Taxes distinguished from debts Citing CIR v.
Algue: Money due the govt in the form of taxes or other
208 SCRA 726 Caltex v. COA
Davide Jr., J.
Caltex is seeking to offset its debt to the Oil Price Stabilization Fund with the reimbursement
it is claiming from the same Fund. The Court here ruled that what is involved here is a tax,
and not a debt that could be set-off.
DOCTRINE
Taxes cannot be subject of compensation, because the government and taxpayer are not
mutually creditors and debtors of each other. A claim for taxes is not such a debt, demand,
contract, or judgment as is allowed to be set-off.
FACTS
1. Sec. 8 of PD No. 1956, as amended by EO No. 137 created the Oil Price
Stabilization Fund (OPSF), to be used primarily for reimbursing oil companies for
losses incurred due to cost increases of oil exportation, and for possible cost
underrecovery as a result of the reduction of domestic oil prices mandated by the
government.
Purpose: To stabilize the oil industry
Source of funds: Mostly increase in tax collection imposed by the oil companies on
their products; they have to remit this to the Ministry of Energy as contribution to
the OPSF
2. The Commission on Audit informed petitioner Caltex that it should remit P1.287B
of the additional taxes on petroleum products it collected spanning 1986-1988, as its
contribution to the OPSF. It stated that pending such remittance, all of its claims of
reimbursement from the OPSF shall be held in abeyance.
3. Caltex proposed a method for payment, claiming that to make outright payment of
P1.287B will impair its cash position. Its proposal included an offsetting of its debt
with the reimbursement due to it from the OPSF.
4. The COA accepted the proposal as offsetting a portion of its due remittances has
apparently been previously allowed by the Office of Energy Affairs. However, it
prohibited Caltex from further offsetting its remittances due for the current and
ensuing years with its reimbursement claims from the OPSF. The COA also
disallowed some of Caltex claims against the OPSF.
5. Caltex moved for reconsideration of this decision, but this was denied by the COA.
ISSUE with HOLDING
W/N the amounts due to the OPSF from petitioner may be offset against petitioners
outstanding claims from the said fund NO
Caltex: It should be allowed to offset its claims from the OPSF against its
contribution to the fund, as this has been allowed in the past, particularly in 1987
and 1988.
o COA: There is no legal basis for offsetting taxes against the claims that a
taxpayer may have against the government, as taxes do not arise from
contracts or dependent upon the will of the taxpayer, but are imposed by law.
1 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
dues is its lifeblood and should be collected without hindrance
Caltex: Remittances due is not from taxation, because PD 1956 did not create a
source of taxation, but intended only to establish a special fund. This is apparent
because the OPSF contributions do not go to a general fund and are not used for
a public purpose.
Court: Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of a govt; taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a threatened industry which
is affected with public interest as to be within the police power of the state. The oil
industry is greatly imbued with public interest, as it vitally affects the general
welfare. (Note: Court seems to say that the power being exercised is police power,
but in the form of a tax.)
o PD 1956 explicitly provides that the source of OPSF is taxation.
o A taxpayer may not offset taxes due from claims he has against the
government. Taxes cannot be subject of compensation, because the
government and taxpayer are not mutually creditors and debtors of
each other. A claim for taxes is not such a debt, demand, contract, or
judgment as is allowed to be set-off.
o Technically, the oil companies are only collecting agents because they only
remit the taxes they imposed on end-users of their products.
o Art. 12791 prescribes when compensation may be proper, and it doesnt
apply in the present case because: (1) The government and Caltex cannot
be regarded as creditors and debtors of each other; and, (2) There is no proof
that petitioners claim is already due and liquidated.
Court: That compensation had been the practice in the past can set no valid
precedent. Such a practice has no legal basis.
DISPOSITIVE PORTION
WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the
challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National
Power Corporation, which is hereby allowed. With costs against petitioner. SO ORDERED.
OTHER NOTES
The other issues covered in the case involve the disallowances of the COA of some claims
of Caltex. The COA was claiming that those claims arent covered by the enumeration of
reimbursable sums in the EO. The Court sustained the COA in most grounds, except as to
Caltex claims from the sales to NPC. These issues are technical and arent relevant.
DIGESTER: Alyssa Mateo
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. (1196)
1
 Definition of Tax
L-67649 Francia v IAC DISPOSITIVE PORTION
Gutierrez Petition dismissed.

Francia was the owner of a property in Pasay, which was expropriated and then later sold
at public action after he failed to pay real estate taxes. Francia sought the annulment of the
auction, claiming that since the government owed him compensation for the expropriation of DIGESTER: Gab
his property, the amount should have been set-off his taxes. The Court held that there can
be no offsetting of taxes against the claims that the taxpayer may have against the
government

DOCTRINE
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 Government and the taxpayer are not mutually creditors and debtors of each other
under Article 1278 of the Civil Code and a claim of taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off.

FACTS
6. Engracio Francia is the owner of a lot and 2 story house in Barrio San Isidoro in Pasay.
On Oct 15, 1997, a portion of Francias property was expropriated by the RP for P4k
the amount equivalent to the assessed value.
7. From 1963 up to 1977, Francia failed to pay his real estate taxes (RET). As a result his
property was sold to satisfy a tax delinquency of P2.4k. Eventually Francia got a notice
of hearing filed by Ho Fernandez, who was seeking the cancellation of the title in
Francias name.
8. After verifying with his lawyer, he discovered that his land was sold to Fernandez (he
didnt know cause he wasnt at the auction). Afterwards, he filed a complaint to annul
the sale. The lower court denied this and the IAC subsequently affirmed the denial,
hence this petition.
9. One of the arguments that Francia brought was that his taxes were offset because the
govt owed him P4, 116.00.

ISSUE with HOLDING

1. W/N the taxes of Francia was offset by the taking of his property NO
a. The court has consistently ruled that theres no off-setting of taxes against the
claims that the taxpayer may have against the govt. A person cant refuse to
pay a tax on the ground that the govt owes him cash equal to or greater than
the tax being collected.
b. Citing the case of Republic v Mambulao Lumber, the court reiterated that
Internal Revenue Taxes cant be the subject of set off or compensation. The
basis of such is public policy. Taxes dont partake the nature of contracts
between 2 parties.
c. Rather, taxes grow out of duty and the govt does not require the consent of
the taxpayer to collect. Also, the tax being collected was due to the city govt,
while the claimed offset was against the national govt. Further, he already
received the payment in his bank account as he admitted in his testimony.
d. Also, he had one year to redeem his property. And though he contends that
he didnt get notice, during the cross examination he admitted that he had the
notice but neglected to check it.
2
 Taxes Distinguished from Debts
G.R. No. 125704 Philex Mining v. CIR
Romero, J.
Philex argued that the tax refunds it was securing shouldve been used to set off the tax
liabilities it had. The CTA and CA refused. The Supreme Court agrees with the lower courts,
although it called out BIR for the slow pace it took to refund Philex.
DOCTRINE
Taxes cannot be subject to compensation because the government and the taxpayer are
not creditors and debtors of each other. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity.
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.
FACTS
10. On August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for
the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the
total amount of P123,821.982.52.
11. Philex protested the demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the
amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund
should be applied against the tax liabilities.
12. The BIR found no merit in Philex's position, since these pending claims have not yet
been established or determined with certainty, and thus, no legal compensation can
take place.
13. Philex raised the issue to the Court of Tax Appeals on November 6, 1992. In the course
of the proceedings, the BIR issued a Tax Credit Certificate which effectively lowered
the latter's tax obligation to P110,677,688.52.
14. Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the
remaining balance of P110,677,688.52 plus interest, as there can be no compensation
since one of the two obligations is not yet liquidated and demandable. It also further
ruled that taxes cannot be subject to set-off on compensation since claim for taxes is
not a debt or contract.
15. The Court of Appeals upheld the CTA ruling. After the denial of the MR by the CA, hilex
was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991
but also for 1992 and 1994.
ISSUE with HOLDING
Whether or not the tax credits could be used to set off its excise tax liabilities No, it cant
be, because 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.
- Francia v. IAC: 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.
- Philex's reliance on the Supreme Courts holding in CIR v. Itogon-Suyoc Mines Inc.,
wherein they ruled that a pending refund may be set off against an existing tax liability
even though the refund has not yet been approved by the Commissioner, is no longer
supported by law.
o The premise of the ruling in Itogon-Suyoc was anchored on Section 51 (d) of
the NIRC of 1939. However, when the NIRC of 1977 was enacted, the same
provision was omitted.
- Philex posits the theory that it had no obligation to pay the excise tax liabilities within
the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR.
o Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. To countenance Philex's whimsical
reason would render ineffective our tax collection system.
- A distinguishing feature of a tax is that it is compulsory rather than a matter of bargain.
Hence, a tax does not depend upon the consent of the taxpayer. If any taxpayer can
defer the payment of taxes by raising the defense that it still has a pending claim
for refund or credit, this would adversely affect the government revenue system.
o A taxpayer cannot refuse to pay his taxes when they fall due simply because
he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government.
- Philex asserts that the BIR violated Section 106 (e) of the National Internal Revenue
Code of 1977, which requires the refund of input taxes within 60 days, when it took five
years for the latter to grant its tax claim for VAT input credit/refund.
o The Court agrees with Philex, as the VAT input taxes were paid between 1989
to 1991 but the refund of these erroneously paid taxes was only granted in
1996. Had the BIR been more diligent and judicious with their duty, it could
have granted the refund earlier.
o It is a settled rule, though, that in the performance of governmental function,
the State is not bound by the neglect of its agents and officers.
- While the Court can never condone the BIR's apparent callousness in performing its
duties, still, the same cannot justify Philex's non-payment of its tax liabilities.
DISPOSITIVE PORTION
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
DIGESTER: Francis Eldon Mabutin
3
 II. Taxes Distinguished From: License Fees
172 SCRA 629 Progressive Development Corporation vs. Quezon City
Feliciano
The owner and operator of Farmers Market paid under protest the 5% license fee imposed
by QC. It insisted that such fee is actually an income tax, w/c the QC City Council had no
authority to impose. The Court ruled otherwise, distinguishing a tax from a license fee.
DOCTRINE
License fee is a legal concept distinguishable from tax: the former is imposed in
the exercise of police power primarily for purposes of regulation, while the latter is imposed
under the taxing power primarily for purposes of raising revenues. Thus, if the generating of
revenue is the primary purpose and regulation is merely incidental, the imposition is a tax;
but if regulation is the primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax.
To be considered a license fee, the imposition questioned must relate to an
occupation or activity that so engages the public interest in health, morals, safety and
development as to require regulation for the protection and promotion of such public interest;
the imposition must also bear a reasonable relation to the probable expenses of regulation,
taking into account not only the costs of direct regulation but also its incidental consequences
as well
Progressive Devt Corp. petitioner; owner & operator of Farmers Market & Shopping
Center
Quezon City respondent; the one that imposed the license fee
FACTS
16. Dec. 24, 1969 City Council of QC adopted Ordinance No. 7997, Series of 1969 (the
Market Code of Quezon City)
Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit
monthly to the Treasurer's Office, a certified list of stallholders showing the amount of
stall fees or rentals paid daily by each stallholder, ... and shall pay 10% of the gross
receipts from stall rentals to the City, ... , as supervision fee. Failure to submit said list
and to pay the corresponding amount within the period herein prescribed shall subject
the operator to the penalties provided in this Code ... including revocation of permit to
operate. ... .
17. Mar 23, 1972 The Market Code was then amended by Ord. No. 9236, Series of 1972
SECTION 1. There is hereby imposed a 5 % tax on gross receipts on rentals or lease
of space in privately-owned public markets in Quezon City.
18. Progressive Development Corporation (PDC), owner and operator of a public market
known as the "Farmers Market & Shopping Center" filed a Petition for Prohibition
with Preliminary Injunction against Quezon City.
Ground: The supervision fee or license tax imposed by the above-mentioned
ordinances is in reality a tax on income which QC may not impose, the same being
expressly prohibited by Republic Act No. 2264, as amended.
QCs Answer:
- It had authority to enact the questioned ordinances, maintaining that the tax
on gross receipts imposed therein is not a tax on income.
- The SolGen also filed an Answer arguing that PDC, not having paid the 10%
supervision fee prescribed by Ordinance No. 7997, had no personality to
question and was estopped from questioning its validity; and that
2 Sec. 2 RA 2264 xxx all chartered cities x x x shall have authority to impose municipal license tax
or fees upon persons engaged in any occupation or business x x x
- the tax on gross receipts was not a tax on income but one imposed for the
enjoyment of the privilege to engage in a particular trade or business which
was within the power of respondent to impose.
19. PDC claims to have paid under protest the 5% tax under Ord. No. 9236 and moved for
a judgment on the pleadings.
20. The lower court dismissed PDCs petition ruling that the questioned imposition is not a
tax on income, but rather a privilege tax or license fee which local governments, like
QC, are empowered to impose and collect.
21. Hence, this present Petition for Review before the SC.
ISSUE with HOLDING: Whether the tax imposed by QC on gross receipts of stall
rentals is properly characterized as partaking of the nature of an income tax or,
alternatively, of a license fee. License fee.
2. Both the Local Autonomy Act2 and the Charter of QC3 show that QC is authorized to fix
the license fee collectible from and regulate the business of PDC as operator of a
privately-owned public market.
3. PDC, however, insists that the "supervision fee" collected from rentals, being a return
from capital invested in the construction of the Farmers Market, practically operates as
a tax on income (w/c is outside the taxing authority of QC).
The term "tax" frequently applies to all kinds of exactions of monies which become
public funds. It is often loosely used to include levies for revenue as well as levies
for regulatory purposes such that license fees are frequently called taxes
although license fee is a legal concept distinguishable from tax: the former is
imposed in the exercise of police power primarily for purposes of regulation, while
the latter is imposed under the taxing power primarily for purposes of raising
revenues. Thus, if the generating of revenue is the primary purpose and regulation
is merely incidental, the imposition is a tax; but if regulation is the primary purpose,
the fact that incidentally revenue is also obtained does not make the imposition a
tax.
To be considered a license fee, the imposition questioned must relate to an
occupation or activity that so engages the public interest in health, morals, safety
and development as to require regulation for the protection and promotion of such
public interest; the imposition must also bear a reasonable relation to the probable
expenses of regulation, taking into account not only the costs of direct regulation
but also its incidental consequences as well.
4. The "Farmers' Market and Shopping Center" being a public market in the' sense of a
market open to and inviting the patronage of the general public, even though privately
owned, PDCs operation thereof required a license issued by the respondent City, the
issuance of which, applying the standards set forth above, was done principally in the
exercise of the respondent's police power.
5. Lastly, PDC has not shown that the rate of the gross receipt tax is so unreasonably
large as to compel the Court to characterize the imposition as a revenue measure
exclusively.
DISPOSITIVE PORTION
Petition denied for lack of merit. Decision of the lower court affirmed.
DIGESTER: Viveka
3 Sec. 12 (c), Art. III, RA 537 City Council is authorized: (c) To tax; fix the license fee, and regulate
te business of the following: preparation and sale of meat; poultry, fish, game, butter, cheese
4
 Taxes Distinguished from License Fees
G.R. No. L-41383 August 15, 1988
PAL vs Edu
GUTIERREZ, JR., J.
PAL was given a legislative franchise under which they were granted an exemption from the
payment of taxes. Despite this, the Land Transportation Commission, a government agency,
required PAL to pay motor vehicle registration fees, arguing that such fees are regulatory and
not revenue measures. Thus, they are not considered taxes within the exemption of PAL. The
SC held that the motor vehicle reg fees are in fact taxes because its primary purpose was to raise
revenue for the government.
DOCTRINE
Its possible for an exaction to be both tax and regulation. License fees are charges looked
to as a source of revenue as well as a means of regulation. This is true of automobile license
fees, where the fees may properly be regarded as taxes even though they also serve as an
instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one
of the real and substantial purposes, then the exaction is properly called a tax.
FACTS
22. PAL is a corporation under a legislative franchise which grants it an exemption from
the payment of taxes.
23. On the strength of an opinion of the Secretary of Justice,PAL has not been paying motor
vehicle registration fees since 1956.
24. The Land Transportation Commissioner (aka Commissioner) then required all tax
exempt entities to pay motor vehicle registration fees, pursuant to RA 4136.
a. The Commissioner refused to register PALs motor vehicles unless the said
fees were paid.
25. PAL paid the registration fees under protest, and subsequently demanded a refund of
the amounts paid.
a. PAL invoked the ruling in Calalang vs Lorenzo (1951 ) where it was held that
motor vehicle registration fees are in reality taxes, which PAL is exempt
from paying by virtue of its legislative franchise.
26. The Commissioner denied the refund, invoking the case of Republic vs Philippine
Rabbit Bus Lines Inc (1970) where it was held that motor vehicle registration fees
are regulatory, and not revenue measures. They therefore do not come within the
exemption granted to PAL under its franchise.
27. PAL thus filed a civil case with the CFI to recover said amounts.
a. The CFI held in favor of the Commissioner, relying on the Republic vs
Philippine Rabbit Bus Lines ruling.
b. PAL appealed the CA which certified the case to the SC.
ISSUE with HOLDING
6. Whether or not motor vehicle registration fees are taxes. NO.
a. Motor vehicle registration fees are governed by RA 4136, which amended the
previous laws governing the matter (at the time this case was decided).
i. Its clear from the provisions4 of RA 4136 that the legislative intent
and purpose behind requiring payment of reg fees is mainly to raise
funds for the construction and maintenance of highways and
4
Sec. 61. Disposal of Mortgage. CollectedMonies collected under the provisions of this Act shall
be deposited in a special trust account in the National Treasury to constitute the Highway
Special Fund, which shall be apportioned and expended in accordance with the provisions of the"
to a lesser degree, pay for the operating expenses of the
administering agency.
b. Fees may be properly regarded as taxes even though they also serve as an
instrument of regulation.
i. Its possible for an exaction to be both tax and regulation. License
fees are charges looked to as a source of revenue as well as a
means of regulation.
ii. This is true of automobile license fees, where the fees may properly
be regarded as taxes even though they also serve as an instrument
of regulation.
iii. If the purpose is primarily revenue, or if revenue is at least one
of the real and substantial purposes, then the exaction is
properly called a tax.
c. It is patent from RA 4136 that the legislators had in mind a regulatory tax as
the law refers to the said fees as tax or fee.
i. Originally, vehicle registration fees were intended only for purposes
in the exercise of the States police powers.
ii. Over the years however, as vehicular traffic exploded in number and
motor vehicles became absolute necessities, Congress found the
registration of vehicles a very convenient way of raising much
needed revenues.
iii. Without changing term fees, their nature has now become that of
taxes.
d. In view of the foregoing, the Court ruled that the motor vehicle registration
fees in this case are actually taxes intended for additional revenues of
government, even if part of the amount collected is set aside for the operating
expenses of the admin agency.
7. Whether or not PAL is exempt from paying the taxes. Partly.
a. The claim for refund is for the payments made in 1971.
b. However, RA 5448 (enacted in 1968) repealed the tax exemptions of
corporate taxpayers under legislative franchises, which included PAL.
c. An amended franchise under PD 1590 was given to PAL in 1979 however,
restoring their exemption from the payment of any taxes, fees, or other
charges on the registration and licensing of motor vehicles.
d. Thus, the Court held that the registration fees collected between 1968 until
1979 were correctly imposed, because of the repeal of the tax exemption of
PAL during this period.
DISPOSITIVE PORTION
WHEREFORE, the petition is hereby partially GRANTED. The prayed for refund of registration
fees paid in 1971 is DENIED. The Land Transportation Franchising and Regulatory Board
(LTFRB) is enjoined functions-the collecting any tax, fee, or other charge on the registration and
licensing of the petitioner's motor vehicles from April 9, 1979 as provided in Presidential Decree
No. 1590.
SO ORDERED.
DIGESTER: Xave Libardo
Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and
equip the Land Transportation Commission but not to exceed twenty per cent of the total collection
during one year, shall be set aside for the purpose
5
 License Fees
ESSO VS CIR
PONENTE
ESSO tried to have tax deductions made on its gross income, in regards to ordinary and
business expenses pertaining to dry wells and margin fees. CIR disallowed them, and the
CTA ruled the same way (with some differences regarding interest, check facts because
honestly medyo hirap ako sa tax cases). SC held that margin fees cant be held as deductible
since theyre exactions imposed by the State in the exercise of its police power, and neither
can it be considered as ordinary and necessary business expenses since they dont fall
under the ambit of Sec. 30(a) of the NIRC.
DOCTRINE
A margin fee is not a tax but an exaction designed to curb the excessive demands upon our
international reserve, imposed by the State in the exercise of its police power and not the
power of taxation..
FACTS
28. 1st CTA case: ESSO Standard Eastern, Inc. made gross deductions for his gross
income for 1959: the amount it spent for drilling and exploration of its oil petroleum
concessions as ordinary and necessary business expenses,
29. This was disallowed by the respondent Commissioner of Internal Revenue on the
ground that the expenses should be capitalized and might be written off as a loss only
when a "dry hole" should result.
30. ESSO filed an amended return asking for a refund by reason of its abandonment of
several oil wells as dry holes. In addition to this it claimes as ordinary and necessary
business expenses the amount of margin fees it had paid to the Central Bank on its
profit remittances to its New york head office.
31. The CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction
for the margin fees paid.
32. 2nd CTA case: CIR assessed ESSO a deficiency income tax for the year 1960, plus
18% interest thereon from the period April 18,1961 to April 18, 1964
- The deficiency arose from the disallowance of the margin fees paid by ESSOto the
Central Bank on its profit remittances to its New York head office.
8. ESSO settled its tax deficiency assessment by applying a tax credit representing its
overpayment for the year 1959 and paying under protest an additional amount. Later claimed
a refund as overpayment on the interest of its deficiency income tax. Said it only owed the
difference between the tax credit and the total overpayment.
9. CIR denied this claim, stated that 18% interest was on the entire amount of the deficiency
tax.
10. CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960
income taxes, holding that the margin fees paid to the Central Bank could not be considered
taxes or allowed as deductible business expenses.
11. ESSO appealed to the CTA.
12. CTA appeal - CTA denied petitioner's claim for refund of P102,246.00 for 1959 and
P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This portion
of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of
Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for
its part appealed the CTA decision denying its claims for the refund of the margin fees
P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us.
ISSUE with HOLDING
8. Are the margin fees to be considered taxes?
Sc: NO. A margin fee is not a tax but an exaction designed to curb the excessive
demands upon our international reserve, imposed by the State in the exercise of its
police power and not the power of taxation..
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through
Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction designed
to discourage imports and encourage exports, and ultimately, 'curtail any excessive
demand upon the international reserve' in order to stabilize the currency. Originally
adopted to cope with balance of payment pressures, exchange restrictions have come
to serve various purposes, such as limiting non-essential imports, protecting domestic
industry and when combined with the use of multiple currency rates providing a source
of revenue to the government, and are in many developing countries regarded as a
more or less inevitable concomitant of their economic development programs. The
different measures of exchange control or restriction cover different phases of foreign
exchange transactions, i.e., in quantitative restriction, the control is on the amount of
foreign exchange allowable. In the case of the margin levy, the immediate impact is on
the rate of foreign exchange; in fact, its main function is to control the exchange rate
without changing the par value of the peso as fixed in the Bretton Woods Agreement
Act. For a member nation is not supposed to alter its exchange rate (at par value) to
correct a merely temporary disequilibrium in its balance of payments. By its nature, the
margin levy is part of the rate of exchange as fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign exchange
and hence should not form part of the exchange rate, suffice it to state that We have
already held the contrary for the reason that a tax is levied to provide revenue for
government operations, while the proceeds of the margin fee are applied to strengthen
our country's international reserves.
2. Can the margin fee be considered as ordinary and necessary business expenses
deductible from its gros income?
SC: NO. Sec. 30 (a) of the NIRC applies.
In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of
Internal Revenue, 4 the Court laid down the rules on the deductibility of business expenses,
thus:
The principle is recognized that when a taxpayer claims a deduction, he must point to some
specific provision of the statute in which that deduction is authorized and must be able to
prove that he is entitled to the deduction which the law allows. As previously adverted to, the
law allowing expenses as deduction from gross income for purposes of the income tax is
Section 30(a) (1) of the National Internal Revenue which allows a deduction of 'all the
ordinary and necessary expenses paid or incurred during the taxable year in carrying on any
trade or business.' An item of expenditure, in order to be deductible under this section of the
statute, must fall squarely within its language.
Statutory test of deductibility:
(1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year,
(3) it must be paid or incurred in carrying on a trade or business.
6
In addition, not only must the taxpayer meet the business test, he must substantially prove
by evidence or records the deductions claimed under the law, otherwise, the same will be
disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
This, ESSO failed to prove. ESSO has not shown that the remittance to the head office of
part of its profits was made in furtherance of its own trade or business. The petitioner merely
presumed that all corporate expenses are necessary and appropriate in the absence of a
showing that they are illegal or ultra vires. This is error. The public respondent is correct
when it asserts that "the paramount rule is that claims for deductions are a matter of
legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every
instance has the burden of justifying the allowance of any deduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office,
cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on
its own trade or business.

DISPOSITIVE PORTION
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Quisque ac erat placerat turpis
suscipit congue id quis erat. Curabitur lobortis metus ut purus venenatis

OTHER NOTES
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Quisque ac erat placerat turpis
suscipit congue id quis erat. Curabitur lobortis metus ut purus venenatis

DIGESTER: Section 30(a) of the National Internal Revenue Code reading as follows:

SEC. 30. Deductions from gross income in computing net income there shall be allowed as
deductions

(a) Expenses:

(1) In general. All the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business, including a reasonable allowance for salaries or
other compensation for personal services actually rendered; traveling expenses while away
from home in the pursuit of a trade or business; and rentals or other payments required to
be made as a condition to the continued use or possession, for the purpose of the trade or
business, of property to which the taxpayer has not taken or is not taking title or in which he
has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the
case of a non-resident alien individual or a foreign corporation, the expenses deductible are
the necessary expenses paid or incurred in carrying on any business or trade conducted
within the Philippines exclusively.

7
 Tolls
GE L-30727 City of Ozamis v Lumapas
Antonio J.
Municipal Board enacted Ord 466 which imposed parking fees on designated areas.
Respondent Lumapas, an operator of a bus line (Romar) filed a complaint to declare the
ordinance null and recover paid fees amounting to 1,259. CFI ruled that the law is invalid
since it is in the nature of a toll which requires prior approval of the President. SC reversed,
ruling that it is in the nature of parking fees.
DOCTRINE
a. (Tolls) Section 59(b) of RA 4136 (Land Transportation and Traffic Code) requires
prior approval therefor by the President of the Philippines upon recommendation
of the Secretary of Public Works.
b. (What is the nature) Considering that the PUV are charged not for mere passage
but only when they stop and as clearly described in the stipulation of facts, the fees
are in the nature of PARKING FEES and not toll fees.
c. (What conferred power) Sec 15(y) of the Ozamiz Charter granted the city full power
to control and regulate its streets for the purpose of promoting the public health,
safety and welfare.
i. Such is a delegation of the police power of the national government and by
virtue of such power, a municipal corporation can make all necessary and
desirable regulations which are reasonable and desirable regulations which
are reasonable and manifestly in the interest of public safety and
convenience.
IMPORTANT PEOPLE
Petitioner-appellants: City of Ozamiz, rep by City Mayor, Municipal Board, City Treasurer
and City Auditor
Respondent-appellees: Serapio Lumapas (Operator of transportation buses for passengers
and Cargoes under Romar Line) and Hon Geronimo R. Marave
FACTS
33. The Municipal Board of Ozamiz City enacted Ordinance No. 466 which imposed parking
fees for every motor vehicle parked on any portion of existing parking space.
a. Important here is that the rate for the passenger bus is P 1.00, and the definition
of parking: which is construed to mean when a vehicle of whatever kind is stopped
on any portion of the existing parking areas for the purpose of loading and
unloading passengers or cargoes.
34. From the above law, the City began collecting the fees, collecting from herein
respondent Serapio Lumapas who paid under protest total of P 1,259.00 consisting of
parking fees at P 1.00 for each buses from October 1964 to January 1967 (based on
Official Receipts).
35. Four years after, respondent filed a complaint against the petitioners with CFI for the
recovery of the parking fees alleging that Ord 466 is Ultra Vires praying for its
nullification and reimbursement of the taxes plus P 200.00 Atty fees.
36. On the basis of the stipulation of facts and ocular inspection, the CFI rendered a
judgment declaring that the parking fees is in the nature of toll fees thereby violating
Section 59(b) of RA 4136 (Land Transportation and Traffic Code) because there is no
prior approval therefor by the President of the Philippines upon recommendation
of the Secretary of Public Works.
37. Thus the petitioners appealed by Certiorari to the SC maintaining that the ordinance is
valid since fees collected are for property rentals for use as parking spaces and that
such act was authorized by Section 2308 of the Revised Admin Code, Section 15(y) of
the City Charter of Ozamis (RA 321), and by sec 2 of the Local Autonomy law (RA
2264).
38. Note that after filing brief, the counsel of the petitioners prayed that the decision of the
CFI be reversed in view of the approval of the President upon recommendation of the
Secretary of said ordinance.
ISSUE with HOLDING
1. Whether or not the fees collected are tolls or parking fees (If tolls, the ordinance is
invalid) PARKING FEES
The buses of the respondent stopped on the extended portion of Zulueta street
beside the public market (area included by law to be taxed). Sec 3 of Ord 466
defined parking to mean the stoppage of a motor vehicle for whatever kind on any
portion of the existing parking areas for the purpose of loading and unloading
passengers or cargoes.
o Considering that the PUV are charged not for mere passage but only
when they stop and as clearly described in the stipulation of facts, the
fees are in the nature of PARKING FEES and not toll fees.
2. But does any law allow the municipality to enact ordinance for such fee? Yes the
charter confers it
Municipal corporations being mere creatures of law have only such powers as
expressly granted to them and said powers are construed strictissimi juris and any
doubt thereof must be construed against the municipality.
o Implied powers are only those which are necessarily incident to the
powers expressly conferred.
In this case, Sec 15(y) of the Ozamiz Charter granted the city full power to control
and regulate its streets for the purpose of promoting the public health, safety and
welfare.
o Such is a delegation of the police power of the national government and
by virtue of such power, a municipal corporation can make all necessary
and desirable regulations which are reasonable and desirable
regulations which are reasonable and manifestly in the interest of public
safety and convenience.
Therefore the ordinance is valid since it does not a toll which requires
authorization.
DISPOSITIVE PORTION
Reversed, Ordinance declared valid
OTHER NOTES
1. The parking fee imposed (P 1.00) being minimal in amount indicates that the purpose
is not for revenue but for regulation (therefore police power). The public convenience
provided by the law: increased safety and decongestion of traffic
DIGESTER: Dino Roel De Guzman
8
 Penalties
No. L-53961 National Development Company v. CIR
Cruz, J.
The NDC entered into contracts in Tokyo with Japanese shipbuilders. NDC did not withhold
any tax from the interests it paid the Japanese shipbuilders, and the CIR held it liable for
approx. P5M. It appealed to the CTA, which upheld the CIR. The SC agreed with the CTA
and held NDC liable for the withholding tax.
DOCTRINE
Sec. 53(c), NIRC. Return and Payment. Every person required to deduct and withhold
any tax under this section shall make return thereof, in duplicate, on or before the fifteenth
day of April of each year, and, on or before the time fixed by law for the payment of the tax,
shall pay the amount withheld to the officer of the Government of the Philippines authorized
to receive it. Every such person is made personally liable for such tax, and is
indemnified against the claims and demands of any person for the amount of any payments
made in accordance with the provisions of this section.
Although it was technically the Japanese shipbuilders who were liable for the said
withholding tax on the interest, it was NDC who was held liable for the deficiency taxes as a
penalty for its failure to withhold the same from the Japanese shipbuilders income.
FACTS
39. The NDC (herein petitioner) entered into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of 12 ocean-going vessels.
a. Initally, NDC paid by cash and irrevocable letters of credit. For the balance, it
signed 14 promissory notes guaranteed by the Republic of the Philippines.
b. The remaining payments and interests were remitted in due time by the NDC
to Tokyo; the vessels were then completed and delivered to it, also in Tokyo.
c. The NDC remitted to the shipbuilders $4,066,580.70 as interest on the
balance of the purchase price. No tax was withheld.
40. The CIR (herein respondent) held NDC liable for withholding tax in the amount of
P5,115,234.74. Negotiations followed but failed.
a. The BIR then served a warrant of distraint and levy to enforce collection on
NDC.
41. The NDC went to the CTA, which affirmed the CIR but reduced the tax deficiency.
42. The NDC then went to the SC on certiorari.
ISSUE with HOLDING
9. W/N the Japanese shipbuilders were liable for withholding tax on the interest remitted
to them by NDC Yes.
a. SEC. 37, NIRC. Income from sources within the Philippines. (a) Gross
income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:
(1) Interest. Interest derived from sources within the Philippines, and
interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise;
i. NDC claims that the Japanese shipbuilders were not subject to tax
under this section because the signing of the contract, construction
of vessels, payment, and delivery were all done in Tokyo.
ii. However, the provision above specifies interest derived from
sources within the Philippines, which meant that it was not the
place where the contract was signed that mattered, but the
residence of the obligor (here, NDC).
iii. Thus, the interest payment NDC remitted to the Japanese
shipbuilders is taxable.
b. NDC also suggests that the undertaking signed by the Secretary of Finance
exempted it from the collection of taxes.
i. The undertaking states: Upon authority of the President of the
Republic of the Philippines, the undersigned, for value received,
hereby absolutely and unconditionally guarantee (sic), on behalf of
the Republic of the Philippines, the due and punctual payment of
both principal and interest of the above note.
ii. The Court does not agree with NDC. There is no inhibition in the
saisd undertaking which exempted the interests from taxes. Tax
exemptions must be categorically and unmistakably expressed, and
any doubt must be resolved in favor of the taxing power.
c. (RELEVANT TO THE LESSON) NDC also argues that as a GOCC, it was
merely an administrator of the funds of the Republic of the Philippines.
However, as a corporation, it is governed in its proprietary activities by its
charter and by the Corporation Code and pertinent laws.
i. The NDC also forgets that it is not the one being taxed. The tax was
due on the interests earned by the Japanese shipbuilders, imposed
by Sec. 53, NIRC:
Section 53(c). Return and Payment. Every person required
to deduct and withhold any tax under this section shall make
return thereof, in duplicate, on or before the fifteenth day of
April of each year, and, on or before the time fixed by law for
the payment of the tax, shall pay the amount withheld to the
officer of the Government of the Philippines authorized to
receive it. Every such person is made personally liable for such
tax, and is indemnified against the claims and demands of any
person for the amount of any payments made in accordance
with the provisions of this section.
o In effect, the imposition of deficiency taxes on the NDC is a
penalty for its failure to withhold the same from the income of
the Japanese shipbuilders. It was remiss in its obligation as the
withholding agent of the government and so should be held
liable for its omission.
DISPOSITIVE PORTION
Petition denied. CTA decision upheld.
DIGESTER: Cristelle Elaine V. Collera
9
 DIRECT AND INDIRECT TAXES
G.R. No. 88291 MACEDA v. MACARAIG
Nocon, J.
Maceda was assailing the reimbursements made by the BIR to the National Power
Corporation (NPC) on account of the latters tax exemption privileges. This case made
specific reference to the ad valorem tax that were indirectly paid by the NPC for the purchase
of bunker fuel oil from Caltex and Shell. According to Maceda, the reimbursements were
illegal since NPCs exemptions were already withdrawn by P.D. No. 1177. The Court
disagreed. A subsequently law, P.D. 1931 allowed for the restoration of these privileges
subject to the approval of an inter-agency body. That body granted NPCs application for the
restoration of the privileges.
DOCTRINE
Classifications or kinds of taxes according to persons who pay or who bear the burden:
a. Direct Tax the where the person supposed to pay the tax really pays it.
WITHOUT transferring the burden to someone else. Examples: Individual income
tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence tax,
immigration tax
b. Indirect Tax that where the tax is imposed upon goods BEFORE reaching the
consumer who ultimately pays for it, not as a tax, but as a part of the purchase
price. Examples: the internal revenue indirect taxes (specific tax, percentage
taxes, (VAT) and the tariff and customs indirect taxes (import duties, special import
tax and other dues)
IMPORTANT PEOPLE
Ernesto Maceda petitioner, former Senator.
Catalino Macaraig, Jr. Executive Secretary of President Corazon Aquino
FACTS
43. (The case is in response to a motion for reconsideration filed by Maceda after the Court
promulgated its decision on the same issue in 1991.)
44. The National Power Corporation (NPC) filed with the Bureau of Internal Revenue (BIR)
several claims for reimbursement over its payment of ad valorem tax* levied upon some
amount of bunker fuel oil it ordered from Caltex and Pilipinas Shell.
45. The BIR had granted an earlier claim by NPC, reimbursing the state-owned company
the amount of P58 million.
46. NPC, put exclusively in charge of the power generation and distribution in the country,
claimed that it was exempted from paying taxes, including ad valorem taxes, based on
a succession of laws that go back to its charter. The exemption afforded by the state to
NPC since its founding was to facilitate the accomplishment of its mandatethe
electrification of the entire country.
47. Petitioner Maceda is now trying to block the release of another P411 million in
reimbursements, arguing that NPCs tax exemption privileges have been abolished by
P.D. No. 1177 (which abolished tax exemption privileges of government-owned and
controlled companies). The privilege was curtailed by President Marcos apparently in
response to the countrys worsening debt situation.
ISSUE with HOLDING
10. W/N NPC was entitled to ad valorem tax reimbursement
a. Yes. Though P.D. 1177 had abolished tax exemption privileges, the subsequent
law, P.D. 1931, allowed NPC to apply for a total restoration of those privileges.
NPC applied for the restoration. This application was granted by the Fiscal
Incentives Review Board, an inter-agency body created by P.D. 1931 to review
tax exemption applications. The exemption was retroactively applied to include
the period when the privilege was abolished.
11. What kind of tax exemption privileges did NPC have?
a. It is apparent from the succession of laws (more on that below) concerning NPC
that the legislative intent of exempting the company from paying taxes was to
enable it to pay its indebtedness, in light of its total electrification mandate.
b. The NPC was formed in 1936 by virtue of Commonwealth Act No. 120 for the
purpose of building hydro power plants. CA 140 exempted NPC from the payment
of all taxes.
c. Subsequent laws concerning different aspects of the NPC (e.g., its manner of
raising funds through floating bonds, the Presidents authority to guarantee its
debt, increasing its capital stock, its authority to increase indebtedness by
procuring loans domestically or from abroad, etc.) all included provisions
exempting NPC from the payment of taxes of any kind.
d. NPCs tax exemption privileges were enumerated in detail in R.A. No. 6395. That
law expressly exempted NPC from all income and realty taxes, import duties,
compensating tax, advanced sales tax, wharfage fees on imports, and all other
duties, fees and charges on petroleum products used for its operations.
e. Subsequently, P.D. No. 380 amended R.A. 6395. The new law further qualified
NPCs exemptions as to include all direct and indirect taxes.
i. See the definition of direct and indirect taxes in the Doctrine.
ii. The only significant relation of that distinction to this case involves the ad
valorem taxes then imposed on oil products. When Caltex and Pilipinas
Shell sold oil to NPC, the prices were inclusive of the ad valorem tax. In
effect, it was NPC that paid for the ad valorem tax. But since it was
exempted from paying such tax, NPC filed for reimbursement with the BIR.
These were the same reimbursements that were assailed by the petitioner
in this case.
f. The tax privileges were maintained throughout subsequent laws until P.D. 882,
which withdrew NPCs tax-free importation privilege as a measure to control
foreign exchange spending by government-owned companies.
g. P.D. 1177 then amended that law. (See Issue No. 1, a)
12. Who then is liable for the ad valorem tax?
a. Sellers Caltex and Pilipinas Shell had shifted the burden of paying the ad valorem
tax, which is an indirect tax, on bunker fuel oil to its buyers by including the tax in
the price of the oil they sold to NPC.
b. However, as already proven, NPC was exempt from paying those taxes. As a
result, Caltex and Pilipinas Shell must be burdened with paying those taxes. On
the other hand, since NPC had already paid for these indirectly, it was entitled to
be reimbursed by the BIR.
c. Nonetheless the issue was later rendered moot after E.O. No. 195 reduced ad
valorem tax on bunker fuel oil to 0%.
DISPOSITIVE PORTION
Motion for reconsideration DENIED. Courts decision AFFIRMED.
OTHER NOTES
*Ad Valorem Tax Tax levied based on the value of the item taxed.
On the P411 million reimbursement, the Court said there was a so-called Mexican stand-off.
While the Court cannot restrain the BIR from reimbursing that amount since NPC, as found,
is exempted from paying tax, it cannot on the other hand direct the BIR to reimburse that
amount since NPCs claim was belatedly filed. (According to the NIRC, claims must be filed
within two years of payment. In this case, more than two years had elapsed.)
DIGESTER: Horace
10
 Prospectivity of Tax Laws - Hydro failed to prove that the sale happened before the effectivity of EO 860.
Hydro Resources Contractors Corporation vs CTA
Paras ISSUE with HOLDING
13. Whether Hydro should pay the additional 3% ad valorem duty NO.
In 1978, Hydro and NIA entered into a contract that involved the importation of construction - The subsequent executions of the Deeds of Sale of the equipment in question on
equipment. NIA was to advance the funds for the purchase of the equipment and Hydro was December 6, 1982 and March 24, 1983 are not relevant and material in the
to pay NIA back. When Hydro completed the payments in 1982 and 1983, a Deed of Sale consideration of the application of EO 860 because said Deeds of Sale were mere
was executed by NIA and Hydro in order to transfer ownership of the equipment. The Bureau formalities in the implementation of the contract executed on August 1978, which
of Customs imposed an additional ad valorem duty on Hydro, pursuant to EO 860, which should be reckoned and construed as the actual date of sale.
took effect in 1982. The SC held that Hydro should not be made to pay the additional duty - It is a perfected contract of sale subject to a suspensive condition (full payment by
because at the time the contract was executed in 1978, EO 860 was not yet in effect. The Hydro.
SC ruled that laws do not have a retroactive effect unless the contrary is provided. - Under Art 1187 of the Civil Code, the effectivity of said contract reverts back to the
constitution of the contract, in this case August 1978.
- It is a cardinal rule that laws shall have no retroactive effect, unless the
DOCTRINE contrary is provided. (Art. 4, Civil Code)
It is a cardinal rule that laws shall have no retroactive effect, unless the contrary is provided. - Except for a statement providing for its immediate execution, EO 860 does not
(Art. 4, Civil Code) provide for its retroactivity.
- Moreover, the Deputy Minister of Finance clarified that letters of credit opened prior
to the effectivity of EO 860 are not subject to the provisions thereof.
FACTS - Consequently, the importations in question which arrived in 1977 and 1978 are not
48. In August 1978, the National Irrigation Administration (NIA) entered into an agreement subject to the 3% additional ad valorem duty, the same being imposed only on
those whose letter of credit were opened after the promulgation of EO 860.
with petitioner Hydro Resources Contractors Corporation (Hydro) for the construction
of the Magat River Multipurpose Project in Isabela. DISPOSITIVE PORTION
- Under the contract, Hydro was allowed to procure new construction equipment, IN VIEW OF THE FOREGOING CONSIDERATIONS, the petition is GRANTED; the assailed
spare parts and tools from abroad, the payment for which was advanced by NIA. Decisions of respondents Court of Tax Appeals and Deputy Minister of Finance are SET
- In addition, NIA was to pay for the import duties and taxes incident to the ASIDE and another one rendered ordering the refund of the amount of P281,591.00
importations deductible from the proceeds of the contract price. representing 3% additional ad valorem duty to petitioner Hydro Resources Contractors
- Hydro was to repay NIA in full the value of the construction equipment out of the Corporation in the form of tax credit.
same proceeds before eventual transfer or taking ownership of the construction
equipment upon termination of the contract.
DIGESTER: Sarah.
49. NIA failed to comply with its tax obligations.
50. In the meantime, Hydro fully repaid the value of the construction equipment.
- Thus, on December 6, 1982 and March 24, 1983, NIA executed deeds of sale
covering the construction equipment and transferred the ownership to Hydro.
51. Upon the transfer of the ownership, Hydro was assessed by the Bureau of Customs the
corresponding customs duty and compensating tax.
- This amount was paid by Hydro to the Bureau of Customs.
52. In addition, Hydro was assessed additional 3% ad valorem duty in the amount of
P281,591.00 prescribed in Executive Order 860.
- Hydro also paid this amount but this time under protest.
53. The Collector of Customs acted favorably on petitioner's protest and ordered the refund
of the amount paid for the ad valorem duty in the form of tax credit.
- The contract between Hydro and NIA was executed in 1978, before EO 860 took
effect (December 21, 1982).
54. This was affirmed by the acting Commissioner of Customs.
55. This finding as reversed by the Deputy Minister for Finance.
56. The CTA affirmed the Deputy Minister for Finance.
- The CTA ruled that the sale/transfer of the equipment happened after 1978.
- It was incumbent upon Hydro to have shown that the sale/transfer was made
before December 21, 1982, when the EO 860 was effective in order that it shall
not be subject to the imposition of 3% additional ad valorem duty.

11
 IMPRESCRIPTIBILITY OF TAXES
G.R. No. L-29485 CIR v. Ayala Securities Corp.
TEEHANKEE
The SC previously affirmed the cancellation of assessment made by the CIR on the ground
that the assessment made in February 1961 on Ayala Security Corp.s surplus for fiscal year
ending September 1955 was made after the expiration of the five-year prescriptive period
provided in Sec. 331 of the NIRC and was of no binding force and effect. Upon MR, the SC
reversed itself and ruled that the prescriptive period in Sec. 331 only applied where the tax
in question required the filing of a return. Since the tax, which was on surplus profits (also
referred to as unreasonable accumulation of surplus), did not require the filing of a return,
neither the 5-year period under Sec. 331 or the 10-year period under Sec. 332(a) applied,
as both apply only to taxes which require the filing of a return.
DOCTRINE
- In the absence of express statutory provision, the right of the government to assess unpaid
taxes is imprescriptible.
- [Case-specific doctrine: Since there is no express statutory provision limiting the right of
the Commissioner of Internal Revenue to assess the tax on unreasonable accumulation of
surplus provided in Section 25 of the Revenue Code, said tax may be assessed at any time.]
FACTS
57. In 1961, CIR assessed Ayala Securities Corp. in the sum of P758k for its surplus of
P2.7M for its fiscal year ending 1955. The basis was the 25% tax on unreasonably
accumulated surplus under Sec. 25 of the Tax Code.
58. Ayala Securities Corp. argued that the amount sought to be collected was surtax
liability under Sec. 25 and not deficiency corporate income tax under Sec. 24.
Therefore, it has prescribed under Sec. 331.
59. On appeal, the CTA cancelled the assessment. This was affirmed in toto by the SC.
The reason was that the assessment was made after the expiration of the 5-year
prescriptive period in Sec. 331 of the NIRC and was consequently of no force and
effect.
60. CIR filed a motion for reconsideration.
ISSUE with HOLDING
1. W/N the assessment of the CIR had prescribed under Sec. 331 of the NIRC - NO
(MR granted)
- Sec. 331 provides: Except as provided in the succeeding section, internal revenue taxes
shall be assessed within five years after the return was filed
- The section applies to assessment of taxes which requires the filing of returns. A return
(which starts the running of the five-year period), must be one which is required for the
particular tax. (See Butuan Sawmill v. CTA, 16 SCRA 277, which held that the filing of an
income tax return does not start the running of prescription for assessment.)
- Ayala filed an income tax return, but it did not file a return covering surplus profits which
were improperly accumulated. In fact, no return could have been filed; the law could not
possibly require the filing of a return covering unreasonable accumulation of corporate
surplus profits, as a tax thereon is in the nature of a penalty.
- Therefore, the prescriptive period in Sec. 331 does not apply to assessments on
improper accumulation of surplus.
- Sec. 332 (10-year prescriptive period) also does not apply. Sec. 332 also has reference
to taxes requiring the filing of returns; specifically, it treats of the filing of a false or
fraudulent return or a failure to file one. There can be no failure or omission to file a return
when no return is required by law.
2. (side issue) W/N Ayala Securities Corp. is a holding company within the meaning
of Sec. 25 - YES
- Ayala Securities Corp. is a mere holding company of its shareholders through its mother
company (Ayala & Co.), a registered co-partnership then set up by the individual
shareholders belonging to the same family. Through court testimony, it was established
that (1) both companies shared the same set of employees and (2) the policy of Ayala
Securities Corp. was practically governed (at the very least strongly influenced) by the
officers of Ayala & Co.
- Therefore, Ayala Securities Corp. falls under Revenue Regulation No. 2 implementing
provisions of the income tax law, Sec. 20 (Holding and Investment Companies) provides:
A corporation having practically no activities except holding property, and collecting the
income therefrom or investing therein, shall be considered a holding company within the
meaning of section 25.
DISPOSITIVE PORTION
ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu thereof,
judgment is hereby rendered ordering respondent corporation to pay the assessment in the
sum of P758,687.04 as 25% surtax on its unreasonably accumulated surplus, plus the 5%
surcharge and 1% monthly interest thereon, pursuant to section 51 (e) of the National
Internal Revenue Code, as amended by R. A. 2343. With Costs.
OTHER NOTES
The purpose of the additional tax on a corporation's improperly accumulated profits
or surplus (Sec. 25, Tax Code) is to avoid the situation where a corporation unduly retains
its surplus instead of declaring and paving dividends to its shareholders or members who
would then have to pay the income tax due on such dividends received by them.
CIR argued in the alternative that even if the 25% surtax had prescribed (computed
from filing of the income tax return in 1955), the intent to evade payment of the surtax is an
inherent quality of the violation and the return filed must necessarily partake of a false and/or
fraudulent character which would make applicable the 10-year prescriptive period provided
in section 332(a) of the Tax Code. This was not ruled upon because it already held that the
25% surtax is not subject to any statutory prescriptive period.
SEC. 25. Additional tax on corporations improperly accumulating profits or surplus.
xxx xxx xxx
(b) Prima facie evidence. The fact that any corporation is a mere holding company shall
be prima facie evidence of a purpose to avoid the tax upon its shareholders or members
Similar presumption will lie in the case of an investment company where at any time during
the taxable year more than fifty per centum in value of its outstanding stock is owned, directly
or indirectly by one person.
(c) Evidence determinative of a purpose. The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its shareholders or members unless
the corporation, by clear preponderance of evidence, shall prove the contrary.
DIGESTER: Gabi Timbancaya
12
 Double Taxation B. (IMPORTANT) THE ORDINANCE IS NOT CLASS LEGISLATION AND DOES NOT
G.R. No. L-4817 - Punsalan v. Mun. Board of Manila AUTHORIZE DOUBLE TAXATION
Reyes, J.
Petitioners: ordinance unjust and oppressive because it creates discrimination within a class in
Petitoners, who practice professions which under Ordinance 3398 are required to pay a municipal that while professionals with offices in Manila have to pay the tax, outsiders who have no offices
occupation tax, seek to have the ordinance declared invalid. They argue that they are already in the city but practice their profession therein are not subject to the tax.
paying the same tax under the NIRC. The SC upheld the ordinance, stating that there is no double
taxation because there is no double taxation where one tax is imposed by the state and the other
SC: Petitioners create their own distinction not found in the law. The ordinance imposes the tax
is imposed by the city.
upon every person "exercising" or "pursuing" any one of the occupations named, but does not say
____________________________________________________________________________
that such person must have his office in Manila.What constitutes exercise or pursuit of a profession
__
in the city is a matter of judicial determination.
DOCTRINE

The argument against double taxation may not be invoked where one tax is imposed by the state
and the other is imposed by the city, it being widely recognized that there is nothing inherently
obnoxious in the requirement that license fees or taxes be exacted with respect to the same
occupation, calling or activity by both the state and the political subdivisions thereof.
____________________________________________________________________________
FACTS
1. Petitioners (who practiced several professions) filed a suit to declare invalid Ordinance No.
3398 of the City of Manila together with the provision of the Manila charter authorizing it.
They also pray for the refund of taxes collected under the ordinance which was paid under
protest.
2. Petitioners had already paid their occupation tax (required by Sec. 21 of the NIRC). Upon
being required to pay additional occupational tax under the ordinance in question, they paid
in protest and then filed this suit.
3. Ordinance 3398
1. imposes a municipal occupation tax on persons exercising various professions in
the city (petitioners belong to the professions taxed)
2. penalizes non-payment of the tax by a fine of P200 and/or imprisonment of not
more than 6mos.
3. was enacted pursuant to paragraph (1) of section 18 of the City of Manila charter,
which empowers the Municipal Board to impose a municipal occupation tax, not to
exceed P50 per annum, on persons engaged in the various professions above
referred to
4. LOWER COURT: upheld the validity of the provision of law authorizing the enactment of the
ordinance but declared the ordinance itself illegal and void on the ground that the penalty
there in provided for non-payment of the tax was not legally authorized
RE: Double taxation: The argument against double taxation may not be invoked where one tax is
imposed by the state and the other is imposed by the city, it being widely recognized that there is
nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect
to the same occupation, calling or activity by both the state and the political subdivisions thereof.
____________________________________________________________________________
DISPOSITIVE PORTION
In view of the foregoing, the judgment appealed from is reversed in so far as it declares Ordinance
No. 3398 of the City of Manila illegal and void and affirmed in so far as it holds the validity of the
provision of the Manila charter authorizing it. With costs against plaintiffs-appellants.
____________________________________________________________________________
DISSENT BY PARAS:
The Municipal Board of Manila cannot outlaw what Congress of the Philippines has already
authorized. Because, the state and the cit both impose the tax, the license granted by the National
Government is in effect withdrawn by the City in case of non-payment of the tax under the
ordinance. Whereas the professionals elsewhere pay only one occupation tax, in the City of Manila
they have to pay two, although all are on equal footing insofar as opportunities for earning money
out of their pursuits are concerned. A professional who has paid the occupation tax under the
National Internal Revenue Code should be allowed to practice in Manila even without paying the
similar tax imposed by Ordinance No. 3398. The City cannot give what said professional already
has.

ISSUE with HOLDING DIGESTER: AROD

WON the lower courts ruling is correct. NO, SC reverses the LC ruling insofar as it declared
the Ordinance void but affirms the validity of the Manila charter authorizing it.

A. LC ERRED IN RULING THAT PENALTY IMPOSED BY ORDINANCE WAS NOT LEGALLY

AUTHORIZED.

The last paragraph (kk) of section 18 of the Manila Charter empowers the Municipal Board "to fix
penalties for the violation of ordinances which shall not exceed to two hundred pesos fine or six
months" imprisonment, or both such fine and imprisonment, for a single offense. This is the legal
basis for the penalty imposed

13
 Doctrines in Taxation Double Taxation
GR No. 139786 CIR v. Citytrust Investment Phils. Inc.
Sandoval-Gutierrez, J.
Asianbank and Citytrust sought to be refuneded of their overpayment of gross receipt tax,
which included 20% of FWT on their passive income, based on the recent ruling of SC in
Asian bank v. CIR. They argued that there would be double taxation if the passive income,
which they did not actually receive, be subject to two kinds of tax FWT and GRT. SC ruled
that there was no double taxation because it involved two different kinds of tax.
DOCTRINE
Double taxation means taxing for the same tax period the same thing or activity twice, when
it should be taxed but once, for the same purpose and with the same kind of character of
tax.
GRT and FWT are two different concepts because the former is a percentage tax
(percentage of the gross selling price or gross value in money of goods sold, bartered or
imported; or of the gross receipts or earnings derived by any person engaged in the sale of
services; not subject to withholding) while the latter is an income tax (national tax imposed
on the net or the gross income realized in a taxable year; subject to withholding).
IMPORTANT PEOPLE
Citytrust Investment Phils., Inc.: respondent in petition #1
Commissioner of Internal Revenue (CIR): petitioner in petition #1; respondent in petition #2
Asianbank: petitioner in petition #2
FACTS
61. This case involves two petitions that were consolidated with regard to the inclusion of
passive income5 in the computation for the tax of gross receipts received by banks.
a. Section 27(D) of the National Internal Revenue Code (NIRC) of 19976
provides that the earnings of banks from passive income are subject to a 20%
final withholding tax (FWT).
5 earnings one derives from a rental property, limited partnership or other enterprise
in which s/he is not materially involved (Investopedia.com)
6 (D) Rates of Tax on Certain Passive Incomes
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final
tax at the rate of twenty percent (20%) is hereby imposed upon the amount of
interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporation and royalties, derived from sources within the Philippines: x x x
7 SEC. 121. Tax on banks and Non-bank financial intermediaries. There shall be
collected a tax on gross receipts derived from sources within the Philippines by all
banks and non-bank financial intermediaries in accordance with the following
schedule:
(a) On interest, commissions and discounts from lending activities as well as income
from financial leasing, on the basis of remaining maturities of instruments from which
such receipts are derived:
b. Section 121 of NIRC7 subjects their gross receipts, which includes their
passive income, to a 5% gross receipts tax.
62. CIR v. Citytrust
a. Respondent Citytrust is a domestic corporation engaged in quasi-banking
activities.
b. In 1994, it reported P110M as its total gross receipts and paid P5M as its
corresponding 5% GRT.
c. Pursuant to Asian Bank Corporation v. CIR, it sought a tax refund or credit in
the amount of P326k from CIR because said case ruled that the 20% FWT on
a banks passive income does not form part of the taxable gross receipts.
d. To toll the running of the 2-year prescriptive period for filing of claims, it also
filed a petition for review with the Court of Tax Appeals (CTA), which granted
its claim.
e. CA affirmed, which based it on CIR v. Tours Specialist Inc. and CIR v. Manila
Jockey Club, wherein SC ruled that monies or receipts that do not redound to
the taxpayers benefit are not part of its gross receipts. The 20% FWT against
passive income was already remitted to the Bureau of Internal Revenue (BIR).
To include the same to gross receipts for the same year would be considered
double taxation.
f. CIR is now appealing to SC.
63. Asianbank v. CIR
a. Petitioner Asianbank is a domestic corporation engaged in banking business.
b. Asianbank paid the 5% GRT on its total gross receipts for 1994-1996.
c. It sought a claim for refund of the overpaid GRT amounting to P2.002M. It
also filed a petition for review with the CTA.
d. CTA allowed the refund, but in a reduced amount of P1.345M.
e. CA reversed and ruled that the 20% final tax withheld from interest income of
banks and other similar institutions is not income that they have not received;
it is simply withheld from them and paid to the government, for their benefit.
64. CIR and Asianbank appealed to SC and their petitions were consolidated.
a. CIRs arguments:
i. No law which excludes the 20% FWT from the taxable gross
receipts for the purpose of computing the 5% GRT;
Short-term maturity (not in excess of two [2] years) 5%
Medium-term maturity (over two [2] years but not exceeding four [4] years)
3%
Long-term maturity
(1) Over four (4) years but not exceeding seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal, profits from exchange and all
other items treated as gross income under Section 32 of this Code 5%
Provided, however, That in case the maturity period referred to in paragraph (a) is
shortened thru pretermination, then the maturity period shall be reckoned to end as of
the date of pretermination for purposes of classifying the transaction as short,
medium or long-term and the correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax
herein provided on persons performing similar banking activities.
14
 ii. The imposition of the 20% FWT on the banks passive income and i. Double taxation means taxing for the same tax period the same
the 5% GRT on its taxable gross receipts, which includes the banks thing or activity twice, when it should be taxed but once, for the same
passive income, does not constitute double taxation; purpose and with the same kind of character of tax.
iii. Manila Jockey Club is not applicable; AND ii. GRT and FWT are two different concepts because the former is a
iv. In the computation of the 5% GRT, the passive income need not be percentage tax (percentage of the gross selling price or gross value
actually received in order to form part of the taxable gross receipts. in money of goods sold, bartered or imported; or of the gross
b. Citytrust and Asianbanks arguments: receipts or earnings derived by any person engaged in the sale of
i. Section 4(e) of Revenue Regulations No. 12-80 dated November 7, services; not subject to withholding) while the latter is an income tax
1980 provides that the rates of taxes on the gross receipts of (national tax imposed on the net or the gross income realized in a
financial institutions shall be based only on all items of income taxable year; subject to withholding).
actually received; AND d. SC disagreed with the applicability of Manila Jockey Club to this case.
ii. Manila Jockey Club is applicable. i. In Manila Jockey Club, SC ruled that the gross receipts of the Manila
Jockey Club should not include the 5% of wager funds because
ISSUE with HOLDING such money was earmarked by law or regulation for other persons.
14. WON the 20% FWT on a banks passive income form part of the taxable gross receipts The money would go to the Board on Races and to the owners of
for the purpose of computing the 5% GRT YES. horses and jockeys.
a. In a series of SC decisions, it has been held that gross receipts as the entire ii. Earmarking is not the same as withholding. Funds that are
receipts without any deduction. earmarked do not form part of gross receipts.
i. Citytrust and Asianbank were arguing that since they dont actually e. On a final note, SC stressed that tax exemptions are to be construed in
receive the 20% FWT on their passive income, it should not be strictissimi juris against the taxpayer and liberally in favor of the taxing
included in the computation for their gross receipts. authority and should be granted only by clear and unmistakable terms.
ii. CIR v. BPI: The word gross must be used in its plain and ordinary
meaning. It is defined as a whole, entire, total, without deduction. DISPOSITIVE PORTION
iii. Based on the legislative history of the imposition of GRT on banks, CIRs petition is granted. Asianbanks petition is denied.
Congress never established a definition for gross receipts.
However, BIR has been consistently defining it as receipts not OTHER NOTES
having any deduction and this hasnt changed throughout the
various reenactment of Section 121 of NIRC. This shows that its
interpretation carries out the legislative purpose. DIGESTER: Lulu Querido.
b. SC disagrees with Citytrusts argument that they dont actually receive 20%
of their passive income, it should be excluded from the computation for gross
receipts.
i. Section 4(e) of Revenue Regulations No. 12-80 recognized that
income may be taxable either at the time of its actual receipt or its
accrual. It does not exclude accrued interest income from the
taxable gross receipts, but merely postpones it until it is actually
paid.
ii. Section 4(e) makes a distinction between accrual and actual receipt
such that it is only when the amount is actually received would it be
included in the computation.
iii. Section 4(e) of Revenue Regulations No. 12-80 has been
superseded by Section 7(c) of Revenue Regulations No. 17-84
issued on October 12, 1984. There exists a disparity between
Section 4(e) which imposes the GRT only on all items of income
actually received (as opposed to their mere accrual) and Section
7(c) which includes all interest income (whether actual or accrued)
in computing the GRT.
iv. SC also ruled in CIR v. Bank of Commerce that actual receipt can
be physical or constructive.
c. SC agrees with CIR that there is no double taxation in the imposition of the
20% FWT and 5% GRT.

15
 Methods of avoiding the occurrence of double taxation Tax Treaty
G.R. No. 127105 CIR v SC Johnson and Son
Gonzaga-Reyes, J.
SC Johnson and Son, a subsidiary and licensee of a US based company, asked
to be levied a lower tax rate, invoking the RP-US Tax Treaty. The Supreme Court here held
that the Tax Treaty provides that the remedy against double taxation in these cases would
NOT be an exemption (lower rate) but rather a CREDIT mechanism (where the tax paid in
one contracting state will be credited to the tax paid to another state). Thus the SC ruled that
the full tax rate was the correct rate to be levied to SC Johnson and Son.
DOCTRINE
Tax treaties are drafted with a view towards the elimination of international juridical double
taxations (imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods)
Tax Treaties eliminate double taxation via several methods:
i. First method: exclusive right to tax is conferred by the treaty on only one of the contracting
states
ii. Second method: both the state of source of the tax as well as the state of residence are
given the power to tax. In this case, the treaties make it incumbent upon the state of
residence to allow RELIEF in order to avoid double taxation. There are two modes of
relief:
Exemption method: (income/capital which is taxed in the state of source is
exempted in the state of residence) Focus is on the income/capital itself.
Credit method: although income/capital taxed in the state of source is also taxable
in the state of residence, the tax paid in the state of source is credited against the
tax levied in the state of residence. Focus is on the tax itself.
FACTS
65. Respondent SC Johnson (SCJ) is a domestic corporation operating under Philippine
Laws. It entered into a license agreement with SC Johnson and Son, USA, a non-
resident foreign corporation (hereinafter, USA)
66. For the use of licenses, trademarks, and technology, respondent SCJ was obliged to
pay USA royalties based on a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments.
67. Respondent SCJ filed with the International Tax Affairs Division (ITAD) of the BIR a
claim for refund of overpaid withholding tax on royalties. They argued that the facts fall
squarely within the same circumstances of previously held decisions which ruled that a
preferential tax rate of 10% instead of 25% be applied.
a. SCJ submits that royalties paid is only subject to 10% tax because of the
Most-favored nation clause of the RP-US Tax Treaty.
68. The commissioner did not act on said claim for refund. So SCJ filed a petition for review
before the CTA.
69. The CTA rendered its decision IFO SCJ and ordered the CIR to issue a tax credit
certificate representing overpaid withholding tax on royalty payments.
a. It held that the phrase under similar circumstances should be interpreted to
refer to payment of royalty and not to the payment of the tax.
70. Thus, the CIR filed a petition for review with the CA which was denied.
ISSUE with HOLDING
15. W/N the 10% tax rate contemplated in the RP-US Tax Treaty applies to SC
Johnson and Sons. NO.
CIRs Argument:
a. The RP-US Tax Treaty does not apply here. Derived and relative to the RP-
West Germany Tax Treaty, the RP-US Tax Treaty does not contemplate the
situation of the respondent SCJ. (not as important)
b. (important) Even assuming that the phrase paid under similar
circumstances refers to the payment of royalties and not taxes (as held by
the CA), the Most Favored Nation clause cannot be invoked because when
a Tax Treaty contemplates circumstances attendant to the payment of a tax,
or royalty remittances for that matter, these must necessarily refer to
circumstances which are tax related.
c. (important) SCJs invocation of the aforementioned clause is basically a
claim for exemption from the application of the regular rate of 25% and thus
the provisions of the Tax Treaty must be strictly construed against it.
SC Johnsons Argument:
d. Forum shopping
e. Tax Treatys most favored nation clause refers to royalties paid under similar
circumstances as those subject to tax in other treaties thus, it is applicable
to them. (not as important)
i. The most favored nation clause is intended to allow the taxpayer in
one state to avail of liberal provisions contained in another tax treaty
where the country of residence of such taxpayer is also a party
thereto.
f. Estoppel
g. The CTA and CAs interpretation fails to take into account the purpose or spirit
of the Treaty provisions.
The RP-US Tax Treaty was entered into for the avoidance of double taxation. The purpose
of these is to reconcile the national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different jurisdictions.
They are drafted with a view towards the elimination of international juridical double taxations
(imposition of comparable taxes in two or more states on the same taxpayer in respect of
the same subject matter and for identical periods).
This is to encourage the free-floow of goods and services, the movement of capital,
technology, and persons between countries conditions vital in creating robust economies.
Tax Treaties eliminate double taxation via several methods:
- First method: Sets out respective rights to tax of the state of source and of the
state of residence with regard to certain classes of income or capital. (ie exclusive
right to tax is conferred on one of the contracting states)
- Second method: applies whenever the state of source is given a full or limited right
to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow RELIEF in order to avoid double
taxation. There are two modes of relief:
i. Exemption method: (income/capital which is taxed in the state of
source is exempted in the state of residence) Focus is on the
income/capital itself.
ii. Credit method: although income/capital taxed in the state of source
is also taxable in the state of residence, the tax paid in the state of
16
 source is credited against the tax levied in the state of residence.
Focus is on the tax itself.

In the case at bar, the state of source is the Philippines -- royalties are paid for the right to
use property/rights (trademarks, patents, etc). The US is the state of residence since the
taxpayer SC Johnson USA is based there.

Under the RP-US Tax Treaty, the state of residence and the state of source are both
permitted to tax royalties (with a restraint on the tax that may be collected by the state of
source). The method employed to give relief from double taxation is tax credit to citizens or
residents of the US (credit method).
- Thus, the CIR is correct in maintaining that the correct tax rate is 25% as the relief
from double taxation lies NOT in exempting tax but for the tax to be credited later
on.

DISPOSITIVE PORTION
Wherefore, for all the foregoing, the instant petition is GRANTED. The decision dated
May 7, 1996 of the CTA and the decision dated Nov 7 1996 of the CA are hereby SET
ASIDE.

DIGESTER: Reggie Perez

17
 Doctrines in Taxation Methods of Avoiding the occurence of double taxation
G.R. Nos. L-18169, L-18286, L-21434 CIR vs. Lednicky
REYES, J.B.L., J.
Spouses Lednicky are American citizens living in the Philippines. They are claiming
deductions from their tax assessments based on their alleging that they already paid the US
government on the said income. SC did not allow the refund holding that they were not
entitled to tax credit because their income was wholly derived from Philippine sources.
DOCTRINE
Double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit
of the same governmental entity. In the present case, although the taxpayer would have to
pay two taxes on the same income, the Philippine government only receives the proceeds
of one tax. Thus, there is no obnoxious double taxation.
As between where the income was earned and where the taxpayer is domiciled, and where
that income was not earned and where the taxpayer did not reside, it is indisputable that
justice and equity demand that the tax on the income should accrue to the benefit of the
former. Any relief from the alleged double taxation should come from the latter, since its right
to burden the taxpayer is solely predicated on his citizenship, without contributing to the
production of the wealth that is being taxed.
FACTS
71. Sps. Lednicky are American citizens residing in the Philippines, and have derived their
income derived all their income from Philippine sources for the taxable years in
question.
72. They filed their income tax return for 1956, which was assessed for P317,395.40 after
deducting P4,805.59 as withholding tax.
73. They then filed an amended income tax return for the same year claiming an additional
deduction of P205,939.24, which was paid to the US government as federal income tax
for 1956. They requested a refund of P112,437.90.
74. CIR failed to answer, so the Sps. Lednicky filed a petition with the CTA, which is now
with the SC. [G.R. No. L-18286]
75. The two other petitions which were consolidated with this case, G.R. No. L-18169 and
G.R. No. L-21434, have similar facts, but pertain to different years: 1955 and 1957,
respectively.
76. Tax court held that the taxes may be deducted because the Sps did not signify in their
ITR a desire to avail themselves of the benefits of paragraph 3(B) of Sec. 30 of the
Internal Revenue Act.
ISSUE with HOLDING
16. W/N a citizen of the United States residing in the Philippines, who derives income wholly
from sources within the Republic of the Philippines, may deduct from his gross income
the income taxes he has paid to the United States government for the taxable year
NO
a. CIR correct that the construction and wording of Sec. 30c(1)B of the Internal
Revenue Act shows the laws intent that the right to deduct income taxes paid
to foreign government from the taxpayers gross income is given only as an
alternative or substitute to his right to claim a tax credit for such foreign
income taxes.
i. SEC. 30. Deduction from gross income. In computing net
income there shall be allowed as deductions
(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable year,
except
B) Income, war-profits, and excess profits taxes imposed by the
authority of any foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not signify in his return
his desire to have any extent the benefits of paragraph (3) of this
subsection (relating to credit for foreign countries)
b. Unless the alien resident has a right to claim such tax credit if he so chooses,
he is precluded from deducting the foreign income taxes from his gross
income.
c. In prescribing that such deduction shall be allowed in the case of a taxpayer
who does not signify in his return his desire to have any extent benefits of
paragraph 3, the statute assumes that the taxpayer in question may signify
his desire to claim a tax credit and waive the deduction; otherwise, the
foreign taxes would always be deductible and their mention in the list on non-
deductible items in Sec. 30c might as well have been omitted or at least
expressly limited to taxes on income from sources outside the Philippine
Islands.
d. Had the law intended that foreign income taxes could be deducted from gross
income in any event, regardless of the taxpayers right to claim a tax credit, it
is the latter right that should be conditioned upon the taxpayers waiving the
deduction.
e. No danger of double credit/taxation:
i. Double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity.
ii. In the present case, although the taxpayer would have to pay two
taxes on the same income, the Philippine government only
receives the proceeds of one tax, there is no obnoxious double
taxation.
iii. Any relief from the alleged double taxation should come from the
US since the formers right to burden the taxpayer is solely
predicated in is citizenship, without contributing to the production
of wealth that is being taxed.
iv. To allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government amounts to
conferring on the latter the power to reduce the tax income of the
Philippine government simply by increasing the tax rates on the
alien resident.
DISPOSITIVE PORTION
The decisions of the Court of Tax Appeals are reversed, and, the disallowance of the refunds
claimed by the respondents Lednicky is affirmed.
DIGESTER: Liana
18