TAX CASES CORPORATION TAX G.R. No.

160528 October 9, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE AIRLINES, INC., respondent. PANGANIBAN, CJ.: A franchise is a legislative grant to operate a public utility. Like those of any other statute, the ambiguous provisions of a franchise should be construed in accordance with the intent of the legislature. In the present case, Presidential Decree 1590 granted Philippine Airlines an option to pay the lower of two alternatives: (a) "the basic corporate income tax based on PALs annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code" or (b) "a franchise tax of two percent of gross revenues." Availment of either of these two alternatives shall exempt the airline from the payment of "all other taxes," including the 20 percent final withholding tax on bank deposits. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, challenging the September 30, 2003 Decision of the Court of 3 4 Appeals (CA) in CA-GR SP No. 67970. The CA reversed the June 13, 2001 Decision and the November 13, 2001 Resolution of the Court of Tax Appeals (CTA) in CTA Case No. 5824. The assailed CA Decision disposed as follows: "WHEREFORE, the petition is GRANTED, and [the] Commissioner of Internal Revenue is hereby directed to refund to the [respondent] the amount of P731,190.45 representing the 20% final withholding tax collected and deducted by depository banks on the petitioners interest 5 income or, in the alternative, to allow the [respondent] a tax credit for the same amount." The Facts The CA narrates the facts thus: "[Respondent] Philippine Airlines, Inc. (PAL) is a domestic corporation organized in accordance with the laws of the Republic of the Philippines, while [Petitioner] Commissioner of Internal Revenue (CIR) is in-charge of the assessment and collection of the 20% final tax on interest on Philippine currency bank deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, imposed on domestic corporation under Sec. 24 (e) (1) [now Sec. 27 (D) (1)] of the National Internal Revenue Code (NIRC). "On November 5, 1997, *respondents+ AVP -Revenue Operations and Tax Services Officer, Atty. Edgardo P. Curbita, filed with the Office of the then Commissioner of Internal Revenue, Mdm. Liwayway Vinzons-Chato, a written request for refund of the amount of P2,241,527.22 which represents the total amount of 20% final withholding tax withheld from the [respondent] by various withholding agent banks, and which amount includes the 20% final withholding tax withheld by the United Coconut Planters Bank (UCPB) and Rizal Commercial Banking Corporation (RCBC) for the period starting March 1995 through February 1997. "On December 4, 1997, the *respondents+ AVP-Revenue Operations and Tax Services Officer again filed with [petitioner] CIR another written request for refund of the amount of P1,048,047.23, representing the total amount of 20% final withholding tax withheld by various depository banks of the [respondent] which amount includes the 20% withholding tax withheld by the Philippine National Bank (PNB), Equitable Banking Corporation (EBC), and the Jade Progressive Savings & Mortgage Bank (JPSMB) for the period starting March 1995 through November 1997. "The amounts, subject of this petition, and which represent the 20% final withholding tax allegedly erroneously withheld and remitted to the BIR by the aforesaid banks may be summarized as follows: Bank Period Covered Source Interest income on prime savings deposit Interest income on government securities and/or commercial papers Interest income on FBTB and Treasury Bills placements Interest income on PNBIG savings account Interest income on Treasury Bills placement Interest income on deposits Amount
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UCPB

Jan. 9, 1997 Feb. 21, 1997

P60,328.38

78,658.52

P131,986.65

RCBC

Jan. 6, 1997 Feb. 28, 1997

47,763.55

PNB

Feb. 19, 1997 Nov. 14, 1997

514,120.22

EBC

Jan. 3, 1997 Feb. 28, 1997

33,357.25 3,962.78
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JPSMB Jan. 1, 1997 Feb. 28, 1997

"*Petitioner+ CIR failed to act on the *respondents+ request for refund; thus, a petition was filed before the CTA on April 23, 1999."

Ruling of the Court of Tax Appeals The CTA ruled that Respondent PAL was not entitled to the refund. Section 13 of Presidential Decree No. 1590, PALs franchis e, allegedly gave respondent the option to pay either its corporate income tax under the provisions of the NIRC or a franchise tax of two percent of its gross revenues. Payment of either tax would be in lieu of all "other taxes." Had respondent paid the two percent franchise tax, then the final withholding taxes would have been considered as "other taxes." Since it chose to pay its corporate income tax, payment of the final 8 withholding tax is deemed part of this liability and therefore not refundable. Ruling of the Court of Appeals As stated earlier, the Court of Appeals reversed the Decision of the CTA. The CA held that PAL was bound to pay only the corporate income tax or the franchise tax. Section 13 of Presidential Decree No. 1590 exempts respondent from paying all other taxes, duties, royalties and 9 other fees of any kind. Respondent chose to pay its basic corporate income tax, which, after considering the factors allowed by law, 10 resulted in a zero tax liability. This zero tax liability should neither be taken against respondent nor deprive it of the exemption granted by 11 the law. Having chosen to pay its corporate income tax liability, respondent should now be exempt from paying all other taxes including 12 the final withholding tax. Hence, this Petition. The Issue The sole issue raised by petitioner is stated in this wise: "The Court of Appeals erred on a question of law ruling that the in lieu of all other taxes provision in Section 13 of PD No. 1590 applies even if there were in fact no taxes paid under any of subsections (A) and (B) of the said 13 decree." The Courts Ruling - The Petition has no merit. Sole Issue: Tax Liability of PAL The resolution of the instant case hinges on the interpretation of Section 13 of PALs franchise, which states in part: "SEC. 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax: (a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or (b) A franchise tax of two percent (2%) of the gross revenues derived by the grantee from all sources, without distinction a s to transport or non-transport operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax. "The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, 14 provincial, or national authority or government agency, now or in the future, x x x." Two points are evident from this provision. First, as consideration for the franchise, PAL is liable to pay either a) its basic corporate income tax based on its net taxable income, as computed under the National Internal Revenue Code; or b) a franchise tax of two percent based on its gross revenues, whichever is lower. Second, the tax paid is "in lieu of all other taxes" imposed by all government entities in the country. Interpretation of PALs Franchise According to the CA and PAL, the "other taxes in lieu of all other taxes" proviso includes final withholding taxes. When respondent availed itself of the basic corporate income tax as its chosen tax liability, it became exempt from final withholding taxes. On the other hand, the CTA held that the "in lieu of all other taxes" proviso implied the existence of something for which a substitution 16 would be made. Final withholding taxes come under basic corporate income tax liability; hence, payment of the latter cannot mean an exemption from the former. To be exempt from final withholding taxes, PAL should have paid the franchise tax of two percent, which would have been in lieu of all other taxes including the final withholding tax. The CIR argues that the "in lieu of all other taxes" proviso is a mere incentive that applies only when PAL actually pays something; that is, 17 either the basic corporate income tax or the franchise tax. Because of the zero tax liability of respondent under the basic corporate 18 income tax system, it was not eligible for exemption from other taxes. Construing Subsection (a) of Section 13 of PD 1590 Vis--vis the Corporate Income Tax PAL availed itself of PD 1590, Section 13, Subsection (a), the crux of which hinged on the terms "basic corporate income tax" and "annual 19 net taxable income." The applicable laws (PALs franchise and the Tax Code) do not define the terms "basic corporate income tax." On the other hand, "annual net taxable income" is computed in accordance with the provisions of the National Internal Revenue Code.
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The statutory basis for the income tax on corporations is found in Sections 27 to 30 of the National Internal Revenue Code of 1997 under Chapter IV: "Tax on Corporations." Section 27 enumerates the rate of income tax on domestic corporations; Section 28, the rates for foreign corporations; Section 29, the taxes on improperly accumulated earnings; and Section 30, the corporations exempt from tax. Being a domestic corporation, PAL is subject to Section 27, which reads as follows: "Section 27. Rates of Income Tax on Domestic Corporations . "(A) In General. Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, x x x, organized in, or 20 existing under the laws of the Philippines x x x." The NIRC also imposes final taxes on certain passive incomes, as follows: 1) 20 percent on the interests on currency bank deposits, other monetary benefits from deposit substitutes, trust funds and similar arrangements, and royalties derived from sources within the 21 Philippines; 2) 5 percent and 10 percent on the net capital gains realized from the sale of shares of stock in a domestic corporation not 22 traded in the stock exchange; 3) 10 percent on income derived by a depositary bank under the expanded foreign currency deposit 23 system; and 4) 6 percent on the gain presumed to be realized on the sale or disposition of lands and buildings treated as capital 24 25 assets. These final taxes are withheld at source. A corporate income tax liability, therefore, has two components: the general rate of 35 percent, which is not disputed; and the specific final rates for certain passive incomes. PALs request for a refund in the present case pertains to the passive income on bank depo sits, which is 26 subject to the specific final tax of 20 percent. Computation of Taxable Income Under the Tax Code Note that the tax liability of PAL under the option it chose (Item "a" of Section 13 of PD 1590) is to be "computed in accordance with the provisions of the National Internal Revenue Code," as follows: "(a) The basic corporate income tax based on the grantees annual net taxable income computed in accordance with the provisio ns of the National Internal Revenue Code[.]" Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional 27 exemptions, if any, authorized for these types of income. Under Section 32 of the Tax Code, gross income means income derived from whatever source, including compensation for services; the conduct of trade or business or the exercise of a profession; dealings in property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions; and a partners distributive shar e in the net income of a general professional partnership. Section 34 enumerates the allowable deductions; Section 35, personal and additional exemptions. The definition of gross income is broad enough to include all passive incomes subject to specific rates or final taxes. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of gross income, which determines taxable income. Basic Corporate Income Tax Based on Annual Net Taxable Income To repeat, the pertinent provision in the case at bar reads: "basic corporate income tax based on the grantees annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code." The Court has already illustrated that, under the Tax Code, "taxable income" does not include passive income subjected to final withholding taxes. Clearly, then, the "basic corporate income tax" identified in Section 13 (a) of the franchise relates to the general rate of 35 percent as stipulated in Section 27 of the Tax Code. The final 20 percent taxes disputed in the present case a re not covered under Section 13 (a) of PALs franchise; thus, a refund is in order. "Substitution Theory" of the CIR Untenable A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes" proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option. Under Subsection (a), the basis for the tax rate is respondents annual net taxable income, which (as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may result in a negative amount and thus translate into a zero tax liability. Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instance, it has a lower tax liability than that provided by Subsection (b).
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The fallacy of the CIRs argument is evident from the fact that the payment of a measly sum of one peso would suffice to exem pt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no substantial distinction between a zero tax and a one-peso tax liability. The Court is bound to effectuate the lawmakers intent, which is the controlling factor in interpreting a statute. Significantly, this Court has held that the soul of the law is intent: "The intent of a statute is the law. If a statute is valid it is to have effect according to the purpose and intent of the lawmaker. The intent is the vital part, the essence of the law, and the primary rule of construction is to ascertain and give effect to the intent. The intention of the legislature in enacting a law is the law itself, and must be enforced when ascertained, although it may not be consistent with the strict letter of the statute. Courts will not follow the letter of a statute when it leads away from the true intent and purpose of the legislature and to conclusions inconsistent with the general purpose of the act. Intent is the spirit which gives life to a legislative enactment. In construing statutes the proper course is to start out and follow the true intent of the legislature and to adopt that sense which harmonizes best with 30 the context and promotes in the fullest manner the apparent policy and objects of the legislature." While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the taxpayer and in favor of the 31 taxing power, Section 13 of the franchise of respondent leaves no room for interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either the "basic corporate income tax" or the two percent gross revenue tax. Determining whether this tax exemption is wise or advantageous is outside the realm of judicial power. This matter is addressed to the sound discretion of the lawmaking department of government. WHEREFORE, the Petition is DENIED. No pronouncement as to costs. SO ORDERED.
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G.R. No. 159647 April 15, 2005 COMMISSIONER OF INTERNAL REVENUE, Petitioners, vs. CENTRAL LUZON DRUG CORPORATION, Respondent. PANGANIBAN, J.: The 20 percent discount required by the law to be given to senior citizens is a tax credit, not merely a tax deduction from the gross income or gross sale of the establishment concerned. A tax credit is used by a private establishment only after the tax has been computed; a tax deduction, before the tax is computed. RA 7432 unconditionally grants a tax credit to all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to set aside the August 29, 2002 Decision and the August 3 11, 2003 Resolution of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed Decision reads as follows: "WHEREFORE, premises considered, the Resolution appealed from is AFFIRMED in toto. No costs." The assailed Resolution denied petitioners Motion for Reconsideration. The Facts The CA narrated the antecedent facts as follows: "Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style Mercury Drug. "From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaled P904,769.00. "On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations. "On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount of P904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)] via a Petition for Review. "On February 12, 2001, the Tax Court rendered a Decision dismissing respondents Petition for lack of merit. In said decision, the *CTA+ justified its ruling with the following ratiocination: x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of the tax is made by means of a claim for refund or tax credit, before recovery is allowed[,] it must be first established that there was an actual collection and receipt by the government of the tax sought to be recovered. x x x. x x x x x x x x x
5 4 1 2

Prescinding from the above, it could logically be deduced that tax credit is premised on the existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is not available. "Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution, granted respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA+ in CA G.R. SP No. 60057 entitled Central [Luzon] Drug Corporation vs. Commissioner of Internal Revenue promulgated on May 31, 2001, to wit: However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or credite d by petitioner was not erroneously paid or illegally collected. We take exception to the CTAs sweeping but unfounded statement that both tax refun d and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the govern ment. Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals exclusively with illegally collected or erroneously paid taxes but there are other possible situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person, or that of excise tax paid on goods locally produced or manufactured but actually exported. The standards and mechanics for the grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of a 7 tax credit and it does not in any way refer to illegally collected or erroneously paid taxes, x x x." Ruling of the Court of Appeals The CA affirmed in toto the Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit certificate in favor of respondent in the reduced amount of P903,038.39. It reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an 8 unintended benefit from the law, but rather a just compensation for the taking of private property for public use. Hence this Petition. The Issues Petitioner raises the following issues for our consideration: "Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax credit instead of as a deduction from gross income or gross sales. "Whether the Court of Appeals erred in holding that respondent is entitled to a refund."
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These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the 20 percent sales discount as a tax credit. The Courts Ruling - The Petition is not meritorious. Sole Issue: Claim of 20 Percent Sales Discount as Tax Credit Despite Net Loss Section 4a) of RA 7432 grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any 11 12 private establishment in the country. The latter may then claim the cost of the discount as a tax credit. But can such credit be claimed, even though an establishment operates at a loss? We answer in the affirmative. Tax Credit versus Tax Deduction Although the term is not specifically defined in our Tax Code, tax credit generally refers to an amount that is "subtracted directly from 14 15 16 ones total tax liability." It is an "allowance against the tax itself" or "a deduction from what is owed" by a taxpayer to the government. 17 Examples of tax credits are withheld taxes, payments of estimated tax, and investment tax credits. Tax credit should be understood in relation to other tax concepts. One of these is tax deduction -- defined as a subtraction "from income 18 for tax purposes," or an amount that is "allowed by law to reduce income prior to [the] application of the tax rate to compute the amount 19 20 of tax which is due." An example of a tax deduction is any of the allowable deductions enumerated in Section 34 of the Tax Code. A tax credit differs from a tax deduction. On the one hand, a tax credit reduces the tax due, including -- whenever applicable -- the income 21 tax that is determined after applying the corresponding tax rates to taxable income. Atax deduction, on the other, reduces the income 22 23 that is subject to tax in order to arrive at taxable income. To think of the former as the latter is to avoid, if not entirely confuse, the issue. A tax credit is used only after the tax has been computed; a tax deduction, before. Tax Liability Required for Tax Credit Since a tax credit is used to reduce directly the tax that is due, there ought to be a tax liability before the tax creditcan be applied. Without that liability, any tax credit application will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, the existence of a tax credit or its grant by law is not the same as the availment or use of such credit. While the grant is mandatory, the availment or use is not.
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If a net loss is reported by, and no other taxes are currently due from, a business establishment, there will obviously be no tax liability 24 against which any tax credit can be applied. For the establishment to choose the immediate availment of a tax credit will be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without conditions a tax credit benefit to all covered establishments. Although this tax credit benefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By its nature, the tax credit may still be deducted from a future, not a present, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes. Prior Tax Payments Not Required for Tax Credit While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowing tax credits, even though no taxes have been previously paid. For example, in computing the estate tax due, Section 86(E) allows a tax credit -- subject to certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -- again when paid to a foreign country -- in computing for the donors tax due. The tax credits in both instances allude to the prior payment of taxes, even if not made to our government. Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject to the VAT -- is also allowed a tax credit that includes a ratable portion of any input tax not directly attributable to either activity. This input tax may either be the VAT on the purchase or importation of goods or services that is merely due from -- not necessarily paid by -- such VAT-registered person in the course of trade or business; or the transitional input tax determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of goods, materials and 25 supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said items. Clearly from this provision, the tax credit refers to an input tax that is either due only or given a value by mere comparison with the VAT actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit. In Section 111(B), a one and a half percent input tax credit that is merely presumptive is allowed. For the purchase of primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -and for the contract price of public work contracts entered into with the government, again, no prior tax payments are needed for the use of the tax credit. More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section 112(A), apply for the issuance of a tax credit certificate for the amount of creditable input taxes merely due -- again not necessarily paid to -- the government 26 and attributable to such sales, to the extent that the input taxes have not been applied against output taxes. Where a taxpayer is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in availing of such tax credit for VAT purposes, this provision -- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a requisite. It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of a tax credit allowed, even though no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected to the condition that a foreign tax credit will be given by the 27 domiciliary country in an amount equivalent to taxes that are merely deemed paid. Although true, this provision actually refers to the tax credit as a condition only for the imposition of a lower tax rate, not as a deduction from the corresponding tax liability. Besides, it is not our government but the domiciliary country that credits against the income tax payable to the latter by the foreign corporation, the tax to be 28 foregone or spared. In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, a tax credit may be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination of it. In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or allow tax credits, even though no prior tax payments have been made. Under the treaties in which the tax credit method is used as a relief to avoid double taxation, income that is taxed in the state of source is also taxable in the state of residence, but the tax paid in the former is merely allowed as a credit against the tax levied in the 29 latter. Apparently, payment is made to the state of source, not the state of residence. No tax, therefore, has been previously paid to the latter.

Under special laws that particularly affect businesses, there can also be tax credit incentives. To illustrate, the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391, include tax credits equivalent to either five 30 percent of the net value earned, or five or ten percent of the net local content of exports. In order to avail of such credits under the said law and still achieve its objectives, no prior tax payments are necessary. From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of a tax credit. Thus, the CA 31 correctly held that the availment under RA 7432 did not require prior tax payments by private establishments concerned. However, we 32 do not agree with its finding that the carry-over of tax creditsunder the said special law to succeeding taxable periods, and even their application against internal revenue taxes, did not necessitate the existence of a tax liability. The examples above show that a tax liability is certainly important in the availment or use, not the existence or grant, of a tax credit. Regarding this matter, a private establishment reporting a net loss in its financial statements is no different from another that presents a net income. Both are entitled to the tax credit provided for under RA 7432, since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such credit, where no tax is due, will be an improvident usance. Sections 2.i and 4 of Revenue Regulations No. 2-94 Erroneous RA 7432 specifically allows private establishments to claim as tax credit the amount of discounts they grant. In turn, the Implementing 34 Rules and Regulations, issued pursuant thereto, provide the procedures for its availment. To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible. First, the definition given by petitioner is erroneous. It refers to tax credit as the amount representing the 20 percent discount that "shall be deducted by the said establishments from their gross income for income tax purposes and from their gross sales for value-added tax or 35 other percentage tax purposes." In ordinary business language, the tax credit represents the amount of such discount. However, the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations. By ordinary acceptation, a discount is an "abatement or reduction made from the gross amount or value of anything." To be more 37 precise, it is in business parlance "a deduction or lowering of an amount of money;" or "a reduction from the full amount or value of 38 something, especially a price." In business there are many kinds of discount, the most common of which is that affecting the income 39 statement or financial report upon which theincome tax is based. Business Discounts Deducted from Gross Sales A cash discount, for example, is one granted by business establishments to credit customers for their prompt payment. It is a "reduction in 41 price offered to the purchaser if payment is made within a shorter period of time than the maximum time specified." Also referred to as a sales discount on the part of the seller and a purchase discount on the part of the buyer, it may be expressed in such 42 terms as "5/10, n/30." A quantity discount, however, is a "reduction in price allowed for purchases made in large quantities, justified by savings in packaging, 43 44 shipping, and handling." It is also called a volume or bulk discount. A "percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to retailers" is known as a trade discount. No entry for it need be made in the manual or computerized books of accounts, since the purchase or sale is already 46 valued at the net price actually charged the buyer. The purpose for the discount is to encourage trading or increase sales, and the prices 47 at which the purchased goods may be resold are also suggested. Even a chain discount -- a series of discounts from one list price -- is 48 recorded at net. Finally, akin to a trade discount is a functional discount. It is "a suppliers price discount given to a purchaser based on the *latters+ role in 49 the *formers+ distribution system." This role usually involves warehousing or advertising. Based on this discussion, we find that the nature of a sales discount is peculiar. Applying generally accepted accounting principles (GAAP) in 50 the country, this type of discount is reflected in the income statement as a line item deducted -- along with returns, allowances, rebates 51 and other similar expenses -- from gross sales to arrive atnet sales. This type of presentation is resorted to, because the accounts receivable and sales figures that arise from sales discounts, -- as well as from quantity, volume or bulk discounts -- are recorded in the 52 manual and computerized books of accounts and reflected in the financial statements at the gross amounts of the invoices. This manner of recording credit sales -- known as the gross method -- is most widely used, because it is simple, more convenient to apply than the net 53 method, and produces no material errors over time. However, under the net method used in recording trade, chain or functional discounts, only the net amounts of the invoices -- after the 54 discounts have been deducted -- are recorded in the books of accounts and reflected in the financial statements. A separate line item 55 cannot be shown, because the transactions themselves involving both accounts receivable and sales have already been entered into, net of the said discounts. The term sales discounts is not expressly defined in the Tax Code, but one provision adverts to amounts whose sum -- along with sales 56 57 returns, allowances and cost of goods sold -- is deducted from gross sales to come up with the gross income, profit or margin derived
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from business. In another provision therein, sales discountsthat are granted and indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future event -- may be excluded from the gross sales within the same quarter they were 59 given. While determinative only of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in the former. After all, these two provisions affirm that sales discounts are amounts that are always deductible from gross sales. Reason for the Senior Citizen Discount: The Law, Not Prompt Payment A distinguishing feature of the implementing rules of R A 7432 is the private establishments outright deduction of the discount from the 60 invoice price of the medicine sold to the senior citizen. It is, therefore, expected that for each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -- and the net amount thereof collected -- immediately upon 61 perfection of the sale. Although prompt payment is made for an arms-length transaction by the senior citizen, the real and compelling reason for the private establishment giving the discount is that the law itself makes it mandatory. What RA 7432 grants the senior citizen is a mere discount privilege, not a sales discount or any of the above discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be equivalent to the tax credit benefit enjoyed by the private establishment granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been erroneously likened and confined to a sales discount. To a senior citizen, the monetary effect of the privilege may be the same as that resulting from a sales discount. However, to a private establishment, the effect is different from a simple reduction in price that results from such discount. In other words, the tax credit benefit is not the same as a sales discount. To repeat from our earlier discourse, this benefit cannot and should not be treated as a tax deduction. To stress, the effect of a sales discount on the income statement and income tax return of an establishment covered by RA 7432 is different from that resulting from the availment or use of its tax credit benefit. While the former is a deduction before, the latter is a deduction after, the income tax is computed. As mentioned earlier, a discount is not necessarily a sales discount, and a tax credit for a simple discount privilege should not be automatically treated like a sales discount. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 define tax credit as the 20 percent discount deductible from gross income for income tax purposes, or from gross sales for VAT or other percentage tax purposes. In effect, the tax credit benefit under RA 7432 is related to a sales discount. This contrived definition is improper, considering that the latter has to be deducted from gross sales in order to compute the gross income in theincome statement and cannot be deducted again, even for purposes of computing the income tax. When the law says that the cost of the discount may be claimed as a tax credit, it means that the amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of the tax credit benefit depends upon the existence of a tax liability, but to limit the benefit to a sales discount -- which is not even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down. Laws Not Amended by Regulations Second, the law cannot be amended by a mere regulation. In fact, a regulation that "operates to create a rule out of harmony with 62 the statute is a mere nullity"; it cannot prevail. It is a cardinal rule that courts "will and should respect the contemporaneous construction placed upon a statute by the executive officers 63 whose duty it is to enforce it x x x." In the scheme of judicial tax administration, the need for certainty and predictability in the 64 implementation of tax laws is crucial. Our tax authorities fill in the details that "Congress may not have the opportunity or competence to 65 provide." The regulations these authorities issue are relied upon by taxpayers, who are certain that these will be followed by the 66 courts. Courts, however, will not uphold these authorities interpretations when clearly absurd, erroneous or improper. In the present case, the tax authorities have given the term tax credit in Sections 2.i and 4 of RR 2-94 a meaning utterly in contrast to what RA 7432 provides. Their interpretation has muddled up the intent of Congress in granting a mere discount privilege, not a sales discount. The administrative agency issuing these regulations may not enlarge, alter or restrict the provisions of the law it administers; it cannot 67 engraft additional requirements not contemplated by the legislature. In case of conflict, the law must prevail. A "regulation adopted pursuant to law is law." Conversely, a regulation or any portion thereof 70 not adopted pursuant to law is no law and has neither the force nor the effect of law. Availment of Tax Credit Voluntary Third, the word may in the text of the statute implies that the availability of the tax credit benefit is neither unrestricted nor 72 mandatory. There is no absolute right conferred upon respondent, or any similar taxpayer, to avail itself of the tax credit remedy whenever it chooses; "neither does it impose a duty on the part of the government to sit back and allow an important facet of tax 73 collection to be at the sole control and discretion of the taxpayer." For the tax authorities to compel respondent to deduct the 20 percent
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discount from either its gross income or its gross sales is, therefore, not only to make an imposition without basis in law, but also to blatantly contravene the law itself. What Section 4.a of RA 7432 means is that the tax credit benefit is merely permissive, not imperative. Respondent is given two options -either to claim or not to claim the cost of the discounts as a tax credit. In fact, it may even ignore the credit and simply consider the gesture as an act of beneficence, an expression of its social conscience. Granting that there is a tax liability and respondent claims such cost as a tax credit, then the tax credit can easily be applied. If there is 75 none, the credit cannot be used and will just have to be carried over and revalidated accordingly. If, however, the business continues to operate at a loss and no other taxes are due, thus compelling it to close shop, the credit can never be applied and will be lost altogether. In other words, it is the existence or the lack of a tax liability that determines whether the cost of the discounts can be used as a tax credit. RA 7432 does not give respondent the unfettered right to avail itself of the credit whenever it pleases. Neither does it allow our tax administrators to expand or contract the legislative mandate. "The plain meaning rule or verba legis in statutory construction is thus applicable x x x. Where the words of a statute are clear, plain and free from ambiguity, it must be given its literal meaning and applied 76 without attempted interpretation." Tax Credit Benefit Deemed Just Compensation Fourth, Sections 2.i and 4 of RR 2-94 deny the exercise by the State of its power of eminent domain. Be it stressed that the privilege enjoyed by senior citizens does not come directly from the State, but rather from the private establishments concerned. Accordingly, the tax credit benefit granted to these establishments can be deemed as their just compensation for private property taken by the State for 77 public use. The concept of public use is no longer confined to the traditional notion of use by the public, but held synonymous with public 78 interest, public benefit, public welfare, and public convenience. The discount privilege to which our senior citizens are entitled is actually a benefit enjoyed by the general public to which these citizens belong. The discounts given would have entered the coffers and formed part of the gross sales of the private establishments concerned, were it not for RA 7432. The permanent reduction in their total revenues is a forced subsidy corresponding to the taking of private property for public use or benefit. As a result of the 20 percent discount imposed by RA 7432, respondent becomes entitled to a just compensation. This term refers not only to the issuance of a tax credit certificate indicating the correct amount of the discounts given, but also to the promptness in its release. Equivalent to the payment of property taken by the State, such issuance -- when not done within a reasonable time from the grant of the discounts -- cannot be considered as just compensation. In effect, respondent is made to suffer the consequences of being immediately deprived of its revenues while awaiting actual receipt, through the certificate, of the equivalent amount it needs to cope with the reduction 79 in its revenues. Besides, the taxation power can also be used as an implement for the exercise of the power of eminent domain. Tax measures are but 81 82 "enforced contributions exacted on pain of penal sanctions" and "clearly imposed for apublic purpose." In recent years, the power to tax 83 has indeed become a most effective tool to realize social justice, public welfare, and the equitable distribution of wealth. While it is a declared commitment under Section 1 of RA 7432, social justice "cannot be invoked to trample on the rights of property owners who under our Constitution and laws are also entitled to protection. The social justice consecrated in our [C]onstitution [is] not 84 intended to take away rights from a person and give them to another who is not entitled thereto." For this reason, a just compensation for income that is taken away from respondent becomes necessary. It is in the tax credit that our legislators find support to realize social justice, and no administrative body can alter that fact. To put it differently, a private establishment that merely breaks even -- without the discounts yet -- will surely start to incur losses because of such discounts. The same effect is expected if its mark-up is less than 20 percent, and if all its sales come from retail purchases by senior citizens. Aside from the observation we have already raised earlier, it will also be grossly unfair to an establishment if the discounts will be treated merely as deductions from either its gross income or its gross sales. Operating at a loss through no fault of its own, it will realize that thetax credit limitation under RR 2-94 is inutile, if not improper. Worse, profit-generating businesses will be put in a better position if they avail themselves of tax credits denied those that are losing, because no taxes are due from the latter. Grant of Tax Credit Intended by the Legislature Fifth, RA 7432 itself seeks to adopt measures whereby senior citizens are assisted by the community as a whole and to establish a program 86 beneficial to them. These objectives are consonant with the constitutional policy of making "health x x x services available to all the 87 88 people at affordable cost" and of giving "priority for the needs of the x x x elderly." Sections 2.i and 4 of RR 2-94, however, contradict these constitutional policies and statutory objectives. Furthermore, Congress has allowed all private establishments a simple tax credit, not a deduction. In fact, no cash outlay is required from the government for the availment or use of such credit. The deliberations on February 5, 1992 of the Bicameral Conference Committee Meeting on Social Justice, which finalized RA 7432, disclose the true intent of our legislators to treat the sales discounts as a tax credit, rather than as a deduction from gross income. We quote from those deliberations as follows:
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"THE CHAIRMAN (Rep. Unico). By the way, before that ano, about deductions from taxable income. I think we incorporated there a provision na - on the responsibility of the private hospitals and drugstores, hindi ba? SEN. ANGARA. Oo. THE CHAIRMAN. (Rep. Unico), So, I think we have to put in also a provision here about the deductions from taxable income of that private hospitals, di ba ganon 'yan? MS. ADVENTO. Kaya lang po sir, and mga discounts po nila affecting government and public institutions, so, puwede na po nating hindi isama yung mga less deductions ng taxable income. THE CHAIRMAN. (Rep. Unico). Puwede na. Yung about the private hospitals. Yung isiningit natin? MS. ADVENTO. Singit na po ba yung 15% on credit. (inaudible/did not use the microphone). SEN. ANGARA. Hindi pa, hindi pa. THE CHAIRMAN. (Rep. Unico) Ah, 'di pa ba naisama natin? SEN. ANGARA. Oo. You want to insert that? THE CHAIRMAN (Rep. Unico). Yung ang proposal ni Senator Shahani, e. SEN. ANGARA. In the case of private hospitals they got the grant of 15% discount, provided that, the private hospitals can claim the expense as a tax credit. REP. AQUINO. Yah could be allowed as deductions in the perpetrations of (inaudible) income. SEN. ANGARA. I-tax credit na lang natin para walang cash-out ano? REP. AQUINO. Oo, tax credit. Tama, Okay. Hospitals ba o lahat ng establishments na covered. THE CHAIRMAN. (Rep. Unico). Sa kuwan lang yon, as private hospitals lang. REP. AQUINO. Ano ba yung establishments na covered? SEN. ANGARA. Restaurant lodging houses, recreation centers. REP. AQUINO. All establishments covered siguro? SEN. ANGARA. From all establishments. Alisin na natin 'Yung kuwan kung ganon. Can we go back to Section 4 ha? REP. AQUINO. Oho. SEN. ANGARA. Letter A. To capture that thought, we'll say the grant of 20% discount from all establishments et cetera, et cetera, provided that said establishments - provided that private establishments may claim the cost as a tax credit. Ganon ba 'yon? REP. AQUINO. Yah. SEN. ANGARA. Dahil kung government, they don't need to claim it. THE CHAIRMAN. (Rep. Unico). Tax credit. SEN. ANGARA. As a tax credit [rather] than a kuwan - deduction, Okay. REP. AQUINO Okay. SEN. ANGARA. Sige Okay. Di subject to style na lang sa Letter A". Special Law Over General Law Sixth and last, RA 7432 is a special law that should prevail over the Tax Code -- a general law. "x x x [T]he rule is that on a specific matter 90 the special law shall prevail over the general law, which shall be resorted to only to supply deficiencies in the former." In addition, "[w]here there are two statutes, the earlier special and the later general -- the terms of the general broad enough to include the matter provided for in the special -- the fact that one is special and the other is general creates a presumption that the special is to be considered 91 92 as remaining an exception to the general, one as a general law of the land, the other as the law of a particular case." "It is a canon of statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute, will ordinarily not affect 93 the special provisions of such earlier statute."
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RA 7432 is an earlier law not expressly repealed by, and therefore remains an exception to, the Tax Code -- a later law. When the former states that a tax credit may be claimed, then the requirement of prior tax payments under certain provisions of the latter, as discussed 94 above, cannot be made to apply. Neither can the instances of or references to a tax deduction under the Tax Code be made to restrict RA 7432. No provision of any revenue regulation can supplant or modify the acts of Congress. WHEREFORE, the Petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals AFFIRMED. No pronouncement as to costs. SO ORDERED.

G.R. Nos. L-28508-9 July 7, 1989 ESSO STANDARD EASTERN, INC., (formerly, Standard-Vacuum Oil Company), petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, respondent. CRUZ, J.: On appeal before us is the decision of the Court of Tax Appeals denying petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively. I - In CTA Case No. 1251, petitioner ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the respondent Commissioner of Internal Revenue on the ground that the expenses should be capitalized and might be written off as a loss only when a "dry hole" should result. ESSO then filed an amended return where it asked for the refund of P323,279.00 by reason of its abandonment as dry holes of several of its oil wells. Also claimed as ordinary and necessary expenses in the same return was the amount of P340,822.04, representing margin fees it had paid to the Central Bank on its profit remittances to its New York head office. On August 5, 1964, the CIR granted a tax credit of P221,033.00 only, disallowing the claimed deduction for the margin fees paid. In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for the year 1960, in the amount of P367,994.00, plus 18% interest thereon of P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to its New York head office. ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representing its overpayment on its income tax for 1959 and paying under protest the additional amount of P213,201.92. On August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax. It argued that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only on the amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00. This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiency tax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960 income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed as deductible business expenses. ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees were deductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed an overpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if the amount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for 1960, representing excess interest. After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but was affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now before us. II - The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of the Philippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue measure. If it is a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profit remittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of the National Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year and which are related to the taxpayer's trade, business or profession are deductible from gross income. The petitioner maintains that margin fees are taxes and cites the background and legislative history of the Margin Fee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposed by R.A. 601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as part of, and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly, properly originated in the House of Representatives. During its two and a half years of existence, the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government. It was, moreover, payable out of the General Fund. On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that
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We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, steps taken in the enactment of a law, or the history of the passage of the law through the legislature, may be resorted to as an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take into consideration the facts leading up to, coincident with, and in any way connected with, the passage of the act, in order that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only in extremely doubtful matters of interpretation does the legislative history of an act of Congress become important. As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the language of which is plain and unambiguous, since such legislative history may only be resorted to for the purpose of solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.] Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve. In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, the Court stated through Justice Jose P. Bengzon: A margin levy on foreign exchange is a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately, 'curtail any excessive demand upon the international reserve' in order to stabilize the currency. Originally adopted to cope with balance of payment pressures, exchange restrictions have come to serve various purposes, such as limiting non-essential imports, protecting domestic industry and when combined with the use of multiple currency rates providing a source of revenue to the government, and are in many developing countries regarded as a more or less inevitable concomitant of their economic development programs. The different measures of exchange control or restriction cover different phases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the amount of foreign exchange allowable. In the case of the margin levy, the immediate impact is on the rate of foreign exchange; in fact, its main function is to control the exchange rate without changing the par value of the peso as fixed in the Bretton Woods Agreement Act. For a member nation is not supposed to alter its exchange rate (at par value) to correct a merely temporary disequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed by the government. As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not form part of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax is levied to provide revenue for government operations, while the proceeds of the margin fee are applied to strengthen our country's international reserves. Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, the same idea was expressed, though in connection with a different levy, through Justice J.B.L. Reyes: Neither do we find merit in the argument that the 20% retention of exporter's foreign exchange constitutes an export tax. A tax is a levy for the purpose of providing revenue for government operations, while the proceeds of the 20% retention, as we have seen, are applied to strengthen the Central Bank's international reserve. We conclude then that the margin fee was imposed by the State in the exercise of its police power and not the power of taxation. Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary and ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the Unites States. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows: SEC. 30. Deductions from gross income in computing net income there shall be allowed as deductions (a) Expenses: (1) In general. All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. (2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue , the Court laid down the rules on the deductibility of business expenses, thus: The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a) (1) of the National Internal Revenue
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which allows a deduction of 'all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.' An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. In addition, not only must the taxpayer meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction. While it is true that there is a number of decisions in the United States delving on the interpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no adequate or satisfactory definition of those terms is possible. Similarly, this Court has never attempted to define with precision the terms 'ordinary and necessary.' There are however, certain guiding principles worthy of serious consideration in the proper adjudication of conflicting claims. Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate and helpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a payment which is normal in relation to the business of the taxpayer and the surrounding circumstances. The term 'ordinary' does not require that the payments be habitual or normal in the sense that the same taxpayer will have to make them often; the payment may be unique or non-recurring to the particular taxpayer affected. There is thus no hard and fast rule on the matter. The right to a deduction depends in each case on the particular facts and the relation of the payment to the type of business in which the taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in making the determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is an allowable deduction as a business expense must be determined from the nature of the expenditure itself, which in turn depends on the extent and permanency of the work accomplished by the expenditure. In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue as follows: Considering the foregoing test of what constitutes an ordinary and necessary deductible expense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to its Head Office in New York appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the margin fees are not expenses in connection with the production or earning of petitioner's incomes in the Philippines. They were expenses incurred in the disposition of said incomes; expenses for the remittance of funds after they have already been earned by petitioner's branch in the Philippines for the disposal of its Head Office in New York which is already another distinct and separate income taxpayer. x x x Since the margin fees in question were incurred for the remittance of funds to petitioner's Head Office in New York, which is a separate and distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it can never be said therefore that the margin fees were appropriate and helpful in the development of petitioner's business in the Philippines exclusively or were incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss in the Philippines exclusively. If at all, the margin fees were incurred for purposes proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in the Philippines. ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error. The public respondent is correct when it asserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations ... . The taxpayer in every instance has the burden of justifying 5 the allowance of any deduction claimed." It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business. WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner. SO ORDERED.