Taxes

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Updates on
Supreme Court Decisions
PICPA Seminar on Tax Updates
28 September 2017
Agenda
1. CIR vs De La Salle University
2. CIR vs St. Luke’s Medical Center, Inc
3. BIR, Margarito Teves vs TMAP, TUCP
4. SLDC vs DSWD, DOF and BIR
5. CIR vs Fitness By Design, Inc.
6. CIR vs Asalus Corporation
7. CIR vs Philippine Daily Inquirer Inc.
8. DOF vs Rep. Lazatin
9. CIR vs United Cadiz Sugar Farmers Association
10. Medicard vs CIR
11. Mitsubishi Corporation-Manila Branch vs CIR
Updates on Supreme Court Decisions 28 September 2017

PwC 2
CIR vs De La Salle University
GR 196596 dated 9 November 2016
(1) Assessment based on LOA covering

unverified prior years is void
(2) School tax exemption: Use of fund is a

controlling factor
PwC
FACTS
 In 2004, the BIR issued an LOA covering the tax audit of DLSU’s fiscal year
2003 and unverified prior years.
 Consequently, the BIR issued a PAN and, eventually, a FAN assessing DLSU
for deficiency taxes income tax on rental of property, VAT on business and
DST on loans.
 The BIR argued that while DLSU is a non-stock, non-profit school, it is liable
for taxes on income from its property (Section 30 of the Tax Code).
 DLSU questioned the assessment saying that the LOA is void as it covers
unverified prior years.
 Moreover, DLSU insisted that it is not liable to the assessed deficiency taxes
because all its income/revenues are actually, directly and exclusively used for
educational purposes.
PwC 4
(1) Validity of assessment based on LOA covering unverified prior

years
ISSUE
Whether or not the tax assessments arising from LOA covering unverified prior
years are valid.
RULING
 The LOA issued to DLSU is void only as far as the unverified prior years are
concerned. However, the LOA, as well as, the FAN for 2003 is valid.
 RMO 43-90 prohibits the issuance of LOA covering audit of unverified prior
years. However, the rule does not say that the LOA is void.
 It merely prescribes that if the audit includes several years, the periods must
be specified. Otherwise, the audit of the unspecified years shall be void.
Thus, if the LOA covers 2003 and unverified prior years, the same is not
entirely void. The audit for 2003 will be valid.
PwC 5
(2) Use of fund is a controlling factor

ISSUE
Whether or not the revenues of DLSU used actually, directly and exclusively for
educational are tax-exempt.
RULING
 A non-stock, non-profit educational institution whose revenues and assets
are exempt from tax provided that they are actually, directly and exclusively
used for educational purposes.
 The tax exemption granted to non-stock, non-profit educational institutions
is conditional only on the actual, direct and exclusive use of their revenues
and assets for educational purposes. The constitutional provision does not
require that the revenues and income must have been sourced from
educational activities or activities related to the purposes of an educational
institution.
PwC 6
CIR vs St. Luke’s Medical Center, Inc.
GR 203514 dated 13 February 2017
(1) A hospital is not always tax-exempt
(2) Good faith erases penalties
PwC
FACTS
 St. Luke’s Medical Center (SLMC) was assessed for deficiency income tax for
taxable years 2005 and 2006.
 SLMC protested the assessment and eventually elevated the case to the CTA.
 The CTA canceled the assessment and ruled that SLMC as a non-stock, non-
profit hospital is tax-exempt under Section 30(E) and (G) of the Tax Code.
 The BIR argued that SLMC is subject to 10% income tax under Section 27(B)
of the Tax Code.
 On earlier similar cases of SLMC, the SC ruled that SLMC is not tax-exempt
but subject to 10% income tax.
 SLMC paid the basic income tax but not the penalties. Consequently,
requested the SC to dismiss the case based on mootness.
 However, the BIR insisted that SLMC is liable to pay the compromise
penalties for not filing its quarterly income tax returns
PwC 8
(1) Taxation of hospital
ISSUE
Whether or not SLMC is tax-exempt or subject to 10% income tax.
RULING
 The SC reiterated that for a hospital to be exempt from income tax under
Section 30(E) of the Tax Code, it must be both organized and operated
exclusively for charitable purposes. Otherwise, the hospital shall be subject
to preferential tax rate of 10% under Section 27(B) of the Tax Code.
 10% income tax applies to a hospital that is: (1) proprietary and (2) non-
profit. Non-profit does not necessarily mean charitable. Instead, it connotes
that no part of the net income or assets accrues to or benefits any member or
specific person with all income and asset accruing to the institution’s
purpose.
 The SC found that SLMC is not operating exclusively for charitable purposes.
Thus, its revenue from paying patients is subject to 10% income tax
PwC 9
(2) Imposition of penalties

ISSUE
Whether or not SLMC is liable for penalties for non-filing of income tax returns
RULING
The SC reiterated its earlier decision that the SLMC is not required to pay
penalties for non-filing of income tax returns and non-payment of income tax.
The SC cancelled the assessment for interest, surcharge and compromise
penalties on the basis of good faith and honest belief that on the part of SLMC
that is not subject to tax.

PwC 10
BIR, Margarito Teves vs TMAP, TUCP
GR 185234 dated 24 January 2017
The restrictive implementation of the tax

exemption of Minimum Wage Earners
was voided
PwC
FACTS
 On 17 June 2008, RA 9504 which provides for the tax exemption of MWEs
was enacted. The law is effective 6 July 2008.
 On 24 September 2008, the BIR issued RR 10-2008 dated 8 July 2008,
which provides that the tax exemption is effectively only from 6 July 2008 .
The RR also provides that those MWEs who received “other benefits” in
excess of PhP 30,000.00 are not exempt from tax.
 Several organizations (TMAP and TUCP) and Senator Escudero questioned
the constitutionality of the RR. They argued that the RR restricts the
implementation of the law and, therefore, void.
ISSUES
Whether or not RR 10-2008 implementing RA 9504 is valid.

PwC 12
RULING
 RR 10-2008 of the BIR implementing RA 9504 was voided because it
restricted the grant of exemption to MWE.
 According to the SC, the MWE law is a social legislation and intended to give
relief to individual taxpayers. Thus, it should be applied in full without
adding any condition that is not provided by the law.
 The BIR has no authority to make a partial implementation of the law in
2008 (i.e., by prorating the increased personal and additional exemptions
from the time the law took effect on 6 July 2008 instead of applying the
exemptions in full for the entire calendar year 2008).
 Moreover, there is no basis for the BIR to take away the tax exemption of
MWEs if they receive other benefits in excess of PhP 30,000.

PwC 13
RULING
 The test for the full grant of exemption benefit is whether the exemption was
available at the time of the filing of the income tax return.
 In this case, the tax exemption was already available much earlier than the
required time of filing of the return on 15 April 2009. RA 9504 came into law
on 6 July 2008, more than nine months before the deadline for the filing of
the income tax return for taxable year 2008. Hence, qualified individual
taxpayers are entitled to claim the tax exemption for the entire year 2008.
 Lastly, the SC explained that the exemption of MWEs covers the minimum
wage and other forms of statutory compensation like holiday pay, overtime
pay, night shift differential pay, and hazard pay. The law does not provide
any condition on the grant of exemption to MWEs.

PwC 14
SLDC vs DSWD, DOF and BIR
GR 199669 dated 25 April 2017
Mandatory discount to Elders and PWDs is an

exercise of police power
PwC
FACTS
 Southern Luzon Drug Corporation (SLDC) filed a case anew questioning the
validity of the mandatory 20% discounts to senior citizens and persons with
disability (PWDs.
 This time, the company tried to prove that the compulsory discount amounts
to taking without just compensation which is against the Constitution. It
presented its financial statements reflecting a loss position to prove its point.
 The company insisted that the tax deduction mechanism to recover the
burden of the discount is not enough compensation. It also raised that the
amended senior citizens and PWD laws violate the equal protection clause of
the Constitution. The senior citizens law covers all persons of 60 years old
and above without regard to their earning capacity. Meanwhile, there are no
standards in the PWD law to determine who are qualified PWDs.

PwC 16
ISSUES
Whether or not the mandatory 20% discounts to senior citizens and PWD is
constitutional.
RULING
 The SC En Banc once again affirmed the validity of the mandatory 20%
discount to senior citizens and PWDs. The SC found no wrong on imposing
discounts on the medical services and purchases of senior citizens and PWDs,
and on treating said discounts as tax deduction instead of tax credit.
 What the company is trying to show is that its ability to earn future profits is
affected. However, the laws do not hinder the ability of the establishment to
earn profit/mark up.
 Hence, the loss of the company cannot be pointed to the mandatory discount
but to the wrong business judgment of the company.

PwC 17
RULING
 The SC explained that recognizing all senior citizens as a group
without distinction is a valid classification.
 All senior citizens had retired from working; hence, to take away their
privileges is tantamount to penalizing them for their persistence
instead of rewarding them for being hardworking. On determining
PWDs, the SC said that the law provides clear qualifications and
sufficient measures to ensure that the PWD status is given only to
those who are qualified.

PwC 18
CIR vs Fitness By Design, Inc.
(1) Fraud must be proven for the 10-year

prescriptive period to apply.
(2) FAN is void if it does not indicate

specific due date
PwC
FACTS
 More than 8 years from filing of tax return, Fitness By Design Inc.
(FBDI) received a FAN covering the taxable year 1995.
 The imposed 50% surcharge and indicated that the total amount due
shall be adjusted if paid prior or beyond 15 April 2004.
 FBDI protested the FAN stating that the right of the BIR to assess
has already prescribed.
 Eventually, the BIR issued warrant of Distraint and/or Levy which
prompted FBDI to go the CTA.
 The CTA cancelled the assessment on the ground of prescription.
 Thus, the BIR elevated the case to the SC.

PwC 20
(1) Fraud is not presumed

ISSUE
Whether or not the BIR correctly invoked fraud and therefore 10-year
prescriptive period should apply.
RULING
 The SC held that fraud is a question of fact that should be alleged
and duly proven. It was noted that aside from imposing the 50%
surcharge, the FAN and the Audit Result/Assessment Notice did not
impute fraud on the part of the taxpayer nor did it include any basis
for the allegation of fraud.
 The SC ruled that fraud cannot be presumed and the willful neglect
to file the required return or fraudulent intent to evade taxes must be
proven by the party alleging the fraud.
PwC 21
(2) FAN must be a demand for payment

ISSUE
Whether or not the FAN issued to FBDI is a demand for payment or
merely a request for payment.
RULING
The FAN provides that the tax due is still subject to modification,
depending on the date of payment.
The SC reiterated that in order to serve its purpose, the FAN should
contain a definite amount of tax liability, and an actual demand for the
payment of such. Thus, absent the definite amount and actual demand
to pay, the FAN is void.

PwC 22
CIR vs Asalus Corporation
Finding of substantial under-declaration

of income is sufficient to consider a tax
return false and apply the 10-year
prescriptive period to asses
PwC
FACTS
 The BIR issued FAN to the Asalus Corporation (Asalus) for its tax liability on
the VAT transactions for the taxable year 2007.
 Asalus protested the FAN but the BIR eventually issued the FDDA
 Asalus went to the CTA arguing that the FAN was issued beyond the 3-year
prescriptive period
 The CTA cancelled the assessment on the ground of prescription; CTA ruled
that the BIR failed prove falsity in Asalus tax returns. While the PAN alleged
falsity, the FAN as well as the FDDA failed to reiterate said falsity.
 BIR insisted that the 10-year period applies to the case since there was a
finding of substantial or more than 30% under-declaration of income.

PwC 24
ISSUE
Whether or not the allegation of substantial under-declaration (more than 30%)
is sufficient to make the return false, hence, the 10-year period should apply.
RULING
 There is a prima facie evidence of a false return if there is a substantial under-
declaration of taxable sales, receipt or income. Failure to report sales, receipts
or income in an amount exceeding 30% of what is declared in the returns
constitutes substantial under-declaration.
 In case of false returns, there is no need to show intent to defraud. The mere
showing that the returns filed by the taxpayer were false is sufficient to
warrant the application of the 10-year prescriptive period
 According to the SC, while only in the PAN that the falsity was alleged, FAN
and FDDA made reference to the PAN. Thus, Asalus was properly informed
about the allegation of false return.

PwC 25
CIR vs Philippine Daily Inquirer Inc.
GR 213943 dated 22 March 2017
(1) Mistake without intention to evade

tax does not make a tax return false
(2) Defect in waivers because of BIR

fault makes the waivers void
PwC
FACTS
 This involves deficiency IT and VAT assessments for TY 31 Dec 2004
 The BIR issued the FAN 11 March 2008 and received by PDI on 17
April 2008
 The assessments arose from discrepancies between tax returns and
information from 3rd parties
 The BIR alleged that PDI falsely filed its tax returns because it
under-declared its income based on the BIR's RELIEF system. Thus,
the ten-year prescriptive period from discovery of falsity shall apply.
 PDI executed 3 waivers which it later on questioned for being
defectives

PwC 27
(1) Mere inadvertence does not give rise to falsity

ISSUE
Whether or not discrepancies between PDI’s tax returns and information from
3rd parties make the tax returns false.
RULING
 Citing a previous decision, the SC reiterated that the entry of wrong
information due to mistake, carelessness or ignorance (without the
intent to evade tax) does not constitute a false return.
 The SC did not find enough evidence to support the claim that there
was fraud or intentional falsity on the part of the taxpayer.

PwC 28
(2) Waiver is defective if only the BIR is at fault

ISSUE
Whether or not the waivers executed by PDI are valid.
RULING
 The SC voided the waivers executed by the taxpayer because the BIR failed to
provide the office accepting copies, and the said waivers were not executed in
three copies as required under BIR rules.
 The SC ruled that the waivers executed by the taxpayer were defective since
the BIR did not follow its own rules on waivers. The defect was caused solely
by the BIR; thus, the waivers have no effect and did not extend the three-
year prescriptive period
NOTE: In the case of CIR vs Next Mobile (G.R. No. 212825 dated 7 December 2015), SC
did not void the waivers even if they were defectives because both the taxpayer and BIR
caused the defects (in pari delicto)
PwC 29
DOF vs Rep. Lazatin
Requiring advance VAT and Excise tax

payment on importation of petroleum by
Freeport Zone Enterprises
unconstitutional
PwC
DOF vs Rep. Lazatin
FACTS
 RR 2-2012 was issued in response to reports of smuggling of
petroleum and petroleum products and to ensure the correct taxes
are paid and collected.
 RR 2-2012 requires the VAT and Excise tax payment on importation
of all petroleum in PH, and FEZ, and allows credit and refund of any
VAT or excise tax paid if the taxpayer proves that the petroleum
previously brought in has been sold to an FEZ locator and used in its
registered activity.
 Carmelo Lazatin, in his capacity as Pampanga First District
Representative, filed a petition to annul and set aside RR 2-2012.
ISSUE
Whether or not RR No. 2-2012 is unconstitutional.
PwC 31
DOF vs Rep. Lazatin
RULING
 SC held that RR 2-2012 unconstitutional because:
o it illegally imposes VAT and excise taxes upon FEZ enterprises, which, by
law, enjoy tax-exempt status; and
o it effectively amends the law (i.e., RA 7227, as amended by RA 9400) and
thereby encroaches upon the legislative authority reserved exclusively by
the Constitution for Congress.
 The SC also emphasized that the tax exemption of FEZ enterprises includes
immunity from the payment of the VAT and excise tax.
 According to the SC, the refund mechanism introduced by RR 2-2012 runs
contrary to the tax exempt status of FEZ enterprises. Even while the tax is
subsequently refunded, FEZ enterprises were compelled to spend money and
other resources to pay for something they should be immune to in the first
place. Thus, contradicting the essence of their tax exemption.

PwC 32
CIR vs United Cadiz Sugar Farmers Association
Agricultural cooperatives are exempt

from advance VAT
PwC
FACTS
 The taxpayer is a multi-purpose cooperative with a Certificate of Registration
issued in 2004 by the Cooperative Development Authority (CDA). In
accordance with RR 20-2001, the BIR issued a BIR Ruling, otherwise known
as the “Certificate of Tax Exemption,” in favor of the taxpayer.
 In 2007, the BIR Regional Director of Region 12 required the taxpayer to pay
advanced VAT before an Authorization Allowing Release of Refined Sugar
(AARRS) could be issued.
ISSUE
Whether or not agricultural cooperatives are required to pay advance VAT.

PwC 34
RULING
 The SC held that the VAT exemption of an agricultural cooperative
on its sale of refined sugar logically includes the exemption from the
requirement of advance payment thereof.
 It clarified that the VAT required to be paid in advance is the same
VAT to be imposed on the subsequent sale of refined sugar.
Considering that the very transaction (sale of refined sugar) is VAT-
exempt, there is no VAT to be paid in advance. It is absurd to require
payment of the advance VAT if all sales of the taxpayer-cooperative
are VAT-exempt and no output tax will materialize.

PwC 35
RULING
The Tax Code provision exempting sales of agricultural cooperatives
from VAT provides for only two requirements:
(1) it is duly registered with the CDA, and
(2) it is the producer of the sugar cane from which the refined sugar
is derived.

PwC 36
Medicard vs CIR
(1) The BIR can’t assess deficiency tax

without the requisite letter of authority
(“LOA”)
(2) HMOs pay VAT on receipts net of

payments to medical service providers
PwC
Medicard vs CIR
FACTS
 Medicard, an HMO, received a Letter Notice (“LN”) containing findings of
discrepancies between its VAT returns and Income tax returns.
 Subsequently, the BIR issued a Preliminary Assessment Notice (“PAN”)
and eventually the Formal Assessment Notice (“FAN”).
 The BIR assessed Medicard for deficiency VAT on the basis that the
company should pay VAT based on its gross receipts without any
deduction.
 Medicard questioned issuance of FAN without the prerequisite Letter of
Authority
 Medicard also argued that its VAT liability should be based on collection
net of the amounts earmarked and paid to medical service providers.

PwC 38
Medicard vs CIR
(1) LOA cannot be dispensed with in a tax audit

ISSUE
Whether or not an LOA is always required before an assessment is issued.
RULING
 An LOA cannot be dispensed with in the conduct of a tax audit and eventual
issuance of a tax assessment.
 Under Section 6 of the NIRC , the power to examine and make tax
assessment is granted to the CIR. Thus, Unless the audit is done by CIR
himself, other tax officer cannot validly conduct an audit without prior
authority from the CIR.
 The SC also explained that a Letter Notice (LN) is not a substitute for an
LOA.

PwC 39
Medicard vs CIR
(2) HMOs should pay VAT on receipts net of payments to medical
service providers
ISSUE
Whether the amounts earmarked and eventually paid to the medical service
providers should form part of HMO’s Gross receipts for VAT purposes.
RULING
 Gross receipts for VAT purposes is limited only to the amount that the taxpayer
received for the services it performed.
 HMOs are primarily engaged in arranging for coverage or designated managed
care services that are needed by plan members. It is this service and the value
charged by the HMOs that is taxable.
 While HMOs collect the total membership fees, significant portion of the
amount belongs to the medical service providers. Thus, HMO’s VAT base
excludes the amount earmarked as fiduciary funds for the medical utilization of
its members.
PwC 40
Mitsubishi Corporation-Manila
Branch vs CIR
GR 175772 dated 5 June 2017
Government to Government Exchange of

Note is an executive agreement, which is
binding even without Senate concurrence
PwC
Mitsubishi Corporation-Manila Branch vs CIR
FACTS
 A Japanese contractor, working on a Coal-Fired Thermal Power Plant
Project, which is funded through the Overseas Economic Cooperation Fund
(OECF), now Japan Bank for International Cooperation (JBIC), paid income
tax and branch profit remittance tax.
 Subsequently, it sought a refund for said taxes on the basis that the
Philippine government is supposed to assume these taxes as provided in the
Exchange of Notes between the governments of Japan and the Philippines.
 The BIR denied the refund stating that the Exchange of Notes, which lacks
Senate concurrence is not a valid basis for tax exemption.
ISSUE
Whether or not the tax provision of the Exchange of Notes between Japan and
the Philippines is valid, even without the Senate concurrence.

PwC 42
Mitsubishi Corporation-Manila Branch vs CIR
RULING
 The Exchange of Notes is considered an executive agreement, which is
binding on the state even without Senate concurrence.
 The assumption provision in the Exchange of Notes is a clear concession to
the Japanese contractors working on the Project
 The tax assumption provision differs from a tax exemption provision in that,
in the former, there is still a tax liability but it is merely assumed by another
entity, in this case, the Philippine government. Thus, the constitutional
requirement on tax exemption would not apply.
 Because the Japanese contractor paid the taxes not required, this is a case of
an erroneous tax payment which is refundable.

PwC 43
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Updates on Supreme Court Decisions 28 September 2017

(1) Assessment based on LOA covering

(2) School tax exemption: Use of fund is a

(1) Validity of assessment based on LOA covering unverified prior

(2) Use of fund is a controlling factor

(1) A hospital is not always tax-exempt

(2) Good faith erases penalties

(2) Imposition of penalties

Updates on Supreme Court Decisions 28 September 2017

The restrictive implementation of the tax

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

Mandatory discount to Elders and PWDs is an

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

(1) Fraud must be proven for the 10-year

(2) FAN is void if it does not indicate

Updates on Supreme Court Decisions 28 September 2017

(1) Fraud is not presumed

(2) FAN must be a demand for payment

Updates on Supreme Court Decisions 28 September 2017

Finding of substantial under-declaration

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

(1) Mistake without intention to evade

(2) Defect in waivers because of BIR

Updates on Supreme Court Decisions 28 September 2017

(1) Mere inadvertence does not give rise to falsity

Updates on Supreme Court Decisions 28 September 2017

(2) Waiver is defective if only the BIR is at fault

Requiring advance VAT and Excise tax

Updates on Supreme Court Decisions 28 September 2017

Agricultural cooperatives are exempt

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

(1) The BIR can’t assess deficiency tax

(2) HMOs pay VAT on receipts net of

Updates on Supreme Court Decisions 28 September 2017

(1) LOA cannot be dispensed with in a tax audit

Updates on Supreme Court Decisions 28 September 2017

Government to Government Exchange of

Updates on Supreme Court Decisions 28 September 2017

Updates on Supreme Court Decisions 28 September 2017

WARNING: The following disclaimer and copyright notices

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