Digested Cases in Taxation (on Assessment, Levy and Distraint, and Statute of

Limitations)
CIR vs. CA, Atlas Consolidated
242 SCRA 289
GR No. 104151 March 10, 1995
"Assessments are prima facie presumed correct and made in good faith. So that, in the absence of
proof of any irregularities in the performance of official duties, an assessment will not be
disturbed."

FACTS: The Commissioner of Internal Revenue served two notices and demand for payment of
the respective deficiency ad valorem and business taxes for taxable years 1975 and 1976 against
the respondent Atlas Consolidated Mining and Development Corporation (ACMDC). The latter
protested both assessments but the same were denied; hence it filed two separate petitions for
review in the Court of Tax Appeals. The CTA rendered a consolidated decision holding, inter
alia, that ACMDC was not liable for deficiency ad valorem taxes on copper and silver for 1975
and 1976 thereby effectively sustaining the theory of ACMDC that in computing the ad valorem
tax on copper mineral, the refining and smelting charges should be deducted, in addition to
freight and insurance charges.
However, the tax court held ACMDC liable for the amount consisting of 25% surcharge for
late payment of the ad valorem tax and late filing of notice of removal of silver, gold and pyrite
extracted during certain periods, and for alleged deficiency manufacturer's sales tax and such
contractor's tax for leasing out of its personal properties. ACDMC elevated the matter to the
Supreme Court claiming that the leasing out was a mere isolated transaction, hence should not be
subjected to contractor's tax.

ISSUE: Is the claim of the private respondent, with respect to the contractor's tax, impressed with
merit?

HELD: No. It is being held that ACMDC was not a manufacturer subject to the percentage tax
imposed by Section 186 of the tax code. However such conclusion cannot be made with respect
to the contractor's tax being imposed on ACMDC. It cannot validly claim that the leasing out of
its personal properties was merely an isolated transaction. Its book of accounts shows that
several distinct payments were made for the use of its personal properties such as its plane,
motor boat and dump truck. The series of transactions engaged in by ACMDC for the lease of its
aforesaid properties could also be deduced from the fact that during the period there were profits
earned and reported therefore. The allegation of ACMDC that it did not realize any profit from
the leasing out of its said personal properties, since its income therefrom covered only the costs
of operation such as salaries and fuel, is not supported by any documentary or substantial
evidence.
Assessments are prima facie presumed correct and made in good faith. Contrary to the theory
of ACMDC, it is the taxpayer and not the BIR who has the duty of proving otherwise. It is an
elementary rule that in the absence of proof of any irregularities in the performance of official
duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments.
Verily, failure to present proof of error in assessments will justify judicial affirmance of said
assessment.

REPUBLIC vs. CA, and NIELSON & CO.,INC.

149 SCRA 351
GR No. L-38540 April 30, 1987
"The follow-up letter reiterating demand for payment could be considered a notice of assessment
in itself if duly received by the taxpayer."

FACTS: The petitioner sought the review on certiorari of the decision of the respondent Court of
Appeals reversing the decision of the then Court of First Instance of Manila which ordered
private respondent Nielson & Co., Inc. to pay the Government the amount of P11,496.00 as ad
valorem tax, occupation fees, additional residence tax and 25% surcharge for late payment, for
the years 1949 to 1952. Petitioner claims that the demand letter of 16 July 1955 showed an
imprint indicating that the original thereof was released and mailed on 4 August 1955 by the
Chief, Records Section of the Bureau of Internal Revenue, and that the original letter was not
returned to said Bureau; thus, said demand letter must be considered to have been received by
the private respondent. According to petitioner, if service is made by ordinary mail, unless the
actual date of receipt is shown, service is deemed complete and effective upon the expiration of
five (5) days after mailing. As the letter of demand dated 16 July 1955 was actually mailed to
private respondent, there arises the presumption that the letter was received by private
respondent in the absence of evidence to the contrary. More so, where private respondent did not
offer any evidence, except the self-serving testimony of its witness, that it had not received the
original copy of the demand letter dated 16 July 1955.

ISSUE: Was notice of assessment or demand properly served to the respondent? Should the
receipt by the respondent of the succeeding follow-up demand notices be construed as receipt of
the original demand?

HELD: As to the first issue, no. As correctly observed by the respondent court in its appealed
decision, while the contention of petitioner is correct that a mailed letter is deemed received by
the addressee in the ordinary course of mail, still this is merely a disputable presumption, subject
to controversion, and a direct denial of the receipt thereof shifts the burden upon the party
favored by the presumption to prove that the mailed letter was indeed received by the addressee.
Since petitioner has not adduced proof that private respondent had in fact received the demand
letter of 16 July 1955, it can not be assumed that private respondent received said letter. As to the
second issue, Yes. Records show that petitioner wrote private respondent a follow-up letter dated
19 September 1956, reiterating its demand for the payment of taxes as originally demanded in
petitioner's letter dated 16 July 1955. This follow-up letter is considered a notice of assessment
in itself which was duly received by private respondent in accordance with its own admission.
And consequently, under Section 7 of Republic Act No. 1125, the assessment is appealable to the
Court of Tax Appeals within thirty (30) days from receipt of the letter. The taxpayer's failure to
appeal in due time, as in the case at bar, makes the assessment in question final, executory and
demandable. Thus, private respondent is now barred from disputing the correctness of the
assessment or from invoking any defense that would reopen the question of its liability on the
merits.

COLLECTOR OF INTERNAL REVENUE vs. VDA. DE CODIÑERA

102 PHIL 1165
GR No. L-9675, September 28, 1957
"The property levied by a competent court may, with the consent thereof, be distrained, subject
to the prior lien of the attachment creditor."

FACTS: The Collector of Internal Revenue sent a warrant of distraint and levy against the
properties of Restituto Codiñera for collection of certain deficiency specific tax. However, it
could not be effected in view of the attachment of the said properties of the CFI-Manila of
another case. After seven years, the Collector of Internal Revenue issued a warrant of distraint
and levy commanding the City Treasurer of Cebu City to distrain the goods, chattels, or effects
and other personal property of whatever character, and levy upon the real property and interest in
or rights to real property of the estate of the deceased. The heirs of the deceased filed the action
with the CTA barring the government to collect said deficiency on the ground of prescription
therefore praying to declare null and void, and of no legal force and effect the warrant of distraint
and levy which the respondent issued on March 7, 1955.

ISSUE: Does the attachment made by a court in a civil case over certain properties of a taxpayer
bar the government from enforcing a warrant of distraint and levy over the aforesaid properties
in order to collect the taxes due?

HELD: No. There may be a valid reason for non-distraint of the property which was due to the
attachment of the CFI-Manila in another case. However, such property levied by a competent
court may, with the consent thereof, be subsequently distrained, subject to the prior lien of the
attachment creditor. The attachment merely deprives the Collector of Internal Revenue the power
to divest the Court of its jurisdiction over said property but it does not impair such rights as the
Government may have for the collection of taxes.

CABRERA vs. THE PROVINCIAL TREASURER OF TAYABAS

GR No. 502, January 29, 1946
"The taxpayer should at least be apprised of the exact date of the proceeding by which she is to
lose her property. Failure of the taxpayer to accordingly correct or change name in the
assessment record cannot supplant such absence of notice."

FACTS: The Provincial Treasurer of Tayabas issued a notice for the sale at public auction of the
real properties of Nemesio Cabrera forfeited for tax delinquency on December 15, 1940. The
letter sent to Nemesio Cabrera was returned marked “Unclaimed” for the latter was already dead
in 1935. The land was actually sold in a rescheduled public auction sale on May 1941 to
Catigbac and was finalized in May 1942. Basilia Cabrera, the registered owner of the land
subject to attachment, filed a complaint with the CFI-Tayabas against the Provincial Treasurer
and Catigbac attacking the validity of the sale on the grounds that she was not notified, even
though the property had remained in the assessment book in the name of Nemesio Cabrera,
because she became the registered owner thereof since 1934 when a Torrens Title was issued to
her by the Register of Deeds of Tayabas.

ISSUE: Is there a need for new notices if the land was not sold on the date specified in the
previous notice?

HELD: Yes. Under the law, even if the notice state that the sale would take place on a specified
date and every day thereafter, it is a general and indefinite notice. In order to protect the
taxpayer’s rights, the taxpayer should at least be apprised of the exact date of the proceeding by
which she is to lose her property. Besides, the appellee admittedly being not notified also vitiates
the proceeding. She is the registered owner of the land and had become liable for taxes thereon.
For all purposes, she is the delinquent taxpayer "against whom the taxes were assessed." It
cannot be Nemesio for the latter's obligation to pay ended where Basilia's liability began.
Basilia may be criticized for failure to have changed the name in the assessment record.
However, such circumstance, nevertheless, cannot supplant the absence of notice.

MAMBULAO LUMBER CO. vs. REPUBLIC

132 SCRA 1
GR No. L-37061, September 5, 1984
"Forest charges are internal revenue taxes and the BIR has the sole power and duty to collect
them. Thus, an assessment made by the Bureau of Forestry cannot be considered an assessment
made by the BIR."

FACTS: The Bureau of Forestry sent a demand letter dated January 15, 1949 to Mambulao
Lumber Co. demanding for the payment of forest charges and surcharges. Mambulao protested
the assessment. On August 29,1958, the BIR likewise wrote a letter to the company demanding
payment, which subsequently requested reinvestigation. The BIR gave the company twenty (20)
days from receipt within which to submit the results of its verification of payments. For failure to
comply and failure to pay its tax liability despite demands, CIR filed a complaint for collection
with CFI-Manila on August 25, 1961. The CFI-Manila and Court of Appeals decided against
Mambulao ordering it to pay the tax liability. Petitioner argued that the collection is barred by
the statute of limitations under Sections 332 of the NIRC. As stated, the collection should be
made within the five (5) year period. From 1949 (date when the Bureau of Forestry assessed and
demand payment as forestry charges and surcharges) up to 1961 (date of filing of complaint), it
is already more than five years.

ISSUE: Has the period of filing of collection complaint prescribed?

HELD: No. The action for collection is not barred by prescription. The basis of the complaint
filed on August 1961 was the demand letter made by the CIR on August 29, 1958 and not the
demand letter of the Bureau of Forestry on January 1949. So that the reckoning date of the 5-year
period should be from the date of the BIR letter and not that of the Bureau of Forestry. This must
be so because forest charges are internal revenue taxes and the BIR has the sole power and duty
to collect them.

FERNANDOS HERMANOS, INC. vs. COMMISSIONER

29 SCRA 552
GR No. No. L-21551, September 30, 1969
"The filing of an answer to taxpayer's petition for review is considered as institution of judicial
action."

FACTS: The Commissioner of Internal Revenue assessed the petitioner investment corporation
of deficiency income taxes for the years 1950 to 1954 and for 1957. There were two conflicting
dates of assessment, which are vital to the compliance with the statute of limitations, based on
each claim of the petitioner and the respondent; the Commisioner's record of date of assesment is
February 27, 1956 while the petitioner believes the demand was made on December 27, 1955 so
that, as the petitioner corporation claims, the Commissioner's action to recover its tax liability
should be deemed to have prescribed for failure on the part of the Commissioner to file a
complaint for collection against it in an appropriate civil action.

ISSUE: Has the action for collection prescribed?

HELD: No. It has been held that "a judicial action for the collection of a tax is begun by the
filing of a complaint with the proper court of first instance, or where the assessment is appealed
to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for review wherein
payment of the tax is prayed for." This is but logical for where the taxpayer avails of the right to
appeal the tax assessment to the Court of Tax Appeals, the said Court is vested with the authority
to pronounce judgment as to the taxpayer's liability to the exclusion of any other court. In the
present case, regardless of whether the assessments were made on February 24 and 27, 1956, as
claimed by the Commissioner, or on December 27, 1955 as claimed by the taxpayer, the
government's right to collect the taxes due has clearly not prescribed, as the taxpayer's appeal or
petition for review was filed with the Tax Court on May 4, 1960, with the Commissioner filing
on May 20, 1960 his Answer with a prayer for payment of the taxes due, long before the
expiration of the five-year period to effect collection by judicial action counted from the date of
assessment.

REPUBLIC vs. ARANETA

2 SCRA 144
GR No. L-14142, May 30, 1961
"Where the tax obligation is secured by a bond, the prescriptive period for the action for the
forfeiture of the bond is governed by the Civil Code."

FACTS: The Solicitor General, in behalf of the Republic of the Philippines, filed before CFI of
Manila an action against the defendant Araneta, as principals, and Manila Surety, as surety, to
recover the internal revenue taxes including surcharges, the payment of which was guaranteed by
a bond executed when the first extrajudicial demand for payment was made. The appellant-
taxpayers contend that the appellee's cause of action has prescribed, because the action for
recovery of internal revenue taxes and surcharge due brought on 22 February 1957, was not
commenced within the period of five years after the assessment dated 15 May 1948 had been
made, as provided for in Section 331 of the Tax Code.

ISSUE: Has the action to recover the taxes due from the taxpayer and the surety already
prescribed?

HELD: No. The appellant-taxpayers cannot invoke prescription under the provisions of Section
331 of the NIRC because the government is suing on the bond executed and filed by them to
guarantee payment in 6 monthly installments of the tax liability due from 1946 to 1948, which is
a separate and distinct obligation of the parties thereto. The action to enforce the obligation on
the bond executed on March 18, 1949, having been filed in court on February 22, 1957, was
within the 10-year prescriptive period to enforce a written contractual obligation, as set by the
Civil Code.

MARCOS II vs. CA
273 SCRA 47
GR No. 120880, June 5, 1997
"The approval of the court sitting in probate is not a mandatory requirement in the collection of
estate taxes."
"In case of failure to file a return, the tax may be assessed at anytime within 10 years after the
omission."

FACTS: Bongbong Marcos sought for the reversal of the ruling of the Court of Appeals to grant
CIR's petition to levy the properties of the late Pres. Marcos to cover the payment of his tax
delinquencies during the period of his exile in the US. The Marcos family was assessed by the
BIR after it failed to file estate tax returns. However the assessment were not protested
administratively by Mrs. Marcos and the heirs of the late president so that they became final and
unappealable after the period for filing of opposition has prescribed. Marcos contends that the
properties could not be levied to cover the tax dues because they are still pending probate with
the court, and settlement of tax deficiencies could not be had, unless there is an order by the
probate court or until the probate proceedings are terminated.
 Petitioner also pointed out that applying Memorandum Circular No. 38-68, the BIR's Notices
of Levy on the Marcos properties were issued beyond the allowed period, and are therefore null
and void.

ISSUE: Are the contentions of Bongbong Marcos correct?

HELD: No. The deficiency income tax assessments and estate tax assessment are already final
and unappealable -and-the subsequent levy of real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This
summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil
actions and Criminal actions), and is not affected or precluded by the pendency of any other tax
remedies instituted by the government.
The approval of the court, sitting in probate, or as a settlement tribunal over the deceased's
estate is not a mandatory requirement in the collection of estate taxes. On the contrary, under
Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the
executor or judicial administrator of the decedent's estate to deliver any distributive share to any
party interested in the estate, unless it is shown a Certification by the Commissioner of Internal
Revenue that the estate taxes have been paid. This provision disproves the petitioner's contention
that it is the probate court which approves the assessment and collection of the estate tax.
On the issue of prescription, the omission to file an estate tax return, and the subsequent failure
to contest or appeal the assessment made by the BIR is fatal to the petitioner's cause, as under
Sec.223 of the NIRC, in case of failure to file a return, the tax may be assessed at anytime within
10 years after the omission, and any tax so assessed may be collected by levy upon real property
within 3 years (now 5 years) following the assessment of the tax. Since the estate tax assessment
had become final and unappealable by the petitioner's default as regards protesting the validity of
the said assessment, there is no reason why the BIR cannot continue with the collection of the
said tax.

REPUBLIC vs. HIZON

320 SCRA 574
GR No. 130430, December 13, 1999
"A request for reconsideration of the tax assessment does not effectively suspend the running of
the precriptive period if the same is filed after the assessment had become final and
unappealable."

FACTS: On July 18, 1986, the BIR issued to respondent Salud V. Hizon a deficiency income tax
assessment covering the fiscal year 1981-1982. Respondent not having contested the assessment,
petitioner BIR, on January 12, 1989, served warrants of distraint and levy to collect the tax
deficiency. However, for reasons not known, it did not proceed to dispose of the attached
properties.
More than three years later, the respondent wrote the BIR requesting a reconsideration of her
tax deficiency assessment. The BIR, in a letter dated August 11, 1994, denied the request. On
January 1, 1997, it filed a case with the RTC to collect the tax deficiency. Hizon moved to
dismiss the case on two grounds: (1) that the complaint was not filed upon authority of the BIR
Commissioner as required by Sec. 221 of the NIRC, and (2) that the action had already
prescribed. Over petitioner's objection, the trial court granted the motion and dismissed the
complaint.
BIR on the other hand contends that respondent's request for reinvestigation of her tax
deficiency assessment on November 1992 effectively suspended the running of the period of
prescription.
ISSUE: Has the action for collection of the tax prescribed?

HELD: Yes. Sec. 229 of the NIRC mandates that a request for reconsideration must be made
within 30 days from the taxpayer's receipt of the tax deficiency assessment, otherwise the
assessment becomes final, unappealable and, therefore, demandable. The notice of assessment
for respondent's tax deficiency was issued by petitioner on July 18, 1986. On the other hand,
respondent made her request for reconsideration thereof only on November 3, 1992, without
stating when she received the notice of tax assessment. Hence, her request for reconsideration
did not suspend the running of the prescriptive period provided under Sec. 223(c). Although the
Commissioner acted on her request by eventually denying it on August 11, 1994, this is of no
moment and does not detract from the fact that the assessment had long become demandable.

CIR vs. VILLA

22 SCRA 3
GR No. L-23988, January 2, 1968
"What may be the subject of a judicial review is the decision of the Commissioner on the protest
against assessment, not the assessment itself."

FACTS: The spouses Villa filed joint income tax returns for the years 1951 to 1956. The BIR
issued assessments for deficiency of income tax for the said years. Without contesting the said
assessments with the CIR, they filed a petition for review with the CTA. The CTA took
cognizance of the of the appeal and rendered favorable judgment to the spouses. The CIR
appealed to the SC questioning the jurisdiction of the CTA.

ISSUE: Is an appeal to the CTA proper in this case? Is the CTA vested with jurisdiction?

HELD: No. The rule is that where a taxpayer questions an assessment and asks the Collector to
reconsider or cancel the same because he (the taxpayer) believes he is not liable therefor, the
assessment becomes a "disputed assessment" that the Collector must decide, and the taxpayer
can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the
disputed assessment. Since in the instant case the taxpayer appealed the assessment of the
Commissioner of Internal Revenue without previously contesting the same, the appeal was
premature and the Court of Tax Appeals had no jurisdiction to entertain said appeal. For, as
stated, the jurisdiction of the Tax Court is to review by appeal decisions of Internal Revenue on
disputed assessments. The Tax Court is a court of special jurisdiction. As such, it can take
cognizance only of such matters as are clearly within its jurisdiction.

2006 Taxation Case Digests

PERIOD TO ASSESS AND COLLECT TAX DEFICIENCY

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL vs. COMMISSIONER OF

INTERNAL REVENUE
GR. No. 155541. January 27, 2004

Facts: During the lifetime of the decedent Juliana vda. De Gabriel, her business affairs were
managed by the Philippine Trust Company (PhilTrust). The decedent died on April 3, 1979 but
two days after her death, PhilTrust filed her income tax return for 1978 not indicating that the
decedent had died. The BIR conducted an administrative investigation of the decedent’s tax
liability and found a deficiency income tax for the year 1997 in the amount of P318,233.93.
Thus, in November 18, 1982, the BIR sent by registered mail a demand letter and assessment
notice addressed to the decedent “c/o PhilTrust, Sta. Cruz, Manila, which was the address stated
in her 1978 income tax return. On June 18, 1984, respondent Commissioner of Internal Revenue
issued warrants of distraint and levy to enforce the collection of decedent’s deficiency income
tax liability and serve the same upon her heir, Francisco Gabriel. On November 22, 1984,
Commissioner filed a motion to allow his claim with probate court for the deficiency tax. The
Court denied BIR’s claim against the estate on the ground that no proper notice of the tax
assessment was made on the proper party. On appeal, the CA held that BIR’s service on
PhilTrust of the notice of assessment was binding on the estate as PhilTrust failed in its legal
duty to inform the respondent of antecedent’s death. Consequently, as the estate failed to
question the assessment within the statutory period of thirty days, the assessment became final,
executory, and incontestable.

Issue: (1) Whether or not the CA erred in holding that the service of deficiency tax assessment
on Juliana through PhilTrust was a valid service as to bind the estate.
(2) Whether or not the CA erred in holding that the tax assessment had become final, executory,
and incontestable.

Held: (1) Since the relationship between PhilTrust and the decedent was automatically severed
the moment of the taxpayer’s death, none of the PhilTrust’s acts or omissions could bind the
estate of the taxpayer. Although the administrator of the estate may have been remiss in his legal
obligation to inform respondent of the decedent’s death, the consequence thereof merely refer to
the imposition of certain penal sanction on the administrator. These do not include the indefinite
tolling of the prescriptive period for making deficiency tax assessment or waiver of the notice
requirement for such assessment.
(2) The assessment was served not even on an heir or the estate but on a completely disinterested
party. This improper service was clearly not binding on the petitioner. The most crucial point to
be remembered is that PhilTust had absolutely no legal relationship with the deceased or to her
Estate. There was therefore no assessment served on the estate as to the alleged underpayment of
tax. Absent this assessment, no proceeding could be initiated in court for collection of said tax;
therefore, it could not have become final, executory and incontestable. Respondent’s claim for
collection filed with the court only on November 22, 1984 was barred for having been made
beyond the five-year prescriptive period set by law.

TAX EXEMPTION; WITHDRAWAL OF TAX PRIVILEGES OF ELECTRIC

COOPERATIVES BY THE LOCAL GOVERNMENT CODE

PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC., et al. vs. THE

SECRETARY OF DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT
GR. No. 143076. June 10, 2003

Facts: On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of
other electric cooperatives organized and existing under PD 269 which are members of petitioner
Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA). The other petitioners,
electric cooperatives of Agusan del Norte (ANECO), Iloilo 1 (ILECO 1) and Isabela 1 (ISELCO
1) are non-stock, non-profit electric cooperatives organized and existing under PD 269, as
amended, and registered with the National Electrification Administration (NEA).
Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all National
Government, local government, and municipal taxes and fee, including franchise, fling
recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court
or administrative proceedings in which it may be party.
From 1971to 1978, in order to finance the electrification projects envisioned by PD 269, as
amended, the Philippine Government, acting through the National Economic council (now
National Economic Development Authority) and the NEA, entered into six loan agreements with
the government of the United States of America, through the United States Agency for
International Development (USAID) with electric cooperatives as beneficiaries. The loan
agreements contain similarly worded provisions on the tax application of the loan and any
property or commodity acquired through the proceeds of the loan.
Petitioners allege that with the passage of the Local Government Code their tax exemptions have
been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of the
said code. Sec. 193 provides for the withdrawal of tax exemption privileges granted to all
persons, whether natural or juridical, except cooperatives duly registered under RA 6938, while
Sec. 234 exempts the same cooperatives from payment of real property tax.

Issue: (1) Does the Local Government Code (under Sec. 193 and 234) violate the equal
protection clause since the provisions unduly discriminate against petitioners who are duly
registered cooperatives under PD 269, as amended, and no under RA 6938 or the Cooperatives
Code of the Philippines?
(2) Is there an impairment of the obligations of contract under the loan entered into between the
Philippine and the US Governments?

Held: (1) No. The guaranty of the equal protection clause is not violated by a law based on a
reasonable classification. Classification, to be reasonable must (a) rest on substantial
classifications; (b) germane to the purpose of the law; (c) not limited to the existing conditions
only; and (d) apply equally to all members of the same class. We hold that there is reasonable
classification under the Local Government Code to justify the different tax treatment between
electric cooperatives covered by PD 269 and electric cooperatives under RA 6938.
First, substantial distinctions exist between cooperatives under PD 269 and those under RA
6938. In the former, the government is the one that funds those so-called electric cooperatives,
while in the latter, the members make equitable contribution as source of funds.
a. Capital Contributions by Members – Nowhere in PD 269 doe sit require cooperatives to make
equitable contributions to capital. Petitioners themselves admit that to qualify as a member of an
electric cooperative under PD 269, only the payment of a P5.00 membership fee is required
which is even refundable the moment the member is no longer interested in getting electric
service from the cooperative or will transfer to another place outside the area covered by the
cooperative. However, under the Cooperative Code, the articles of cooperation of a cooperative
applying for registration must be accompanied with the bonds of the accountable officers and a
sworn statement of the treasurer elected by the subscribers showing that at least 25% of the
authorized share capital has been subscribed and at least 25% of the total subscription has been
paid and in no case shall the paid-up share capital be less than P2,000.00.
b. Extent of Government Control over Cooperatives – The extent of government control over
electric cooperatives covered by PD 269 is largely a function of the role of the NEA as a primary
source of funds of these electric cooperatives. It is crystal clear that NEA incurred loans from
various sources to finance the development and operations of these electric cooperatives.
Consequently, amendments were primarily geared to expand the powers of NEA over the electric
cooperatives o ensure that loans granted to them would be repaid to the government. In contrast,
cooperatives under RA 6938 are envisioned to be self-sufficient and independent organizations
with minimal government intervention or regulation.
Second, the classification of tax-exempt entities in the Local Government Code is germane to the
purpose of the law. The Constitutional mandate that “every local government unit shall enjoy
local autonomy,” does not mean that the exercise of the power by the local governments is
beyond the regulation of Congress. Sec. 193 of the LGC is indicative of the legislative intent to
vet broad taxing powers upon the local government units and to limit exemptions from local
taxation to entities specifically provided therein.
Finally, Sec. 193 and 234 of the LGC permit reasonable classification as these exemptions are
not limited to existing conditions and apply equally to all members of the same class.

(2) No. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of
the obligations of contracts does not prohibit every change in existing laws. To fall within the
prohibition, the change must not only impair the obligation of the existing contract, but the
impairment must be substantial. Moreover, to constitute impairment, the law must affect a
change in the rights of the parties with reference to each other and not with respect to non-
parties.
The quoted provision under the loan agreement does not purport to grant any tax exemption in
favor of any party to the contract, including the beneficiaries thereof. The provisions simply shift
the tax burden, if any, on the transactions under the loan agreements to the borrower and/or
beneficiary of the loan. Thus, the withdrawal by the Local Government Code under Sec. 193 and
234 of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the
borrower, the lender or the beneficiary under the loan agreements as, in fact, no tax exemption is
granted therein.

TARIFF AND CUSTOMS LAWS; PRIMARY JURISDICTION OVER SEIZURE AND

FORFEITURE CASES

Chief State Prosecutor JOVENCITO R. ZUÑO, ATTY. CLEMENTE P. HERALDO, Chief of

the Internal Inquiry and Prosecution Division-customs Intelligence and Investigation Service
(IIPD-CIIS), and LEONITO A. SANTIAGO, Special Investigator of the IIPD-CIIS vs. JUDGE
ARNULFO G. CABREDO, Regional Trial Court, Branch 15, Tabaco City, Albay
AM. No. RTJ-03-1779, April 30, 2003

Facts: Atty. Winston Florin, the Deputy Collector of Customs of the Sub-Port of Tabaco, Albay,
issued on September 3, 2001 Warrant of Seizure and Detention (WSD) No. 06-2001against a
shipment of 35, 000 bags of rice aboard the vessel M/V Criston for violation of Sec. 2530 of the
Tariff and Customs Code of the Philippines (TCCP).
A few days, after the issuance of the warrant of seizure and detention, Antonio Chua, Jr. and
Carlos Carillo, claiming to be consignees of the subject goods, filed before the Regional Trial
Court of Tabaco City, Albay a Petition with Prayer for the Issuance of Preliminary Injunction
and Temporary Restraining Order (TRO). The said petition sought to enjoin the Bureau of
Customs and its officials from detaining the subject shipment.
By virtue of said TRO, the 35,000 bags of rice were released from customs to Antonio Chua, Jr.
and Carlos Carillo.
In his complaint, Chief State Prosecutor Zuño alleged that respondent Judge violated
Administrative Circular No. 7-99, which cautions trial court judges in their issuance of TROs
and writs of preliminary injunctions. Said circular reminds judges of the principle, enunciated in
Mison vs. Natividad, that the Collector of Customs has exclusive jurisdiction over seizure and
forfeiture proceedings, and regular courts cannot interfere with his exercise thereof or stifle or
put it to naught.

Issue: Whether or not the issuance of the TRO was illegal and beyond the jurisdiction of the
RTC.

Held: The collection of duties and taxes due on the seized goods is not the only reason why trial
courts are enjoined from issuing orders releasing imported articles under seizure and forfeiture
proceedings by the Bureau of Customs. Administrative Circular No. 7-99 takes into account the
fact that the issuance of TROs and the granting of writs of preliminary injunction in seizure and
forfeiture proceedings before the Bureau of Customs may arouse suspicion that the issuance or
grant was fro considerations other than the strict merits of the case. Furthermore, respondent
Judge’s actuation goes against settled jurisprudence that the Collector of Customs has exclusive
jurisdiction over seizure and forfeiture proceedings, and regular courts cannot interfere with his
exercise thereof or stifle and put it to naught.
Respondent Judge cannot claim that he issued the questioned TRO because he honestly believed
tat the Bureau of Customs was effectively divested of its jurisdiction over the seized shipment.
Even if it be assumed that in the exercise of the Collector of Customs of its exclusive jurisdiction
over seizure and forfeiture cases, a taint of illegality is correctly imputed, the most that can be
said is that under these circumstance, grave abuse of discretion may oust it of its jurisdiction.
This does mean, however, that the trial court is vested with competence to acquire jurisdiction
over these seizure and forfeiture cases. The proceedings before the Collector of Customs are not
final. An appeal lies to the Commissioner of Customs and, thereafter, to the Court of Tax
Appeals. It may even reach this Court through an appropriate petition for review. Certainly, the
RTC is not included therein. Hence, it is devoid of jurisdiction.
Clearly, therefore, respondent Judge had no jurisdiction to take cognizance of the petition and
issue the questioned TRO.
It is a basic principle that the Collector of Customs has exclusive jurisdiction over seizure and
forfeiture proceedings of dutiable goods. A studious and conscientious judge can easily be
conversant with such an elementary rule.

NATURE OF FRANCHISE TAX; TAX EXEMPTION; WITHDRAWAL OF TAX

PRIVILEGES BY THE LOCAL GOVERNMENT CODE

NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN

GR. No. 149110, April 9, 2003

Facts: NAPOCOR, the petitioner, is a government-owed and controlled corporation created

under Commonwealth Act 120. It is tasked to undertake the “development of hydroelectric
generations of power and the production of electricity from nuclear, geothermal, and other
sources, as well as, the transmission of electric power on a nationwide basis.”
For many years now, NAPOCOR sells electric power to the resident Cabanatuan City, posting a
gross income of P107,814,187.96 in 1992. Pursuant to Sec. 37 of Ordinance No. 165-92, the
respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing 75%
of 1% of the former’s gross receipts for the preceding year.
Petitioner, whose capital stock was subscribed and wholly paid by the Philippine Government,
refused to pay the tax assessment. It argued that the respondent has no authority to impose tax on
government entities. Petitioner also contend that as a non-profit organization, it is exempted from
the payment of all forms of taxes, charges, duties or fees in accordance with Sec. 13 of RA 6395,
as amended.
The respondent filed a collection suit in the RTC of Cabanatuan City, demanding that petitioner
pay the assessed tax, plus surcharge equivalent to 25% of the amount of tax and 2% monthly
interest. Respondent alleged that petitioner’s exemption from local taxes has been repealed by
Sec. 193 of RA 7160 (Local Government Code). The trial court issued an order dismissing the
case. On appeal, the Court of Appeals reversed the decision of the RTC and ordered the
petitioner to pay the city government the tax assessment.

Issues: (1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its
stocks are wholly owned by the National Government and its charter characterized is as a ‘non-
profit organization’?
(2) Is the NAPOCOR’s exemption from all forms of taxes repealed by the provisions of the
Local Government Code (LGC)?

Held: (1) NO. To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is the corporation
which exercises the franchise, and not the individual stockholders. By virtue of its charter,
petitioner was created as a separate and distinct entity from the National Government. It can sue
and be sued under its own name, and can exercise all the powers of a corporation under the
Corporation Code.
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is no engage din business.
(2) YES. One of the most significant provisions of the LGC is the removal of the blanket
exclusion of instrumentalities and agencies of the National Government from the coverage of
local taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any
kind on the National Government, its agencies and instrumentalities, this rule now admits an
exception, i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fees, or
charges on the aforementioned entities. The legislative purpose to withdraw tax privileges
enjoyed under existing laws or charter is clearly manifested by the language used on Sec. 137
and 193 categorically withdrawing such exemption subject only to the exceptions enumerated.
Since it would be tedious and impractical to attempt to enumerate all the existing statutes
providing for special tax exemptions or privileges, the LGC provided for an express, albeit
general, withdrawal of such exemptions or privileges. No more unequivocal language could have
been used.

TAX EXEMPTIONS vs. TAX EXCLUSION; “IN LIEU OF ALL TAXES” PROVISION

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC. (PLDT) vs. CITY OF

DAVAO and ADELAIDA B. BARCELONA, in her capacity as City Treasurer of Davao
GR. No. 143867, March 25, 2003

Facts: PLDT paid a franchise tax equal to three percent (3%) of its gross receipts. The franchise
tax was paid “in lieu of all taxes on this franchise or earnings thereof” pursuant to RA 7082. The
exemption from “all taxes on this franchise or earnings thereof” was subsequently withdrawn by
RA 7160 (LGC), which at the same time gave local government units the power to tax
businesses enjoying a franchise on the basis of income received or earned by them within their
territorial jurisdiction. The LGC took effect on January 1, 1992.
The City of Davao enacted Ordinance No. 519, Series of 1992, which in pertinent part provides:
Notwithstanding any exemption granted by law or other special laws, there is hereby imposed a
tax on businesses enjoying a franchise, a rate of seventy-five percent (75%) of one percent (1%)
of the gross annual receipts for the preceding calendar year based on the income receipts realized
within the territorial jurisdiction of Davao City.
Subsequently, Congress granted in favor of Globe Mackay Cable and Radio Corporation (Globe)
and Smart Information Technologies, Inc. (Smart) franchises which contained “in leiu of all
taxes” provisos.
In 1995, it enacted RA 7925, or the Public Telecommunication Policy of the Philippines, Sec. 23
of which provides that any advantage, favor, privilege, exemption, or immunity granted under
existing franchises, or may hereafter be granted, shall ipso facto become part of previously
granted telecommunications franchises and shall be accorded immediately and unconditionally to
the grantees of such franchises. The law took effect on March 16, 1995.
In January 1999, when PLDT applied for a mayor’s permit to operate its Davao Metro exchange,
it was required to pay the local franchise tax which then had amounted to P3,681,985.72. PLDT
challenged the power of the city government to collect the local franchise tax and demanded a
refund of what had been paid as a local franchise tax for the year 1997 and for the first to the
third quarters of 1998.

Issue: Whether or not by virtue of RA 7925, Sec. 23, PLDT is again entitled to the exemption
from payment of the local franchise tax in view of the grant of tax exemption to Globe and
Smart.

Held: Petitioner contends that because their existing franchises contain “in lieu of all taxes”
clauses, the same grant of tax exemption must be deemed to have become ipso facto part of its
previously granted telecommunications franchise. But the rule is that tax exemptions should be
granted only by a clear and unequivocal provision of law “expressed in a language too plain to
be mistaken” and assuming for the nonce that the charters of Globe and of Smart grant tax
exemptions, then this runabout way of granting tax exemption to PLDT is not a direct, “clear and
unequivocal” way of communicating the legislative intent.
Nor does the term “exemption” in Sec. 23 of RA 7925 mean tax exemption. The term refers to
exemption from regulations and requirements imposed by the National Telecommunications
Commission (NTC). For instance, RA 7925, Sec. 17 provides: The Commission shall exempt
any specific telecommunications service from its rate or tariff regulations if the service has
sufficient competition to ensure fair and reasonable rates of tariffs. Another exemption granted
by the law in line with its policy of deregulation is the exemption from the requirement of
securing permits from the NTC every time a telecommunications company imports equipment.
Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of
language too plain to be mistaken.

REMEDIES OF A TAXPAYER UNDER THE NIRC; POWER OF THE CTA TO REVIEW

RULINGS OR OPINIONS OF COMMISSIONER

COMMISSIONER OF INTERNAL REVENUE vs. LEAL

GR. No. 113459, November 18, 2002

Facts: Pursuant to Sec. 116 of the Tax Code which imposes percentage tax on dealers in
securities and lending investors, the Commissioner of Internal Revenue issued Memorandum
Order (RMO) No. 15-91 dated March 11, 1991, imposing five percent (5%) lending investor’s
tax on pawnshops based on their gross income and requiring all investigating units of the Bureau
to investigate and assess the lending investor’s tax due from them. The issuance of RMO No. 15-
91 was an offshoot of petitioner’s evaluation that the nature of pawnshop business is akin to that
of lending investors.
Subsequently, petitioner issued Revenue Memorandum Circular No. 43-91 dated May 27, 1992,
subjecting the pawn ticket to the documentary stamp tax as prescribed in Title VII of the Tax
Code.
Adversely affected by those revenue orders, herein respondent Josefina Leal, owner and operator
of Josefina Pawnshop in San Mateo, Rizal, asked for a reconsideration of both RMO No. 15-91
and RMC No. 43-91 but the same was denied with finality by petitioner in October 30, 1991.
Consequently, on March 18, 1992, respondent filed with the RTC a petition for prohibition
seeking to prohibit petitioner from implementing the revenue orders.
Petitioner, through the Office of the Solicitor-General, filed a motion to dismiss the petition on
the ground that the RTC has no jurisdiction to review the questioned revenue orders and to
enjoin their implementation. Petitioner contends that the subject revenue orders were issued
pursuant to his power “to make rulings or opinions in connection with the Implementation of the
provisions of internal revenue laws.” Thus, the case falls within the exclusive appellate
jurisdiction of the Court of Tax Appeals, citing Sec. 7(1) of RA 1125.
The RTC issued an order denying the motion to dismiss holding that the revenue orders are not
assessments to implement a Tax Code provision, but are “in effect new taxes (against
pawnshops) which are not provided for under the Code,” and which only Congress is empowered
to impose. The Court of Appeals affirmed the order issued by the RTC.

Issue: Whether or not the Court of Tax Appeals has jurisdiction to review rulings of the
Commissioner implementing the Tax Code.

Held: The jurisdiction to review rulings of the Commissioner pertains to the Court of Tax
Appeals and NOT to the RTC. The questioned RMO and RMC are actually rulings or opinions
of the Commissioner implementing the Tax Code on the taxability of the Pawnshops.
Under RA 1125, An Act Creating the Court of Tax Appeals, such rulings of the Commissioner of
Internal Revenue are appealable to that court:
Sec. 7 Jurisdiction – The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to
review by appeal, as herein provided—
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under the National Revenue Code or other laws or part of law administered
by the Bureau of Internal Revenue.
xxxxxx

tax remedies; section 220; who should institute appeal in tax cases

COMMISSIONER OF INTERNAL REVENUE vs. LA SUERTE CIGAR AND CIGARETTE

FACTORY
GR. No. 144942, July 4, 2002

Facts: In its resolution, dated 15 November 2000, the Supreme Court denied the Petition for
Review on Certiorari submitted by the Commissioner of Internal Revenue for non-compliance
with the procedural requirement of verification explicit in Sec. 4, Rule 7 of the 1997 Rules of
Civil Procedure and, furthermore, because the appeal was not pursued by the Solicitor-General.
When the motion for reconsideration filed by the petitioner was likewise denied, petitioner filed
the instant motion seeking an elucidation on the supposed discrepancy between the
pronouncement of this Court, on the one hand that would require the participation of the Office
of the Solicitor-General and pertinent provisions of the Tax Code, on the other hand, that allow
legal officers of the Bureau of Internal Revenue (BIR) to institute and conduct judicial action in
behalf of the Government under Sec, 220 of the Tax Reform Act of 1997.

Issue: Are the legal officer of the BIR authorized to institute appeal proceedings (as
distinguished from commencement of proceeding) without the participation of the Solicitor-
General?

Held: NO. The institution or commencement before a proper court of civil and criminal actions
and proceedings arising under the Tax Reform Act which “shall be conducted y legal officers of
the Bureau of Internal Revenue” is not in dispute. An appeal from such court, however, is not a
matter of right. Sec. 220 of the Tax Reform Act must not be understood as overturning the long-
established procedure before this Court in requiring the Solicitor-General to represent the interest
of the Republic. This court continues to maintain that it is the Solicitor-General who has the
primary responsibility to appear for the government in appellate proceedings. This
pronouncement finds justification in the various laws defining the Office of the Solicitor-
General, beginning with Act No. 135, which took effect on 16 June 1901, up to the present
Administrative Code of 1987. Sec. 35, Chapter 12, Title III, Book IV of the said code outlines
the powers and functions of the Office of the Solicitor General which includes, but not limited to,
its duty to—
1. Represent the Government in the Supreme Court and the Court of Appeals in all criminal
proceedings; represent the Government and its officers in the Supreme Court, the Court of
Appeals, and all other courts or tribunals in all civil actions and special proceedings in which the
Government or any officer thereof in his official capacity is a party.
2. Appear in any court in any action involving the validity of any treaty, law, executive order, or
proclamation, rule or regulation when in his judgment his intervention is necessary or when
requested by the Court.

TAX EXEMPTIONS; EXECUTIVE LEGISLATION

COCONUT OIL REFINERS ASSOCIATION, INC. et al vs. RUBEN TORRES, as Executive

Secretary, et al
G.R. No. 132527. July 29, 2005

Facts: On March 13, 1992, RA No. 7227 was enacted, providing for, among other things, the
sound and balanced conversion of the Clark and Subic military reservations and their extensions
into alternative productive uses in the form of special economic zones in order to promote the
economic and social development of Central Luzon in particular and the country in general. The
law contains provisions on tax exemptions for importations of raw materials, capital and
equipment. After which the President issued several Executive Orders as mandated by the law
for the implementation of RA 7227. Herein petitioners contend the validity of the tax exemption
provided for in the law.

Issue: Whether or not the Executive Orders issued by President for the implementation of the tax
exemptions constitutes executive legislation.

Held: To limit the tax-free importation privilege of enterprises located inside the special
economic zone only to raw materials, capital and equipment clearly runs counter to the intention
of the Legislature to create a free port where the “free flow of goods or capital within, into, and
out of the zones” is insured.
The phrase “tax and duty-free importations of raw materials, capital and equipment” was merely
cited as an example of incentives that may be given to entities operating within the zone. Public
respondent SBMA correctly argued that the maxim expressio unius est exclusio alterius, on
which petitioners impliedly rely to support their restrictive interpretation, does not apply when
words are mentioned by way of example. It is obvious from the wording of RA No. 7227,
particularly the use of the phrase “such as,” that the enumeration only meant to illustrate
incentives that the SSEZ is authorized to grant, in line with its being a free port zone.
The Court finds that the setting up of such commercial establishments which are the only ones
duly authorized to sell consumer items tax and duty-free is still well within the policy enunciated
in Section 12 of RA No. 7227 that “. . .the Subic Special Economic Zone shall be developed into
a self-sustaining, industrial, commercial, financial and investment center to generate employment
opportunities in and around the zone and to attract and promote productive foreign investments.”
However, the Court reiterates that the second sentences of paragraphs 1.2 and 1.3 of Executive
Order No. 97-A, allowing tax and duty-free removal of goods to certain individuals, even in a
limited amount, from the Secured Area of the SSEZ, are null and void for being contrary to
Section 12 of RA No. 7227. Said Section clearly provides that “exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of the Philippine
territory shall be subject to customs duties and taxes under the Customs and Tariff Code and
other relevant tax laws of the Philippines.”

TAX EXEMPTIONS; NULLITY OF TAX DECLARATIONS AND TAX ASSESSMENTS

RADIO COMMUNICATIONS OF THE PHILIPPINES, INC. (RCPI), vs. PROVINCIAL
ASSESOR OF SOUTH COTABATO, et al.
G.R. No. 144486. April 13, 2005

Facts: RCPI was granted a franchise under RA 2036, the law provides tax exemption for several
properties of the company. Section 14 of RA 2036 reads: “In consideration of the franchise and
rights hereby granted and any provision of law to the contrary notwithstanding, the grantee shall
pay the same taxes as are now or may hereafter be required by law from other individuals, co
partnerships, private, public or quasi-public associations, corporations or joint stock companies,
on real estate, buildings and other personal property except radio equipment, machinery and
spare parts needed in connection with the business of the grantee, which shall be exempt from
customs duties, tariffs and other taxes, as well as those properties declared exempt in this section.
In consideration of the franchise, a tax equal to one and one-half per centum of all gross receipts
from the business transacted under this franchise by the grantee shall be paid to the Treasurer of
the Philippines each year, within ten days after the audit and approval of the accounts as
prescribed in this Act. Said tax shall be in lieu of any and all taxes of any kind, nature or
description levied, established or collected by any authority whatsoever, municipal, provincial or
national, from which taxes the grantee is hereby expressly exempted.” Thereafter, the municipal
treasurer of Tupi, South Cotabato assessed RCPI real property taxes from 1981 to 1985. The
municipal treasurer demanded that RCPI pay P166,810 as real property tax on its radio station
building in Barangay Kablon, as well as on its machinery shed, radio relay station tower and its
accessories, and generating sets. The Local Board of Assessment Appeals affirmed the
assessment of the municipal treasurer. When the case reach the C A, it ruled that, petitioner is
exempt from paying the real property taxes assessed upon its machinery and radio equipment
mounted as accessories to its relay tower. However, the decision assessing taxes upon
petitioner’s radio station building, machinery shed, and relay station tower is valid.

Issue: (1) Whether or not appellate court erred when it excluded RCPI’s tower, relay station
building and machinery shed from tax exemption.
(2) Whether or not appellate court erred when it did not resolve the issue of nullity of the tax
declarations and assessments due to non-inclusion of depreciation allowance.

Held: (1) RCPI’s radio relay station tower, radio station building, and machinery shed are real
properties and are thus subject to the real property tax. Section 14 of RA 2036, as amended by
RA 4054, states that “in consideration of the franchise and rights hereby granted and any
provision of law to the contrary notwithstanding, the grantee shall pay the same taxes as are now
or may hereafter be required by law from other individuals, co partnerships, private, public or
quasi-public associations, corporations or joint stock companies, on real estate, buildings and
other personal property.” The clear language of Section 14 states that RCPI shall pay the real
estate tax.
(2) The court held the assessment valid. The court ruled that, records of the case shows that
RCPI raised before the LBAA and the CBAA the nullity of the assessments due to the non-
inclusion of depreciation allowance. Therefore, RCPI did not raise this issue for the first time.
However, even if we consider this issue, under the Real Property Tax Code depreciation
allowance applies only to machinery and not to real property.

SECRETARY OF FINANCE CANNOT PROMULGATE REGULATIONS FIXING A RATE

OF PENALTY ON DELINQUENT TAXES

The Honorable Secretary of Finance vs. THE HONORABLE RICARDO M. ILARDE, Presiding
Judge, Regional Trial Court, 6th Judicial Region, Branch 26, Iloilo City, and CIPRIANO P.
CABALUNA, JR
G.R. No. 121782. May 9, 2005

Facts: Cabaluna with his wife owns several real property located in Iloilo City. Cabaluana is the
Regional Director of Regional Office No. VI of the Department of Finance in Iloilo City. After
his retirement, there are tax delinquencies on his properties; he paid the amount under protest
contending that the penalties imposed to him are in excess than that provided by law. After
exhausting all administrative remedies, he filed a suit before the RTC which found that Section
4(c) of Joint Assessment Regulation No. 1-85 and Local Treasury Regulation No. 2-85 issued on
August 1, 1985 by respondent Secretary (formerly Minister) of Finance is null and void; (2)
declaring that the penalty that should be imposed for delinquency in the payment of real property
taxes should be two per centum on the amount of the delinquent tax for each month of
delinquency or fraction thereof, until the delinquent tax is fully paid but in no case shall the total
penalty exceed twenty-four per centum of the delinquent tax as provided for in Section 66 of
P.D. 464 otherwise known as the Real Property Tax Code.

Issue: Whether or not the then Ministry of Finance could legally promulgate Regulations
prescribing a rate of penalty on delinquent taxes other than that provided for under Presidential
Decree (P.D.) No. 464, also known as the Real Property Tax Code.

Held: The Ministry of Finance now Secretary of Finance cannot promulgate regulations
prescribing a rate of penalty on delinquent taxes. The Court ruled that despite the promulgation
of E.O. No. 73, P.D. No. 464 in general and Section 66 in particular, remained to be good law.
To accept the Secretary’s premise that E.O. No. 73 had accorded the Ministry of Finance the
authority to alter, increase, or modify the tax structure would be tantamount to saying that E.O.
No. 73 has repealed or amended P.D. No. 464. Repeal of laws should be made clear and
expressed. Repeals by implication are not favored as laws are presumed to be passed with
deliberation and full knowledge of all laws existing on the subject. Such repeals are not favored
for a law cannot be deemed repealed unless it is clearly manifest that the legislature so intended
it. Assuming argumenti that E.O. No. 73 has authorized the petitioner to issue the objected
Regulations, such conferment of powers is void for being repugnant to the well-encrusted
doctrine in political law that the power of taxation is generally vested with the legislature. Thus,
for purposes of computation of the real property taxes due from private respondent for the years
1986 to 1991, including the penalties and interests, is still Section 66 of the Real Property Tax
Code of 1974 or P.D. No. 464. The penalty that ought to be imposed for delinquency in the
payment of real property taxes should, therefore, be that provided for in Section 66 of P.D. No.
464, i.e., two per centum on the amount of the delinquent tax for each month of delinquency or
fraction thereof but “in no case shall the total penalty exceed twenty-four per centum of the
delinquent tax.”

EVIDENCE IN TAX ASSESSMENTS; MACHINE COPIES OF RECORDS/ DOCUMENTS

HAVE NO PROBATIVE VALUE

COMMISSION OF INTERNAL REVENUE vs. HANTEX TRADING CO., INC

G.R. No. 136975. March 31, 2005

Facts: Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale
of plastic products, it imports synthetic resin and other chemicals for the manufacture of its
products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration
(Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs
Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence
Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential
information that the respondent had imported synthetic resin amounting to P115,599,018.00 but
only declared P45,538,694.57. Thus, Hentex receive a subpoena to present its books of account
which it failed to do. The bureau cannot find any original copies of the products Hentex imported
since the originals were eaten by termites. Thus, the Bureau relied on the certified copies of the
respondent’s Profit and Loss Statement for 1987 and 1988 on file with the SEC, the machine
copies of the Consumption Entries, Series of 1987, submitted by the informer, as well as excerpts
from the entries certified by Tomas and Danganan. The case was submitted to the CTA which
ruled that Hentex have tax deficiency and is ordered to pay, per investigation of the Bureau. The
CA ruled that the income and sales tax deficiency assessments issued by the petitioner were
unlawful and baseless since the copies of the import entries relied upon in computing the
deficiency tax of the respondent were not duly authenticated by the public officer charged with
their custody, nor verified under oath by the EIIB and the BIR investigators.

Issue: Whether or not the final assessment of the petitioner against the respondent for deficiency
income tax and sales tax for the latter’s 1987 importation of resins and calcium bicarbonate is
based on competent evidence and the law.

Held: Central to the second issue is Section 16 of the NIRC of 1977, as amended which provides
that the Commissioner of Internal Revenue has the power to make assessments and prescribe
additional requirements for tax administration and enforcement. Among such powers are those
provided in paragraph (b), which provides that “Failure to submit required returns, statements,
reports and other documents. – When a report required by law as a basis for the assessment of
any national internal revenue tax shall not be forthcoming within the time fixed by law or
regulation or when there is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.” This
provision applies when the Commissioner of Internal Revenue undertakes to perform her
administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a
taxpayer’s failure to file one, or to amend a return already filed in the BIR. The “best evidence”
envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting
records of the taxpayer who is the subject of the assessment process, the accounting records of
other taxpayers engaged in the same line of business, including their gross profit and net profit
sales. Such evidence also includes data, record, paper, document or any evidence gathered by
internal revenue officers from other taxpayers who had personal transactions or from whom the
subject taxpayer received any income; and record, data, document and information secured from
government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau
of Customs, and the Tariff and Customs Commission. However, the best evidence obtainable
under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of
records/documents. The petitioner, in making a preliminary and final tax deficiency assessment
against a taxpayer, cannot anchor the said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption Entries have no probative weight if
offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of
paper and are of no probative value as basis for any deficiency income or business taxes against
a taxpayer.

Companies exempt from zero-rate tax

COMMISSIONER OF INTERNAL REVENUE vs. AMERICAN EXPRESS

INTERNATIONAL, INC.
(PHILIPPINE BRANCH),
G.R.No. 152609. June 29, 2005

Facts: American Express international is a foreign corporation operating in the Philippines, it is a

registered taxpayer. On April 13, 1999, [respondent] filed with the BIR a letter-request for the
refund of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived
at after deducting from its total input VAT paid of P3,763,060.43 its applied output VAT
liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43,
respectively. The CTA ruled in favor of the herein respondent holding that its services are
subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section
4.102-2 (b)(2) of Revenue Regulations 5-96. The CA affirmed the decision of the CTA.

Issue: Whether or not the company is subject to zero-rate tax pursuant to the Tax Reform Act of
1997.

Held: Services performed by VAT-registered persons in the Philippines (other than the
processing, manufacturing or repacking of goods for persons doing business outside the
Philippines), when paid in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the BSP, are zero-rated. Respondent is a VAT-registered person that
facilitates the collection and payment of receivables belonging to its non-resident foreign client,
for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in
conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is
not in the same category as “processing, manufacturing or repacking of goods” and should,
therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT Ruling No.
080-89 that the income respondent earned from its parent company’s regional operating centers
(ROCs) was automatically zero-rated effective January 1, 1988. Service has been defined as “the
art of doing something useful for a person or company for a fee” or “useful labor or work
rendered or to be rendered by one person to another.” For facilitating in the Philippines the
collection and payment of receivables belonging to its Hong Kong-based foreign client, and
getting paid for it in duly accounted acceptable foreign currency, respondent renders service
falling under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent
should, therefore, be levied upon the supply of that service.
As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed only in the country where they are consumed.
Thus, exports are zero-rated, while imports are taxed. VAT rate for services that are performed in
the Philippines, “paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP.” Thus, for the supply of service to be zero-rated as an
exception, the law merely requires that first, the service be performed in the Philippines; second,
the service fall under any of the However, the law clearly provides for an exception to the
destination principle; that is, for a zero percent categories in Section 102(b) of the Tax Code;
and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules
and regulations. Indeed, these three requirements for exemption from the destination principle
are met by respondent. Its facilitation service is performed in the Philippines. It falls under the
second category found in Section 102(b) of the Tax Code, because it is a service other than
“processing, manufacturing or repacking of goods” as mentioned in the provision. Undisputed is
the fact that such service meets the statutory condition that it be paid in acceptable foreign
currency duly accounted for in accordance with BSP rules. Thus, it should be zero-rated.