COMPAGNIE

FINANCIERESUCRES ET
DENREES,
Petitioner,

versus

G.R. No. 133834

Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
*
CORONA,
AZCUNA, and
GARCIA, JJ.
Promulgated:

COMMISSIONER OF INTERNAL
REVENUE,
Respondent.

August 28, 2006

For our resolution is the instant Petition for Review on Certiorari assailing the Decision [1] of
the Court of Appeals dated October 27, 1997 in CA-G.R. SP No.39501.
Compagnie Financiere Sucres et Denrees, petitioner, is a non-resident private corporation
duly organized and existing under the laws of the Republic of France.
On October 21, 1991, petitioner transferred its eight percent (8%) equity interest in the
Makati Shangri-La Hotel and Resort, Incorporated to Kerry Holdings Ltd. (formerly Sligo Holdings
Ltd), as shown by a Deed of Sale and Assignment of Subscription and Right of Subscription of the
same date. Transferred were (a) 107,929 issued shares of stock valued at P100.00 per share
with a total par value of P10,792,900.00; (b) 152,031 with a par value of P100.00 per share with
a total par value ofP15,203,100.00; (c) deposits on stock subscriptions amounting
to P43,147,630.28; and (d) petitioners right of subscription.
On November 29, 1991, petitioner paid the documentary stamps tax and capital gains tax
on the transfer under protest.
On October 21, 1993, petitioner filed with the Commissioner of Internal Revenue, herein
respondent, a claim for refund of overpaid capital gains tax in the amount of P107,869.00 and
overpaid
documentary
stamps
taxes
in
the
sum
of P951,830.00
or
a
total
of P1,059,699.00. Petitioner alleged that the transfer of deposits on stock subscriptions is not a
sale/assignment of shares of stock subject to documentary stamps tax and capital gains tax.
However, respondent did not act on petitioners claim for refund. Thus, on November 19,
1993, petitioner filed with the Court of Tax Appeals (CTA) a petition for review, docketed as CTA
Case No. 5042.
In its Decision[2] dated October 6, 1995, the CTA denied petitioners claim for refund. The
CTA held that it is clear from Section 176 of the Tax Code that sales to secure the future
payment of money or for the future transfer of any bond, due-bill, certificates of obligation or
stock are taxable. Furthermore, petitioner admitted that it profited from the sale of shares of
stocks. Such profit is subject to capital gains tax.
Petitioner filed a motion for reconsideration, but in a Resolution dated December 26, 1995,
the CTA denied the same. This prompted petitioner to file with the Court of Appeals a petition for
review, docketed as CA-G.R. SP No. 39501.
On October 27, 1997, the Court of Appeals denied the petition and affirmed the Decision of
the CTA. The appellate court ruled that a taxpayer has the onusprobandi of proving entitlement
to a refund or deduction, following the rule that tax exemptions are strictly construed against the

taxpayer and liberally in favor of the State. Petitioner failed to meet the requisite burden of proof
to support its claim.
Hence, petitioners recourse to this Court by way of a Petition for Review on Certiorari.
The sole issue for our resolution is whether the Court of Appeals erred in holding that the
assignment of deposits on stock subscriptions is subject to documentary stamps tax and capital
gains tax.
Along with police power and eminent domain, taxation is one of the three basic and
necessary attributes of sovereignty. Thus, the State cannot be deprived of this most essential
power and attribute of sovereignty by vague implications of law. Rather, being derogatory of
sovereignty, the governing principle is that tax exemptions are to be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who
claims an exemption must be able to justify his claim by the clearest grant of statute .
[3]

In the instant case, petitioner seeks a refund. Tax refunds are a derogation of the States
taxing power. Hence, like tax exemptions, they are construed strictly against the taxpayer and
liberally in favor of the State.[4] Consequently, he who claims a refund or exemption from taxes
has the burden of justifying the exemption by words too plain to be mistaken and too categorical
to be misinterpreted.[5] Significantly, petitioner cannot point to any specific provision of
the National Internal Revenue Code authorizing its claim for an exemption or
refund. Rather, Section 176 of the National Internal Revenue Code applicable to the issue
provides that the future transfer of shares of stocks is subject to documentary stamp tax, thus:
SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or
transfer of due-bills, certificates of obligation, or shares or certificates of stock. On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of
obligation, or shares or certificates of stock in any association, company, or corporation, or
transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement,
or memorandum or other evidences of transfer or sale whether entitling the holder in any
manner to the benefit of such due bills, certificates of obligation or stock, or to secure
the future payment of money, or for the future transfer of any due-bill, certificates of
obligation or stock, there shall be collected a documentary stamp tax of fifty centavos (P1.50)
on each two hundred pesos(P200.00), or fractional part thereof, of the par value of such due-bill,
certificates of obligation or stock: Provided, That only one tax shall be collected on each sale or
transfer of stock or securities from one person to another, regardless of whether or not a
certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such
sale or transfer; and Provided, further, That in case of stock without par value the amount of
the documentary stamp tax herein prescribed shall be equivalent to twentyfive percentum (25%) of the documentary stamp tax paid upon the original issue of the said
stock. (Emphasis supplied).
Clearly, under the above provision, sales to secure the future transfer of due-bills,
certificates of obligation or certificates of stock are liable for documentary stamp tax. No
exemption from such payment of documentary stamp tax is specified therein.
Petitioner contends that the assignment of its deposits on stock subscription is not
subject to capital gains tax because there is no gain to speak of. In the Capital Gains Tax Return
on Stock Transaction, which petitioner filed with the Bureau of Internal Revenue, the acquisition
cost of the shares it sold, including the stock subscription is P69,143,630.28. The transfer price to
Kerry Holdings, Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the amount
of P1,189,239.64. As the CTA aptly ruled, a tax on the profit of sale on net capital gain is the
very essence of the net capital gains tax law. To hold otherwise will ineluctably deprive the
government of its due and unduly set free from tax liability persons who profited from said
transactions.

Verily, the Court of Appeals committed no error in affirming the CTA Decision.
We reiterate the well-established doctrine that as a matter of practice and principle, this
Court will not set aside the conclusion reached by an agency, like the CTA, especially if affirmed
by the Court of Appeals. By the very nature of its function, it has dedicated itself to the study
and consideration of tax problems and has necessarily developed an expertise on the subject,
unless there has been an abuse or improvident exercise of authority on its part, which is not
present here.
WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP No.
39501 is AFFIRMED IN TOTO. Costs against petitioner.
SO ORDERED.
Convenience-of-the-employer rule
Henderson v. Collector, 1 SCRA 649
Facts: Arthur Henderson is the President of the American Intl. Underwriters for thePhils. w/c represents a group of American cos.
engaged in the business of generalinsurance (exc. in life insurance). he receives a basic annual salary of P30,000 andallowance
for house rentals and utilities. Although he and his wife are childless andare only two in the family, they lived in a large apartment
provided for by hisemployer. As company president, he and his wife had to entertain and put uphouseguests for the company.The
BIR now seeks to collect taxes on the allowances for rental and utilitiesexpenses
.Held: The exigencies of Henderson's high executive position, not to mention socialstanding, demanded and compelled them to
live in a more spacious and pretentiousquarters like the ones they had occupied. Because they had to entertain and put
uphouseguests, the employer had to grant him allowances for rental and utilities inaddition to his annual basic salary to take care of
those expenses for rental andutilities in excess of their personal needs. Hence, the fact that the taxpayers had tolive or did not have
to live in the apartment chosen by the employer is of no moment,for no part of the allowance redounded to the benefit of the
Hendersons. Neither wasthere an amount retained by them. Their bills for rental were paid directly by theemployer to the creditor.

i) Convenience-of-the-employer rule
Henderson v. Collector, 1 SCRA 649
Facts: Arthur Henderson is the President of the American Intl. Underwriters for the Phils. w/c
represents a group of American cos. engaged in the business of general insurance (exc. in life
insurance). he receives a basic annual salary of P30,000 and allowance for house rentals and
utilities. Although he and his wife are childless and are only two in the family, they lived in a
large apartment provided for by his employer. As company president, he and his wife had to
entertain and put up houseguests for the company. The BIR now seeks to collect taxes on the
allowances for rental and utilities expenses.
Held: The exigencies of Henderson's high executive position, not to mention social standing,
demanded and compelled them to live in a more spacious and pretentious quarters like the ones
they had occupied. Because they had to entertain and put up houseguests, the employer had to
grant him allowances for rental and utilities in addition to his annual basic salary to take care of
those expenses for rental and utilities in excess of their personal needs. Hence, the fact that the
taxpayers had to live or did not have to live in the apartment chosen by the employer is of no
moment, for no part of the allowance redounded to the benefit of the Hendersons. Neither was
there an amount retained by them. Their bills for rental were paid directly by the employer to the
creditor.
G.R. No. L-59758 December 26, 1984

ADVERTISING
ASSOCIATES,
vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

INC., petitioner,

AQUINO, J.:
This case is about the liability of Advertising Associates, lnc. for P382,700.16 as 3% contractor's percentage tax on
its rental income from the lease of neon signs and billboards imposed by section 191 of the Tax Code (as amended
by Republic Acts Nos. 1612 and 6110) on business agents and independent contractors. Parenthetically, it may be
noted that Presidential Decree No. 69, effective November 24, 1972, added paragraph 17 to section 191 by taxing
lessors of personal property.
Section 191 defines an independent contractor as including all persons whose activity consists essentially of the
sale of all kinds of services for a fee. Section 194(v) of the Tax Code defines a business agent as includingpersons
who conduct advertising agencies.
It should be noted that in Advertising Associates, Inc. vs. Collector of Internal Revenue, 97 Phil. 636, the taxpayer
was held liable as a manufacturer for the.90% sales tax on its sales of neon-tube signs under section 185(k) of the
Tax Code as amended. It paid P11,986.18 as sales tax for the 4th quarter of 1948 to 1951.
This Court rejected the taxpayer's contention that it was only a contractor of neon-tube signs and that it should pay
only the 3% contractor's tax under section 191 of the Tax Code.
In the instant case, Advertising Associates alleged that it sold in 1949 its advertising agency business to Philippine
Advertising Counsellors, that its business is limited to the making, construction and installation of billboards and
electric signs and making and printing of posters, signs, handbills, etc. (101 tsn). It contends that it is a media
company, not an advertising company,
It paid sales taxes for selling billboards, electric signs, calendars, posters, etc., realty dealer's tax for leasing
billboards and electric signs and 3% contractor's tax for repairing electric signs.
The billboards and electric signs manufactured by it are either sold or leased, As already stated, the Commissioner
of Internal Revenue subjected to 3% contractor's tax its rental income from billboards and electric signs (p. 10,
Appellant's brief ).
The Commissioner required Advertising Associates to pay P297,927.06 and P84,773.10 as contractor's tax for
1967-1971 and 1972, respectively, including 25% surcharge (the latter amount includes interest) on its income from
billboards and neon signs.
The basis of the assessment is the fact that the taxpayer's articles of incorporation provide that its primary purpose
is to engage in general advertising business. Its income tax returns indicate that its business was advertising (Exh.
14 and 15, etc.).
It is supposed "to conduct a general advertising business, both as principal and agent, including the preparation and
arrangements of advertising devices and novelties; to erect, construct, purchase, lease or otherwise acquire fences,
billboards, signboards, buildings and other structures suitable for advertising purposes; to carry on the business of
printers, publishers, binders, and decorators in connection with advertising business and to make and carry out
contracts of every kind and character that may be necessary or conducive to the accomplishment of any of the
purposes of the company; to engage in and carry on a general advertising business by the circulation and
distribution and the display of cards, signs, posters, dodgers, handbills, programs, banners and flags to be placed in
and on railroad cars, street cars, steam boats, cabs, hacks, omnibuses, stages and any and all kinds of
conveyances used for passengers or for any other purposes; to display moveable or changeable signs, cards,

pictures, designs, mottoes, etc., operated by clockwork, electricity or any other power; to use, place and display the
same in depots, hotels, halls, and other public places, to advertise in the air by airplanes, streamers, skywriting and
other similar or dissimilar operation." (Exh. 14-A, pp. 48-49, BIR Records, Vol. I).
Advertising Associates contested the assessments in its 'letters of June 25, 1973 (for the 1967-71 deficiency taxes)
and March 7, 1974 (for the 1972 deficiency). The Commissioner reiterated the assessments in his letters of July 12
and September 16,1974 (p. 3, Rollo).
The taxpayer requested the cancellation of the assessments in its letters of September 13 and November 21, 1974
(p. 3, Rollo). Inexplicably, for about four years there was no movement in the case. Then, on March 31, 1978, the
Commissioner resorted to the summary remedy of issuing two warrants of distraint, directing the collection
enforcement division to levy on the taxpayer's personal properties as would be sufficient to satisfy the deficiency
taxes (pp. 4, 29 and 30, Rollo). The warrants were served upon the taxpayer on April 18 and May 25, 1978.
More than a year later, Acting Commissioner Efren I. Plana wrote a letter dated May 23, 1979 in answer to the
requests of the taxpayer for the cancellation of the assessments and the withdrawal of the warrants of
distraint(Annex C of Petition, pp. 31-32, Rollo).
He justified the assessments by stating that the rental income of Advertising Associates from billboards and neon
signs constituted fees or compensation for its advertising services. He requested the taxpayer to pay the deficiency
taxes within ten days from receipt of the demand; otherwise, the Bureau would enforce the warrants of distraint. He
closed his demand letter with this paragraph:
This constitutes our final decision on the matter. If you are not agreeable, you may appeal to the
Court of Tax Appeals within 30 days from receipt of this letter.
Advertising Associates received that letter on June 18, 1979. Nineteen days later or on July 7, it filed its petition for
review. In its resolution of August 28, 1979, the Tax Court enjoined the enforcement of the warrants of distraint.
The Tax Court did not resolve the case on the merits. It ruled that the warrants of distraint were the
Commissioner's appealable decisions. Since Advertising Associates appealed from the decision of May 23, 1979,
the petition for review was filed out of time. It was dismissed. The taxpayer appealed to this Court.
We hold that the petition for review was filed on time. The reviewable decision is that contained in Commissioner
Plana's letter of May 23, 1979 and not the warrants of distraint.
No amount of quibbling or sophistry can blink the fact that said letter, as its tenor shows, embodies the
Commissioner's final decision within the meaning of section 7 of Republic Act No. 1125. The Commissioner said so.
He even directed the taxpayer to appeal it to the Tax Court. That was the same situation in St. Stephen's
Association and St. Stephen's Chinese Girl's School vs. Collector of Internal Revenue, 104 Phil. 314, 317-318.
The directive is in consonance with this Court's dictum that the Commissioner should always indicate to the
taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment.
That procedure is demanded by the pressing need for fair play, regularity and orderliness in administrative action
(Surigao Electric Co., Inc. vs. Court of Tax Appeals, L-25289, June 28, 1974, 57 SCRA 523).
On the merits of the case, the petitioner relies on the Collector's rulings dated September 12, 1960 and June 20,
1967 that it is neither an independent contractor nor a business agent (Exh. G and H).
As already stated, it considers itself a media company, like a newspaper or a radio broadcasting company, but not
an advertising agency in spite of the purpose stated in its articles of incorporation. It argues that its act of leasing its

neon signs and billboards does not make it a business agent or an independent contractor. It stresses that it is a
mere lessor of neon signs and billboards and does not perform advertising services.
But the undeniable fact is that neon signs and billboards are primarily designed for advertising. We hold that the
petitioner is a business agent and an independent contractor as contemplated in sections 191 and 194(v).
However, in view of the prior rulings that the taxpayer is not a business agent nor an independent contractor and in
view of the controversial nature of the deficiency assessments, the 25% surcharge should be eliminated (C. M.
Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511, 519; Imus
Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1084).
Petitioner's last contention is that the collection of the tax had already prescribed. Section 332 of the 1939 Tax
Code, now section 319 of the 1977 Tax Code, Presidential Decree No. 1158, effective on June 3, 1977, provides
that the tax may be collected by distraint or levy or by a judicial proceeding begun 'within five years after the
assessment of the tax".
The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments herein. The warrants of
distraint were served upon it on April 18 and may 25,1978 or within five years after the assessment of the tax.
Obviously, the warrants were issued to interrupt the five-year prescriptive period. Its enforcement was not
implemented because of the pending protests of the taxpayer and its requests for withdrawal of the warrants which
were eventually resolved in Commissioner Plana's letter of May 23, 1979.
It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the
warrants of distraint to interrupt the running of the statute of limitations. He gave the taxpayer ample opportunity to
contest the assessments but at the same time safeguarded the Government's interest by means of the warrants of
distraint.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The Commissioner's deficiency
assessments are modified by requiring the petitioner to pay the tax proper and eliminating the 25% surcharge,
interest and penalty. In case of non-payment, the warrants of distrant should be implemented. The preliminary
injunction issued by the Tax Court on August 28, 1979 restraining the enforcement of said warrants is lifted. No
costs.
[G.R. No. L-6553. September 30, 1955.]
ADVERTISING ASSOCIATES, INC., Petitioner, v. COLLECTOR OF INTERNAL REVENUE,Respondent.
Modesto Formilleza and A. De Aboitiz Pinaga for Petitioner.
Solicitor General Francisco Carreon and Solicitor Felicisimo R. Rosete for Respondent.
SYLLABUS
1. TAXATION; TAX ON EXISTING, AND NOT ON FUTURE, INDUSTRIES. As a rule taxes are imposed on existing industries,
occupations, transactions, products and articles and not on those that may possibly exist or come in the future.
2. ID.; ID.; TAX ON NEON-TUBE SIGNS. When the 10 per cent, then 15 per cent and later 30 per cent tax was imposed on
neon-tube signs, electric signs, and electric advertising devices sold, exchanged, or transferred the Legislature could not
have had in mind and referred to any other signs or devices than those which were being made and manufactured by
previous order, such as those manufactured by petitioner. The Legislature was not so much interested in how those neontube signs and electric advertising diverse were made manufactured as it was their eventual to the public and to customers
who ordered them. Consequently, petitioner should be taxed under section 185 (k) of the National Internal Revenue Code.

This is a petition for review of the decision of the Board of Tax Appeals affirming the ruling of the respondent Collector of
Internal Revenue which denied the refund to petitioner of the sum of P11,986.18 paid by it as percentage taxes on sales of
neon-tube signs, electric signs, and electric advertising devices, pursuant to section 185 (k) of the National Internal Revenue
Code. The basic facts in this case are not disputed and are stated in the decision of the Tax Board which we reproduce

below:

jgc:chanrobles.com .ph

"The petitioner is a manufacturer of neon-tube signs for advertising purposes. Petitioner manufactures neon-tube signs upon
previous orders from advertisers. After the neon-tube signs with their corresponding armatures are finished, they are
delivered to petitioners customers, who pay the corresponding sales price, according to contract. Sometimes neon-tube
signs are rented by customers. The respondent assessed the amount of P8,581.59 corresponding to the 3rd quarter of 1948
to 4th quarter of 1949 and the sum of P3,404.59, corresponding to the period covered from 1950 to 1951, as sales tax
pursuant to the provisions of Section 185 (k) of the Tax Code. The petitioner paid the total sum of P11,986.18 as demanded
by the Respondent. On May 12, 1949, petitioner demanded the refund of P8,581.59 as excess tax, alleging that petitioner
should be taxed as a contractor or publisher and not as a manufacturer in accordance with the provisions of Section 191 of
the Tax Code. Respondent denied the petitioners request for refund in his letter dated December 20, 1950 and received by
petitioner on January 2, 1951. On June 23, 1951, petitioner addressed a letter to the Secretary of Finance requesting advice
as to what steps petitioner should take in order to perfect its appeal before this Board. Inasmuch as no action was taken by
the Department of Finance, petitioner on April 28, 1952 addressed a letter to the respondent requesting reconsideration of its
letter dated December 20, 1950 and at the same time requested the refund of the additional sum of P3,404.59, taxes paid
for the year 1950-1951. Respondent in his communication dated October 14, 1952, and received by petitioner on October
20, 1952, refused to reconsider his ruling and considered his decision dated December 20, 1951, final. Petitioner now comes
to
this
Board
for
the
review
of
the
respondents
decision.
We

also

reproduce

the

pertinent

portions

of

the

two

sections

of

the

Tax

Code:

jgc:chanroble s.com.ph

"SEC. 185. Percentage tax on sales of automobiles, sporting goods, refrigerators, and others. There shall be levied,
assessed and collected only once on every original sale, barter exchange or similar transaction intended to transfer
ownership of, or title to, the articles herein below enumerated, a tax equivalent to thirty per centum of the gross value in
money of the articles so sold, bartered, exchanged or transferred, such tax to be paid by the manufacturer; producer or
importer:
.
.
.
"(k) Neon-tube signs, electric signs, and electric advertising devices.
x

"SEC. 191. Percentage tax on road, building, irrigations, artesian well, waterworks, and other construction work contractors,
proprietors or operators of dockyards, and others. . . . publishers, except those engaged in the publication or printing and
publication of any newspaper, magazine, review, or bulletin which appears at regular intervals, with fixed prices for
subscription and sale, and which is not devoted principally to the publication of advertisements, printers, and bookbinders,
shall pay a tax equivalent to three per centum of their gross receipts."
cralaw virtua1aw library

It is the contention of petitioner that it is not a manufacturer but only a contractor of neon-tube signs for the reason that it
makes neon-tube signs, electric signs, and electric advertising devices only by contract and by previous order of the party
paying for the signs or devices; also, that petitioner may also be considered a publisher for the reason that the neon signs
made by it really publish a product or a business, and that consequently, it should be taxed under section 191 of the Tax
Code which imposes as much lower tax both in rate and in amount. According to the Solicitor General, however, the very
articles of incorporation of petitioner rebuts its contention that it is not a manufacturer. We quote a portion of said articles of
incorporation,
viz.
:

jgc:chanrobles.com .ph

"To conduct a general advertising business, both as principal and agent, including the preparation and arrangement of
advertisements, and the manufacture and construction of advertising devices and novelties; . . ."
cralaw

virtua1aw

library

Petitioner makes extensive arguments and citation of authorities as to the meaning of manufacturer in an endeavor to show
that it does not really manufacture neon-tube signs, electric signs and electric advertising devices but only sells or leases its
services in making said signs according to the wishes and instructions of the customer. To us there is no need of seriously
considering said authorities and arguments because the decisive point involved in the case is the meaning and purpose of
section 85 (k) of the Tax Code. What was the intention of the Legislature in enacting said legal provision and what did it
mean to tax? In this connection, it is both relevant and interesting to give a brief history of this legal provision. According to
the
decision
of
the
Tax
Board,
and
we
quote:

jgc:chanrobles.com .ph

". . . The original text of the Tax Code (Commonwealth Act No. 466) approved on June 15, 1939, does not include the
manufacture of neon-tube signs as taxable under Section 185. This was due to the fact that the business of manufacturing
neon-tube signs was not at the time very lucrative for lack of demand. But as years went by, the demand for such devices
increased, so, under Republic Acts Nos. 41, 217, 588, and 594, the rate of percentage tax was increased from 10% to 15%
and
then
to
30%."
cralaw

virtua1aw

library

And, the Solicitor General adds that at the beginning when the tax was only 10 per cent the petitioner without question or
protest paid the same; and it was only when the tax was increased to 15 per cent and then to 30 per cent that it thought of
questioning the legality of the assessment and for the first time claimed that it did not fall under the provisions of section 185

(k). From the time that the tax on neon-tube signs, electric signs, and electric advertising devices was imposed there had
been no such neon-tube signs and electric devices mass-produced for sale to the public. And even at the present time
petitioner admits that no such signs and devices are made or sold to the public except upon orders by the customers. This
being the case, and if as contended by petitioner that its business of making and manufacturing neon-tube signs, electric
signs, and electric advertising devices does not come under section 185 (k) of the Tax Code then one may ask what neontube signs, electric signs, and electric advertising devices does said section 185 (k) tax? As the Tax Board aptly frames the
question
in
the
last
part
of
this
decision:

jgc:chanroble s.com.ph

"If petitioner does not come within the purview of section 185 (k) of the Tax Code, what neon-tube signs, electric signs, and
electric
advertising
devices
does
Congress
intend
to
tax?"
The answer would be "none." In other words, Congress would be placed in the position of imposing a tax on something that
did
not
exist
and
so
will
have
performed
a
futile
and
useless
legislative
act.
"A statute is a solemn enactment of the state acting through its legislature and it must be assumed that this process achieve
result. It cannot be presumed that the legislature would do a futile thing." (Sutherland Statutory Construction, Vol. 2, p.
237.)
As a rule taxes are imposed on existing industries, occupations, transactions, products and articles and not on those that
may possibly exist or come in the future. Tax law makers, and tax collectors who generally propose and recommend the
enactment of tax laws, are usually practical-minded people who deal with and consider existing situations and problems and
not those that may possibly arise in the future. When the 10 per cent, then 15 per cent and later 30 per cent tax was
imposed on neon-tube signs, electric signs, and electric advertising devices sold, exchanged, or transferred the Legislature
could not have had in mind and referred to any signs or devices than those which were being made and manufactured by
petitioner. The Legislature was not so much interested in how those neon-tube sings and electric advertising devices were
made and manufactured as it was in their eventual sale to the public and to customers who ordered them. We therefore find
and hold that the Tax Board committed no error in affirming the ruling of the Collector of Internal Revenue.
Petitioner also claims that it should be allowed deductions for the materials used in the making of these electric signs which
are now being taxed under the section 185 (k). But according to the Solicitor General, although he agrees that the cost of
the materials used in the manufacture of the finished articles on which the sales tax has been previously paid may be
deductible from the gross selling price of the finished article, petitioner did not raise this issue before the Tax Board, and
during the hearing before said body no proof was presented to show that said deduction had not been allowed, as a result of
which the Tax Board did not make any finding on the point. We agree with the Solicitor General that at this stage of the case,
this
matter
cannot
be
considered.
In view of the foregoing, the decision of the Tax Board is hereby affirmed with costs. We find it unnecessary to pass upon the
other
points
raised
in
the
petition.
Bengzon, Acting C.J., Padilla, Reyes, A., Jugo, Bautista Angelo, Labrador, Concepcion and Reyes, J.B.L., JJ., concur.

G.R. No. 78953 July 31, 1991

COMMISSIONER
OF
INTERNAL
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.

REVENUE, petitioner,

Elison G. Natividad for accused-appellant.

SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his income
tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation
and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July 27,
1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in
his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50% surcharge from Javier's
deficiency income tax assessment on his income for 1977.

The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for Reconsideration 3 and
Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and incorporated
in the assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received
from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted
by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is
Mellon Bank, N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First
Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private
respondent herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error
and should have been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on the
ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate,
and continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit Criminal
Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his wife with the crime of
estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and benefit the amount of
US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank and as a result of the mistake in
the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the taxable year
1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the footnote of the return
that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to
be an error and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the acting
Commissioner of Internal Revenue dated November 14, 1980, together with income assessment notices for the
years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before December 15, 1980
the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976 and 1977
respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue that
he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income
for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case
filed against him for filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of
Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest
that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable." . . . 5
The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981.

The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding
portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner here) further
requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72 of the Tax Code,
in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since petitioner (private
respondent) filed his income tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by
respondent (petitioner) because he considered the return filed false or fraudulent. This additional requirement, to our
mind, is much less called for because petitioner (private respondent), as stated earlier, reflected in as 1977 return as
footnote that "Taxpayer was recipient of some money received from abroad which he presumed to be gift but turned
out to be an error and is now subject of litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully and
deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to give up
some legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its lawful agents
from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 ( sic) SCRA
519), because petitioner literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or
law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too plain and
simple to understand. Since the question involved in this case is of first impression in this jurisdiction, under the
circumstances, the 50% surcharge imposed in the deficiency assessment should be deleted. 7
The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to us, by
the present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY?

On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which held him
liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted in the
samememorandum "that the issue may be raised in the case not for the purpose of correcting or setting aside the decision
which held him liable for deficiency income tax, but only to show that there is no basis for the imposition of the surcharge."
This subsequent disavowal therefore renders moot and academic the posturings articulated in as Comment 10 on the nontaxability of the amount he erroneously received and the bulk of which he had already disbursed. In any event, an appeal
at that time (of the filing of the Comments) would have been already too late to be seasonable. The petitioner, through the
office of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is self-convinced, and so
acted, that he is the beneficial owner, and of which reason is liable to tax. Put another way, the studied insinuation
that private respondent may not be the beneficial owner of the money or income flowing to him as enhanced by the
studied claim that the amount is "subject of litigation" is belied by the record and clearly exposed as a fraudulent
ploy, as witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount of
private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the amount of
$999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven (11) electric days,
specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the said dollar account in the
sum of $975,000.00 or P7,020,000.00. . . . 11
In reply, the private respondent argues:

The petitioner contends that the private respondent committed fraud by not declaring the "mistaken remittance" in
his income tax return and by merely making a footnote thereon which read: "Taxpayer was the recipient of some
money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." It is
respectfully submitted that the said return was not fraudulent. The footnote was practically an invitation to the
petitioner to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782), that is, it
must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain a judgment on the
issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40 BTA 672). The
following circumstances attendant to the case at bar show that in filing the questioned return, the private respondent
was guided, not by that "willful and deliberate intent to prevent the Government from making a proper assessment"
which constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given very, very
wide publicity by media; and only one who is not in his right mind would have entertained the idea that the BIR
would not make an assessment if the amount in question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in this jurisdiction"
(See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not unanimous in holding that
similar receipts are subject to the income tax. It should be noted that the decision in the Rutkin case is a five-to-four
decision; and in the very case before this Honorable Court, one out of three Judges of the respondent Court was of
the opinion that the amount in question is not taxable. Thus, even without the footnote, the failure to declare the
"mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by the Mellon
Bank for the return of the money, and was being prosecuted by the Government for estafa committed allegedly by
his failure to return the money and by converting it to his personal benefit. The basic tax amounted to P4,899,377.00
(See p. 6 of the Petition) and could not have been paid without using part of the mistaken remittance. Thus, it was
not unreasonable for the private respondent to simply state in his income tax return that the amount received was
still under litigation. If he had paid the tax, would that not constitute estafa for using the funds for his own personal
benefit? and would the Government refund it to him if the courts ordered him to refund the money to the Mellon
Bank? 12
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a
taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency
tax in case payment has been made on the basis of the return filed before the discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the
return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed
on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift
but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not
constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid
his cards on the table." 13
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It
must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere
mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal

Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the
inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with
fraud and those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create
only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. 15
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be, Rick v. U.S., App.
D.C., 161 F. 2d 897, 898. 16
In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government
was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from
proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The
petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately,
the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling
charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing
of fraud committed because he did not conceal the fact that he had received an amount of money although it was a
"subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by
the petitioner against the private respondent in the deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED. No
costs.
G.R. No. 137377

December 18, 2001

COMMISSIONER
OF
vs.
MARUBENI CORPORATION, respondent.

INTERNAL

REVENUE, petitioner,

PUNO, J.:
In this petition for review, the Commissioner of Internal Revenue assails the decision dated January 15, 1999 of the
Court of Appeals in CA-G.R. SP No. 42518 which affirmed the decision dated July 29, 1996 of the Court of Tax
Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Internal Revenue to desist from
collecting the 1985 deficiency income, branch profit remittance and contractor's taxes from Marubeni Corporation
after finding the latter to have properly availed of the tax amnesty under Executive Orders Nos. 41 and 64, as
amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is
engaged in general import and export trading, financing and the construction business. It is duly registered to
engage in such business in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine
the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985.
In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in
the Philippines, both of which were completed in 1984. One of the contracts was with the National Development
Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial
Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine
Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte
Industrial Development Estate.

On March 1, 1986, petitioner's revenue examiners recommended an assessment for deficiency income, branch
profit remittance, contractor's and commercial broker's taxes. Respondent questioned this assessment in a letter
dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from petitioner assessing
respondent several deficiency taxes. The assessed deficiency internal revenue taxes, inclusive of surcharge and
interest, were as follows:

I. DEFICIENCY INCOME TAX

FY ended March 31, 1985

Undeclared gross income (Philphos and

NDC construction projects)
P967,269,811.14

Less: Cost and expenses (50%)

483,634,905.57

Net undeclared income

483,634,905.57

Income tax due thereon

169,272,217.00

Add:

84,636,108.50

50% surcharge

20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90

TOTAL AMOUNT DUE

P290,583,972.40

II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX

FY ended March 31, 1985

Undeclared gross income from Philphos

and NDC construction projects
P483,634,905.57

Less: Income tax thereon

169,272,217.00

Amount subject to Tax

314,362,688.57

Tax due thereon

47,154,403.00

Add:

23,577,201.50

50% surcharge

20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66

TOTAL AMOUNT DUE

P83,036,965.16

III. DEFICIENCY CONTRACTOR'S TAX

FY ended March 31, 1985

Undeclared gross receipts/gross income

from Philphos and NDC construction
projects
P967,269,811.14

Contractor's tax due thereon (4%)

Add:

50% surcharge for non-declaration 19,345,396.00

20% surcharge for late payment

Sub-total

Add:

38,690,792.00

9,672,698.00

67,708,886.00

20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46

TOTAL AMOUNT DUE

P85,563,625.46

IV. DEFICIENCY COMMERCIAL BROKER'S TAX

FY ended March 31, 1985

Undeclared share from commission

income
(denominated as "subsidy from Home
Office")
P24,683,114.50

Tax due thereon

Add:

50% surcharge for non-declaration 814,284.50

20% surcharge for late payment

Sub-total

Add:

1,628,569.00

407,142.25

2,849,995.75

20% int. p.a.fr. 4-21-85 to 8-15-86

TOTAL AMOUNT DUE

751,539.98

P3,600,535.68

The 50% surcharge was imposed for your client's failure to report for tax purposes the aforesaid taxable revenues
while the 25% surcharge was imposed because of your client's failure to pay on time the above deficiency
percentage taxes.
xxx

xxx

xxx"1

Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and that the gross income
from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects
called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted
income from Philippine sources, hence, subject to internal revenue taxes. The assessment letter further stated that
the same was petitioner's final decision and that if respondent disagreed with it, respondent may file an appeal with
the Court of Tax Appeals within thirty (30) days from receipt of the assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax Appeals. The first
petition, CTA Case No. 4109, questioned the deficiency income, branch profit remittance and contractor's tax
assessments in petitioner's assessment letter. The second, CTA Case No. 4110, questioned the deficiency
commercial broker's assessment in the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty covering unpaid income
taxes for the years 1981 to 1985 was issued. Under this E.O., a taxpayer who wished to avail of the income tax
amnesty should, on or before October 31, 1986: (a) file a sworn statement declaring his net worth as of December
31, 1985; (b) file a certified true copy of his statement declaring his net worth as of December 31, 1980 on record
with the Bureau of Internal Revenue (BIR), or if no such record exists, file a statement of said net worth subject to

verification by the BIR; and (c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in net
worth from December 31, 1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated October 30, 1986 and
attached thereto its sworn statement of assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986.
The return was received by the BIR on November 3, 1986 and respondent paid the amount of P2,891,273.00
equivalent to ten percent (10%) of its net worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986 by E.O.
No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive Order (E.O.) No. 64. In
addition to the income tax amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3 included
estate and donor's taxes under Title III and the tax on business under Chapter II, Title V of the National Internal
Revenue Code, also covering the years 1981 to 1985. E.O. No. 64 further provided that the immunities and
privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the period within which the taxpayer
could avail of the amnesty was extended to December 15, 1986. Those taxpayers who already filed their amnesty
return under E.O. No. 41, as amended, could avail themselves of the benefits, immunities and privileges under the
new E.O. by filing an amended return and paying an additional 5% on the increase in net worth to cover business,
estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95 dated December 17,
1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the benefit of E.O. No. 64 and
paid a further amount of P1,445,637.00 to the BIR equivalent to five percent (5%) of the increase of its net worth
between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals rendered a decision in CTA
Case No. 4109. The tax court found that respondent had properly availed of the tax amnesty under E.O. Nos. 41
and 64 and declared the deficiency taxes subject of said case as deemed cancelled and withdrawn. The Court of
Tax Appeals disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to DESIST from
collecting the 1985 deficiency taxes it had assessed against petitioner and the same are deemed considered
[sic] CANCELLED and WITHDRAWN by reason of the proper availment by petitioner of the amnesty under
Executive Order No. 41, as amended."4
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision of the Court of Tax
Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1) Whether or not the Court of Appeals erred in affirming the Decision of the Court of Tax Appeals which
ruled that herein respondent's deficiency tax liabilities were extinguished upon respondent's availment of tax
amnesty under Executive Orders Nos. 41 and 64.
(2) Whether or not respondent is liable to pay the income, branch profit remittance, and contractor's taxes
assessed by petitioner."5
The main controversy in this case lies in the interpretation of the exception to the amnesty coverage of E.O. Nos. 41
and 64. There are three (3) types of taxes involved herein income tax, branch profit remittance tax and
contractor's tax. These taxes are covered by the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims,
however, that respondent is disqualified from availing of the said amnesties because the latter falls under the
exception in Section 4 (b) of E.O. No. 41.

Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted thereunder, viz:
"Sec. 4. Exceptions. The following taxpayers may not avail themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax law already filed in court as of the
effectivity hereof;
d) Those that have withholding tax liabilities under the National Internal Revenue Code, as amended, insofar
as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue as of the effectivity hereof
as a result of information furnished under Section 316 of the National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and Transactions) and Chapter
Four (Malversation of Public Funds and Property) of the Revised Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30, 1986, CTA Case No. 4109
had already been filed and was pending; before the Court of Tax Appeals. Respondent therefore fell under the
exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and unambiguous. It excepts from
income tax amnesty those taxpayers "with income tax cases already filed in court as of the effectivity hereof." The
point of reference is the date of effectivity of E.O. No. 41. The filing of income tax cases in court must have been
made before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under Section
4 (b) there must have been no income tax cases filed in court against him when E.O. No. 41 took effect. This is
regardless of when the taxpayer filed for income tax amnesty, provided of course he files it on or before the deadline
for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985 deficiency income, branch
profit remittance and contractor's tax assessments was filed by respondent with the Court of Tax Appeals on
September 26, 1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not yet
been filed in court. Respondent corporation did not fall under the said exception in Section 4 (b), hence, respondent
was not disqualified from availing of the amnesty for income tax under E.O. No. 41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A branch profit remittance
tax is defined and imposed in Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue Code. 6 In the
tax code, this tax falls under Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the
exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and respondent's availment of the amnesty
under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O. No. 41 by including estate and donor's taxes and
tax on business. Estate and donor's taxes fall under Title III of the Tax Code while business taxes fall under Chapter
II, Title V of the same. The contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it is
defined and imposed under the title on business taxes, and is therefore a tax on business. 7
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to the coverage of the
amnesty for business, estate and donor's taxes. Instead, Section 8 of E.O. No. 64 provided that:
"Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with
this amendatory Executive Order shall remain in full force and effect."

By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or inconsistent with the
amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty
coverage also applied to E.O. No. 64. With respect to Section 4 (b) in particular, this provision excepts from tax
amnesty coverage a taxpayer who has "income tax cases already filed in court as of the effectivity hereof." As to
what Executive Order the exception refers to, respondent argues that because of the words "income" and "hereof,"
they refer to Executive Order No. 41.8
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to refer to E.O. No. 41 and
its date of effectivity. The general rule is that an amendatory act operates prospectively.9 While an amendment is
generally construed as becoming a part of the original act as if it had always been contained therein, 10 it may not be
given a retroactive effect unless it is so provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired.11
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity of E.O. No. 41, the
original issuance. Neither is it necessarily implied from E.O. No. 64 that it or any of its provisions should apply
retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does not merely change
provisions in E.O. No. 41. It supplements the original act by adding other taxes not covered in the first. 12 It has been
held that where a statute amending a tax law is silent as to whether it operates retroactively, the amendment will not
be given a retroactive effect so as to subject to tax past transactions not subject to tax under the original act. 13 In an
amendatory act, every case of doubt must be resolved against its retroactive effect. 14
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general pardon or intentional
overlooking by the State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the government of its right to collect what is
due it and to give tax evaders who wish to relent a chance to start with a clean slate. 16 A tax amnesty, much like a
tax exemption, is never favored nor presumed in law.17 If granted, the terms of the amnesty, like that of a tax
exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. 18 For the right
of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful
words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest
grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent
of the legislature, that doubt must be resolved in favor of the state.19
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should therefore be construed
strictly against the taxpayer. The term "income tax cases" should be read as to refer to estate and donor's taxes and
taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order No. 64 took effect on November
17, 1986, consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity referred to in
Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect on November 17,
1986, CTA Case No. 4109 was already filed and pending in court. By the time respondent filed its supplementary tax
amnesty return on December 15, 1986, respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41
and 64 and was disqualified from availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty under the two Executive
Orders, it is still not liable for the deficiency contractor's tax because the income from the projects came from the
"Offshore Portion" of the contracts. The two contracts were divided into two parts, i.e., the Onshore Portion and the
Offshore Portion. All materials and equipment in the contract under the "Offshore Portion" were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of the two contracts, examine
their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the corporate investment arm of the
Philippine Government, established the Philphos to engage in the large-scale manufacture of phosphatic fertilizer
for the local and foreign markets.20 The Philphos plant complex which was envisioned to be the largest phosphatic
fertilizer operation in Asia, and among the largest in the world, covered an area of 180 hectares within the 435hectare Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.

In 1982, the NDC opened for public bidding a project to construct and install a modern, reliable, efficient and
integrated wharf/port complex at the Leyte Industrial Development Estate. The wharf/port complex was intended to
be one of the major facilities for the industrial plants at the Leyte Industrial Development Estate. It was to be
specifically adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products, liquid materials
and other products of Philphos, the Philippine Associated Smelting and Refining Corporation (Pasar), 21and other
industrial plants within the Estate. The bidding was participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into an agreement entitled
"Turn-Key Contract for Leyte Industrial Estate Port Development Project Between National Development Company
and Marubeni Corporation."22 The Port Development Project would consist of a wharf, berths, causeways,
mechanical and liquids unloading and loading systems, fuel oil depot, utilities systems, storage and service
buildings, offsite facilities, harbor service vessels, navigational aid system, fire-fighting system, area lighting, mobile
equipment, spare parts and other related facilities.23 The scope of the works under the contract covered turn-key
supply, which included grants of licenses and the transfer of technology and know-how,24 and:
". . . the design and engineering, supply and delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning of the Wharf-Port Complex as set forth in Annex I of this
Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the whole
of the Wharf/Port Complex through the Owner, with the design and construction of other facilities around the
site. The scope of works shall also include any activity, work and supply necessary for, incidental to or
appropriate under present international industrial port practice, for the timely and successful implementation
of the object of this Contract, whether or not expressly referred to in the abovementioned Annex I." 25
The contract price for the wharf/port complex was 12,790,389,000.00 and P44,327,940.00. In the contract, the
price in Japanese currency was broken down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese
Yen Portion II, while the price in Philippine currency was referred to as the Philippine Pesos Portion. The Japanese
Yen Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni from the Export-Import Bank of Japan.
The OECF is a Fund under the Ministry of Finance of Japan extended by the Japanese government as assistance
to foreign governments to promote economic development. 26 The OECF extended to the Philippine Government a
loan of 7,560,000,000.00 for the Leyte Industrial Estate Port Development Project and authorized the NDC to
implement the same.27 The other type of financing is an indirect type where the supplier, i.e., Marubeni, obtained a
loan from the Export-Import Bank of Japan to advance payment to its sub-contractors. 28
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos Portion were further
broken down and subdivided according to the materials, equipment and services rendered on the project. The price
breakdown and the corresponding materials, equipment and services were contained in a list attached as Annex III
to the contract.29
A few months after execution of the NDC contract, Philphos opened for public bidding a project to construct and
install two ammonia storage tanks in Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that
participated in and won the bidding. Thus, on May 2, 1982, Philphos and respondent corporation entered into an
agreement entitled "Turn-Key Contract for Ammonia Storage Complex Between Philippine Phosphate Fertilizer
Corporation and Marubeni Corporation." 30 The object of the contract was to establish and place in operating
condition a modern, reliable, efficient and integrated ammonia storage complex adapted to the site for the receipt
and storage of liquid anhydrous ammonia 31 and for the delivery of ammonia to an integrated fertilizer plant adjacent
to the storage complex and to vessels at the dock. 32 The storage complex was to consist of ammonia storage tanks,
refrigeration system, ship unloading system, transfer pumps, ammonia heating system, fire-fighting system, area
lighting, spare parts, and other related facilities.33 The scope of the works required for the completion of the
ammonia storage complex covered the supply, including grants of licenses and transfer of technology and knowhow,34 and:
". . . the design and engineering, supply and delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning of the Ammonia Storage Complex as set forth in Annex I
of this Contract, as well as the coordination of tie-ins at boundaries and schedule of the use of a part or the
whole of the Ammonia Storage Complex through the Owner with the design and construction of other
facilities at and around the Site. The scope of works shall also include any activity, work and supply
necessary for, incidental to or appropriate under present international industrial practice, for the timely and

successful implementation of the object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."35
The contract price for the project was 3,255,751,000.00 and P17,406,000.00. Like the NDC contract, the price was
divided into three portions. The price in Japanese currency was broken down into the Japanese Yen Portion I and
Japanese Yen Portion II while the price in Philippine currency was classified as the Philippine Pesos Portion. Both
Japanese Yen Portions I and II were financed by supplier's credit from the Export-Import Bank of Japan. The price
stated in the three portions were further broken down into the corresponding materials, equipment and services
required for the project and their individual prices. Like the NDC contract, the breakdown in the Philphos contract is
contained in a list attached to the latter as Annex III.36
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion under the two
contracts corresponds to the two parts into which the contracts were classified the Foreign Offshore Portion and
the Philippine Onshore Portion. In both contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore
Portion.37 Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. 38
Under the Philippine Onshore Portion, respondent does not deny its liability for the contractor's tax on the income
from the two projects. In fact respondent claims, which petitioner has not denied, that the income it derived from the
Onshore Portion of the two projects had been declared for tax purposes and the taxes thereon already paid to the
Philippine government.39 It is with regard to the gross receipts from the Foreign Offshore Portion of the two contracts
that the liabilities involved in the assessments subject of this case arose. Petitioner argues that since the two
agreements are turn-key,40 they call for the supply of both materials and services to the client, they are contracts for
a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials provided and
services rendered were all done and completed within the territorial jurisdiction of the Philippines. 41 Accordingly,
respondent's entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income
from Philippine sources. The total gross receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v. Engineering Equipment &
Supply Co.42
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205. Contractors, proprietors or operators of dockyards, and others. A contractor's tax of four percent of the
gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or
persons engaged in the business of selling or rendering the following services for a fee or compensation:
(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;
(q) Other independent contractors. The term "independent contractors" includes persons (juridical or
natural) not enumerated above (but not including individuals subject to the occupation tax under the
Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee
regardless of whether or not the performance of the service calls for the exercise or use of the
physical or mental faculties of such contractors or their employees. It does not include regional or
area headquarters established in the Philippines by multinational corporations, including their alien
executives, and which headquarters do not earn or derive income from the Philippines and which act
as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches
in the Asia-Pacific Region.
Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the
sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the
exercise or use of the physical or mental faculties of such contractors or their employees. The word "contractor"
refers to a person who, in the pursuit of independent business, undertakes to do a specific job or piece of work for
other persons, using his own means and methods without submitting himself to control as to the petty details. 44
A contractor's tax is a tax imposed upon the privilege of engaging in business. 45 It is generally in the nature of an
excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; 46 and is directly
collectible from the person exercising the privilege. 47 Being an excise tax, it can be levied by the taxing authority only
when the acts, privileges or business are done or performed within the jurisdiction of said authority. 48 Like property
taxes, it cannot be imposed on an occupation or privilege outside the taxing district. 49

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two
subject contracts. Respondent, however, argues that the work therein were not all performed in the Philippines
because some of them were completed in Japan in accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment to be made and the works
and services to be performed by respondent are indeed classified into two. The first part, entitled "Breakdown of
Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete portions of
materials and equipment which will be shipped to Leyte as units and lots. This subdivision of price is to be
used by owner to verify invoice for Progress Payments under Article 19.2.1 of the Contract. The agreed
subdivision of Japanese Yen Portion I is as follows:
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese Yen Portion II and the
Philippine Pesos Portion enumerate other materials and equipment and the construction and installation work on the
project. In other words, the supplies for the project are listed under Portion I while labor and other supplies are listed
under Portion II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the Industrial Plant
Section II of the Industrial Plant Department of Marubeni Corporation in Japan who supervised the implementation
of the two projects, testified that all the machines and equipment listed under Japanese Yen Portion I in Annex III
were manufactured in Japan.51 The machines and equipment were designed, engineered and fabricated by
Japanese firms sub-contracted by Marubeni from the list of sub-contractors in the technical appendices to each
contract.52 Marubeni sub-contracted a majority of the equipment and supplies to Kawasaki Steel Corporation which
did the design, fabrication, engineering and manufacture thereof; 53 Yashima & Co. Ltd. which manufactured the
mobile equipment; Bridgestone which provided the rubber fenders of the mobile equipment; 54 and B.S. Japan for the
supply of radio equipment.55 The engineering and design works made by Kawasaki Steel Corporation included the
lay-out of the plant facility and calculation of the design in accordance with the specifications given by
respondent.56 All sub-contractors and manufacturers are Japanese corporations and are based in Japan and all
engineering and design works were performed in that country.57
The materials and equipment under Portion I of the NDC Port Project is primarily composed of two (2) sets of ship
unloader and loader; several boats and mobile equipment. 58 The ship unloader unloads bags or bulk products from
the ship to the port while the ship loader loads products from the port to the ship. The unloader and loader are big
steel structures on top of each is a large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the specifications of the project. After manufacture,
they were rolled on to a barge and transported to Isabel, Leyte. 59 Upon reaching Isabel, the unloader and loader
were rolled off the barge and pulled to the pier to the spot where they were installed. 60 Their installation simply
consisted of bolting them onto the pier.61
Like the ship unloader and loader, the three tugboats and a line boat were completely manufactured in Japan. The
boats sailed to Isabel on their own power. The mobile equipment, consisting of three to four sets of tractors, cranes
and dozers, trailers and forklifts, were also manufactured and completed in Japan. They were loaded on to a
shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on wheels and self-propelled.
Once unloaded at the port, they were ready to be driven and perform what they were designed to do. 62
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex III to the NDC contract.
These other items consist of supplies and materials for five (5) berths, two (2) roads, a causeway, a warehouse, a
transit shed, an administration building and a security building. Most of the materials consist of steel sheets, steel
pipes, channels and beams and other steel structures, navigational and communication as well as electrical
equipment.63
In connection with the Philphos contract, the major pieces of equipment supplied by respondent were the ammonia
storage tanks and refrigeration units. 64 The steel plates for the tank were manufactured and cut in Japan according
to drawings and specifications and then shipped to Isabel. Once there, respondent's employees put the steel plates
together to form the storage tank. As to the refrigeration units, they were completed and assembled in Japan and
thereafter shipped to Isabel. The units were simply installed there. 65 Annex III to the Philphos contract lists down
under the Japanese Yen Portion I the materials for the ammonia storage tank, incidental equipment, piping facilities,
electrical and instrumental apparatus, foundation material and spare parts.

All the materials and equipment transported to the Philippines were inspected and tested in Japan prior to shipment
in accordance with the terms of the contracts. 66 The inspection was made by representatives of respondent
corporation, of NDC and Philphos. NDC, in fact, contracted the services of a private consultancy firm to verify the
correctness of the tests on the machines and equipment 67 while Philphos sent a representative to Japan to inspect
the storage equipment.68
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all paid by respondent in
Japan. In his deposition upon oral examination, Kenjiro Yamakawa, formerly the Assistant General Manager and
Manager of the Steel Plant Marketing Department, Engineering & Construction Division, Kawasaki Steel
Corporation, testified that the equipment and supplies for the two projects provided by Kawasaki under Japanese
Yen Portion I were paid by Marubeni in Japan. Receipts for such payments were duly issued by Kawasaki in
Japanese and English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by Marubeni in Japan. 70
Between Marubeni and the two Philippine corporations, payments for all materials and equipment under Japanese
Yen Portion I were made to Marubeni by NDC and Philphos also in Japan. The NDC, through the Philippine National
Bank, established letters of credit in favor of respondent through the Bank of Tokyo. The letters of credit were
financed by letters of commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon
respondent's submission of pertinent documents, released the amount in the letters of credit in favor of respondent
and credited the amount therein to respondent's account within the same bank. 71
Clearly, the service of "design and engineering, supply and delivery, construction, erection and installation,
supervision, direction and control of testing and commissioning, coordination. . . " 72 of the two projects involved two
taxing jurisdictions. These acts occurred in two countries Japan and the Philippines. While the construction and
installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and
supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats
and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and
completed in Japan. They were already finished products when shipped to the Philippines. The other construction
supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental
apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise
fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan.
These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to
contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering Equipment & Supply
Co73 is not in point. In that case, the Court found that Engineering Equipment, although an independent contractor,
was not engaged in the manufacture of air conditioning units in the Philippines. Engineering Equipment designed,
supplied and installed centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported some items for the system
it designed and installed.74 The issues in that case dealt with services performed within the local taxing jurisdiction.
There was no foreign element involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is affirmed.
SO ORDERED.
GR No. 137377| J. Puno

Facts:

CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency income,
branch profit remittance and contractors taxes from Marubeni Corp after finding the latter to have properly availed
of the tax amnesty under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is
duly registered in the Philippines with Manila branch office. CIR examined the Manila branchs books of accounts
for fiscal year ending March 1985, and found that respondent had undeclared income from contracts with NDC and
Philphos for construction of a wharf/port complex and ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. On Sept
1986, respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch profit
remittance and contractors tax assessments and second questioned the deficiency commercial brokers assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who wished
to avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41s scope to include estate and donors taxes under Title 3 and business tax
under Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already
availed amnesty under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA
affirmed on appeal.

Issue:
W/N Marubeni is exempted from paying tax
Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:

Sec. 4. Exceptions.The following taxpayers may not avail themselves of the amnesty herein
granted: xxx b) Those with income tax cases already filed in Court as of the effectivity hereof;
Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already been
filed and was pending before the CTA and Marubeni therefore fell under the exception. However, the point of
reference is the date of effectivity of EO 41 and that the filing of income tax cases must have been made before and as
of its effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26, 1986.
When EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception and is thus,
not disqualified from availing of the amnesty under EO 41 for taxes on income and branch profit remittance.
The difficulty herein is with respect to the contractors tax assessment (business tax) and respondents availment of
the amnesty under EO 64, which expanded EO 41s coverage. When EO 64 took effect on Nov 17, 1986, it did not
provide for exceptions to the coverage of the amnesty for business, estate and donors taxes. Instead, Section 8
said EO provided that:

Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or
inconsistent with this amendatory Executive Order shall remain in full force and effect.
Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The general
rule is that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is so provided
expressly or by necessary implication and no vested right or obligations of contract are thereby impaired.
2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax
because the income from the projects came from the Offshore Portion as opposed to Onshore Portion. It claims
all materials and equipment in the contract under the Offshore Portion were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the
contracts, the prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and
financed either by OECF or by suppliers credit. The Japanese Yen Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine Onshore
Portion. Marubeni has already paid the Onshore Portion, a fact that CIR does not deny.)
CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the
client, they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines,
and the materials provided and services rendered were all done and completed within the territorial jurisdiction of
the Philippines. Accordingly, respondents entire receipts from the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total gross receipts covering both labor and materials
should be subjected to contractors tax (a tax on the exercise of a privilege of selling services or labor rather than a
sale on products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines
because some of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the
contracts. All services for the design, fabrication, engineering and manufacture of the materials and equipment
under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside
Philippines taxing jurisdiction and are therefore not subject to contractors tax.Petition denied.

G.R. No. 12287. August 7, 1918. ]

VICENTE MADRIGAL and his wife, SUSANA PATERNO, Plaintiffs-Appellants, v. JAMES J. RAFFERTY, Collector of

Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue, Defendants-Appellees.
Gregorio Araneta, for Appellants.
Assistant Attorney Round, for Appellees.
SYLLABUS
1. TAXATION; INCOME TAX; PURPOSES. The Income Tax Law of the United States in force in the Philippine Islands has
selected income as the test of faculty in taxation. The aim has been to mitigate the evils arising from the inequalities of
wealth by a progressive scheme of taxation, which places the burden on those best able to pay. To carry out this idea, public
considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these exceptions, the
Income Tax Law is supposed to reach the earnings of the entire non-governmental property of the country.
2. ID.; ID.; INCOME CONTRACTED WITH CAPITAL AND PROPERTY. Income as contrasted with capital or property is to be
the test. The essential difference between capital and income is that capital is a fund; income is a flow. Capital is wealth,
while income is the service of wealth. "The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit;
capital
is
a
tree,
income
the
fruit."
(Waring
v.
City
of
Savannah
[1878],
60
Ga.,
93.)
3.

ID.;

ID.;

"INCOME:,"

DEFINED.

Income

means

profits

or

gains.

4. ID.; ID.; CONJUGAL PARTNERSHIPS. The decisions of this court in Nable Jose v. Nable Jose [1916], 16 Off. Gaz., 871,
and Manuel and Laxamana v. Losano [1918], 16 Off. Gaz., 1265, approved and followed. The provisions of the Civil Code
concerning
conjugal
partnerships
have
no
application
to
the
Income
Tax
Law.
5. ID.; ID.; ID. M and P were legally married prior to January 1, 1914. The marriage was contracted under the provisions
concerning conjugal partnerships. The claim is submitted that the income shown on the form presented for 1914 was in fact
the income of the conjugal partnership existing between M and P, and that in computing and assessing the additional income
tax, the income declared by M should be divided into two equal parts, one-half to be considered the income of M and the
other half the income of P. Held: That P, the wife of M, has an inchoate right in the property of her husband M during the life
of the conjugal partnership, but that P has no absolute right to one-half of the income of the conjugal partnership.
6. ID.; ID.; ID. The higher schedules of the additional tax provided by the Income Tax Law directed at the incomes of the
wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership. The
aims
and
purposes
of
the
Income
Tax
Law
must
be
given
effect.
7. ID.; ID.; ID. The Income Tax Law does not look on the spouses as individual partners in an ordinary partnership.
8. ID.; ID.; STATUTORY CONSTRUCTION. The Income Tax Law, being a law of American origin and being peculiarly
intricate in its provisions, the authoritative decision of the official charged with enforcing it has peculiar force for the
Philippines. Great weight should be given to the construction placed upon a revenue law, whose meaning is doubtful, by the
department charged with its execution

DECISION
MALCOLM, J. :
This appeal calls for consideration of the Income Tax Law, a law of American origin, with reference to the Civil Code, a law of
Spanish
origin.
STATEMENT

OF

THE

CASE

Vicente Madrigal and Susana Paterno Were legally married prior to January 1, 1914. The marriage was contracted under the
provisions of law concerning conjugal partnerships (sociedad de gananciales) . On February 25, 1915, Vicente Madrigal filed a
sworn declaration on the prescribed form with the Collector of Internal Revenue, showing, as his total net income for the year
1914, the sum of P296,302.73. Subsequently Madrigal submitted the claim that the said P296,302.73 did not represent his
income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife
Susana Paterno, and that in computing and assessing the additional income tax provided by the Act of Congress of October
3, 1913, the income declared by Vicente Madrigal should be divided into two equal parts, one-half to be considered the
income of Vicente Madrigal and the other half the income of Susana Paterno. The general question had in the meantime been
submitted to the Attorney-General of the Philippine Islands who in an opinion dated March 17, 1915, held with the petitioner
Madrigal. The revenue officers being still unsatisfied, the correspondence together with this opinion was forwarded to
Washington for a decision by the United States Treasury Department. The United States Commissioner of Internal Revenue
reversed
the
opinion
of
the
Attorney-General,
and
thus
decided
against
the
claim
of
Madrigal.
After payment under protest, and after the protest of Madrigal had been decided adversely by the Collector of Internal
Revenue, action was begun by Vicente Madrigal and his wife Susana Paterno in the Court of First Instance of the city of

Manila against the Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum of
P3,786.08, alleged to have been wrongfully and illegally assessed and collected by the defendants from the plaintiff, Vicente
Madrigal, under the provisions of the Act of Congress known as the Income Tax Law. The burden of the complaint was that if
the income tax for the year 1914 had been correctly and lawfully computed there would have been due and payable by each
of the plaintiffs the sum of P2,921.09, which taken together amounts to a total of P5,842.18 instead of P9,668.21,
erroneously and unlawfully collected from the plaintiff Vicente Madrigal, with the result that plaintiff Madrigal has paid as
income
tax
for
the
year
1914,
P3,786.08,
in
excess
of
the
sum
lawfully
due
and
payable.
The answer of the defendants, together with an analysis of the tax declaration, the pleadings, and the stipulation, sets forth
the basis of defendants stand in the following way: The income of Vicente Madrigal and his wife Susana Paterno for the year
1914 was made up of three items: (1) P362,407.67, the profits made by Vicente Madrigal in his coal and shipping business;
(2) P4,086.50, the profits made by Susana Paterno in her embroidery business; (3) P16,687.80, the profits made by Vicente
Madrigal in a pawnshop company. The sum of these three items is P383,181.97, the gross income of Vicente Madrigal and
Susana Paterno for the year 1914. General deductions were claimed and allowed in the sum of P86,879.24. The resulting net
income was P296,302.73. For the purpose of assessing the normal tax of one per cent on the net income there were allowed
as specific deductions the following: (1) P16,687.80, the tax upon which was to be paid at source, and (2) P8,000, the
specific exemption granted to Vicente Madrigal and Susana Paterno, husband and wife. The remainder, P271,614.93 was the
sum upon which the normal tax of one per cent was assessed. The normal tax thus arrived at was P2,716.15.
The dispute between the plaintiffs and the defendants concerned the additional tax provided for in the Income Tax Law. The
trial
court
in
an
exhausted
decision
found
in
favor
of
defendants,
without
costs.
ISSUES.
The contentions of plaintiffs and appellants, having to do solely with the additional income tax, is that it should be divided
into two equal parts, because of the conjugal partnership existing between them. The learned argument of counsel is mostly
based upon the provisions of the Civil Code establishing the sociedad de gananciales. The counter contentions of appellees
are that the taxes imposed by the Income Tax Law are as the name implies taxes upon income and not upon capital and
property; that the fact that Madrigal was a married man, and his marriage contracted under the provisions governing the
conjugal partnership, has no bearing on income considered as income, and that the distinction must be drawn between the
ordinary form of commercial partnership and the conjugal partnership of spouses resulting from the relation of marriage.
DECISION.
From the point of view of test of faculty in taxation, no less than five answers have been given in the course of history. The
final stage has been the selection of income as the norm of taxation. (See Seligman, "The Income Tax," Introduction.) The
Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of legislators to
put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising from
inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay. To carry out
this idea, public considerations have demanded an exemption roughly equivalent to the minimum of subsistence. With these
exceptions, the income tax is supposed to reach the earnings of the entire non governmental property of the country. Such is
the
background
of
the
Income
Tax
Law.
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is that
capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services
rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to
such fund through a period of time is called income. Capital is wealth, while income is the service of wealth. (See Fisher, "The
Nature of Capital and Income.") The Supreme Court of Georgia expresses the thought in the following figurative language:
"The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the fruit."
(Waring v. City of Savannah [1878], 60 Ga., 93.) A tax on income is not a tax on property. "Income," as here used, can be
defined as "profits or gains." (London County Council v. Attorney-General [1901], A. C., 26; 70 L. J. K. B. N. S., 77; 83 L. T.
N. S., 605; 49 Week. Rep., 686; 4 Tax Cas., 265. See further Fosters Income Tax, second edition [1915. ], Chapter IV; Black
on Income Taxes, second edition [1915], Chapter VIII; Gibbons v. Mahon [1890], 136 U. S., 549; and Towne v. Eisner,
decided
by
the
United
States
Supreme
Court,
January
7,
1918.)
A regulation of the United States Treasury Department relative to returns by the husband and wife not living apart, contains
the
following:

jgc:chanrobles.com .ph

"The husband, as the head and legal representative of the household and general custodian of its income, should make and
render the return of the aggregate income of himself and wife, and for the purpose of levying the income tax it is assumed
that he can ascertain the total amount of said income. If a wife has a separate estate managed by herself as her own
separate property, and receives an income of more than $3,000, she may make return of her own income, and if the
husband has other net income, making the aggregate of both incomes more than $4,000, the wifes return should be
attached to the return of her husband, or his income should be included in her return, in order that a deduction of $4,000
may be made from the aggregate of both incomes. The tax in such case, however, will be imposed only upon so much of the
aggregate income of both as shall exceed $4,000. If either husband or wife separately has an income equal to or in excess of
$3,000, a return of annual net income is required under the law, and such return must include the income of both, and in
such case the return must be made even though the combined income of both be less than $4,000. If the aggregate net
income of both exceeds $4,000, an annual return of their combined incomes must be made in the manner stated, although

neither one separately has an income of $3,000 per annum. They are jointly and separately liable for such return and for the
payment of the tax. The single or married status of the person claiming the specific exemption shall be determined as of the
time of claiming such exemption if such claim be made within the year for which return is made, otherwise the status at the
close
of
the
year."
cralaw

virtua1aw

library

With these general observations relative to the Income Tax Law in force in the Philippine Islands, we turn for a moment to
consider the provisions of the Civil Code dealing with the conjugal partnership. Recently in two elaborate decisions in which a
long line of Spanish authorities were cited, this court, in speaking of the conjugal partnership, decided that "prior to the
liquidation, the interest of the wife, and in case of her death, of her heirs, is an interest inchoate, a mere expectancy, which
constitutes neither a legal nor an equitable estate, and does not ripen into title until there appears that there are assets in
the community as a result of the liquidation and settlement." (Nable Jose v. Nable Jose [1916], 15 Off. Gaz., 871; Manuel
and
Laxamana
v.
Losano
[1918],
16
Off.
Gaz.,
1265.)
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her husband Vicente Madrigal during the
life of the conjugal partnership. She has an interest in the ultimate property rights and in the ultimate ownership of property
acquired as income after such income has become capital. Susana Paterno has no absolute right to one-half the income of
the conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot make a separate return in order to
receive the benefit of the exemption which would arise by reason of the additional tax. As she has no estate and income,
actually and legally vested in her and entirely distinct from her husbands property, the income cannot properly be considered
the separate income of the wife for the purposes of the additional tax. Moreover, the Income Tax Law does not look on the
spouses as individual partners in an ordinary partnership. The husband and wife are only entitled to the exemption of P8,000,
specifically granted by the law. The higher schedules of the additional tax directed at the incomes of the wealthy may not be
partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application
to the Income Tax Law. The aims and purposes of the Income Tax Law must be given effect.
The point we are discussing has heretofore been considered by the Attorney-General of the Philippine Islands and the United
States Treasury Department. The decision of the latter overruling the opinion of the Attorney-General is as follows:

jgc:chanroble s.com.ph

"TREASURY

DEPARTMENT,

Washington.

"Income

Tax.

"FRANK MCINTYRE,
"Chief,

Bureau

of

Insular

Affairs,

War

Department,

"Washington, D.C.
"SIR: This office is in receipt of your letter of June 22, 1915, transmitting copy of correspondence from the Philippine
authorities
relative
to
the
method
of
submission
of
income
tax
returns
by
married
persons.
"You advise that The Governor-General, in forwarding the papers to the Bureau, advises that the Insular Auditor has been
authorized to suspend action on the warrants in question until an authoritative decision on the points raised can be secured
from
the
Treasury
Department.
"From the correspondence it appears that Gregorio Araneta, married and living with his wife, had an income of an amount
sufficient to require the imposition of the additional tax provided by the statute; that the net income was properly computed
and then both income and deductions and the specific exemption were divided in half and two returns made, one return for
each half in the names respectively of the husband and wife, so that under the returns as filed there would be an escape
from the additional tax; that Araneta claims the returns are correct on the ground that under the Philippine law his wife is
entitled to half of his earnings; that Araneta has dominion over the income and under the Philippine law, the right to
determine its use and disposition; that in this case the wife has no separate estate within the contemplation of the Act of
October
3,
1913,
levying
an
income
tax.
"It appears further from the correspondence that upon the foregoing explanation, tax was assessed against the entire net
income against Gregorio Araneta; that the tax was paid and an application for refund made, and that the application for
refund was rejected, whereupon the matter was submitted to the Attorney-General of the Islands who holds that the returns
were correctly rendered, and that the refund should be allowed; and thereupon the question at issue is submitted through
the Governor-General of the Islands and Bureau of Insular Affairs for the advisory opinion of this office.
"By paragraph M of the statute, its provisions are extended to the Philippine Islands, to be administered as in the United
States but by the appropriate internal-revenue officers of the Philippine Government. You are therefore advised that upon the
facts as stated, this office holds that for the Federal Income Tax (Act of October 3, 1913), the entire net income in this case
was taxable to Gregorio Araneta, both for the normal and additional tax, and that the application for refund was properly
rejected.
"The separate estate of a married woman within the contemplation of the Income Tax Law is that which belongs to her solely
and separate and apart from her husband, and over which her husband has no right in equity. It may consist of lands or

chattels.
"The statute and the regulations promulgated in accordance therewith provide that each person of lawful age (not excused
from so doing) having a net income of $3,000 or over for the taxable year shall make a return showing the facts; that from
the net income so shown there shall be deducted $3,000 where the person making the return is a single person, or married
and not living with consort, and $1,000 additional where the person making the return is married and living with consort; but
that where the husband and wife both make returns (they living together), the amount of deduction from the aggregate of
their
several
incomes
shall
not
exceed
$4,000.
"The only occasion for a wife making a return is where she has income from a sole and separate estate in excess of $3,000,
or where the husband and wife neither separately have an income of $3,000, but together they have an income in excess of
$4,000, in which latter event either the husband or wife may make the return but not both. In all instances the income of
husband and wife whether from separate estates or not, is taken as a whole for the purpose of the normal tax. Where the
wife has income from a separate estate and makes return thereof, or where her income is separately shown in the return
made by her husband, while the incomes are added together for the purpose of the normal tax they are taken separately for
the purpose of the additional tax. In this case, however, the wife has no separate income within the contemplation of the
Income
Tax
Law.
"Respectfully,
"DAVID

A.

GATES,

"Acting Commissioner."
In connection with the decision above quoted, it is well to recall a few basic ideas. The Income Tax Law was drafted by the
Congress of the United States and has been by the Congress extended to the Philippine Islands. Being thus a law of
American origin and being peculiarly intricate in its provisions, the authoritative decision of the official who is charged with
enforcing it has peculiar force for the Philippines. It has come to be a well-settled rule that great weight should be given to
the construction placed upon a revenue law, whose meaning is doubtful, by the department charged with its execution. (U. S.
v. Cerecedo Hermanos y Cia. [1907], 209 U. S., 338; In re Allen [1903], 2 Phil., 630; Government of the Philippine Islands v.
Municipality
of
Binalonan,
and
Roman
Catholic
Bishop
of
Nueva
Segovia
[1915],
32
Phil., 634.)
We conclude that the judgment should be as it is hereby affirmed with costs against appellants. So ordered
Torres, Johnson, Carson, Street and Fisher, JJ.,; concur.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA,

JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision [1] of the Court of Appeals of 31 January 2001 in CA-G.R.
SP No. 57799 affirming the 3 January 2000 Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax
of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the
cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway
Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building
known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.

On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands
for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn,
sold the same property on the same day to Royal Match Inc. (RMI) forP200 million. These two transactions
were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.[5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount ofP75,728.021. After crediting withholding
taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks. [9] Three and a half years later, or on 16 January 1994, Toda
died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice [10] and demand letter
to the CIC for deficiency income tax for the year 1989 in the amount ofP79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover,
Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal
years 1987-1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment [12]dated 9 January 1995 from the
Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount
of P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return

P75,987,725.00

Add: Additional gain on sale

of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M)
Total Net Taxable Income
per investigation

100,000,000.00
P175,987,725.00

Tax Due thereof at 35%

P 61,595,703.75

Less: Payment already made

1. Per return

P26,595,704.00

2. Thru Capital Gains

Tax made by R.A.
Altonaga

10,000,000.00

Balance of tax due

36,595,704.00
P 24,999,999.75

Add: 50% Surcharge

12,499,999.88

25% Surcharge

6,249,999.94

Total

P 43,749,999.57

Add: Interest 20% from

4/16/90-4/30/94 (.808)
TOTAL AMT. DUE & COLLECTIBLE

35,349,999.65
P 79,099,999.22
============

The Estate thereafter filed a letter of protest.[13]

In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a fraudulent
scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the
additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale
of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher
corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the Commissioner
erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the
properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already
prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property
from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference
between the second simulated sale forP200 million and the first simulated sale for P100 million) realized by
CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35%
as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of
the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March
1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section
223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten

years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate
personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of
CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors
of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale
were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a preconceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There
being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in
Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the
return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The assessment issued on 9
January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of
99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate
personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax
of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9
January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property owned by CIC
was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a
representative, dummy, and a close business associate of the former, having held his office in a property
owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for
representation services rendered. The CTA denied[20] the motion for reconsideration, prompting the
Commissioner to file a petition for review[21] with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA,
reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of
taxation, is better situated to determine the correctness, propriety, and legality of the income tax assessments
assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking
the following grounds:
I.

THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO

FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES
INSURANCE CORPORATION.

II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO
ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of
the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of
purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two
sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between
Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former

registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989;
and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4
May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in
its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million
was withdrawn by Toda through the declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1.

Is this a case of tax evasion or tax avoidance?

2.

Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3.

Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be
used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used
outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil
or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due;
(2) an accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and
not accidental; and (3) a course of action or failure of action which is unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior
to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million
from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance [26] as
other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs
trial balance as other inv. Cibeles Bldg. This would show that the real buyer of the properties was RMI, and
not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one
of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the
assistant accountant of CIC and an old timer in the company. [27] But Mr. Prieto did not testify on this matter,
hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either,
since the letter-request for investigation of Altonaga was unserved, [28] Altonaga having left for the United States
of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of
respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by
the records. In its Memorandum, respondent Estate declared:

Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one hundred percent. But
isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely, Sec. 40
(2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the
tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the
law. It is absolutely allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [ sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax
planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and unconscionable advantage is taken of
another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains
tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the
subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did
not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and
without business purpose and economic substance. Doubtless, the execution of the two sales was calculated
to mislead the BIR with the end in view of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.[31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.
The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from
gains from a sale of property are not finally to be determined solely by the means employed to transfer legal
title. Rather, the transaction must be viewed as a whole, and each step from the commencement of
negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true
nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would
seriously impair the effective administration of the tax policies of Congress.[33]
[32]

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct
entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws.
Hence, the sale to Altonaga should be disregarded for income tax purposes. [34] The two sale transactions
should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now
27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable
net income received during each taxable year from all sources by every corporation organized in, or existing under the
laws of the Philippines, and partnerships, no matter how created or organized but not including general professional
partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital
gains tax provided for in Section 34 (h) of the NIRC of 1986 [35] (now 6% under Section 24 (D) (1) of the Tax
Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR
must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or
fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court
after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to
file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or
omission, as the case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the
BIR on the tax consequence of the two sale transactions. [36] Thus, the BIR was amply informed of the
transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the
two sales were openly made with the execution of public documents and the declaration of taxes for 1989.
However, these circumstances do not negate the existence of fraud. As earlier discussed those two
transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the
income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained
from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years
from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991. [37] The assessment for the 1989 deficiency income tax
of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income
tax was well within the prescriptive period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a

corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has
been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not
necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988,
and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent
or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited financial statement as
of December 31, 1989, attached hereto as Annex B and made a part hereof. The business of Cibeles has at all times
been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to
hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988
and 1989.[39][Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself personally
liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year
1989 by invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual
undertaking, as contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is
hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency
income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the
amount is fully paid.
Costs against respondent.
SO ORDERED.

CIR vs. Estate of Benigno Toda; Tax Evasion

G.R. No. 147188. September 14, 2004

Facts:
Cebiles Insurance Corporation authorized Benigno P. Toda, Jr., President and owner of 99.991% of

its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on
which the building stands for an amount of not less than P90 million.
Toda purportedly sold the property for P100 million to Rafael A. Altonaga. However, Altonaga in
turn, sold the same property on the same day to Royal Match Inc. for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.
For the sale of the property to Royal Dutch, Altonaga paid capital gains tax [6%] in the amount of
P10 million.
Issue:
Whether or not the scheme employed by Cibelis Insurance Company constitutes tax evasion.
Ruling:
Yes! The scheme, explained the Court, resorted to by CIC in making it appear that there were two
sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be
considered
a
legitimate
tax
planning.
Such
scheme
is
tainted
with
fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence
justly reposed, resulting in the damage to another, or by which an undue and unconscionable
advantage
is
taken
of
another.
It is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga
never controlled the property and did not enjoy the normal benefits and burdens of ownership. The
sale to him was merely a tax ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of
reducing
the
consequent
income
tax
liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on
the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated. The incidence of taxation depends upon the substance of a transaction. The tax
consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each
step from the commencement of negotiations to the consummation of the sale is relevant. A sale by
one person cannot be transformed for tax purposes into a sale by another by using the latter as a
conduit through which to pass title. To permit the true nature of the transaction to be disguised by
mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective
administration
of
the
tax
policies
of
Congress.
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. The two
sale transactions should be treated as a single direct sale by CIC to RMI.

G.R. No. L-66838 December 2, 1991

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS,respondents.
For the taxable year 1974 ending on 30 June 1974, and the taxable year 1975 ending 30 June 1975, private
respondent Procter and Gamble Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends payable to
its parent company and sole stockholder, Procter and Gamble Co., Inc. (USA) ("P&G-USA"), amounting to
P24,164,946.30, from which dividends the amount of P8,457,731.21 representing the thirty-five percent (35%)
withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner of Internal Revenue a claim for
refund or tax credit in the amount of P4,832,989.26 claiming, among other things, that pursuant to Section 24 (b) (1)
of the National Internal Revenue Code ("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding tax on the
dividends remitted was only fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13 July 1977, filed a petition for
review with public respondent Court of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January 1984,
the CTA rendered a decision ordering petitioner Commissioner to refund or grant the tax credit in the amount of
P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division reversed the decision of the CTA and held
that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to claim the refund or tax credit here
involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that allows a credit against the US tax due
from P&G-USA of taxes deemed to have been paid in the Philippines equivalent to twenty percent (20%) which
represents the difference between the regular tax of thirty-five percent (35%) on corporations and the tax of fifteen
percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary in order that "the dividends received by
its non-resident parent company in the US (P&G-USA) may be subject to the preferential tax rate of 15% instead of
35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration and we will deal with them seriatim in
this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of P&G-Phil. to bring the present claim for
refund or tax credit, which need to be examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the Commissioner of Internal Revenue. The
question was not raised by the Commissioner on the administrative level, and neither was it raised by him before
the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed to defeat an otherwise valid claim for
refund by raising this question of alleged incapacity for the first time on appeal before this Court. This is clearly a
matter of procedure. Petitioner does not pretend that P&G-Phil., should it succeed in the claim for refund, is likely to

run away, as it were, with the refund instead of transmitting such refund or tax credit to its parent and sole
stockholder. It is commonplace that in the absence of explicit statutory provisions to the contrary, the government
must follow the same rules of procedure which bind private parties. It is, for instance, clear that the government is
held to compliance with the provisions of Circular No. 1-88 of this Court in exactly the same way that private litigants
are held to such compliance, save only in respect of the matter of filing fees from which the Republic of the
Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR, unlike any other litigant, be allowed to
raise for the first time on appeal questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible opportunity, i.e., at the administrative level,
demanded that P&G-Phil. produce an express authorization from its parent corporation to bring the claim for refund,
then P&G-Phil. would have been able forthwith to secure and produce such authorization before filing the action in
the instant case. The action here was commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has substantive dimensions as well which,
as will be seen below, also ultimately relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the Commissioner of Internal Revenue is
essential for maintenance of a suit for recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to
have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner of Internal Revenue; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after
the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: . . . (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund Taxes.The Commissioner may:
(3) credit or refund taxes erroneously or illegally received, . . . No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty. (As amended by P.D. No. 69) (Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises is: is P&G-Phil. a "taxpayer" under
Section 309 (3) of the NIRC? The term "taxpayer" is defined in our NIRC as referring to "any person subject to
taximposed by the Title [on Tax on Income]." 2 It thus becomes important to note that under Section 53 (c) of the NIRC, the withholding agent
who is "required to deduct and withhold any tax" is made " personally liable for such tax" and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments effected by the withholding agent in accordance with the provisions of the NIRC. The
withholding agent, P&G-Phil., is directly and independently liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties should the amount of the tax withheld be finally found to
be less than the amount that should have been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer."

4 The terms
liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person who is
statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person should be regarded as a party in interest, or as a person having
sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him.

In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5 this Court pointed out that a withholding agent is in
fact the agent both of the government and of the taxpayer, and that the withholding agent is not an ordinary government agent:

The law sets no condition for the personal liability of the withholding agent to attach. The reason is to compel the
withholding agent to withhold the tax under all circumstances. In effect, the responsibility for the collection of the tax
as well as the payment thereof is concentrated upon the person over whom the Government has jurisdiction.
Thus, the withholding agent is constituted the agent of both the Government and the taxpayer. With respect to the
collection and/or withholding of the tax, he is the Government's agent. In regard to the filing of the necessary
income tax return and the payment of the tax to the Government, he is the agent of the taxpayer . The withholding
agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held personally
liable for the tax he is duty bound to withhold; whereas the Commissioner and his deputies are not made liable by
law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an agent of the beneficial owner of the
dividends with respect to the filing of the necessary income tax return and with respect to actual payment of the tax
to the government, such authority may reasonably be held to include the authority to file a claim for refund and to
bring an action for recovery of such claim. This implied authority is especially warranted where, is in the instant
case, the withholding agent is the wholly owned subsidiary of the parent-stockholder and therefore, at all times,
under the effective control of such parent-stockholder. In the circumstances of this case, it seems particularly unreal
to deny the implied authority of P&G-Phil. to claim a refund and to commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring P&G-Phil. to show some written or
telexed confirmation by P&G-USA of the subsidiary's authority to claim the refund or tax credit and to remit the
proceeds of the refund., or to apply the tax credit to some Philippine tax obligation of, P&G-USA, before actual
payment of the refund or issuance of a tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable to the Government for the taxes and
any deficiency assessments to be collected, the Government is not legally liable for a refund simply because it did
not demand a written confirmation of P&G-Phil.'s implied authority from the very beginning. A sovereign government
should act honorably and fairly at all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil. is properly regarded as a "taxpayer"
within the meaning of Section 309, NIRC, and as impliedly authorized to file the claim for refund and the suit to
recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to the dividend remittances by P&G-Phil.
to P&G-USA of the fifteen percent (15%) tax rate provided for in the following portion of Section 24 (b) (1) of the
NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade and business in the Philippines, . . .,
shall pay a tax equal to 35% of the gross income receipt during its taxable year from all sources within the
Philippines, as . . . dividends . . .Provided, still further, that on dividends received from a domestic corporation liable
to tax under this Chapter, the tax shall be 15% of the dividends, which shall be collected and paid as provided in
Section 53 (d) of this Code, subject to the condition that the country in which the non-resident foreign corporation, is
domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on
corporations and the tax (15%) on dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to fifteen percent (15%) if the country of domicile of the foreign
stockholder corporation "shall allow" such foreign corporation a tax credit for "taxes deemed paid in the Philippines,"

applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. In other words,
in the instant case, the reduced fifteen percent (15%) dividend tax rate is applicable if the USA "shall allow" to P&GUSA a tax credit for "taxes deemed paid in the Philippines" applicable against the US taxes of P&G-USA. The NIRC
specifies that such tax credit for "taxes deemed paid in the Philippines" must, as a minimum, reach an amount
equivalent to twenty (20) percentage points which represents the difference between the regular thirty-five percent
(35%) dividend tax rate and the preferred fifteen percent (15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the US must give a "deemed paid" tax
credit for the dividend tax (20 percentage points) waived by the Philippines in making applicable the preferred
divided tax rate of fifteen percent (15%). In other words, our NIRC does not require that the US tax law deem the
parent-corporation to have paid the twenty (20) percentage points of dividend tax waived by the Philippines. The
NIRC only requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an amount equivalent to the
twenty (20) percentage points waived by the Philippines.
2. The question arises: Did the US law comply with the above requirement? The relevant provisions of the US
Intemal Revenue Code ("Tax Code") are the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this
chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the
applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under
sections 902and 960. Such choice for any taxable year may be made or changed at any time before the expiration
of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable
year. The credit shall not be allowed against the tax imposed by section 531 (relating to the tax on accumulated
earnings), against the additional tax imposed for the taxable year under section 1333 (relating to war loss
recoveries) or under section 1351 (relating to recoveries of foreign expropriation losses), or against the personal
holding company tax imposed by section 541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the following amounts shall be allowed as
the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen of the United States and of a domestic
corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year
to any foreign country or to any possession of the United States; and
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this
subject, a domestic corporation which owns at least 10 percent of the voting stock of
a foreign corporation from which it receives dividends in any taxable year shall
(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in
subsection (c) (1) (b)] of a year for which such foreign corporation is a less developed country corporation, be
deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be
paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect
to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.
(c) Applicable Rules

(1) Accumulated profits defined. For purposes of this section, the term "accumulated profits" means with respect
to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without
reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such
profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the
income, war profits, and excess profitstaxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years
such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other
respects treating dividends as having been paid from the most recently accumulated gains, profits, or earning. . . .
(Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code

7 shows the following:

a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the amount of the dividend tax actually paid
(i.e., withheld) from the dividend remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid' tax credit 8 fora proportionate part of the corporate
income tax actually paid to the Philippines by P&G-Phil.

The parent-corporation P&G-USA is "deemed to have paid" a portion of the Philippine corporate income taxalthough
that tax was actually paid by its Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid" concept
merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from
revenues earned in the Philippines, thus reducing the amount remittable as dividends to P&G-USA. In other words,
US tax law treats the Philippine corporate income tax as if it came out of the pocket, as it were, of P&G-USA as a
part of the economic cost of carrying on business operations in the Philippines through the medium of P&G-Phil.
and here earning profits. What is, under US law, deemed paid by P&G- USA are not "phantom taxes" but
instead Philippine corporate income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend tax actually withheld, and (ii) the tax
credit for the Philippine corporate income tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax
credits available or applicable against the US corporate income tax of P&G-USA. These tax credits are allowed
because of the US congressional desire to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for applicability of the reduced or
preferential fifteen percent (15%) dividend tax rate under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax waived by the Philippine government under
Section 24 (b) (1), NIRC, and which hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US law is at least equal to the amount of
the dividend tax waived by the Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine government is arithmetically determined in
the following manner:

P100.00 Pretax net corporate income earned by P&G-Phil.

x 35% Regular Philippine corporate income tax rate

P35.00 Paid to the BIR by P&G-Phil. as Philippine

corporate income tax.
P100.00
-35.00

P65.00 Available for remittance as dividends to P&G-USA

P65.00 Dividends remittable to P&G-USA
x 35% Regular Philippine dividend tax rate under Section 24
(b) (1), NIRC
P22.75 Regular dividend tax
P65.00 Dividends remittable to P&G-USA
x 15% Reduced dividend tax rate under Section 24 (b) (1), NIRC

P9.75 Reduced dividend tax

P22.75 Regular dividend tax under Section 24 (b) (1), NIRC
-9.75 Reduced dividend tax under Section 24 (b) (1), NIRC

P13.00 Amount of dividend tax waived by Philippine

===== government under Section 24 (b) (1), NIRC.
Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also
the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the
reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.
Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax
Code, may be computed arithmetically as follows:
P65.00 Dividends remittable to P&G-USA
- 9.75 Dividend tax withheld at the reduced (15%) rate

P55.25 Dividends actually remitted to P&G-USA

P35.00 Philippine corporate income tax paid by P&G-Phil.
to the BIR
Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
= x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US
parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax
"deemed paid" by the parent but actually paid by the wholly-owned subsidiary.
Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government),
Section 902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.
3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with
the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of
Sections 901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal
Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:
However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901
and 902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which
the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government
for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income
tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In other
words, the U.S.government will allow a credit to the U.S. corporation or recipient of the dividend, in addition to the
amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend. Thus, if a
Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay P25,000
Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after income tax,
which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will be withheld
therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation receiving the
dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000 composed of:
(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:
P75,000 x P25,000 = P18,750

100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250

P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax on the dividends received by the U.S.
corporation from a Philippine subsidiary is clearly more than 20% requirement ofPresidential Decree No. 369 as
20% of P75,000.00 the dividends to be remitted under the above example, amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10, 1975 is hereby amended in the sense that
the dividends to be remitted by your client to its parent company shall be subject to the withholding tax at the rate of
15% only.
This ruling shall have force and effect only for as long as the present pertinent provisions of the U.S. Federal Tax
Code, which are the bases of the ruling, are not revoked, amended and modified, the effect of which will reduce the
percentage of tax deemed paid and creditable against the U.S. tax on dividends remitted by a foreign corporation to
a U.S. corporation. (Emphasis supplied)

The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981 addressed to Basic Foods Corporation and
BIR Ruling dated 20 October 1987 addressed to Castillo, Laman, Tan and Associates. In other words, the 1976
Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the case at bar was pending before the CTA and
this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax credit, which is embodied in Section 902,
US Tax Code, is exactly the same "deemed paid" tax credit found in our NIRC and which Philippine tax law allows to
Philippine corporations which have operations abroad (say, in the United States) and which, therefore, pay income
taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there shall be allowed as deductions . . .
(c) Taxes. . . .
(3) Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the
benefits of this paragraphs, the tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of the Philippines and of domestic corporation, the
amount of net income, war profits or excess profits, taxes paid or accrued during the taxable year to any foreign
country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a Philippine corporation for taxes
actually paid by it to the US governmente.g., for taxes collected by the US government on dividend remittances to
the Philippine corporation. This Section of the NIRC is the equivalent of Section 901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a domestic corporation which owns a majority
of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to
have paid the same proportion of any income, war-profits, or excess-profits taxes paid by such foreign corporation
to any foreign country, upon or with respect to the accumulated profits of such foreign corporation from which such
dividends were paid, which the amount of such dividends bears to the amount of such accumulated
profits: Provided, That the amount of tax deemed to have been paid under this subsection shall in no case exceed
the same proportion of the tax against which credit is taken which the amount of such dividends bears to the amount
of the entire net income of the domestic corporation in which such dividends are included.The term "accumulated
profits" when used in this subsection reference to a foreign corporation, means the amount of its gains, profits,
or income in excess of the income, war-profits, and excess-profits taxes imposed upon or with respect
to such profits or income; and the Commissioner of Internal Revenue shall have full power to determine from the
accumulated profits of what year or years such dividends were paid; treating dividends paid in the first sixty days of
any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction
shown otherwise), and in other respects treating dividends as having been paid from the most recently accumulated
gains, profits, or earnings. In the case of a foreign corporation, the income, war-profits, and excess-profits taxes of
which are determined on the basis of an accounting period of less than one year, the word "year" as used in this
subsection shall be construed to mean such accounting period. (Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax credit to a Philippine parent corporation
for taxes "deemed paid" by it, that is, e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent
corporation. The Philippine parent or corporate stockholder is "deemed" under our NIRCto have paid a

proportionate part of the US corporate income tax paid by its US subsidiary, although such US tax was actually paid
by the subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC, must be allowed by US law to P&GUSA, is the same "deemed paid" tax credit that Philippine law allows to a Philippine corporation with a wholly- or
majority-owned subsidiary in (for instance) the US. The "deemed paid" tax credit allowed in Section 902, US Tax
Code, is no more a credit for "phantom taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8),
NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend tax rate in the instant case was the
regular thirty-five percent (35%) rate rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had
failed to prove that its parent, P&G-USA, had in fact been given by the US tax authorities a "deemed paid" tax credit
in the amount required by Section 24 (b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal question before this Court from questions
of administrative implementation arising after the legal question has been answered. The basic legal issue is of
course, this: which is the applicable dividend tax rate in the instant case: the regular thirty-five percent (35%) rate or
the reduced fifteen percent (15%) rate? The question of whether or not P&G-USA is in fact given by the US tax
authorities a "deemed paid" tax credit in the required amount, relates to the administrative implementation of the
applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the "deemed paid" tax credit shall have
actually been granted before the applicable dividend tax rate goes down from thirty-five percent (35%) to fifteen
percent (15%). As noted several times earlier, Section 24 (b) (1), NIRC, merely requires, in the case at bar, that the
USA
"shall
allow a
credit
against
the
tax due from [P&G-USA for] taxes deemed to have been paid in the Philippines . . ." There is neither statutory
provision nor revenue regulation issued by the Secretary of Finance requiring the actual grant of the "deemed paid"
tax credit by the US Internal Revenue Service to P&G-USA before the preferential fifteen percent (15%) dividend
rate becomes applicable. Section 24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax
credit; it is a provision which specifies when a particular (reduced) tax rate is legally applicable.
In the third place, the position originally taken by the Second Division results in a severe practical problem of
administrative circularity. The Second Division in effect held that the reduced dividend tax rate is not applicable until
the US tax credit for "deemed paid" taxes is actually given in the required minimum amount by the US Internal
Revenue Service to P&G-USA. But, the US "deemed paid" tax credit cannot be given by the US tax authorities
unless dividends have actually been remitted to the US, which means that the Philippine dividend tax, at the rate
here applicable, was actually imposed and collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it
issues rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13 Denmark, 14 etc.) comply with the requirements set
out in Section 24 (b) (1), NIRC, for applicability of the fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at
the reduced dividend tax rate.

A requirement relating to administrative implementation is not properly imposed as a condition for

the applicability,as a matter of law, of a particular tax rate. Upon the other hand, upon the determination or
recognition of the applicability of the reduced tax rate, there is nothing to prevent the BIR from issuing implementing
regulations that would require P&G Phil., or any Philippine corporation similarly situated, to certify to the BIR the
amount of the "deemed paid" tax credit actually subsequently granted by the US tax authorities to P&G-USA or a US
parent corporation for the taxable year involved. Since the US tax laws can and do change, such implementing
regulations could also provide that failure of P&G-Phil. to submit such certification within a certain period of time,
would result in the imposition of a deficiency assessment for the twenty (20) percentage points differential. The task

of this Court is to settle which tax rate is applicable, considering the state of US law at a given time. We should
leave details relating to administrative implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the government is not, for that reason alone,
necessarily the correct reading of the statute. There are many tax statutes or provisions which are designed, not to
trigger off an instant surge of revenues, but rather to achieve longer-term and broader-gauge fiscal and economic
objectives. The task of our Court is to give effect to the legislative design and objectives as they are written into the
statute even if, as in the case at bar, some revenues have to be foregone in that process.
The economic objectives sought to be achieved by the Philippine Government by reducing the thirty-five percent
(35%) dividend rate to fifteen percent (15%) are set out in the preambular clauses of P.D. No. 369 which amended
Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the requirements of a developing economy foremost of
which is the financing of economic development programs;
WHEREAS, nonresident foreign corporations with investments in the Philippines are taxed on their earnings from
dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects an appropriate tax need be imposed on
dividends received by non-resident foreign corporations in the same manner as the tax imposed on interest on
foreign loans;
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of foreign equity investment in the
Philippines by reducing the tax cost of earning profits here and thereby increasing the net dividends remittable to the
investor. The foreign investor, however, would not benefit from the reduction of the Philippine dividend tax rate
unless its home country gives it some relief from double taxation (i.e., second-tier taxation) (the home country would
simply have more "post-R.P. tax" income to subject to its own taxing power) by allowing the investor additional tax
credits which would be applicable against the tax payable to such home country. Accordingly, Section 24 (b) (1),
NIRC, requires the home or domiciliary country to give the investor corporation a "deemed paid" tax credit at least
equal in amount to the twenty (20) percentage points of dividend tax foregone by the Philippines, in the assumption
that a positive incentive effect would thereby be felt by the investor.
The net effect upon the foreign investor may be shown arithmetically in the following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.

P55.25 Dividends actually remitted to P&G-USA

P55.25
x 46% Maximum US corporate income tax rate

P25.415US corporate tax payable by P&G-USA

without tax credits
P25.415
- 9.75 US tax credit for RP dividend tax withheld by P&G-Phil.

at 15% (Section 901, US Tax Code)

P15.66 US corporate income tax payable after Section 901

tax credit.
P55.25
- 15.66

P39.59 Amount received by P&G-USA net of R.P. and U.S.

===== taxes without "deemed paid" tax credit.
P25.415
- 29.75 "Deemed paid" tax credit under Section 902 US
Tax Code (please see page 18 above)
- 0 - US corporate income tax payable on dividends
====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.
P55.25

Amount
received
====== taxes after Section 902 tax credit.

by

P&G-USA

net

of

RP

and

US

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate
income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after
US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine
taxes. In the calculation of the Philippine Government, this should encourage additional investment or re-investment
in the Philippines by P&G-USA.
3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on
Income,"15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty percent (20%) of the gross amount of
dividends paid to US parent corporations:

Art 11. Dividends

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed
(a) 25 percent of the gross amount of the dividend; or
(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend ifduring the part of the paying
corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior
taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was
owned by the recipient corporation.
(Emphasis supplied)
The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] . 16 This is, of course, precisely the "deemed
paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the part of the Philippines a deliberate undertaking to reduce
the regular dividend tax rate of twenty percent (20%) is a maximum rate, there is still a differential or additional reduction of five (5) percentage points which
compliance of US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.
WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration
dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and
in lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31
January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.

NON-RESIDENT FOREIGN CORPORATION- DIVIDENDS

Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident
corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the
Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However,
such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to 20
percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable to its parent company and sole stockholder, P&G USA. Such
dividends amounted to Php 24.1M. P&G Phil paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M
It subsequently filed a claim with the Commissioner of Internal Revenue for a refund or tax credit, claiming that pursuant to
Section 24(b)(1) of the National Internal Revenue Code, as amended by Presidential Decree No. 369, the applicable rate
of withholding tax on the dividends remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or tax credit.

HELD:
YES.
P&G
Philippines
is
entitled.
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied to dividend remittances to non-resident
corporate stockholders of a Philippine corporation. This rate goes down to 15% ONLY IF he country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes deemed paid in the
Philippines, applicable against the tax payable to the domiciliary country by the foreign stockholder corporation. However,
such tax credit for taxes deemed paid in the Philippines MUST, as a minimum, reach an amount equivalent to 20
percentage points which represents the difference between the regular 35% dividend tax rate and the reduced 15% tax
rate. Thus, the test is if USA shall allow P&G USA a tax credit for taxes deemed paid in the Philippines applicable
against the US taxes of P&G USA, and such tax credit must reach at least 20 percentage points. Requirements were met.

CIR vs. BAIER-NICKEL

GR No. 153793 | August 29, 2006 | J. Ynares-Santiago

Facts:
CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane
Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the
manufacturing, marketing and selling of embroidered textile products. Through Jubanitexs general manager,
Marina Guzman, the company appointed respondent as commission agent with 10% sales commission on all sales
actually concluded and collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10%
withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but then claimed a
refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and that her sales commission
income was compensation for services rendered in Germany not Philippines and thus not taxable here.
She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was
reversed by CA on appeal, holding that the commission was received as sales agent not as President and that the
source of income arose from marketing activities in Germany.
Issue: W/N respondent is entitled to refund
Held:
No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to the
Philippine income taxation on their income received from all sources in the Philippines. In determining the meaning
of source, the Court resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue Law of
1916, as amended in 1917.
US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3)
the sale of capital assets. If the income is from labor, the place where the labor is done should be decisive; if it is
done in this country, the income should be from sources within the United States. If the income is from capital, the
place where the capital is employed should be decisive; if it is employed in this country, the income should be from
sources within the United States. If the income is from the sale of capital assets, the place where the sale is made
should be likewise decisive. Source is not a place, it is an activity or property. As such, it has a situs or location, and
if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign
corporations.
The source of an income is the property, activity or service that produced the income. For the source of income to be
considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi
juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction
subjected to tax is actually exempt from taxation.
In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming
producing service in Germany, which would have entitled her to a tax exemption for income from sources outside
the Philippines. Petition granted.