to its supplier. The phrase "any excise tax paid thereon shall be credited or refunded" requires that the claimant be the same person who paid the excise tax. In Silkair (Singapore) Pte, Ltd. v. Commissioner of Internal Revenue, the Court has categorically declared that "[t]he proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another." Excise taxes imposed under Title VI of the Tax Code are taxes on property24rll which are imposed on "goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition and to things imported."25rll Though excise taxes are paid by the manufacturer or producer before removal of domestic products from the place of production26rll or by the owner or importer before the release of imported articles from the customshouse,27rll the same partake of the nature of indirect taxes when it is passed on to the subsequent purchaser. Indirect taxesare defined asthose wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted to another person. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered. Accordingly, when the excise taxes paid by the supplier were passed on to Diageo, what was shifted is not the tax per se but anadditional cost of the goods sold. Thus, the supplier remains the statutory taxpayer even if Diageo, the purchaser, actually shoulders the burden of tax. the person entitled to claim a tax refund is the statutory taxpayer or the person liable for or subject to tax.29rll In the present case, it is not disputed that the supplier of Diageo imported the subject raw alcohol, hence, it was the one directly liable and obligated to file a return and pay the excise taxes under the Tax Code before the goods or products are removed from the customs house. It is, therefore, the statutory taxpayer as contemplated by law and remains to be so, even if it shifts the burden of tax to Diageo. Consequently, the right to claim a refund, if legally allowed, belongs to it and cannot be transferred to another, in this case Diageo, without any clear provision of law allowing the same.
Silkair vs Commissioner PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 2
Facts: Silkair, a corporation organized under the laws of Singapore which has a Philippine representative office, is an online international air carrier operating the Singapore-Cebu-Davao- Singapore, Singapore-Davao-Cebu-Singapore, and Singapore- Cebu-Singapore routes. On December 19, 2001, Silkair filed with the BIR a written application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its purchases of jet fuel from Petron Corporation from January to June 2000. CTA denied Silkairs petition on the ground that as the excise tax was imposed on Petron Corporation as the manufacturer of petroleum products, any claim for refund should be filed by the latter; and where the burden of tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost of the goods purchased. The liability for excise tax on petroleum products that are being removed from its refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). The right to claim for the refund of excise taxes paid on petroleum products lies with Petron Corporation who paid and remitted the excise tax to the BIR. Respondent, on the other hand, may only claim from Petron Corporation the reimbursement of the tax burden shifted to the former by the latter. The excise tax partaking the nature of an indirect tax, is clearly the liability of the manufacturer or seller who has the option whether or not to shift the burden of the tax to the purchaser. Where the burden of the tax is shifted to the [purchaser], the amount passed on to it is no longer a tax but becomes an added cost on the goods purchased which constitutes a part of the purchase price Issue: WON the petitioner is the proper party to claim for refund or tax credit NO Held: Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997 which reads Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of Agencies. Petroleum products sold to the following are exempt from excise tax: x x x x (b) Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; x x x x x x x, and Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Section 130 (A) (2) of the NIRC provides that "unless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser. The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and if an exemption is found to exist, it must not be enlarged by construction.
b.) Tax avoidance c.) Tax evasion Commissioner vs Estate of Toda Jr.
FACTS: Cibeles Insurance Corporation (CIC) authorized Benigno Toda Jr, president and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and two parcels of land on which the building stands for an amount of not less than P90M.
On August 30, 1989, Toda purportedly sold the property for P100M to Rafael Altonaga, who in turn sold the same property on the same day to Royal Match Inc. (RMI) for P200M.
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For the sale of property to RMI, Altonaga paid capital gains tax of P10M. Then in April 1990, CIC filed its corporate annual ITR for the year 1989, declaring, among other things, its gain from the sale of the real property (which was only P75+M).
In 1994, BIR demanded to the CIC a deficiency income tax for the year 1989. (Toda already died at this time.)
The Commissioner said that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100M, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains (subject only to 5% tax), thus evading the higher corporate income tax rate of 35%.
SC is now called upon to determine whether the tax planning scheme adopted by CIC constitutes tax evasion that would justify and assessment of deficiency income tax.
{Tax Planning Scheme/Flow of Transaction based on my understanding CIC (Corpo) sold to-> Altonaga (individual) for P90+M -> sold to RMI (Corpo) for P200M (but allegedly, this P200M was paid to CIC and not Altonaga. Pinadaan lang kunwari kay Altonaga (simulated sale) so that sa individual capital gains tax ma account ang 200M kay mas malaki man ang % ng corpo tax.}
ISSUE: Is this case a tax evasion or tax avoidance? TAX EVASION
Tax Evasion vs. Tax Avoidance Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
This is a Tax Evasion Case Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known 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"; and (3) a course of action or failure of action which is unlawful.
All these factors are present in the instant case. 1. Even prior to the purported sale of the Cibeles property by CIC to Altonaga on August 30, 1989, CIC received P40M from RMI, and not from Altonaga. That P40M was debited by RMI and reflected in its trial balances as "other inv. Cibeles Bldg." 2. Also, as of July 31, 1989, another P40M was debited and reflected in RMIs trial balance. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga. 3. That Altonaga was a mere conduit finds support in the admission of the Toda Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared: Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted 100%. But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner cannot be faulted for wanting to reduce the tax from 35% to 5%. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another.
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 4
the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability. In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of TAX EVASION.
d.) Tax Exemption e.) Compensation South African Airways vs CIR FACTS: South African Airways is a foreign corporation organized under South African laws. It is an internal air carrier with a sales agent in the Philippines ( Aerotel Limited Corporation). It is not registered with SEC as a corporation or partnership and has no license to do business is the Philippines. For the taxable year 2000, South African Airways filed separate quarterly and annual income tax returns for its off- line flights. On February 5, 2003, it filed with the BIR a claim for the refund of the amount of PhP 1,727,766.38 as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable year 2000. This payment was made on the basis of Sec. 28 (A) (3) (a) . The claim went unheeded. The petition for review filed with the CTA was likewise denied. The CTA denied the tax refund and held that that petitioner is an international air carrier that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country and thus taxable at the rate of 32% of such income under Sec 28 (A) (1) of the NIRC 1997. Although petitioner is right that it cannot be made to pay under Sec 28 (A) (3)(a), it is likewise liable under Sec 28 (A) (1). 1 In other words, the Court held that petitioner cannot claim refund for what it paid under Sec 28 (A) (3) (a) because the same was offset with its liability under Sec 28 (A)(1). Petitioner argues that such offsetting is in the nature of legal compensation2, which cannot be applied under the circumstances present in this case. ISSUE: WON the offsetting was proper in this case such that petitioner cannot anymore claim a refund . Offsetting/ Compensation was not proper because there is a need to assess the liability of the petitioner . HELD: As a general rule , taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. Taxes cannot be subject to set-off or compensation, thus: We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing under Art. 1279 of the Civil Code. Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax deficiency in this wise: Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners supplemental motion for reconsideration alleging bringing to said courts attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year. The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund. Section 82, Chapter IX of the National Internal Revenue Code PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 5
of 1977, which was the applicable law when the claim of Citytrust was filed, provides that (w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines. Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would necessarily require and entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations. Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable. In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each others claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res judicata on both parties as to all the matters subject thereof or necessarily involved therein. Here, petitioners similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a refund. Be that as it may, this Court is unable to affirm the assailed decision and resolution of the CTA En Banc on the outright denial of petitioners claim for a refund. Even though petitioner is not entitled to a refund due to the question on the propriety of petitioners tax return subject of the instant controversy, it would not be proper to deny such claim without making a determination of petitioners liability under Sec. 28(A)(1). It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and exemptions, if any. It cannot be assumed that petitioners liabilities under the two provisions would be the same. There is a need to make a determination of petitioners liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax deficiency exists. The assailed decision fails to mention having computed for the tax due under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish petitioners taxable income. There is a necessity to receive evidence to establish such amount vis--vis the claim for refund. It is only after such amount is established that a tax refund or deficiency may be correctly pronounced. 1. Note: Sec 28 (A)(1) - resident foreign corporations shall be liable for a 32% income tax on their income from within the Philippines (applicable to petitioner) Sec 28 (A)(3)(a)- resident foreign corporations that are international carriers that derive income from carriage of persons, excess baggage, cargo and mail originating from the Philippines which shall be taxed at 2 1/2% of their Gross Philippine Billings. (not applicable to petitioner) 2. Article 1279 of the Civil Code contains the elements of legal compensation, to wit: Art. 1279. In order that compensation may be proper, it is necessary: (1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated; (3) That the two debts be due; (4) That they be liquidated and demandable; (5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 6
Commissioner vs Esso Standard
FACTS: ESSO overpaid its 1959 income tax by P221,033.00. It was accordingly granted a tax credit in this amount by the Commissioner on August 5, 1964. However, ESSOs payment of its income tax for 1960 was found to be short by P367,994.00. So, on July 10, 1964, the Commissioner wrote to ESSO demanding payment of the deficiency tax, together with interest thereon for the period from April 18, 1961 to April 18, 1964. On August 10, 1964, ESSO paid under protest the amount alleged to be due, including the interest as reckoned by the Commissioner. It protested the computation of interest, contending it was more than. that properly due. It claimed that it should not have been required to pay interest on the total amount of the deficiency tax, P367,994.00, but only on the amount of P146,961.00 representing the difference between said deficiency, P367,994.00, and ESSOs earlier overpayment of P221,033.00 (for which it had been granted a tax credit). ESSO thus asked for a refund.
The Internal Revenue Commissioner denied the claim for refund. ESSO appealed to the Court of Tax Appeals. As aforestated, that Court ordered payment to ESSO of its "refund-claim x x in the amount of P39,787.94 as overpaid interest. Hence, this appeal by the Commissioner.
RULING: The CTA justified its award of the refund as follows:jgc:chanrobles.com.ph
". . . In the letter of August 5, 1964, . . . (the Commissioner) admitted that . . (ESSO) had overpaid its 1959 income tax by P221,033.00. Accordingly . . (the Commissioner) granted to . . (ESSO) a tax credit of P221,033.00. In short, the said sum of P221,033.00 of (ESSOs) money was in the Governments hands at the latest on July 15, 1960 when it (ESSO) paid in full its second installment of income tax for 1959. On July 10, 1964 x x (the Commissioner) claimed that for 1960, . . . (ESSO) underpaid its income tax by P367,994.00. However, instead of deducting from P367,994.00 the tax credit of P221,033.00 which . . . (the Commissioner) had already admitted was due . . . (ESSO), . . . (the Commissioner) still insists in collecting the interest on the full amount of P367,994.00 for the period April 18, 1961 to April 18, 1964 when the Government had already in its hands the sum of P221,033.00 of . . . (ESSOs) money even before the latters income tax for 1960 was due and payable. If the imposition of interest does not amount to a penalty but merely a just compensation to the State for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the Governments hand (Castro v. Collector, G.R. No. L-1274, Dec. 28, 1962), the collection of the interest on the full amount of P367,994.00 without deducting first the tax credit of P221,033.00, which has long been in the hands of the Government, becomes erroneous, illegal and arbitrary.chanrobles lawlibrary : rednad
". . . (ESSO) could hardly be charged of delinquency in paying P221,033.00 out of the deficiency income tax of P367,994.00, for which the State should be compensated by the payment of interest because the said amount of P221,033.00 was already in the coffers of the Government. Neither could . . . (ESSO) be charged for the concomitant use of funds that rightfully belong to the Government because as early as July 15, 1960, it was the Government that was using . . . (ESSOs) funds of P221,033.00. In the circumstances, we find it unfair and unjust for . . . (the Commissioner) to exact the interest on the said sum of P221,033.00 which, after all, was paid to and received by the Government even before the incidence of the deficiency income tax of P367,994.00. (Itogon-Suyoc Mines, Inc. v. Commissioner, C.T.A. Case No. 1327, Sept. 30, 1965). On the contrary, the Government should be the first to blaze the trail and set the example of fairness and honest dealing in the administration of tax laws.
"Accordingly, we hold that the tax credit of P221,033.00 for 1959 should first be deducted from the basic deficiency tax of P367,994.00 for 1960 and the resulting difference of P146,961.00 would be subject to the 18% interest prescribed by Section 51 (d) of the Revenue Code. According to the prayer of . . . (ESSO) . . . (the Commissioner) is hereby ordered to refund to . . . (ESSO) the amount of P39,787.94 as overpaid interest in the settlement of its 1960 income tax liability. However, as the collection of the tax was not attended with arbitrariness because . . . (ESSO) itself followed . . . (the Commissioners) manner of computing the tax in paying the sum of P213,189.93 on August 10, 1964, the prayer of . . . (ESSO) that it be granted the legal rate of interest on its overpayment of P39,787.94 from August 10, 1964 to the time it is actually refunded is denied. (See Collector of Internal Revenue v. Binalbagan Estate, Inc., G.R. No. L-12752, Jan. 30, PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 7
1965)."cralaw virtua1aw library
The Commissioners position is that income taxes are determined and paid on an annual basis, and that such determination and payment of annual taxes are separate and independent transactions; and that a tax credit could not be so considered until it has been finally approved and the taxpayer duly notified thereof. Since in this case, he argues, the tax credit of P221,033.00 was approved only on August 5, 1964, it could not be availed of in reduction of ESSOs earlier tax deficiency for the year 1960; as of that year, 1960, there was as yet no tax credit to speak of, which would reduce the deficiency tax liability for 1960. In support of his position, the Commissioner invokes the provisions of Section 51 of the Tax Code pertinently reading as follows:jgc:chanrobles.com.ph
"(c) Definition of deficiency. As used in this Chapter in respect of tax imposed by this Title, the term `deficiency means:chanrob1es virtual 1aw library
(1) The amount by which the tax Imposed by this Title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amount previously abated, credited, returned, or otherwise in respect of such tax; . . . x x x
(d) Interest on deficiency. Interest upon the amount determined as deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date the deficiency is assessed; Provided, That the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present provision regarding prescription to the contrary notwithstanding."cralaw virtua1aw library
The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960, the Government already had in its hands the sum of P221,033.00 representing excess payment. Having been paid and received by mistake, as petitioner Commissioner subsequently acknowledged, that sum unquestionably belonged to ESSO, and the Government had the obligation to return it to ESSO. That acknowledgment of the erroneous payment came some four (4) years afterward in nowise negates or detracts from its actuality. The obligation to return money mistakenly paid arises from the moment that payment is made, and not from the time that the payee admits the obligation to reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake, not from the payees confession of the mistake or recognition of the obligation to reimburse. In other words, since the amount of P221,033.00 belonging to ESSO was already in the hands of the Government as of July, 1960, although the latter hand not right whatever to the amount and indeed was bound to return it to ESSO, it was neither legally nor logically possible for ESSO thereafter to be considered a debtor of the Government in that amount of P221,033.00; and whatever other obligation ESSO might subsequently incur in favor of the Government would have to be reduced by that sum, in respect of which no interest could be charged. To interpret the words of the statute in such a manner as to subvert these truisms simply can not and should not be countenanced. "Nothing is better settled than that courts are not to give words a meaning which would lead to absurd or unreasonable consequences. That is a principle that goes back to In re Allen (2 Phil. 630) decided on October 29, 1903, where it was held that a literal interpretation is to be rejected if it would be unjust or lead to absurd results." 6 "Statutes should receive a sensible construction, suck as will give effect to the legislative intention and so as to avoid an unjust or absurd conclusion.
f.) Equitable Recoupment g.) Tax Amnesty Asia International vs CIR Facts: AIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in the importation of used motor vehicles and heavy equipment which it sells to the public through auction. On August 25, 2004, AIA received from the CIR a Formal PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 8
Letter of Demand, dated July 9, 2004, containing an assessment for deficiency value added tax (VAT) and excise tax in the amounts of P 102,535,520.00 and P 4,334,715.00, respectively, or a total amount of P 106,870,235.00, inclusive of penalties and interest, for auction sales conducted on February 5, 6, 7, and 8, 2004. AIA claimed that it filed a protest letter dated August 29, 2004 but the CIR failed to act on the protest, prompting AIA to file a petition for review before the CTA on June 20, 2005 AIA filed a Manifestation and Motion with Leave of the Honorable Court to Defer or Suspend Further Proceedings20rll on the ground that it availed of the Tax Amnesty Program under Republic Act 948021rll (RA 9480), otherwise known as the Tax Amnesty Act of 2007. On February 13, 2008, it submitted to the Court a Certification of Qualification22rll issued by the BIR on February 5, 2008 stating that AIA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480. Issue: ( in relation to the subject of exemption and exclusion) Whether or not AIA can avail the tax amnestry program under RA 9480. RULING: A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.23rll A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. In 2007, RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.25rll The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are disqualified under Section 8 thereof, to wit: Section 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act: (a) Withholding agents with respect to their withholding tax liabilities; (b) Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government; (c) Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act; (d) Those with pending cases filed in court involving violation of the Anti-Money Laundering Law; (e) Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and (f) Tax cases subject of final and executory judgment by the courts.(Emphasis supplied) The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax Amnesty Program because it is "deemed" a withholding agent for the deficiency taxes. This argument is untenable. The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is fallacious. Indirect taxes, like VAT and excise tax, are different from withholding taxes.
To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.26rll On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions27and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.28
The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special Economic Zone, should have availed of the tax amnesty granted under RA 9399 and not under RA 9480. This is also untenable. RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its coverage from availing of other tax amnesty programs available or enacted in futuro like RA 9480. More so, RA 9480 does not exclude from its coverage taxpayers operating within special economic zones. As long as it is within the bounds of the law, a taxpayer has the liberty to choose which tax amnesty program it wants to PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 9
avail. Lastly, the Court takes judicial notice of the "Certification of Qualification" issued by Eduardo A. Baluyut, BIR Revenue District Officer, stating that AlA "has availed and is qualified for Tax Amnesty for the Taxable Year 2005 and Prior Years" pursuant to RA 9480. In the absence of sufficient evidence proving that the certification was issued in excess of authority, the presumption that it was issued in the regular performance of the revenue district officer's official duty stands'
Philippine Banking Corporation vs CIR FACTS: Petitioner Philippine Banking Corp (now Global Business Bank) is a domestic corporation duly licensed as a banking institution. For the taxable years 1996 and 1997, petitioner offered its Special/Super Savings Deposit Account (SSDA) to its depositors. The SSDA is a form of a savings deposit evidenced by a passbook and earning a higher interest rate than a regular savings account. Petitioner believes that the SSDA is not subject to Documentary Stamp Tax (DST) under Section 180 of the 1977 National Internal Revenue Code (NIRC), as amended. On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent petitioner a Final Assessment Notice assessing deficiency DST based on the outstanding balances of its SSDA, including increments, in the total sum of P17,595,488.75 for 1996 and P47,767,756.24 for 1997. These assessments were based on the outstanding balances of the SSDA appearing in the schedule attached to petitioners audited financial statements for the taxable years 1996 and 1997. Petitioner maintains that the tax assessments are erroneous because Section 180 of the 1977 NIRC does not include deposits evidenced by a passbook among the enumeration of instruments subject to DST. Petitioner asserts that the language of the law is clear and requires no interpretation.[8] Section 180 of the 1977 NIRC, as amended,[9]provides: Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes, whether negotiable or non- negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: provided, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory note issued to secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this section. (Boldfacing supplied) Petitioner insists that the SSDA, being issued in the form of a passbook, cannot be construed as a certificate of deposit subject to DST under Section 180 of the 1977 NIRC. Petitioner explains that the SSDA is a necessary offshoot of the deregulated interest rate regime in bank deposits. Petitioner alleges that prior to the passage of Republic Act No. 9243[15] (RA 9243), there was no law subjecting SSDA to DST during the taxable years 1996 and 1997. The amendatory provision in RA 9243 now specifically includes certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date.*16+ Petitioner admits that with this new taxing clause, its SSDA is now subject to DST. However, the fact remains that this provision was non-existent during the taxable years 1996 and 1997 subject of the assessments in the present case.[17] Respondent, through the Office of the Solicitor General, contends that the SSDA is substantially the same and identical to that of a time deposit account because in order to avail of the SSDA, one has to deposit a minimum of P50,000 and this amount must be maintained for a required period of time to earn higher interest rates.[18] In a time deposit account, the minimum deposit requirement is P20,000 and this amount must be maintained for the agreed period to earn the agreed interest rate. If a time deposit is pre- terminated, a penalty will be imposed resulting in a lower interest income. In a regular savings account, the interest rate is fixed and there is no penalty imposed for as long as the required minimum balance is maintained. Thus, respondent asserts that the SSDA is a time deposit account, albeit in the guise of a regular savings account evidenced by a passbook.[19] Respondent explains that under Section 180 of the 1977 NIRC, certificates of deposits deriving interest are subject to PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 10
the payment of DST. Petitioners passbook evidencing its SSDA is considered a certificate of deposit, and being very similar to a time deposit account, it should be subject to the payment of DST.[20] On 24 May 2007, during the pendency of this case before this Court, Republic Act No. 9480 or An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2005 and Prior Years (RA 9480), lapsed into law. The pertinent provisions of RA 9480 are: Section 1. Coverage. There is hereby authorized and granted a tax amnesty which shall cover all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005: Provided, however, That the amnesty hereby authorized and granted shall not cover persons or cases enumerated under Section 8 hereof. x x x Sec. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty under Section 5 hereof, and have fully complied with all its conditions shall be entitled to the following immunities and privileges: 1. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years. x x x Sec. 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act: 1. Withholding agents with respect to their withholding tax liabilities; 2. Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government; 3. Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act; 4. Those with pending cases filed in court involving violation of the Anti-Money Laundering Law; 5. Those with pending criminal cases for tax evasion and other criminal offenses under Chapter II of Title X of the National Internal Revenue Code of 1997, as amended, and the felonies of frauds, illegal exactions and transactions, and malversation of public funds and property under Chapters III and IV of Title VII of the Revised Penal Code; and 6. Tax cases subject of final and executory judgment by the courts. (Emphasis supplied) The BIR also issued Revenue Memorandum Circular No. 69- 2007 (RMC 69-2007).[59] The pertinent portion provides: Q-32 May surviving or new corporations avail of the tax amnesty in behalf of the corporations absorbed or dissolved pursuant to a merger or consolidation that took effect prior to Taxable Year 2005? Can they avail of the Tax Amnesty? A-32 Yes, these companies can avail of the tax amnesty for purposes of obtaining tax clearances for the dissolved or absorbed corporations. (Emphasis supplied) On 21 September 2007, Metropolitan Bank and Trust Company (Metrobank), the surviving entity that absorbed petitioners banking business, filed a Tax Amnesty Return,*60+ paid the amnesty tax and fully complied with all the requirements[61] of the Tax Amnesty Program under RA 9480. Petitioner alleges that by virtue of this availment, petitioner is now deemed immune from the payment of taxes as well as additions thereto, and is statutorily discharged from paying all internal revenue tax liabilities for the taxable year 2005 and prior years. Petitioner contends that the availment includes all deficiency tax assessments of the BIR subject of this petition. ISSUE 1: WON petitioner is deemed immune from the payment of taxes? HELD 1: YES. A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violation of a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.[62] The DST is one of the taxes covered by the Tax Amnesty Program under RA 9480.[63] As discussed above, petitioner is clearly liable to pay the DST on its SSDA for the years 1996 and 1997. However, petitioner, as the absorbed corporation, can avail of the tax amnesty benefits granted to Metrobank. Records show that Metrobank, a qualified tax amnesty applicant,[64] has duly complied with the requirements enumerated in RA 9480, as implemented by DO 29-07 and RMC 19-2008.[65] Considering that the completion of these requirements shall be deemed full compliance with the tax amnesty program,[66] the law mandates that the taxpayer shall thereafter be immune from the payment of taxes, and additions thereto, as well as the appurtenant civil, criminal or administrative penalties under the NIRC of 1997, as PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 11
amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.[67] The BIRs inclusion of issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer as one of the exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically clear that the exceptions to the tax amnesty program include tax cases subject of final and executory judgment by the courts. The present case has not become final and executory when Metrobank availed of the tax amnesty program.
Banas vs CA FACTS: On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, P2,308,770.00. The Deed of Sale provided that upon the signing of the contract AYALA shall pay four P461,754.00. The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount of P205,224.00. In the succeeding years, until 1979, petitioner reported a uniform income of P230,877.00 as gain from sale of capital asset. In his 1980 income tax amnesty return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital asset for the year. On April 11, 1978, then Revenue Director Calaguio authorized examiners to examine the books and records of petitioner for the year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the entire profit should have been taxable in 1976 since the income was wholly derived in 1976. Examiners filed their audit report and declared a discrepancy of P2,095,915.00 in petitioner's 1976 net income. They recommended deficiency tax assessment P2,473,673.00. Meantime, Aquilino Larin succeeded Calaguio as Regional Director. After reviewing the examiners' report, Larin reduced deficiency tax assessment to P936,598.50, inclusive of surcharges and penalties for the year 1976. On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must be settled him immediately. On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to AYALA was on installment. On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner. On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of P41,729.81. On November 2, 1981, petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of P1,525.62. In both, petitioner did not recognize that his sale of land to AYALA was on cash basis. Reacting to the complaint for tax evasion petitioner filed with the RTC of Manila an action against respondents. He claimed that the filing of criminal complaints against him for violation of tax laws were improper because he had already availed of two tax amnesty decrees, Presidential Decree Nos. 1740 and 1840. ISSUE: Whether P.D. 1740 and 1840 granting tax amnesties granted petitioner immunity from tax suits. NO RULING: P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT. Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for any or all of the taxable years 1974 to 1979, had failed to file a return is hereby, allowed to file a return for each of the aforesaid taxable years and accurately declare therein the true and correct income, deductions and exemptions and pay the income tax due per return. Likewise, any individual who filed a false or fraudulent return for any taxable year in the period mentioned above may amend his return and pay the correct amount of tax due after deducting the taxes already paid, if any, in the original declaration. (emphasis ours) Sec. 5. Immunity from Penalties. Any individual who voluntarily files a return under this Decree and pays the income tax due thereon shall be immune from the penalties, civil or criminal, under the National Internal Revenue Code arising from failure to pay the correct income tax with respect to the taxable years from which an amended return was filed or for which an original return was filed in cases where no return has been filed for any of the taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in cases where the amount of net taxable income declared under this Decree is understated to the extent of 25% or more of the correct net taxable income. (emphasis ours)
P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH. Sec. 1. Coverage. In case of voluntary disclosure of previously untaxed income and/or wealth such as earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever, realized here or abroad, by any individual taxpayer, which are taxable under the National Internal Revenue Code, as amended, the assessment and collection of PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 12
all internal revenue taxes, including the increments or penalties on account of non-payment, as well as all civil, criminal or administrative liabilities arising from or incident thereto under the National Internal Revenue Code, are hereby condoned provided that the individual taxpayer shall pay. (emphasis ours) . . . Sec. 2. Conditions for Immunity. The immunity granted under Section one of this Decree shall apply only under the following conditions: a) Such previously untaxed income and/or wealth must have been earned or realized in any of the years 1974 to 1980; b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax due thereon; c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per taxable year; and d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as required under Section 6 hereof. (emphasis ours)
It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he discounted the promissory note covering the future installments. The discounting seems questionable because ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts a certain percentage from the principal value as its compensation. Here, the discounting was done by the buyer.
On July 2, 1981, two weeks after the filing of the tax evasion complaint against him by respondent Larin on June 17, 1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return for the years 1974 - 1979 was filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal office was located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment. He did not amend his income tax return. He did not pay the tax which was considerably increased by the income derived from the discounting. He did not meet the twin requirements of P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon.
Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his previously untaxed income and must have paid the corresponding tax on such previously untaxed income.
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing authority.11 Hence, on this matter, it is our view that petitioner's claim of immunity from prosecution under the shield of availing tax amnesty is untenable.
IV. CONSTRUCTION AND INTERPRETATION OF TAX LAWS a.) Tax laws CIR vs Fortune Tobacco NATURE: After much wrangling in the CTA and the CA, Fortune Tobacco was granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition. FACTS: CAG.R. SP No. 80675 Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at Fortune Avenue, Parang, Marikina City. Petitioner is the manufacturer/producer of various cigarette brands. Immediately prior to January 1, 1997, the cigarette brands of Fortune Tobacco were subject to ad valorem tax pursuant to then Section 142 of the Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax system was made and subjecting the cigarette brands to specific tax under [S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted thus: Section 145. Cigars and Cigarettes- (A) Cigars. There shall be levied, assessed and collected on PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 13
cigars a tax of One peso (P1.00) per cigar. (B) Cigarettes packed by hand. There shall be levied, assessesed and collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per pack. (C) Cigarettes packed by machine. There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below: (1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve (P12.00) per pack; (2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall beEight Pesos (P8.00) per pack. (3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack; (4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack; Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand. The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, that in cases were (sic) the excise tax rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998. The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000. New brands shall be classified according to their current net retail price. For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside Metro [M]anila, the net retail price shall mean the price at which the cigarette is sold in five (5) major supermarkets in the region excluding the amount intended to cover the applicable excise tax and the value-added tax. The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex D, shall remain in force until revised by Congress. Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand. To implement the provisions for a twelve percent (12%) increase of excise tax on, among others, cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance, upon recommendation of the respondent Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99, dated December 16, 1999, which provides the increase on the applicable tax rates on cigar and cigarettes Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, (t)hat the new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000. For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands manufactured and removed in the total amounts of P585,705,250.00. CA G.R. SP No. 83165 The petition contains essentially similar facts, except that the said case questions the CTAs December 4, 2003 decision in CTA Case No. 6612 granting respondents claim for refund of the amount of P355,385,920.00 representing erroneously or illegally collected specific taxes covering the period January 1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration thereof. This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue Regulation 17-99. ON TAX LAWS ISSUE (1): Whether or not the last paragraph of Section 1 of Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of Republic Act [No.] 8240, now incorporated in Section 145 of the Tax Code of 1997. HELD: PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 14
Section 145 states that during the transition period, i.e., within the next three (3) years from the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue collection starting from this period may turn out to be lower than that collected prior to this date. By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%a situation not supported by the plain wording of Section 145 of the Tax Code. As we have previously declared, rule-making power must be confined to details for regulating the mode or proceedings in order to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony with the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic law. The OSGs argument that by 1 January 2000, the excise tax on cigarettes should be the higher tax imposed under the specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify what is clearly an impermissible incursion into the limits of administrative legislation. Such an interpretation is not supported by the clear language of the law and is obviously only meant to validate the OSGs thesis that Section 145 of the Tax Code is ambiguous and admits of several interpretations. The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The Commissioner cannot seek refuge in his claim that the purpose behind the passage of the Tax Code is to generate additional revenues for the government. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. However, as borne by the legislative record, the shift from the ad valorem system to the specific tax system is likewise meant to promote fair competition among the players in the industries concerned, to ensure an equitable distribution of the tax burden and to simplify tax administration by classifying cigarettes, among others, into high, medium and low-priced based on their net retail price and accordingly graduating tax rates.
b.) Exemption and Exclusion Panasonic vs CIR
FACTS: Petitioner Panasonic Communications Imaging Corporation of the Philippines (Panasonic) is registered with the Board of Investments as a preferred pioneer enterprise under the Omnibus Investments Code of 1987. It is also a registered value-added tax (VAT) enterprise. Believing that the export sales from April 1 to September 30 1998 and from Oct 1 1998 to march 31, 1999, were zero-rated for VAT under Section 106(A)(2)(a)(1) of the 1997 National Internal Revenue Code as amended by Republic Act (R.A.) 8424 (1997 NIRC), Panasonic paid input VAT of P4,980,254.26 and P4,388,228.14 for the two periods or a total ofP9,368,482.40 attributable to its zero-rated sales.
Claiming that the input VAT it paid remained unutilized or unapplied, Panasonic filed two separate applications for refund or tax credit of what it paid. Panasonic filed on December 16, 1999 a petition for review with the CTA, averring the inaction of the respondent Commissioner of Internal Revenue (CIR) on its applications.
CTA denied the petition for lack of merit. While petitioner Panasonics export sales were subject to 0% VAT under Section 106(A)(2)(a)(1) of the 1997 NIRC, the same did not qualify for zero-rating because the word zero-rated was not printed on Panasonics export invoices. This omission, said the First Division, violates the invoicing requirements of Section 4.108-1 of Revenue Regulations (RR) 7-95.
Panasonic appealed to the CTA en banc. CTA en banc upheld the First Divisions decision and resolution and dismissed the petition. Panasonic filed a MFR but this was denied. PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 15
ISSUE: Whether or not the CTA en banc correctly denied petitioner Panasonics claim for refund of the VAT it paid as a zero-rated taxpayer on the ground that its sales invoices did not state on their faces that its sales were zero-rated. YES THE CTA CORRECTLY DENIED.
HELD: The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports.
Related to topic of Exemption: For the effective zero rating of such transactions, however, the taxpayer has to be VAT-registered and must comply with invoicing requirements. Interpreting these requirements, respondent CIR ruled that under Revenue Memorandum Circular (RMC) 42-2003, the taxpayers failure to comply with invoicing requirements will result in the disallowance of his claim for refund. RMC 42-2003 provides:
A-13. Failure by the supplier to comply with the invoicing requirements on the documents supporting the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-claimant.
If the claim for refund/TCC is based on the existence of zero- rated sales by the taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g., failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied considering that the invoice it is issuing to its customers does not depict its being a VAT-registered taxpayer whose sales are classified as zero- rated sales. Nonetheless, this treatment is without prejudice to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer.
Petitioner points out that in requiring the printing on its sales invoices of the word zero-rated, the Secretary of Finance unduly expanded, amended, and modified by a mere regulation (Section 4.108-1 of RR 7-95) the letter and spirit of Sections 113 and 237 of the 1997 NIRC, prior to their amendment by R.A. 9337. Petitioner Panasonic points out that Sections 113 and 237 did not require the inclusion of the word zero- rated for zero-rated sales covered by its receipts or invoices. The BIR incorporated this requirement only after the enactment of R.A. 9337 on November 1, 2005, a law that did not yet exist at the time it issued its invoices.
But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule that applied was Section 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on December 9, 1995 and took effect on January 1, 1996. It already required the printing of the word zero-rated on the invoices covering zero-rated sales. When R.A. 9337 amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code. This conversion from regulation to law did not diminish the binding force of such regulation with respect to acts committed prior to the enactment of that law.
The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. As aptly explained by the CTAs First Division, the appearance of the word zero-rated on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect.
Further, the printing of the word zero-rated on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund.
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This Court held that, since the BIR authority to print is not one of the items required to be indicated on the invoices or receipts, the BIR erred in denying the claim for refund. Here, however, the ground for denial of petitioner Panasonics claim for tax refundthe absence of the word zero-rated on its invoicesis one which is specifically and precisely included in the above enumeration. Consequently, the BIR correctly denied Panasonics claim for tax refund.
This Court will not set aside lightly the conclusions reached by the CTA which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority. Besides, statutes that grant tax exemptions are construed strictissimi jurisagainst the taxpayer and liberally in favor of the taxing authority. Tax refunds in relation to the VAT are in the nature of such exemptions. The general rule is that claimants of tax refunds bear the burden of proving the factual basis of their claims. Taxes are the lifeblood of the nation. Therefore, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government.
CIR vs Fortune Tobacco ON EXEMPTON AND EXCLUSION ISSUE (2): Whether or not petitioner is entitled to a refund of P35,651,410.00 as alleged overpaid excise tax for the month of January 2000. The Commissioners contention that a tax refund partakes the nature of a tax exemption does not apply to the tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the former is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here. Quite the contrary, Fortune Tobaccos claim for refund is premised on its erroneous payment of the tax, or better still the governments exaction in the absence of a law. Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken. The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention. The rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain to be mistaken. Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected. What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import. As burdens, taxes should not be unduly exacted nor assumed beyond the plain meaning of the tax laws. Commissioner vs Central Luzon Facts: "Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style Mercury Drug. "From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to R.A.7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00. "On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. "On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with R.A. 7432. Unable to obtain affirmative response from PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 17
petitioner, respondent elevated its claim to the CTA via a Petition for Review. The Tax Court rendered a decision dismissing respondents petition for lack of merit. Respondent lodged a Motion for Reconsideration. The CTA, in its assailed resolution, granted respondents motion for reconsideration and ordered herein petitioner to issue Tax Credit Certificate in favor of respondent. The CA affirmed in toto the resolution of the CTA ordering petitioner to issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that RA 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the taking of private property for public use. Issue: WON respondent, despite incurring a net loss, may still claim the 20 percent sales discount as tax credit? Held: Section 4a) of RA 743210 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any private establishment in the country. The latter may then claim the cost of the discount as a tax credit.12 But can such credit be claimed, even though an establishment operates at a loss? We answer in the affirmative. Although the term is not specifically defined in our Tax Code,13 tax credit generally refers to an amount that is "subtracted directly from ones total tax liability.It is an "allowance against the tax itself" or "a deduction from what is owed by a taxpayer to the government. Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits. Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a subtraction "from income for tax purposes, or an amount that is "allowed by law to reduce income prior to [the] application of the tax rate to compute the amount of tax which is due. An example of a tax deduction is any of the allowable deductions enumerated in Section 3420 of the Tax Code. A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income tax that is determined after applying the corresponding tax rates to taxable income.21 Atax deduction, on the other, reduces the income that is subject to tax22 in order to arrive at taxable income.23 To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before.
Sections 2.i and 4 of RR 2-94 are erroneous as it deny the exercise by the State of its power of eminent domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for public use.
The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public interest, public benefit, public welfare, and public convenience.78 The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit.
As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction in its revenues.
Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain.80Tax measures are but "enforced contributions exacted on pain of penal sanctions"81 and "clearly imposed for apublic purpose."82 In recent years, the power to tax has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. Thus, the 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.
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Asia International Auctioneers FACTS: AIA is a duly organized corporation operating within the Subic Special Economic Zone. It is engaged in the importation of used motor vehicles and heavy equipment which it sells to the public through auction.4 AIA received from the CIR a Formal Letter of Demand, containing an assessment for deficiency VAT and excise tax for a total amount of P 106,870,235.00 AIA claimed that it filed a protest letter through registered mail. The court of tax appeals ruled that there was no sufficient evidence to prove the receipt of the protest letter. Hence this petition. AIA filed a Manifestation and Motion with Leave of the Honorable Court to Defer or Suspend Further Proceedings20 on the ground that it availed of the Tax Amnesty Program under Republic Act 948021 (RA 9480), otherwise known as the Tax Amnesty Act of 2007. Issue: WON strict construction against the taxpayer in tax exemption also applies in tax amnesty. YES (gamay lang kayo ang ako nakita na discussion sa exemption and exclusion) WON AIA is qualified to avail of the tax amnesty program? YES Held: A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violating a tax law. It partakes of an absolute waiver by the government of its right to collect what is due it and to give tax evaders who wish to relent a chance to start with a clean slate.23
A tax amnesty, much like a tax exemption, is never favored or presumed in law. The grant of a tax amnesty, similar to a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority.24 RA 9480 took effect granting a tax amnesty to qualified taxpayers for all national internal revenue taxes for the taxable year 2005 and prior years, with or without assessments duly issued therefor, that have remained unpaid as of December 31, 2005.25
The Tax Amnesty Program under RA 9480 may be availed of by any person except those who are disqualified under Section 8 thereof, to wit:
Section 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to the following persons or cases existing as of the effectivity of this Act: (a) Withholding agents with respect to their withholding tax liabilities; XXXXXXX
The CIR contends that AIA is disqualified under Section 8(a) of RA 9480 from availing itself of the Tax Amnesty Program because it is "deemed" a withholding agent for the deficiency taxes. This argument is untenable. The CIR did not assess AIA as a withholding agent that failed to withhold or remit the deficiency VAT and excise tax to the BIR under relevant provisions of the Tax Code. Hence, the argument that AIA is "deemed" a withholding agent for these deficiency taxes is fallacious.
Indirect taxes, like VAT and excise tax, are different from withholding taxes.To distinguish, in indirect taxes, the incidence of taxation falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it.26 On the other hand, in case of withholding taxes, the incidence and burden of taxation fall on the same entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who merely collects, by withholding, the tax due from income payments to entities arising from certain transactions and remits the same to the government. Due to this difference, the deficiency VAT and excise tax cannot be "deemed" as withholding taxes merely because they constitute indirect taxes. Moreover, records support the conclusion that AIA was assessed not as a withholding agent but, as the one directly liable for the said deficiency taxes.28
The CIR also argues that AIA, being an accredited investor/taxpayer situated at the Subic Special Economic Zone, should have availed of the tax amnesty granted under RA 939929 and not under RA 9480. This is also untenable. RA 9399 was passed prior to the passage of RA 9480. RA 9399 does not preclude taxpayers within its coverage from availing of other tax amnesty programs available or enacted in futuro like RA 9480. (Petition was DENIED for being MOOT and ACADEMIC in view of AIAs availment of the Tax Amnesty Program under RA 9480)
c.) Rules and Regulations Lincoln Philippine Life Insurance FACTS: Petitioner, now the Jardine-CMG Life Insurance PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 19
Company. In 1984, it issued 50,000 shares of stock as stock dividends, with a par value of P100 or a total of P5 million. Petitioner paid documentary stamp taxes on each certificate on the basis of its par value. The pertinent provision of law, as it stood at the time of the questioned transaction, reads as follows: SEC. 224. Stamp tax on original issues of certificates of stock. -- On every original issue, whether on organization, reorganization or for any lawful purpose, of certificates of stock by any association, company or corporation, there shall be collected a documentary stamp tax of one peso and ten centavos on each two hundred pesos, or fractional part thereof, of the par value of such certificates: Provided, That in the case of the original issue of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration received by the association, company, or corporation for the issuance of such stock, and in the case of stock dividends on the actual value represented by each share. ]
CIRs Interpretation: book value of the shares, amounting to P19,307,500.00, should be used as basis for determining the amount of the documentary stamp tax. Accordingly, respondent Internal Revenue Commissioner issued a deficiency documentary stamp tax assessment in the amount of P78,991.25 in excess of the par value of the stock dividends. CTA ruled that the amount of the documentary stamp tax should be based on the par value stated on each certificate of stock. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn. So, CIR appealed to the CA which reversed the CTAs decision holding that in assessing the tax in question, the basis should be the actual value represented by the subject shares on the assumption that stock dividends, being a distinct class of shares, are not subject to the qualification in the law as to the type of certificate of stock used (with or without par value). The appellate court, therefore, ordered: ISSUE: WON in determining the amount to be paid as documentary stamp tax, it is the par value of the certificates of stock or the book value of the shares which should be considered? PAR VALUE HELD: First. There are three (3) classes of stocks referred to in Section 224 (now 175) of the Internal Revenue Code: (a) Certificate of Stocks with par value, (b) Certificate of Stock with no par value and (c) stock dividends. The first two (2) mentioned are original issuances of the corporation, association or company while the third ones are taken by the corporation, association or company out of or from their unissued shares of stock, hence are also originals. Undoubtedly, all the three classifications are subject to the documentary stamp tax. Conformably, in the case of stock certificates with par value, the documentary stamp tax is based on the par value of the stock; for stock certificates without par value, the same tax is computed from the actual consideration received by the corporation, association or company; but for stock dividends, documentary stamp tax is to be paid on the actual value represented by each share. Since in dividends, no consideration is technically received by the corporation, petitioner is correct in basing the assessment on the book value thereof Indeed, a reading of the then 224 of the NIRC, starting from its heading, will show that the documentary stamp tax is not levied upon the shares of stock per se but rather on the privilege of issuing certificates of stock. A stock certificate is merely evidence of a share of stock and not the share itself. Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporations books. [6] Thus, it is clear that stock dividends are shares of stock and not certificates of stock which merely represent them. There is, therefore, no reason for determining the actual value of such dividends for purposes of the documentary stamp tax if the certificates representing them indicate a par value. The Solicitor General himself says that, based on the then 224, there are only two bases for determining the amount of the documentary stamp tax:, either the par value, or the actual consideration or actual value. It specifies in the first part that the basis for the imposition of the documentary stamp tax on shares of stocks belonging to the first category, discussed in the early part of this comment, shall be the face value. In contradistinction, the provision specifies in the proviso that for the second and third categories, the basis for the tax shall not be the face value. Rather, the basis is either the actual consideration received by the corporation for the share or the actual value of the share. Second. It is error for the Solicitor General to contend that, under the then 224 of the NIRC, the basis for assessment is the actual value of the business transaction that is the source of the original issuance of stock certificates. To the contrary, the documentary stamp tax here is not levied upon the specific transaction which gives rise to such original issuance but on the privilege of issuing certificates of stock. A documentary stamp tax is PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 20
in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. ONLY RELATED TO THE CASE: Third. Settled is the rule that, in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. This is because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. That such strict construction is necessary in this case is evidenced by the change in the subject provision as presently worded, which now expressly levies the said tax on shares of stock as against the privilege of issuing certificates of stock as formerly provided: xxx there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: xxx
d.) Other Gulf Air Company vs CIR
FACTS: Petitioner Gulf Air Company Philippine Branch (GF) is a branch of Gulf Air Company, a foreign corporation duly organized in accordance with the laws of the Kingdom of Bahrain.3 On October 25, 2001, GF availed of the Voluntary Assessment Program of the Bureau of Internal Revenue (BIR) under Revenue Regulations 8-2001.4GF also made a claim for refund of percentage taxes for the first, second and fourth quarters of 2000. In connection with this, a letter of authority was issued by the BIR authorizing its revenue officers to examine GFs books of accounts and other records to verify its claim.
Thereafter, GF received its Preliminary Assessment Notice on November 4, 2003 for deficiency percentage tax amounting to P 32,745,141.93. On the same day, GF also received a letter denying its claim for tax credit or refund of excess percentage tax remittance. NOW, GF filed a petition with the CTA.9 On March 21, 2007, the Second Division of the CTA dismissed the petition, finding that Revenue Regulations No. 6-66 was the applicable rule providing that gross receipts should be computed based on the cost of the single one-way fare as approved by the Civil Aeronautics Board (CAB). In addition, it noted that GF failed to include in its gross receipts the special commissions on passengers and cargo. Finally, it ruled that Revenue Regulations No. 15-2002, allowing the use of the net net rate in determining the gross receipts, could not be given any or a retroactive effect.
GFS CONTENTION: GF questions the validity of Revenue Regulations No. 6-66, claiming that it is not a correct interpretation of Section 118(A) of the NIRC, and insisting that the gross receipts should be based on the "net net" amount the amount actually received, derived, collected, and realized by the petitioner from passengers, cargo and excess baggage.
GF also insists that its construction of "gross receipts" to mean the "net net" amount actually received, rather than the CAB approved rates as mandated by Revenue Regulations No. 6-66, has been validated by the issuance of Revenue Regulations No. 15-2002 which expressly superseded the former.
ISSUE: whether Revenue Regulations No. 6-66 was the applicable rule providing that gross receipts should be computed based on the cost of the single one-way fare as approved by the Civil Aeronautics Board (CAB). YES
RULING: There is no doubt that prior to the issuance of Revenue Regulations No. 15-2002 which became effective on October 26, 2002, the prevailing rule then for the purpose of computing common carriers tax was Revenue Regulations No. 6-66. While the petitioners interpretation has been vindicated by the new rules which compute gross revenues based on the actual amount received by the airline company as reflected on the plane ticket, this does not change the fact that during the relevant taxable period involved in this case, it was Revenue Regulations No. 6-66 that was in effect. Tax laws, including rules and regulations, operate prospectively unless otherwise legislatively intended by express terms or by necessary implication.
Although GF does not dispute that Revenue Regulations No. 6-66 was the applicable rule covering the taxable period involved, it puts in issue the wisdom of the said rule as it pertains to the definition of gross receipts. GF is reminded that rules and regulations interpreting the tax code and promulgated by the Secretary of Finance, who has been granted the authority to do so by Section 244 of the PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 21
NIRC, "deserve to be given weight and respect by the courts in view of the rule-making authority given to those who formulate them and their specific expertise in their respective fields."
As such, absent any showing that Revenue Regulations No. 6- 66 is inconsistent with the provisions of the NIRC, its stipulations shall be upheld and applied accordingly. This is in keeping with our primary duty of interpreting and applying the law. Regardless of our reservations as to the wisdom or the perceived ill-effects of a particular legislative enactment, the court is without authority to modify the same as it is the exclusive province of the law-making body to do so
Moreover, the validity of the questioned rules can be sustained by the application of the principle of legislative approval by re-enactment. Under the aforementioned legal concept, "where a statute is susceptible of the meaning placed upon it by a ruling of the government agency charged with its enforcement and the Legislature thereafter re-enacts the provisions without substantial change, such action is to some extent confirmatory that the ruling carries out the legislative purpose."23 Thus, there is tacit approval of a prior executive construction of a statute which was re-enacted with no substantial changes.
In this case, Revenue Regulations No. 6-66 was promulgated to enforce the provisions of Title V, Chapter I (Tax on Business) of Commonwealth Act No. 466 (National Internal Revenue Code of 1939), under which Section 192, pertaining to the common carriers tax, can be found: Sec. 192. Percentage tax on carriers and keepers of garages. Keepers of garages, transportation contractors, persons who transport passenger or freight for hire, and common carriers by land, air, or water, except owners of bancas, and owners of animal-drawn two-wheeled vehicles, shall pay a tax equivalent to two per centum of their monthly gross receipts. This provision has, over the decades, been substantially reproduced with every amendment of the NIRC, up until its recent reincarnation in Section 118 of the NIRC.
The legislature is presumed to have full knowledge of the existing revenue regulations interpreting the aforequoted provision of law and, with its subsequent substantial re- enactment, there is a presumption that the lawmakers have approved and confirmed the rules in question as carrying out the legislative purpose.25 Hence, it can be concluded that with the continued duplication of the NIRC provision on common carriers tax, the law-making body was aware of the existence of Revenue Regulations No. 6-66 and impliedly endorsed its interpretation of the NIRC and its definition of gross receipts.
On a final note, it is incumbent on the Court to emphasize that tax refunds partake the nature of tax exemptions which are a derogation of the power of taxation of the State. Consequently, they are construed strictly against a taxpayer and liberally in favor of the State such that he who claims a refund or exemption must justify it by words too plain to be mistaken and too categorical to be misinterpreted. Regrettably, the petitioner in the case at bench failed to unequivocally prove that it is entitled to a refund. The SC affirmed the resolution of the CTA. Consequently, the definition of "gross receipts," for purposes of computing the 3% Percentage Tax under Section 118(A) of the 1997 National Internal Revenue Code (NIRC), should include special commissions on passengers and special commissions on cargo based on the rates approved by the CAB.13 CIR vs Filinvest Development Corp FACTS: The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding company which also owned 67.42% of the outstanding shares of Filinvest Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange with FLI whereby the former both transferred in favor of the latter parcels of land appraised at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate development of medium-rise residential and commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI. On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue (BIR) to the effect that no gain or loss should be recognized in the aforesaid transfer of real properties. Acting on the request, the BIR issued Ruling No. S- 34-046-97 dated 3 February 1997, finding that the exchange is among those contemplated under Section 34 (c) (2) of the old National Internal Revenue Code (NIRC)[4] which provides that (n)o gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for a stock in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation." With the BIRs reiteration of the foregoing ruling upon the 10 February 1997 request for clarification filed by FLI, the latter, together with FDC and FAI, complied with all the requirements imposed in the ruling. On various dates during the years 1996 and 1997, in the meantime, FDC also extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).[8] Duly evidenced by instructional letters as well as cash and journal vouchers, said cash advances amounted toP2,557,213,942.60 in 1996[9] and PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 22
P3,360,889,677.48 in 1997. On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to pay deficiency income and documentary stamp taxes, plus interests and compromise penalties, covered by the following Assessment Notices, viz.: (a) Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in the sum of P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for deficiency documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 for 1997. The foregoing deficiency taxes were assessed on the taxable gain supposedly realized by FDC from the Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the Shareholders Agreement FDC executed with RHPL as well as the arms-length interest rate and documentary stamp taxes imposable on the advances FDC extended to its affiliates. On 3 January 2000, FAI similarly received from the BIR a Formal Letter of Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the year 1997. Covered by Assessment Notice No. SP-INC-97-0027-2000, said deficiency tax was also assessed on the taxable gain purportedly realized by FAI from the Deed of Exchange it executed with FDC and FLI. On 26 January 2000 or within the reglementary period of thirty (30) days from notice of the assessment, both FDC and FAI filed their respective requests for reconsideration/protest, on the ground that the deficiency income and documentary stamp taxes assessed by the BIR were bereft of factual and legal basis. The case was now elevated to the CTA. The CTA went on to render the Decision dated 10 September 2002 which, with the exception of the deficiency income tax on the interest income FDC supposedly realized from the advances it extended in favor of its affiliates, cancelled the rest of deficiency income and documentary stamp taxes assessed against FDC and FAI for the years 1996 and 1997, thus: WHEREFORE, in view of all the foregoing, the court finds the instant petition partly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary stamp tax on FDC for taxable years 1996 and 1997, respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition, petitioner is also ORDERED to PAY 20% delinquency interest computed from February 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the Tax Code. Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the petition for review. Calling attention to the fact that the cash advances it extended to its affiliates were interest-free in the absence of the express stipulation on interest required under Article 1956 of the Civil Code, FDC questioned the imposition of an arm's-length interest rate thereon on the ground, among others, that the CIR's authority under Section 43 of the NIRC: (a) does not include the power to impute imaginary interest on said transactions; (b) is directed only against controlled taxpayers and not against mother or holding corporations; and, (c) can only be invoked in cases of understatement of taxable net income or evident tax evasion. ISSUE: WON theoretical interests can be imputed on the advances FDC extended to its affiliates HELD: NO. Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business. In amplification of the equivalent provision[39] under Commonwealth Act No. 466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as follows: Determination of the taxable net income of controlled taxpayer. (A) DEFINITIONS. When used in this section XXX (3) The term controlled includes any kind of control, direct or indirect, whether legally enforceable, and however exercisable or exercised. It is the reality of the control which is decisive, not its form or mode of exercise. A presumption of control arises if income or deductions have been arbitrarily shifted. (4) The term controlled taxpayer means any one of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests. XXX (C) APPLICATION Transactions between controlled taxpayer and another will be subjected to special scrutiny to ascertain whether the common control is being used to reduce, avoid PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 23
or escape taxes. In determining the true net income of a controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce or avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arms length with another uncontrolled taxpayer. As may be gleaned from the definitions of the terms controlled and "controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as cash advances to its said affiliates for the purpose of providing them financial assistance for their operational and capital expenditures seemingly indicate that the situation sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or allocate gross income or deductions between or among controlled taxpayers may be likewise exercised whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to prevent evasion of taxes. Despite the broad parameters provided, however, we find that the CIR's powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC, after all, the term gross income is understood to mean all income from whatever source derived, including, but not limited to the following items: compensation for services, including fees, commissions, and similar items; gross income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the gross income of general professional partnership. While it has been held that the phrase "from whatever source derived" indicates a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, the term "income" has been variously interpreted to mean "cash received or its equivalent", "the amount of money coming to a person within a specific time" or "something distinct from principal or capital." Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. Our circumspect perusal of the record yielded no evidence of actual or possible showing that the advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from commercial banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances the former provided its affiliates. Even if we were, therefore, to accord precipitate credulity to the CIR's bare assertion that FDC had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself.
V. DEFINITION, NATURE, CHARACTERISTICS OF TAX a.) Requisites of a valid Tax b.) Kinds of Tax i. As to object ii. As to burden or incidence CIR vs PLDT Facts: PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a telecommunications PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 24
system throughout the Philippines. For equipment, machineries and spare parts it imported for its business on different dates from October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a) compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT). On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax exemption privilege under Section 12 of R.A. 7082, which reads: Sec. 12. The grantee shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis supplied).
Responding, the BIR issued on April 19, 1994 Ruling No. UN- 140-94,[3] pertinently reading, as follows: PLDT shall be subject only to the following taxes, to wit: xxx xxx xxx 7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings thereof. xxx xxx xxx The in lieu of all taxes provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its importations of equipment, machineries and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly made liable. xxx xxx xxx In view thereof, this Office hereby holds that PLDT, is exempt from VAT on its importation of equipment, machineries and spare parts needed in its franchise operations. Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim[4] for tax credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying in connection with its importation of various equipment, machineries and spare parts needed for its operations. With its claim not having been acted upon by the BIR, and obviously to forestall the running of the prescriptive period therefor, PLDT filed with the CTA a petition for review,[5] therein seeking a refund of, or the issuance of a tax credit certificate in, the amount of P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. The BIR Commissioner submits that the exempting in lieu of all taxes clause covers direct taxes only, adding that for indirect taxes to be included in the exemption, the intention to include must be specific and unmistakable. He thus faults the Court of Appeals for erroneously declaring PLDT exempt from payment of VAT and other indirect taxes on its importations. To the Commissioner, PLDTs claimed entitlement to tax refund/credit is without basis inasmuch as the 3% franchise tax being imposed on PLDT is not a substitute for or in lieu of indirect taxes. Issue: whether or not PLDT, given the tax component of its franchise, is exempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations. NO! Ruling: Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax. In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them;[19] they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in.[20] On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.[21] Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 25
ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered. To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.[22] Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services, is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or end-user of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.[23] There can be no serious argument that PLDT, vis--vis its payment of internal revenue taxes on its importations in question, is effectively claiming exemption from taxes not falling under the category of direct taxes. The claim covers VAT, advance sales tax and compensating tax. The NIRC classifies VAT as an indirect tax the amount of [which] may be shifted or passed on to the buyer, transferee or lessee of the goods.*24+ As aptly pointed out by Judge Amancio Q. Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing articles. It is not a tax on the franchise of a business enterprise or on its earnings. It is imposed on all taxpayers who import goods (unless such importation falls under the category of an exempt transaction under Sec. 109 of the Revenue Code) whether or not the goods will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on importation replaces the advance sales tax payable by regular importers who import articles for sale or as raw materials in the manufacture of finished articles for sale.[25] Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax or, to borrow from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue,*26+ lay the economic burden of the tax, on the purchaser, by subsequently adding the tax to the selling price of the imported article or finished product. Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not.[27] The rationale for compensating tax is to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries.[28] It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke ones exemption privilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods he purchased.[29] Hence, it is important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable.[30] Time and again, the Court has stated that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.[31] To him, therefore, who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted.[32] As may be noted, the clause in lieu of all taxes in Section 12 of RA 7082 is immediately followed by the limiting or qualifying clause on this franchise or earnings thereof, suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to PLDTs franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDTs franchise or earnings, are outside the purview of the in lieu provision. It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. When claimed, it must be strictly construed against the taxpayer who must prove that he falls under the exception. And, if an exemption is found to exist, it must not be enlarged by construction, since the reasonable presumption is that the state has granted in express terms all it intended to grant at all, and that, unless the privilege is limited to the very terms of the statute the favor would be extended beyond dispute in ordinary cases.[39] All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. PLDT has not shown its eligibility for the desired exemption. None should be granted.
iii. As to Tax rates iv. As to purposes v. As to scope or Authority vi. As to graduation PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 26
c.) Tax v Other Exactions i. Tariff ii. Toll Diaz vs Secretary of Finance
May toll fees collected by tollway operators be subjected to value- added tax? FACTS: Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for declaratory relief[1] assailing the validity of the impending imposition of value- added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators. They claim that since the VAT would result in increased toll fees, they have an interest as regular users of tollways in stopping the BIR action. Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users tax, not a sale of services; that to impose VAT on toll fees would amount to a tax on public service; On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the implementation of the VAT. The Court required the government, represented by respondents Cesar V. Purisima, Secretary of the Department of Finance, and Kim S. Jacinto-Henares, Commissioner of Internal Revenue, to comment on the petition within 10 days from notice.[2] Later, the Court issued another resolution treating the petition as one for prohibition.[3] On August 23, 2010 the Office of the Solicitor General filed the governments comment.*4+ The government avers that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway operations, except where the law provides otherwise; that the Court should seek the meaning and intent of the law from the words used in the statute; and that the imposition of VAT on tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.[5] Finally, the government contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using the tollways. In their reply*6+ to the governments comment, petitioners point out that tollway operators cannot be regarded as franchise grantees under the NIRC since they do not hold legislative franchises. Further, the BIR intends to collect the VAT by rounding off the toll rate and putting any excess collection in an escrow account. But this would be illegal since only the Congress can modify VAT rates and authorize its disbursement. Finally, BIR Revenue Memorandum Circular 63-2010 (BIR RMC 63-2010), which directs toll companies to record an accumulated input VAT of zero balance in their books as of August 16, 2010, contravenes Section 111 of the NIRC which grants entities that first become liable to VAT a transitional input tax credit of 2% on beginning inventory. For this reason, the VAT on toll fees cannot be implemented. ISSUE; Whether or not the imposition of VAT on tollway operators a) amounts to a tax on tax and not a tax on services; b) will impair the tollway operators right to a reasonable return of investment under their TOAs RULING: Petitioners argue that a toll fee is a users tax and to impose VAT on toll fees is tantamount to taxing a tax.[21] Actually, petitioners base this argument on the discussion in Manila International Airport Authority (MIAA) v. Court of Appeals. Petitioners assume that what the Court said in MIAA v. CA, equating terminal fees to a users tax must also pertain to tollway fees. But the main issue in the MIAA case was whether or not Paraaque City could sell airport lands and buildings under MIAA administration at public auction to satisfy unpaid real estate taxes. Since local governments have no power to tax the national government, the Court held that the City could not proceed with the auction sale. MIAA forms part of the national government although not integrated in the department framework.*24+ Thus, its airport lands and buildings are properties of public dominion beyond the commerce of man under Article 420(1)[25] of the Civil Code and could not be sold at public auction. As can be seen, the discussion in the MIAA case on toll roads and toll fees was made, not to establish a rule that tollway fees are users tax, but to make the point that airport lands and buildings are properties of public dominion and that the collection of terminal fees for their use does not make them private properties. Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do not go to the general coffers of the government. It would of course be another matter if Congress enacts a law imposing a users tax, collectible from motorists, for the construction and maintenance of certain roadways. The tax in such a case goes directly to the government for the replenishment of resources it spends for the roadways. This is not the case here. What the government seeks to tax here PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 27
are fees collected from tollways that are constructed, maintained, and operated by private tollway operators at their own expense under the build, operate, and transfer scheme that the government has adopted for expressways.[26] Except for a fraction given to the government, the toll fees essentially end up as earnings of the tollway operators. In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures.[27] Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, therefore, they are not government exactions that can be properly treated as a tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. Parenthetically, VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax. In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or services to the buyer. In such a case, what is transferred is not the sellers liability but merely the burden of the VAT.[29] Thus, the seller remains directly and legally liable for payment of the VAT, but the buyer bears its burden since the amount of VAT paid by the former is added to the selling price. Once shifted, the VAT ceases to be a tax[30] and simply becomes part of the cost that the buyer must pay in order to purchase the good, property or service. Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the course of trade or business, sells or renders services for a fee. In other words, the seller of services, who in this case is the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the tollway user as part of the toll fees. For this reason, VAT on tollway operations cannot be a tax on tax even if toll fees were deemed as a users tax. VAT is assessed against the tollway operators gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT burden simply becomes part of the toll fees that one has to pay in order to use the tollways.[32] If the legislative intent was to exempt tollway operations from VAT, as petitioners so strongly allege, then it would have been well for the law to clearly say so. Tax exemptions must be justified by clear statutory grant and based on language in the law too plain to be mistaken.[37] But as the law is written, no such exemption obtains for tollway operators. The Court is thus duty-bound to simply apply the law as it is found.
iii. License fee iv. Special Assessment v. Debt vi. Compromise/Compromise Penalty vii. Penalty d.) Tax Pyramiding
People vs Sandiganbayan
FACTS: The BIR examiners investigated on the ad valorem and specific tax liabilities of [San Miguel Corp. (SMC)] covering the period from January 1, 1985 to March 31, 1986and found a deficiency on specific and ad valorem taxes totaling P342,616,217.88 broken down as follows: Specific Tax P 33,817,613.21 Ad Valorem Tax P308,798,604.67 SMC alleged that the computation of the ad valorem tax deficiency was erroneous since the BIR examiners disallowed the deduction of the price differential (cost of freight from brewery to warehouse) and ad valorem tax. A recomputation was conducted and the tax liability was substantially reduced to P22 million. The respondent Court held that the tax base for computing the ad valorem tax should not include the ad valorem tax itself and the price differential. ISSUE: WON the ad valorem tax should not be included in the tax base for computing the ad valorem tax. HELD: A tax should not be imposed upon another tax. This is tax pyramiding, which has no basis either in fact or in law. Private respondent has shown by mathematical analysis that the inclusion of the ad valorem tax in the tax base would only yield a circuitous manner of computation that will never end in just one ad valorem tax figure properly chargeable against a taxpayer. Quoted verbatim, his presentation is as follows: If *SMC+ wants to make P42.7269 on a case of beer and because of price differential and specific taxes has to fix a price of P51.2722 ex brewery, what would the ad valorem tax be? PERCY TAXIN CASE DIGESTS| ESCAPE FROM TAXATION| CONSTRUCTION|DEFN ETC| 28
The prosecutions method is to charge the 20% ad valorem on the selling price ex brewery of P51.2722 and to tack that on the SMC price as follows: P51.2722 - price ex brewery x .20 P10.2544 - ad valorem tax and 42.7269 - SMC price P52.9813 - this should be the new selling price ex brewery but SMC only charged P51.2722 Following the prosecutions theory, since there is a new selling price ex brewery, i.e., P52.9813, the ad valorem tax should be adjusted to the new selling price or tax base or 20% of P52.9813, resulting in: P42.7269 - SMC price 10.5962 - new ad valorem tax P53.3231 P53.3231 - another new selling price ex brewery Then following the prosecutions theory, the 20% ad valorem tax is again charged on the new selling price ex brewery. 20% of P53.3231 the new tax base or P10.6646 - the new ad valorem tax Resulting in P42.7269 - SMC price 10.6646 - new ad valorem tax P53.3915 - new selling price ex warehouse Therefore, the ad valorem tax is not P10.2544 or P10.5962 but P10.6646 ad infinitum. The obvious untenability of the above situation is a clear enough argument to prove that ad valorem tax should be excluded from the tax base. The correct method is that used by the BIR and that is: P51.2722 - original price to public [1.20] = P42.726[8] - SMC warehouse price. Expectedly, though, petitioner is unable to negate the mathematics proffered by private respondent. Equally important, tax pyramiding has since 1922 been rejected by this Court, the legislature, and our tax authorities. The intent behind the law is clearly to obviate a tax imposed upon another tax. Ratio legis est anima legis. The reason for the law is its spirit. For instance, Regulations No. 27, promulgated March 1, 1923, already excludes the specific tax on cigars and cigarettes from the tax base upon which such tax is computed. This is reiterated in the more recent amendments to our tax law, among which are EOs 22 and 273, and their implementing rules. In fact, Commissioner of Internal Revenue v. American Rubber Co. held that a taxpayer cannot be compelled to pay a x x x tax on the tax itself. Having shown the appropriateness of deducting the ad valorem tax from the tax base upon which it is computed, private respondent has shown prudence in exercising his power under Section 204(2) of the NIRC of 1977 to abate an unjust, excessively assessed, and unreasonable tax; and to accept the offer of P10 million, if only to avoid protracted and costly litigation. Note: Commisioner Tan , herein respondent, was convicted for violation of RA 3019 for accepting the settlement of SMC at P10 million . The Court finally ruled that it was not a compromise but abatement. The BIR may abate or cancel the whole or any unpaid portion of a tax liability, inclusive of increments, if its assessment is excessive or erroneous(as in this case) .