[G.R. No. 143672.

April 24, 2003]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. GENERAL FOODS (PHILS.), INC.
Facts:

Respondent corporation, which is engaged in the manufacture of beverages such as Tang, Calumet
and Kool-Aid, filed its income tax return for the fiscal year ending February 28, 1985. In said tax return,
respondent corporation claimed as deduction, among other business expenses, the amount
of P9,461,246 for media advertising for Tang.
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed
by respondent corporation. Consequently, respondent corporation was assessed deficiency income
taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the same was
denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the
appeal was dismissed
Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which rendered
a decision reversing and setting aside the decision of the Court of Tax Appeals

Issue:

Whether or not the subject media advertising expense for Tang incurred by respondent
corporation was an ordinary and necessary expense fully deductible under the National Internal Revenue
Code (NIRC).

Held:

No.

Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising expense
for Tang paid or incurred by respondent corporation for the fiscal year ending February 28, 1985
necessary and ordinary, hence, fully deductible under the NIRC? Or was it a capital expenditure, paid in
order to create goodwill and reputation for respondent corporation and/or its products, which should have
been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:

(A) Expenses.-

(1) Ordinary and necessary trade, business or professional expenses.-

(a) In general.- There shall be allowed as deduction from gross income all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on, or which are directly
attributable to, the development, management, operation and/or conduct of the trade,
business or exercise of a profession.

Simply put, to be deductible from gross income, the subject advertising expense must comply with
the following requisites:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year;

1
 (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other pertinent papers.
The parties are in agreement that the subject advertising expense was paid or incurred within
the corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was
necessary. However, their views conflict as to whether or not it was ordinary. To be deductible, an
advertising expense should not only be necessary but also ordinary. These two requirements must be
met.
The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence:
first, reasonableness of the amount incurred and;
second, the amount incurred must not be a capital outlay to create goodwill for the product
and/or private respondents business. Otherwise, the expense must be considered a capital
expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which
the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these,
among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for Tang alone was almost
one-half of its total claim for marketing expenses. Aside from that, respondent-corporation also
claimed P2,678,328 as other advertising and promotions expense and another P1,548,614, for
consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for Tang was almost double the
amount of respondent corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately
large. Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds:
(1) advertising to stimulate the current sale of merchandise or use of services and;
(2) advertising designed to stimulate the future sale of merchandise or use of services. The second
type involves expenditures incurred, in whole or in part, to create or maintain some form of goodwill for
the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. If the
expenditures are for the advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of the second kind, then normally they
should be spread out over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the
second kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its
letter protest to the Commissioner of Internal Revenues assessment, that the subject media expense was
incurred in order to protect respondent corporations brand franchise, a critical point during the period
under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones
property. This is a capital expenditure which should be spread out over a reasonable period of
time.

2
[G.R. No. 125508. July 19, 2000]
CHINA BANKING CORPORATIONvs CA, CIR and CTA
Facts:
Petitioner China Banking Corporation made a 53% equity investment in the First CBC Capital (Asia)
Ltd., a Hongkong subsidiary engaged in financing and investment with "deposit-taking" function. The
investment amounted to P16,227,851.80, consisting of 106,000 shares with a par Value of P100 per share.
In the course of the regular examination of the financial books and investment portfolios of petitioner
conducted by Bangko Sentral in 1986, it was shown that First CBC Capital (Asia), Ltd., has become
insolvent. With the approval of Bangko Sentral, petitioner wrote-off as being worthless its investment in
First CBC Capital (Asia), Ltd., in its 1987 Income Tax Return and treated it as a bad debt or as an
ordinary loss deductible from its gross income.
Respondent Commissioner of internal Revenue disallowed the deduction and assessed petitioner
for income tax deficiency in the amount of P8,533,328.04, inclusive of surcharge, interest and compromise
penalty. The disallowance of the deduction was made on the ground that the investment should not be
classified as being "worthless" and that, although the Hongkong Banking Commissioner had revoked
the license of First CBC Capital as a "deposit-taping" company, the latter could still exercise, however,
its financing and investment activities. Assuming that the securities had indeed become worthless,
respondent Commissioner of Internal Revenue held the view that they should then be classified as "capital
loss," and not as a bad debt expense there being no indebtedness to speak of between petitioner and
its subsidiary.
CTA: sustained the Commissioner, holding that the securities had not indeed become worthless and
ordered petitioner to pay its deficiency income tax for 1987 of P8,533,328.04 plus 20% interest per annum until
fully paid.
CA: upheld the CTA.
Issue: Whether or not “securities becoming worthless” be allowed as deduction from gross income of First
CBC.
Held:
No.An equity investment is a capital, not ordinary, asset of the investor the sale or exchange of which
results in either a capital gain or a capital loss. The gain or the loss is ordinary when the property sold or
exchanged is not a capital asset. A capital asset is defined negatively in Section 33(1) of the NIRC; viz:

(1) Capital assets. - The term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other property
of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable
year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business, or property used in the trade or business, of a character which is subject to the allowance for
depreciation provided in subsection (f) of section twenty-nine; or real property used in the trade or business of
the taxpayer.

Thus, shares of stock; like the other securities defined in Section 20(t) [ of the NIRC, would be ordinary
assets only to a dealer in securities or a person engaged in the purchase and sale of, or an active trader
(for his own account) in, securities.
In the hands, however, of another who holds the shares of stock by way of an investment, the shares to
him would be capital assets. When the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets. Section 29(d)(4)(B) of the NIRC states:

"(B) Securities becoming worthless. - If securities as defined in Section 20 become worthless during the tax"
year and are capital assets, the loss resulting therefrom shall, for the purposes of his Title, be considered as a
loss from the sale or exchange, on the last day of such taxable year, of capital assets."

3
 The above provision conveys that the loss sustained by the holder of the securities, which are capital
assets (to him), is to be treated as a capital loss as if incurred from a sale or exchange transaction.
A capital gain or a capital loss normally requires the concurrence of two conditions for it to result:
(1) There is a sale or exchange; and
(2) the thing sold or exchanged is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law deems the
loss anyway to be "a loss from the sale or exchange of capital assets.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains derived
from the sale or exchange of capital assets, and not from any other income of the taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation are not intended for purchase
or sale but as an investment. Unquestionably then, any loss therefrom would be a capital loss, not an
ordinary loss, to the investor.

"(c) Limitation on capital losses. - Losses from sales or exchange of capital assets shall be allowed only
to the extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one
issued by a government or political subdivision thereof), with interest coupons or in registered form, any
loss resulting from such sale shall not be subject to the foregoing limitation an shall not be included in
determining the applicability of such limitation to other losses.

The exclusionary clause found in the foregoing text of the law does not include all forms of securities but
specifically covers only bonds, debentures, notes, certificates or other evidence of indebtedness, with
interest coupons or in registered form, which are the instruments of credit normally dealt with in the usual
lending operations of a financial institution. Equity holdings cannot come close to being, within the
purview of "evidence of indebtedness" under the second sentence of the aforequoted paragraph. Verily, it is
for a like thesis that the loss of petitioner bank in its equity in vestment in the Hongkong subsidiary cannot
also be deductible as a bad debt. The shares of stock in question do not constitute a loan extended by it to
its subsidiary (First CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements to
constitute a bad debt, but a long term investment made by CBC.
One other item. Section 34(c)(1) of the NIRC , states that the entire amount of the gain or loss upon the
sale or exchange of property, as the case may be, shall be recognized.
The above law should be taken within context on the general subject of the determination, and recognition
of gain or loss; it is not preclusive of, let alone renders completely inconsequential, the more specific provisions
of the code. Thus, pursuant, to the same section of the law, no such recognition shall be made if the sale or
exchange is made in pursuance of a plan of corporate merger or consolidation or, if as a result of an exchange
of property for stocks, the exchanger, alone or together with others not exceeding four, gains control of the
corporation. Then, too, how the resulting gain might be taxed, or whether or not the loss would be deductible
and how, are matters properly dealt with elsewhere in various other sections of the NIRC. At all events, it may
not be amiss to once again stress that the basic rule is still that any capital loss can be deducted only from
capital gains under Section 33(c) of the NIRC.
In sum -
(a) The equity investment in shares of stock held by CBC of approximately 53% in its Hongkong
subsidiary, the First CBC Capital (Asia), Ltd., is not an indebtedness, and it is a capital, not an ordinary, asset.
(b) Assuming that the equity investment of CBC has indeed become "worthless," the loss sustained is a
capital, not an ordinary, loss.
(c) The capital loss sustained by CBC can only be deducted from capital gains if any derived by it during
the same taxable year that the securities have become "worthless."

4
 CIR v. PAL
Facts:
PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for
Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES, INC. did
not pay the Minimum Corporate Income Tax using as basis its franchise which exempts it from “all other
taxes” upon payment of whichever is lower of either (a) the basic corporate income tax based on the net
taxable income or (b) a franchise tax of 2%.
Issue:
Is PAL liable for Minimum Corporate Income Tax?

Held:
No. PHILIPPINE AIRLINES, INC.’s franchise clearly refers to "basic corporate income tax"
which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under
the Tax Code between taxable income, which is the basis for basic corporate income tax under Sec. 27
(A) and gross income, which is the basis for the Minimum Corporate Income Tax under Section 27 (E).
The two terms have their respective technical meanings and cannot be used interchangeably. Not being
covered by the Charter which makes PAL liable only for basic corporate income tax, then
Minimum Corporate Income Tax is included in "all other taxes" from which PHILIPPINE AIRLINES,
INC. is exempted.

The CIR also can not point to the “Substitution Theory” which states that Respondent may not
invoke the “in lieu of all other taxes” provision if it did not pay anything at all as basic corporate income tax
or franchise tax.
The Court ruled that it is not the fact tax payment that exempts Respondent but the exercise of
its option. The Court even pointed out the fallacy of the argument in that a measly sum of one peso
would suffice to exempt PAL from other taxes while a zero liability would not and said that there is really
no substantial distinction between a zero tax and a one-peso tax liability.
Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does more
than just clarify a previous regulation and goes beyond mere internal administration and thus cannot be
given effect without previous notice or publication to those who will be affected thereby.

5
CREBA v. The Hon. Executive Secretary Alberto Romulo, et al
G.R. No. 160756. March 9, 2010

Facts:
Petitioner Chamber of Real Estate and Builders’ Associations, Inc. (CREBA), an association of
real estate developers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax
Code which imposes the minimum corporate income tax (MCIT) on corporations.

Under the Tax Code, a corporation can become subject to the MCIT at the rate of 2% of gross
income, beginning on the 4th taxable year immediately following the year in which it commenced its
business operations, when such MCIT is greater than the normal corporate income tax. If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT.

CREBA argued, among others, that the use of gross income as MCIT base amounts to a
confiscation of capital because gross income, unlike net income, is not realized gain.

CREBA also sought to invalidate the provisions of RR No. 2-98, as amended, otherwise known as
the Consolidated Withholding Tax Regulations, which prescribe the rules and procedures for the collection
of CWT on sales of real properties classified as ordinary assets, on the grounds that these regulations:

 Use gross selling price (GSP) or fair market value (FMV) as basis for determining
the income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable
income as provided for under the Tax Code;
 Mandate the collection of income tax on a per transaction basis, contrary to the Tax Code
provision which imposes income tax on net income at the end of the taxable period;
 Go against the due process clause because the government collects income tax even when the
net income has not yet been determined; gain is never assured by mere receipt of the selling
price; and
 Contravene the equal protection clause because the CWT is being charged upon real estate
enterprises, but not on other business enterprises, more particularly, those in the manufacturing
sector, which do business similar to that of a real estate enterprise.

Issues:
(1) Is the imposition of MCIT constitutional?
(2) Is the imposition of CWT on income from sales of real properties classified as ordinary assets
constitutional?

Held:
(1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and
confiscatory if it taxes capital, because it is income, and not capital, which is subject to income tax.
However, MCIT is imposed on gross income which is computed by deducting from gross sales the
capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct
expenses from gross sales. Clearly, the capital is not being taxed.

Various safeguards were incorporated into the law imposing MCIT:

Firstly, recognizing the birth pangs of businesses and the reality of the need to recoup
initial major capital expenditures, the MCIT is imposed only on the 4th taxable year immediately
following the year in which the corporation commenced its operations.

Secondly, the law allows the carry-forward of any excess of the MCIT paid over the normal
income tax which shall be credited against the normal income tax for the three immediately
succeeding years.

6
 Thirdly, since certain businesses may be incurring genuine repeated losses, the law
authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers
losses due to prolonged labor dispute, force majeure and legitimate business reverses.

(2) Yes. Despite the imposition of CWT on GSP or FMV, the income tax base for sales of
real property classified as ordinary assets remains as the entity’s net taxable income as provided
in the Tax Code, i.e., gross income less allowable costs and deductions. The seller shall file its income
tax return and credit the taxes withheld by the withholding agent-buyer against its tax due. If the
tax due is greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other hand,
the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax credit.

The use of the GSP or FMV as basis to determine the CWT is for purposes of practicality and
convenience. The knowledge of the withholding agent-buyer is limited to the particular transaction in
which he is a party. Hence, his basis can only be the GSP or FMV which figures are reasonably known to
him.

Also, the collection of income tax via the CWT on a per transaction basis, i.e., upon
consummation of the sale, is not contrary to the Tax Code which calls for the payment of the net income
at the end of the taxable period. The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to cancel its possible future tax obligation. They are installments on the annual
tax which may be due at the end of the taxable year. The withholding agent-buyer’s act of
collecting the tax at the time of the transaction, by withholding the tax due from the income
payable, is the very essence of the withholding tax method of tax collection.

On the alleged violation of the equal protection clause, the taxing power has the authority
to make reasonable classifications for purposes of taxation. Inequalities which result from singling
out a particular class for taxation, or exemption, infringe no constitutional limitation. The real estate
industry is, by itself, a class and can be validly treated differently from other business enterprises.

What distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their
goods sold and the number of transactions involved. The income from the sale of a real property is
bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply with
the withholding tax scheme. On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every month involving both minimal and
substantial amounts.

7
SOUTH AFRICAN AIRWAYS v. CIR
G.R. No. 180356 | February 16, 2010
Petitioner: SOUTH AFRICAN AIRWAYS
Respondent: COMMISSIONER OF INTERNAL REVENUE
VELASCO, JR., J.:

Doctrine: If an international air carrier maintains flights to and from the Philippines, it shall be taxed at the
rate of 2 ½%of its Gross Philippine Billings, while international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country will be taxed at the regular rate of 32%
(now 30%) of such income.

SUMMARY:
South African Airways is a foreign corporation organized and existing under and by virtue of the
laws of the Republic of South Africa. In the Philippines, it is an internal air carrier having no landing rights in
the country. South African Airways, however, has a general sales agent in the Philippines, Aerotel. Aerotel sells
passage documents for compensation or commission for South African Airways’ off-line flights for the
carriage of passengers and cargo between ports or points outside the territorial jurisdiction of the Philippines. South
African Airways filed income tax returns and paid tax on its Gross Philippine Billings (GPB). South African
Airways, however, subsequently claim for refund contending that it was not liable to pay tax on its GPB. CTA
denied the claim on the ground that South African Airways is liable to pay the 32% (now 30%) regular corporate
income tax.

W/N South African Airways engaged in trade or business in the Philippines subject to the regular
corporate income tax? YES. The general rule is that resident foreign corporations shall be liable for a 32% income
tax on their income from within the Philippines, except for 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 ½% of their Gross Philippine Billings. South African Airways being an
international carrier with no flights originating from the Philippines, does not fall under the exception . As
such, it must fall under the general rule  Hence, it is liable for regular corporate income tax.

FACTS:

 Petition for Review on Certiorari seeking the reversal of CTA EB decision (affirming decision of CTA division)
DENYING its claim for tax refund.
 South African Airways is a foreign corporation organized and existing under and by virtue of the laws of the
Republic of South Africa. Its principal office is located at Johannesburg International Airport, South Africa.
 In PH, it is an internal air carrier having no landing rights in the country. South African Airways,
however, has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel).
 Aerotel sells passage documents for compensation or commission for South African Airways’ off-
line flights for the carriage of passengers and cargo between ports or points outside the territorial
jurisdiction of the Philippines.
 South African Airways is not registered with the SEC as a corporation, branch office, or partnership. It is
not licensed to do business in PH.
 For the taxable year 2000, South African Airways filed separate quarterly and annual income tax returns for
its off-line flights
 February 5, 2003: South African Airways 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.
 Claim was unheeded  South African Airways filed a Petition for Review with the CTA for the refund of the
said amount.

CTA First Division: DENIED petition for lack of merit

 Ruled that South African Airways is a resident foreign corporation engaged in trade or business in the
Philippines.
 South African Airways was not liable to pay tax on its GPB under Section 28(A)(3)(a) of NIRC. BUT South

8
 African Airways is liable to pay a tax of 32% on its income derived from the sales of passage
documents in the Philippines.
CTA En Banc: AFFIRMED CTA Division’s Decision. MR Denied.

Hence, this petition.

ISSUES:

1. W/N South African Airways, as an off-line international carrier selling passage documents through an
independent sales agent in the Philippines, is engaged in trade or business in the Philippines subject to
the 32% (now 30%) income tax? YES
2. W/N the income derived by South African Airways from the sale of passage documents covering petitioner’s off-
line flights is Philippine-source income subject to Philippine income tax? YES
3. W/N South African Airways is entitled to a refund or a tax credit of erroneously paid tax on Gross Philippine
Billings for the taxable year 2000 in the amount of P1,727,766.38?

HELD: CTA Decision SET ASIDE. The instant case is REMANDED to the CTA En Banc for further proceedings and
appropriate action, more particularly, the reception of evidence for both parties and the corresponding disposition the
case consistent with the SC’s decision

RATIO:

SOUTH AFRICAN AIRWAYS IS SUBJECT TO INCOME TAX AT THE RATE OF 32% (NOW 30%) OF ITS
TAXABLE INCOME

 South African Airways failed to sufficiently prove that it is exempted from being taxed for its sale of passage
documents in the Philippines.
o CIR v. Acesite (Philippines) Hotel Corporation: Tax refund partakes of the nature of an exemption 
it is strictly construed against the claimant who must discharge such burden convincingly.

South African Airways’ contentions:

 With the new definition of GPB (the provision was amended), it is no longer liable under Sec. 28(A)(3)(a).
 Since 2 1/2% tax on GPB is inapplicable to it, South African Airways is also excluded from the imposition of
any income tax.

There were several amendments to the provision involving GPB, but the present Tax Code (1997) provides:
"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the
place of sale or issue and the place of payment of the ticket or passage document.

 Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the world,
provided that the passage documents were sold in the Philippines.

 Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and cargo occur to
or from the Philippines, income is included in GPB.

SC: South African Airways is correct in saying that since it does not maintain flights to or from the Philippines, it
is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC (GPB provision).

 BUT it is wrong when it said that in view of non-applicability of Sec. 28(A)(3)(a) to it, it is precluded
from paying any other income tax for its sale of passage documents in the Philippines.
 CIR v. British Overseas Airways Corporation (BOAC): SC ruled that off-line air carriers having general sales
agents in the Philippines are engaged in or doing business in the Philippines and that their income from
sales of passage documents here is income from within the Philippines.  The off-line air carrier liable for

9
 the 32% tax on its taxable income. (Note: this case was decided under similar factual circumstances as
South African Airways)

 Sec. 28(A)(3)(a) of the 1997 NIRC does NOT, in any categorical term, exempt all international air
carriers from the coverage of Sec. 28(A)(1) – General Rule 32% (now 30%) income tax.
 Had legislature’s intentions been to completely exclude all international air carriers from the application of
the general rule it would have used the appropriate language to do so – BUT IT DID NOT!
 Thus, the logical interpretation of such provisions is that, if the GPB provision (2 ½% Gross PH Billings)
were applicable to a taxpayer, then the general rule (32% now 30% income tax) would not apply.
 If, however, GPB Provision does not apply, a resident foreign corporation, whether an international
air carrier or not, would be liable for the tax under Sec. 28(A)(1).

To reiterate, the correct interpretation of the above provisions is that, if an international air carrier maintains flights
to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while
international air carriers that do not have flights to and from the Philippines but nonetheless earn income
from other activities in the country will be taxed at the rate of 32% of such income.

Other Matters:

a. Statutory Construction: Basically, SC said that the pronouncements made during the deliberations are not
controlling. It is a cardinal rule in the interpretation of statutes is that the meaning and intention of the law-making
body must be sought, first of all, in the words of the statute itself.
b. Exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as
coming within the purview of the general rule. Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident
foreign corporations are liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an
exception to this general rule.
 South African Airways, being an international carrier with no flights originating from the Philippines, does not
fall under the exception. As such, petitioner must fall under the general rule.

c. On the Denial of claim for refund: The CTA denied the claim on the basis that South African Airways is liable
for income tax. Thus, South African Airways raises the issue of whether the existence of such liability would
preclude their claim for a refund of tax paid on the basis of Gross Philippine Billings.

 South African Airways avers that a deficiency tax assessment does not disqualify a taxpayer from claiming a
tax refund since a refund claim can proceed independently of a tax assessment and that the assessment
cannot be offset by its claim for refund.  Argument is erroneous.
o South African Airways premises its argument on the existence of an assessment.
o In the assailed Decision, CTA did not, in any way, assess South African Airways of any deficiency
corporate income tax.
o CTA merely pointed out that it is liable for the regular corporate income tax.  There is no
assessment to speak of.

 GR: Taxes cannot be subject to compensation for the simple reason that the government and the taxpayer
are not creditors and debtors of each other.
 Exception: CIR v. CA, CityTrust (234 SCRA 348) SC, however, granted the offsetting of a tax refund with a
tax deficiency on the ground that such deficiency assessment is intimately related to and inextricably
intertwined with the right of CityTrust to claim for a tax refund for the same year.
o To award such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. CityTrust cannot be entitled to refund and at the same time be liable
for a tax deficiency assessment for the same year.
o The grant of a refund is founded on the assumption that the tax return is valid - the facts stated
therein are true and correct.
o 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.
o 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.

10
  Note: In determining W/N South African Airways 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.
o 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.
o Given the finding of the CTA that South African Airways, although not liable for GPB, is liable for
income tax  the correctness of the return filed by South African Airways is now put in doubt.
o Hence, SC cannot grant the prayer for a refund.

SC Court is unable to affirm CTA En Banc’s decision on the outright denial of petitioner’s claim for a refund.

 Even though petitioner is not entitled to a refund due to the question on the propriety of petitioner’s tax
return subject of the instant controversy, it would not be proper to deny such claim without making a
determination of South African Airways’ liability under Sec. 28(A)(1).
o Note: 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.
o It cannot be assumed that South African Airways’ liabilities under the two provisions would be the
same.
o There is a need to make a determination of South African Airways’ liability under Sec. 28(A)(1) to
establish whether a tax refund is forthcoming or that a tax deficiency exists.

11
 United Airlines, Inc. v. CIR
Facts:
Petitioner used to be an online carrier but ceased operating cargo flights from the
Philippines starting 2001. It is now an offline international air carrier but has a general sales
agent in the Philippines which sells passage documents for its off-line flights for carriage of
passengers and cargo. It filed a claim for refund on the Gross Philippine Billings (GPB) tax it
paid. The CTA ruled that Petitioner was not liable for the GBP but was liable to pay 32% tax on
its net income derived from the sales of passage documents in the Philippines.
Issue:
Is petitioner liable for either the GPB or the 32% tax?

Held:
32% tax. The Court reiterated the ruling in South African Airways and BOAC stating that
it is the sale of tickets which is the revenue-generating activity subject to Philippine tax.
The correct interpretation of the applicable rules is that, if an international air carrier
maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its
Gross Philippine Billings, while international air carriers that do not have flights to and from the
Philippines but nonetheless earn income from other activities in the country will be taxed at the
rate of 32% of such income.

12
 Marubeni Corporation v. CIR
The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific
Co. are not income arising from the business activity in which Marubeni Corporation
is engaged. Accordingly, said dividends if remitted abroad are not considered branch
profits subject to Branch Profit Remittance Tax.

Facts:

Marubeni Corporation is a Japanese corporation licensed to engage in

business in the Philippines. When the profits on Marubeni’s investments in Atlantic
Gulf and Pacific Co. of Manila were declared, a 10% final dividend tax was withheld
from it, and another 15% profit remittance tax based on the remittable amount after
the final 10% withholding tax were paid to the Bureau of Internal Revenue. Marubeni
Corp. now claims for a refund or tax credit for the amount which it has allegedly
overpaid the BIR.

Issues and Held:

1. Whether or not the dividends Marubeni Corporation received from Atlantic

Gulf and Pacific Co. are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to 15% profit remittance tax
imposed under Section 24(b)(2) of the National Internal Revenue Code.

No. Pursuant to Section 24(b)(2) of the Tax Code, as amended, only profits
remitted abroad by a branch office to its head office which are effectively connected
with its trade or business in the Philippines are subject to the 15% profit remittance
tax. The dividends received by Marubeni Corporation from Atlantic Gulf and Pacific
Co. are not income arising from the business activity in which Marubeni Corporation
is engaged. Accordingly, said dividends if remitted abroad are not considered branch
profits for purposes of the 15% profit remittance tax imposed by Section 24(b)(2) of
the Tax Code, as amended.

2. Whether Marubeni Corporation is a resident or non-resident foreign corporation.

Marubeni Corporation is a non-resident foreign corporation, with respect to the

transaction. Marubeni Corporation’s head office in Japan is a separate and distinct
income taxpayer from the branch in the Philippines. The investment on Atlantic Gulf
and Pacific Co. was made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Corporation in Japan, but certainly not of the branch in
the Philippines.

3. At what rate should Marubeni be taxed?

15%. The applicable provision of the Tax Code is Section 24(b)(1)(iii) in

conjunction with the Philippine-Japan Tax Treaty of 1980. As a general rule, it is
taxed 35% of its gross income from all sources within the Philippines.

However, a discounted rate of 15% is given to Marubeni Corporation on

dividends received from Atlantic Gulf and Pacific Co. on the condition that Japan, its
domicile state, extends in favor of Marubeni Corporation a tax credit of not less than
20% of the dividends received. This 15% tax rate imposed on the dividends received

13
under Section 24(b)(1)(iii) is easily within the maximum ceiling of 25% of the gross
amount of the dividends as decreed in Article 10(2)(b) of the Tax Treaty.

Note: Each tax has a different tax basis.

Under the Philippine-Japan Tax Convention, the 25% rate fixed is the maximum
rate, as reflected in the phrase “shall not exceed.” This means that any tax
imposable by the contracting state concerned hould not exceed the 25% limitation
and said rate would apply only if the tax imposed by our laws exceeds the same.

COMMISSIONER OF INTERNAL
REVENUE v. YMCA
G.R. No. 124043 October 14,
1998
Panganiban, J.
Facts:
Private Respondent YMCA is a
non-stock, non-profit
institution, which conducts
various
programs and activities that
are beneficial to the public,
especially the young people,
14
pursuant to its religious,
educational and charitable
objectives.
YMCA earned income from
leasing out a portion of its
premises to small shop
owners,
like restaurants and canteen
operators, and from parking
fees collected from non-
members. Petitioner issued an
assessment to private
respondent for deficiency
taxes.
Private respondent formally
protested the assessment. In
reply, the CIR denied the
15
claims of YMCA.
Issue:
Whether or not the income
derived from rentals of real
property owned by YMCA
subject
to income tax
Held:
Yes. Income of whatever kind
and character of non-stock
non-profit organizations from
any of their properties, real or
personal, or from any of their
activities conducted for profit,
regardless of the disposition
made of such income, shall be
subject to the tax imposed
16
under the NIRC.
Rental income derived by a
tax-exempt organization from
the lease of its properties, real
or personal, is not exempt
from income taxation, even if
such income is exclusively
used
for the accomplishment of its
objectives.
Because taxes are the
lifeblood of the nation, the
Court has always applied the
doctrine
of strict in interpretation in
construing tax exemptions

17
(Commissioner of Internal
Revenue
v. Court of Appeals, 271 SCRA
605, 613, April 18, 1997).
Furthermore, a claim of
statutory exemption from
taxation should be manifest
and unmistakable from the
language of the law on which
it is based. Thus, the claimed
exemption “must expressly
be granted in a statute stated
in a language too clear to be
mistaken” (Davao Gulf
Lumber Corporation v.
Commissioner of Internal

18
Revenue and Court of Appeals,
G.R.
No. 117359, p. 15 July 23,
1998).
Verba legis non est
recedendum. The law does not
make a distinction. The rental
income
is taxable regardless of
whence such income is
derived and how it is used or
disposed of.
Where the law does not
distinguish, neither should we.
Private respondent also
invokes Article XIV, Section 4,

19
par. 3 of the Constitution,
claiming
that it “is a non-stock, non-
profit educational institution
whose revenues and assets
are
used actually, directly and
exclusively for educational
purposes so it is exempt from
taxes
on its properties and income.”
This is without merit since the
exemption provided lies on
the payment of property tax,
and not on the income tax on
the rentals of its property. The

20
bare allegation alone that one
is a non-stock, non-profit
educational institution is
insufficient to justify its
exemption from the payment
of income tax.
For the YMCA to be granted
the exemption it claims under
the above provision, it must
prove with substantial
evidence that (1) it falls under
the classification non-stock,
non-
profit educational institution;
and (2) the income it seeks to
be exempted from taxation is

21
used actually, directly, and
exclusively for educational
purposes. Unfortunately for
respondent, the Court noted
that not a scintilla of evidence
was submitted to prove that it
met the said requisites.
The Court appreciates the
nobility of respondent’s cause.
However, the Court’s power
and function are limited
merely to applying the law
fairly and objectively. It cannot
change
the law or bend it to suit its
sympathies and appreciations.
Otherwise, it would be
22
overspilling its role and
invading the realm of
legislation. The Court regrets
that, given its
limited constitutional
authority, it cannot rule on the
wisdom or propriety of
legislation.
That prerogative belongs to
the political departments of
government
COMMISSIONER OF INTERNAL
REVENUE v. YMCA
G.R. No. 124043 October 14,
1998
Panganiban, J.
Facts:
23
Private Respondent YMCA is a
non-stock, non-profit institution,
which conducts various
programs and activities that are
beneficial to the public,
especially the young people,
pursuant to its religious,
educational and charitable
objectives.
YMCA earned income from
leasing out a portion of its
premises to small shop owners,
like restaurants and canteen
operators, and from parking
fees collected from non-
members. Petitioner issued an
assessment to private
respondent for deficiency taxes.
24
Private respondent formally
protested the assessment. In
reply, the CIR denied the
claims of YMCA.
Issue:
Whether or not the income
derived from rentals of real
property owned by YMCA
subject
to income tax
Held:
Yes. Income of whatever kind
and character of non-stock non-
profit organizations from
any of their properties, real or
personal, or from any of their
activities conducted for profit,
25
regardless of the disposition
made of such income, shall be
subject to the tax imposed
under the NIRC.
Rental income derived by a tax-
exempt organization from the
lease of its properties, real
or personal, is not exempt from
income taxation, even if such
income is exclusively used
for the accomplishment of its
objectives.
Because taxes are the lifeblood
of the nation, the Court has
always applied the doctrine
of strict in interpretation in
construing tax exemptions
26
(Commissioner of Internal
Revenue
v. Court of Appeals, 271 SCRA
605, 613, April 18, 1997).
Furthermore, a claim of
statutory exemption from
taxation should be manifest
and unmistakable from the
language of the law on which it
is based. Thus, the claimed
exemption “must expressly
be granted in a statute stated
in a language too clear to be
mistaken” (Davao Gulf
Lumber Corporation v.
Commissioner of Internal
Revenue and Court of Appeals,
G.R.
27
No. 117359, p. 15 July 23,
1998).
Verba legis non est
recedendum. The law does not
make a distinction. The rental
income
is taxable regardless of whence
such income is derived and how
it is used or disposed of.
Where the law does not
distinguish, neither should we.
Private respondent also invokes
Article XIV, Section 4, par. 3 of
the Constitution, claiming
that it “is a non-stock, non-
profit educational institution
whose revenues and assets are

28
used actually, directly and
exclusively for educational
purposes so it is exempt from
taxes
on its properties and income.”
This is without merit since the
exemption provided lies on
the payment of property tax,
and not on the income tax on
the rentals of its property. The
bare allegation alone that one
is a non-stock, non-profit
educational institution is
insufficient to justify its
exemption from the payment of
income tax.

29
For the YMCA to be granted the
exemption it claims under the
above provision, it must
prove with substantial evidence
that (1) it falls under the
classification non-stock, non-
profit educational institution;
and (2) the income it seeks to
be exempted from taxation is
used actually, directly, and
exclusively for educational
purposes. Unfortunately for
respondent, the Court noted
that not a scintilla of evidence
was submitted to prove that it
met the said requisites.

30
The Court appreciates the
nobility of respondent’s cause.
However, the Court’s power
and function are limited merely
to applying the law fairly and
objectively. It cannot change
the law or bend it to suit its
sympathies and appreciations.
Otherwise, it would be
overspilling its role and
invading the realm of
legislation. The Court regrets
that, given its
limited constitutional authority,
it cannot rule on the wisdom or
propriety of legislation.

31
That prerogative belongs to the
political departments of
government
COMMISSIONER OF INTERNAL REVENUE v. YMCA
Facts:

Private Respondent YMCA is a non-stock, non-profit institution, which conducts various programs and
activities that are beneficial to the public, especially the young people, pursuant to its religious, educational and
charitable objectives.

YMCA earned income from leasing out a portion of its premises to small shop owners, like restaurants
and canteen operators, and from parking fees collected from non-members. Petitioner issued an assessment to
private respondent for deficiency taxes. Private respondent formally protested the assessment. In reply, the
CIR denied the claims of YMCA.

Issue: Whether or not the income derived from rentals of real property owned by YMCA subject to income tax

Held: Yes. Income of whatever kind and character of non-stock non-profit organizations from any of their
properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition
made of such income, shall be subject to the tax imposed under the NIRC.

Rental income derived by a tax-exempt organization from the lease of its properties, real or
personal, is not exempt from income taxation, even if such income is exclusively used for the
accomplishment of its objectives.

Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions (Commissioner of Internal Revenue v. Court of Appeals, 271 SCRA
605, 613, April 18, 1997). Furthermore, a claim of statutory exemption from taxation should be manifest
and unmistakable from the language of the law on which it is based. Thus, the claimed exemption
“must expressly be granted in a statute stated in a language too clear to be mistaken” (Davao Gulf
Lumber Corporation v. Commissioner of Internal Revenue and Court of Appeals, G.R. No. 117359, p. 15 July
23, 1998).

Verba legis non est recedendum. The law does not make a distinction. The rental income is taxable
regardless of whence such income is derived and how it is used or disposed of. Where the law does
not distinguish, neither should we.

Private respondent also invokes Article XIV, Section 4, par. 3 of the Constitution, claiming that it
“is a non-stock, non-profit educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from taxes on its properties and
income.” This is without merit since the exemption provided lies on the payment of property tax, and
not on the income tax on the rentals of its property. The bare allegation alone that one is a non-stock,
non-profit educational institution is insufficient to justify its exemption from the payment of income tax.

For the YMCA to be granted the exemption it claims under the above provision, it must prove
with substantial evidence that

(1) it falls under the classification non-stock, non-profit educational institution; and

(2) the income it seeks to be exempted from taxation is used actually, directly, and exclusively for
educational purposes.

32
 Unfortunately for respondent, the Court noted that not a scintilla of evidence was submitted to prove
that it met the said requisites.

The Court appreciates the nobility of respondent’s cause. However, the Court’s power and function are
limited merely to applying the law fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm of legislation.
The Court regrets that, given its limited constitutional authority, it cannot rule on the wisdom or propriety of
legislation. That prerogative belongs to the political departments of government.

33