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TAX REVIEW CASES

CIR v FORTUNE TABACCO

Facts:
Fortune Tabacco was granted tax refund/ credit representing specific taxes erroneously
collected from its tobacco products, Tax refund is being reclaimed by CIR.

Petitioner is a domestic corporation manufacturer of cigarette brands. Prior to Jan 1, 1997

cigarette brands were subject to ad valorem tax pursuant to Tax Code 1977. On Jan 1,1997, RA
8240 took effect whereby a shift from ad valorem tax (VAT) system to specific tax system was
made and subjecting cigarette brands to specific tax.

The rates of excise tax on cigars shall be increased by 12% on Jan 1, 2000. TO implement
the provision for 12% increase of excise tax, Sec of Finance issued RR17-19 which provides ‘that
new specific tax rate for any existing brand of cigars packed shall not be lower than the excise tax
that is actually being paid prior Jan 1,2000.

Fortune filed a claim for refund for alleged overpaymnet of excise tax which the CTA
ordered to be returned.

The OSG argues that Sec 145 of Tax Cide admits of several interpretations. That excise tax
on cigarattes should be higher tax imposed under specific tax system and the tax imposed under
ad valorem tax system plus 12% increase - this being so, interpretation which will give life to
legislative intent to raise revenue should govern

Fortune argued that CTA and CA merely followed the letter of the law when they ruled that
the basis for 12% increase in tax rate should be the net retail price of the cigarettes in the market.
That CIR has gone beyond his delegated rule making power when he promulgated RR1799 which
created separate classification for cigarretes based on excise tax

Issue: WON RR1799 exceeded the allowable limits of legislative delegation

Ruling:
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OSG argument is not supported by clear language of the law. RR1799 is indeed flawed. The
passage of tax code is generate additional revenues for government. Shift from the ad valorem
system to specific tax systems is likewise meant to promote fair competition among the players in
the industries concerned, to ensure an equitable distribution of the tax burden and to simplify tax
administration.

What is controlling in this case is the doctrine of strict interpretation in imposition of

taxes.That statute will not be construed as imposing a tax unless it does so clearly, and
unambigously. TAx cannot be imposed without clear and express words for that purpose. Tax
laws construed strictly against the government

Tax refund may be based on

1. Erroneously/ illegally assessed or collected taxes
2. Penalties imposed without authority
3. Excessive or wrongful collection

CIR v SM PRIME HOLDINGS

Facts:
Sm Prime and First Asia are domestic corporations are engaged in the business of operating
cinema houses. BIR sent SM and First Asia Preliminary Assessment Notice for VAT deficiency
on cinema ticket sales for year 2000. SM and First Asia protested, BIR denied the protest.

A PAN for VAT deficiency on cinema ticket sales for taxable year 2003 was issued by BIR
against First Asia. Prompting the later to file a petition for review before CTA.

CTA ruled that cinematographic film is not a service covered by VAT under NIRC but an
activity subject to amusement tax of 30% under LGC. That national government should be
precluded from imposing its own business tax in addition to that already imposed and collected
by local government units.

On appeal CTA en Banc held that Sec 108 of NIRC actually sets forth an exhaustive
enumeration of what services are intended to be subject to VAT. And showing or exhibition of
motion pictures, films, or movies by cinema operators is not among those enumerated activities.
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Issue: WON gross receipts derived by operators of cinema/ theater house s from admission of
tickets are subject to VAT

Ruling:
Sec 11 LGC amended NIRC provision and transferring the power to impose amusement tax
on admission from theaters, cinema, concert halls, circuses and other places of amusement
exclusively to the local government. Thus, when NIRC 1977 was enacted the national
government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and
nights clubs, Jai-alai and race tracks.

Petition denied
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REYES v ALMANZOR

FACTS:
Petitioners JBL Reyes et al. owned a parcel of land in Tondo which are leased and occupied
as dwelling
units by tenants who were paying monthly rentals of not exceeding P300. Sometimes in 1971 the
Rental

Freezing Law was passed prohibiting for one year from its effectivity, an increase in monthly
rentals of dwelling units where rentals do not exceed three hundred pesos (P300.00), so that the
Reyeses were precluded from raising the rents and from ejecting the tenants. In 1973, respondent
City Assessor of Manila re-classified and reassessed the value of the subject properties based on
the schedule of market values, which entailed an increase in the corresponding tax rates
prompting petitioners to file a Memorandum of Disagreement averring that the reassessments
made were "excessive, unwarranted, inequitable, confiscatory and unconstitutional" considering
that the taxes imposed upon them greatly exceeded the annual income derived from their
properties. They argued that the income approach should have been used in determining the land
values instead of the comparable sales approach which the City Assessor adopted.

Issue: Is the approach on tax assessment used by the City Assessor reasonable?

Ruling:
No. The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a spirit of hostility, or at
the very least discrimination that finds no support in reason. It suffices then that the laws operate
equally and uniformly on all persons under similar circumstances or that all persons must be
treated in the same manner, the conditions not being different both in the privileges conferred and
the liabilities imposed. Consequently, it stands to reason that petitioners who are burdened by the
government by its Rental Freezing Laws (then R.A. No. 6359 and P.D. 20) under the principle of
social justice should not now be penalized by the same government by the imposition of
excessive taxes petitioners can ill afford and eventually result in the forfeiture of their properties.
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PBCom v CIR

Facts:
PBCom a commercial banking corp filed its quarterly income tax returns for first and second
quarters of 1985. It suffered net loss of 25.3 Million thereby showing no income tax liability in its
annual tax returns for the year 1985.

For the succeeding year of 1986 petitioner reported a net loss of 14.1 Million and declared
no tax payable year.

During these 2 years, petitioner earned rental income form leased properties. The lessees
withheld and remitted to BIR withholding creditable taxes of 282,795 and 234,077 in 1986.
Petioner requested CIR for tax credit of 5 million representing the overpayment of taxes in the 1st
and 2nd quarter of 1985.

On 1988 petitioner filed a claim for refund of creditable taxes withheld by their lessess from
property rentals in 1985 assailing RR 785 which alters the reglementary period from 2 years to 10
years to file refund.

CTA ruled that such petition was filed out of time because it was beyond the 2-year period
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Issue: WON RR7-85 was valid

Ruling:
Invalid. Administrative issuances are merely interpretation and not expansion of provision of
law. In case of inconsistency, the law prevails over them. Administrative agencies have no
legislative power. The RMC 7-85 issued by CIR is an administrative interpretation whic is not in
harmony with Sec230 of 1977 NIRC for being contrary to the express provision of a statute.

The cliam for refund already prescribed.

NATIONAL POWER CORPORATION v CITY OF CABANATUAN

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Facts:
Petitioner a GOCC sells electric power to Cabanatuan City posting a gross income of
107,814,187 in 1992. Pursuant to Sec 37 of Ordinance No165-92, Respondent assessed petitioner
a franchise tax amntng to 808,604

Petitioner refused to pay tax assessment arguing that respondent has no authority to impose
tax on GOCC. Also contend that as a non-profit organization it is exempted from payment of all
forms of taxes, charges, duties or fees in accordance with Sec 13 of RA 6395.

Respondent filed a collection suit in RTC alleging that petitioner’s exemption from locall
taxes has been repealed by Sec 193 LGC.

RTC upheld NPC’s tax exemption but CA ruled otherwise

Issue: WON Respondent has the authority to issue Ordinance 165-92 and impose an annual tax
on business enjoying a franchise

Ruling:
Yes. Taxes are lifeblood of the government. Sec 137 LGC clearly states that LGUs can
impose franchise tax notwithstanding any exemption granted by any law or other special law.

The original reasons for the withdrawal of tax exemption privileges granted to GOCC and all
other units of the government were that such privilege resulted in serious tax base erosion and
distortions in the tax treatment of similarly situated enterprises.
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BAGTSING v RAMIREZ

Facts:
Municipal Board of Mnl enacted ordinance 7522 regulating the operation of public markets
and prescribing fees for the rentals of stalls and providing penalties for violation thereof.

The collection of said fees was let by City of Mnl to said private corporation in a
“management and operating contract’

Issue: WON the delegation of the collection of taxes to a private entity invalidates a tax ordinance
and defeats public purpose

Ruling:
No. The fees collected do not go to private coffers of the corporation. Ordinance No. 7522
was not made for the corporation but for the purpose of raising revenue for the city. Entrusting of
the collection of the fees does not destroy the public purpose of the ordinance. So long as the
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purpose is public , it does not matter whether the agency through which the money is dispensed is
public or private. The right to tax depends upon the ultimate use, purpose and object for which
the fund is raised. It is not dependent on the nature or character of the person/ corporation whose
intermediate agency is to be used in applying it.

Note: now, the ordinance is invalid bcus of LGC bcus it contradicts LGC provision that
collection of taxes should not be let to private person/ entity.
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CHAMBER OF ESTATE BUILDERS ASSOCIATION v ROMULO

Facts:
CHAMBER question the validity of Sec 27 € of RA8424 and the RR issued by BIR to
implement said provision and those involving creditable witholding taxes. Also assails the
imposition of MCIT on corporations on sales of real properties classified as ordinary assets.

CHAMBER argues that MCIT violates due process clause because it levies income tax even
if there is no realized gain.

‘Sec 27 €: MCIT on Domestic Corporations. A corporation, beginning on its 4th year of

operation, is assessed an MCIT of 2% of its gross income when such MCIT is greater than the
normal corporate income tax imposed under Sec 27 (A) applying 30% tax rate. If the regular
income is higher than MCIT, corporation does not pay MCIT.

Any excess of MCIT over Normal tax shall be carried forward and credited against the
normal income tax for 3 immediately succeeding taxable years. Sec of Finance is authorized to
suspend imposition of MCIT o any corporations which suffrers, losses, labor dispute, force
majeure or legitimate business reverse.

The term Gross Income means gross sales less returns, discounts, allowances, and cost of
goods sold. Cost of goods sold include all business expense directly incurred to procure the
merchandise

Issue:
WON imposition of MCIT is constitutional/ valid.

Ruling:
Yes. MCIT is not a tax on capital. It is imposed on gross income which is arrived at
deducting the capital spent by corporation in the sale of its goods. MCIT is not an additional tax
imposition. IT is imposed in liue of the normal net income tax.
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Even if corporation incurs net loss in its business operations or reports 0 income after
deducting its expenses, it is still subject to MCIT of 2% of its gross income. This is consistent
with the law which imposes MCIT on gross income notwithstanding the amount of net income

VILLANUEVA v CITY OF ILOILO

Facts:
Municipality of Iloilo enacted Ordinance 86 imposing license tax fee upon tenement houses.
The ordinance was challenged.

On Jan 1960 the municipal board, believing that it acquired authority to enact an ordinance
of same nature pursuant to Local Autonomy Act, enacted Ordinance 11.

Issue: WON Ordinance 11 violate rule of uniformity of taxation

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Ruling:
No. Tenement houses constitute a distinct class of property and that taxes are uniform and
equal when imposed upon all property of same class or character within the taxing authority.

The fact that the owners of the other classes of buildings in iloilo are not imposed upon by
the ordinance, or that tenement taxes are imposed in other cities do not violate the rule of equility
and uniformity. The rule does not require that taxes for same purpose should be imposed in
different territorial subdivision at the same time. So long as the burden of tax falls equally and
impartially on all owners or operators of tenement houses similarly classified or situated, equality
and uniformity is accomplished.
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PHILEX MINING CORP v CIR

Facts:
Philex protested the demand for payment 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.

BIR, found no merit in Philexs position. Since these pending claims have not yet been
established or determined with certainty, it follows that no legal compensation can take place..

In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund
against its exercise tax obligation, Philex raised the issue to the Court of Tax Appeals. In the
course of the proceedings, the BIR issued a Tax Credit Certificate,which applied to the total tax
liabilities of Philex effectively lowered the latters tax obligation of P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance, elucidating its reason, to wit: for legal compensation to take place, both obligations must
be liquidated and demandable. Court of Tax Appeals ruled that taxes cannot be subject to set-off
on compensation since claim for taxes is not a debt or contract.

Philex appealed the case before the CA. CA affirmed the CTAs observation.

However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund. In view of the grant of its VAT input credit/refund, Philex
now contends that the same should, ipso jure, off-set its excise tax liabilities since both had
already become due and demandable, as well as fully liquidated;hence, legal compensation can
properly take place.

Issue: WON Taxes can be subject to compensation or set-off

Ruling:
No merit. Taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each other.There is a material
distinction between a tax and debt. Debts are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign capacity.
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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 tax cannot await the results of a
lawsuit against the government. Tax law that taxes are the lifeblood of the government and so
should be collected without unnecessary hindrance.

We cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been
granted. Tax is compulsory rather than a matter of bargain. 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.

Finally, 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.

In this regard, we agree with Philex.VAT input taxes were paid between 1989 to 1991 but
the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been
more diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes.
"The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collectot kill the 'hen that lays the golden egg.'
And, in the order to maintain the general public's trust and confidence in the Government this
power must be used justly and not treacherously."
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CARLOS SUPERDRUG V DSWD

Facts:
Assailing the constitutionality of Section 4(a) of Republic Act (R.A.) No. 9257, otherwise
known as the Expanded Senior Citizens Act of 2003.
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Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.

Public respondents, DSWD, DOH, DOF, DOJ, and DILG specifically tasked to monitor the
drugstores compliance with the law; promulgate the implementing rules and regulations for the
effective implementation of the law; and prosecute and revoke the licenses of erring drugstore
establishments.

The antecedents are as follows:

On February 26, 2004, R.A. No. 9257, amending R.A. No. 7432, was signed into law
became effective. Section 4(a) of the Act states: The senior citizens shall be entitled to the 20%
discount from all establishments relative to the utilization of services in hotels and similar lodging
establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial
services for the death of senior citizens;

The establishment may claim the discounts granted as tax deduction based on the
net cost of the goods sold or services rendered: Provided, That the cost of the discount
shall be allowed as deduction from gross income for the same taxable year that the
discount is granted. Provided, further, That the total amount of the claimed tax deduction
net of value added tax if applicable, shall be included in their gross sales receipts for tax
purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended.[4]

DSWD approved and adopted the Implementing Rules and Regulations of R.A. No. 9257,
Rule VI, Article 8 of which states: The establishment may claim the discounts granted
under Rule V, Section 4 Discounts for Establishments;[5]

The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants
(20%) discount from all establishments, the costs of which may be claimed by the private
establishments concerned as tax credit- t is a peso-for-peso deduction from a taxpayers
tax liability due to the government of the amount of discounts such establishment has
granted to a senior citizen. The establishment recovers the full amount of discount given
to a senior citizen and hence, the government shoulders 100% of the discounts granted.

A simple illustration might help amplify the points discussed above, as follows:

Tax Deduction Tax Credit

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Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x --
Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x

Under a tax deduction scheme, the tax deduction on discounts was subtracted
from Net Sales together with other deductions which are considered as operating
expenses before the Tax Due was computed based on the Net Taxable Income. On the
other hand, under a tax credit scheme, the amount of discounts which is the tax
credit item, was deducted directly from the tax due amount.[10]

Petitioners assail the constitutionality of Section 4(a) of the Expanded Senior Citizens Act
based on the following grounds:[13]

1) The law is confiscatory because it infringes Art. III, Sec. 9 of the

Constitution which provides that private property shall not be taken for
public use without just compensation;

2) It violates the equal protection clause (Art. III, Sec. 1) enshrined in

our Constitution which states that no person shall be deprived of life,
liberty or property without due process of law, nor shall any person be
denied of the equal protection of the laws; and

3) The 20% discount on medicines violates the constitutional

guarantee in Article XIII, Section 11 that makes essential goods, health
and other social services available to all people at affordable cost.[14]

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes
deprivation of private property. Compelling drugstore owners and establishments to grant the
discount will result in a loss of profit and capital because 1) drugstores impose a mark-up of only
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5% to 10% on branded medicines; and 2) the law failed to provide a scheme whereby drugstores
will be justly compensated for the discount.

Theoretically, the treatment of the discount as a deduction reduces the net income of the
private establishments concerned. The discounts given would have entered the coffers and formed
part of the gross sales of the private establishments, were it not for R.A. No. 9257.

The permanent reduction in their total revenues is a forced subsidy corresponding to the
taking of private property for public use or benefit.[17] This constitutes compensable taking for
which petitioners would ordinarily become entitled to a just compensation.

The Senior Citizens Act was enacted primarily to maximize the contribution of senior
citizens to nation-building, and to grant benefits and privileges to them for their improvement and
well-being as the State considers them an integral part of our society.[20]

The priority given to senior citizens finds its basis in the Constitution as set forth
in the law itself:the duty of the family to take care of its elderly members while
the State may design programs of social security for them. There shall be priority
for the needs of the underprivileged sick, elderly, disabled, women and children.

The law is a legitimate exercise of police power which, similar to the power of eminent domain,
has general welfare for its object. Property rights must bow to the primacy of police power
because property rights, though sheltered by due process, must yield to general welfare.

Incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have not taken time to calculate correctly and
come up with a financial report, so that they have not been able to show properly whether or not
the tax deduction scheme really works greatly to their disadvantage.

In treating the discount as a tax deduction, petitioners insist that they will incur losses
because, referring to the DOF Opinion, for every P1.00 senior citizen discount that petitioners
would give, P0.68 will be shouldered by them as only P0.32 will be refunded by the government
by way of a tax deduction.

To illustrate this point, petitioner Carlos Super Drug cited the anti-hypertensive
maintenance drug Norvasc as an example. According to the latter, it acquires Norvasc from the
distributors at P37.57 per tablet, and retails it at P39.60 (or at a margin of 5%). If it grants a 20%
discount to senior citizens or an amount equivalent to P7.92, then it would have to
sell Norvasc at P31.68 which translates to a loss from capital of P5.89 per tablet. Even if the
government will allow a tax deduction, only P2.53 per tablet will be refunded and not the full
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amount of the discount which is P7.92. In short, only 32% of the 20% discount will be
reimbursed to the drugstores.[28]

Petitioners computation is flawed. For purposes of reimbursement, the law states that the
cost of the discount shall be deducted from gross income, the amount of income derived from all
sources before deducting allowable expenses, which will result in net income. Here, petitioners
tried to show a loss on a per transaction basis, which should not be the case.

Petition is DISMISSED for lack of merit.

CIR v ALGUE
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Facts:
Algue a domestic corp engaged in engineering, construction and other allied activities. The
corp received a letter from CIR regarding its delinquent income taxes from 1958-1959. A letter of
protest was filed by Algue assailing the claimed deductions as ordinary, reasonable or necessary
business expense

SISON v ANCHETA
PLANTERS PRODUCT v FERTIPHIL CORP
CIR v Central Luzon Drug Corporation
Southern Cross Cement v Cement Manufacturers
CIR V JOHNSON INC
CIR v GONZALEZ
PP v SANDIGANBAYAN

DOMINGOS v CARLITOS