1. Philex Mining Corporation vs.

CIR, G.R . No. 125704 August 28, 1998 FACTS: The Court of Tax Appeals ordered Philex to pay the amount of P110, 677,668.52as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid.Philex refused to pay and argued that it had pending claims for VAT inputcredit/refund for the taxes it paid for the years 1989-1991 in the amount of P119,977,037.02 plus interest and therefore should be applied against the said excisetax liabilities in a manner of a set-off or legal compensation. ISSUE: WON taxes could be the subject of a set-off or legal compensation? RULING :No. Taxes could not be the subject of a set-off or legal compensation for thesimple reason that the government and the taxpayer are not mutual creditors and debtors of each other. Claims for taxes are neither debts nor contracts . Ataxpayer cannot refuse to pay his taxes when they fall due simply because he has aclaim against the government that the collection of the tax is contingent on the result of the lawsuit it filed against the government. In the case at bar, the claims of Philex for VAT refund is still pending litigation. Moreover, taxes are the lifeblood of thegovernment and should be collected without unnecessary hindrance.Citing Francia v. Intermediate Appellate Court, the SC categorically held thattaxes cannot be subject to set-off or compensation, thus: We have consistently ruled that there can be no off -setting of taxes against the claimsthat the taxpayer may have against the government. A person cannot refuse to pay atax on the ground that the government owes him an amount equal to or greater than thetax being collected. The collection of tax cannot await the results of a lawsuit against the government.

NPC vs. City of Cabanatuan G.R. No. 149110, April 9, 2003 Facts: National Power Corporation, a Government Owned and Controlled Corporationwas assessed by the City of Cabanatuan for franchise tax pursuant to sec. 37 of Ordinance No. 165-92. NPC refused to pay the tax assessment on the grounds that theCity of Cabanatuan has no authority to impose tax on government entities and also thatit is exempted as a non-profit organization. For its part, the City government alleged that NPCs exemption from local taxes has been repealed by sec. 193 of RA 7160. Issue: Whether or not NPC is liable to pay an annual franchise tax to the Citygovernment. RULING: One of the most significant provisions of the Local Government Code is theremoval of the blanket exclusion of instrumentalities and agencies of the nationalgovernment from the coverage of local taxation. Although as a general rule, LGUscannot impose taxes, fees or charges of any kind on the National Government, itsagencies and instrumentalities, this rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities. As commonly used, a franchise tax is "a tax on the privilege of transactingbusiness in the state and exercising corporate franchises granted by the state." It is notlevied on the corporation simply for existing as a corporation, upon its property or itsincome, but on its exercise of the rights or privileges granted to it by the government.Hence, a corporation need not pay franchise tax from the time it ceased to do businessand exercise its franchise. It is within this context that the phrase "tax on businessesenjoying a franchise" in section 137 of the LGC should be interpreted and understood.Verily, to determine whether the petitioner is covered by the franchise tax in question,the following requisites should concur:(1) That petitioner has a "franchise" in the sense of a secondary or specialfranchise; and(2) That it is exercising its rights or privileges under this franchise withinthe territory of the respondent city government.NPC fulfills both requisites. To stress, a franchise tax is imposed based not onthe ownership but on the exercise by the corporation of a privilege to do business. Thetaxable entity is the corporation which exercises the franchise, and not the individualstockholders. By virtue of its charter, petitioner was created as a separate and distinct 7

Taxation ICase Digests entity from the National Government. It can sue and be sued under its own name, andcan exercise all the powers of a corporation under the Corporation Code.The Supreme COurt also did not find merit in the petitioner's contention that itstax exemptions under its charter subsist despite the passage of the LGC. As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. In the case at bar, the petitioner's sole refuge is section 13 of Rep. ActNo. 6395 exempting from, among others, "all income taxes, franchise taxes and realtytaxes to be paid to the National Government, its provinces, cities, municipalities andother government agencies and instrumentalities."It is worth mentioning that section 192 of the LGC empowers the LGUs, throughordinances duly approved, to grant tax exemptions, initiatives or reliefs. But in enactingsection 37 of Ordinance No. 165-92 which imposes an annual franchise tax"notwithstanding any exemption granted by law or other special law," the respondentcity government clearly did not intend to exempt the petitioner from the coveragethereof

COMMISSIONER OF INTERNAL REVENUE, vs. JOHN GOTAMCO & SONS, INC.and THE COURT OF TAX APPEALS, G.R. No. L-31092 February 27, 1987 Facts: The World Health Organization is an international organization which enjoysprivileges and immunities under the Host Agreement entered into between thePhilippines which provides that the Organization, its assets, income and other properties shall be exempt from all direct and indirect taxes.When the WHO decided to construct a building to house its own offices stationedin Manila, it entered into a further agreement with the Government that the Organizationmay import into the country materials and fixtures required for the construction free fromall duties and taxes and agrees not to utilize any portion of the international reserves of the Government.In inviting bids for the construction of the building, the WHO informed the biddersthat the building to be constructed belonged to an international organization withdiplomatic status and thus exempt from the payment of all fees, licenses, and taxes.The construction contract was awarded to respondent John Gotamco & Sons, Inc. for the stipulated price of P370,000.00, but when the building was completed the pricereached a total of P452,544.00.Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of Internal Revenue stating that as the 3% contractor's tax is an indirect taxon the assets and income of the Organization and thus, are exempt from tax inaccordance with the Host Agreement. Subsequently, on June 3, 1958, theCommissioner of Internal Revenue reversed his opinion and stated that as the 3%contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarilydue from the contractor, the same

is not covered by the Host Agreement.In January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding payment of P 16,970.40, representing the 3%contractor's tax plus surcharges on the gross receipts.Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which after trial rendered a decision, in favor of Gotamco.Hence, this appeal. Issue: Whether or not respondent John Gotamco & Sons, Inc. should pay the 3%contractor's tax under Section 191 of the National Internal Revenue Code Ruling: Petitioner's position is that the contractor's tax is in the nature of an excise taxwhich is a charge imposed upon the performance of an act, the enjoyment of a privilegeor the engaging in an occupation. It is a tax due primarily and directly on the contractor,not on the owner of the building. Since this tax has no bearing upon the WHO, it cannotbe deemed an indirect taxation upon it

CIR vs. Santos, 277 SCRA 617 (1997) Facts Guild of Phil. Jewellers questions the constitutionality of certain provisions of theNIRC and Tariff and Customs Code of the Philippines. It is their contention that presentTariff and tax structure increases manufacturing costs and render local jewelrymanufacturers uncompetitive against other countries., in support of their position, theysubmitted what they purported to be an exhaustive study of the tax rates on jewelryprevailing in other Asian countries, in comparison to tax rates levied in the country.Judge Santos of RTC Pasig, ruled that the laws in question are confiscatory andoppressive and declared them INOPERATIVE and WITHOUR FORCE AND EFFECTinsofar as petitioners are concerned.Petitioner CIR assailed decision rendered by respondent judge contending thatthe latter has no authority to pass judgment upon the taxation policy of the government.Petitioners also impugn the decision by asserting that there was no showing that the taxlaws on jewelry are confiscatory. ISSUE: Whether or not the Regional Trial Court has authority to pass judgment upontaxation policy of the government. RULING: The policy of the courts is to avoid ruling on constitutional questions and topresume that the acts of the political departments are valid in the absence of a clear and unmistakable showing to the contrary.This

is not to say that RTC has no power whatsoever to declare a lawunconstitutional. But this authority does not extend to deciding questions which pertainto legislative policy.RTC have the power to declare the law unconstitutional but this authority doesnot extend to deciding questions which pertain to legislative policy. RTC can only lookinto the validity of a provision, that is whether or not it has been passed according to theprovisions laid down by law, and thus cannot inquire as to the reasons for its existence. RULING ON THE EXTENT OF LEGISLATIVE POWER TO TAX SC held that it is within the power f the legislature whether to tax jewelry or not.With the legislature primarily lies the discretion to determine the nature (kind), object(purpose), extent (rate), coverage (subject) and situs (place) of taxation.

Commissioner vs. CA, G.R. No 119761, August 29, 1996 Facts: RA 7654 was enacted by Congress on June 10, 1993 and took effect July 3, 1993. It amended partly Sec. 142 (c) of the NIRC.Fortune Tobacco manufactured the following cigaretter brands: Hope, More andChampion. Prior to RA 7654, these 3 brands were considered local brands subjected to an ad valorem tax of 20 to 45%. Applying the amendment, the 3 brands should fallunder Sec 142 (c) (2) NIRC and shall be taxed from 20 to 45%.However, on July 1, 1993 , petitioner Commissioner of Internal Revenue issued Revenue Memorandum Circular37-93 which reclassified the 3 brands as locallymanufactured cigarettes bearing a foreign brand subject to the 55% ad valorem

tax. Thereclassification was before RA 7654 took effect. In effect, the memo circular subjected the 3 brands to the provisions of Sec 142 (c) (1) NIRC imposing upon these brands a rate of 55% instead of just 20 to45% under Sec 142 (c) (2) NIRC. Issue: Whether or not Revenue Memorandum Circular 37-93 was valid andenforceable. Ruling: No, there was lack of notice and hearing violated due process required for promulgated rules. Moreover, it infringed on uniformity of taxation / equal protection since other local cigarettes bearing foreign brands had not been included within the scope of the memo circular. Contrary to petitioners contention, the memo was not a mere interpretative rulebut a legislative rule in the nature of subordinate legislation, designed to implement aprimary legislation by providing the details thereof. Promulgated legislative rules mustbe published.On the other hand, interpretative rules only provide guidelines to the law whichthe administrative agency is in charge of enforcing.BIR, in reclassifying the 3 brands and raising their applicable tax rate, did notsimply interpret RA 7654 but legislated under its quasi-legislative authority.

CIR vs. PAL 504 scra 90 Facts: A franchise is a legislative grant to operate a public utility. In the present case, P.D. 1590 granted PAL 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 NIRC or (b) a franchise tax of 2% 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. On Nov. 5, 1997, PALs AVP-Revenue filed with the CIR a written request for refund in the amount of P2M, which represents the total amount of 20% final withholding tax withheld from the respondent by various withholding agent banks. CTA ruled PAL was not entitled to refund. The CA held that PAL was bound to pay only either (A) or (B); that Sec. 13 of PD 1590 exempts respondent form paying all other taxes, duties, royalties and other feeds of any kind. Having chosen to pay its corporate income tax liability, respondent should now be exempt from paying all other taxes including the final withholding tax.

Issue: Whether the CA erred on a question of law ruling that the in lieu of all other taxes provisions in Sec. 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 decree.

Held: Note that the tax liability of PAL under the option it chose (Item a of Sec. 13 of PD 1590) is to be computed in accordance with the provisions of the NIRC. Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for these types of income. Under Sec. 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 share in the net income of a general professional partnership. Sec. 34 enumerates the allowable deductions; Sec. 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.

Thus, PALs franchise exempts it from paying any tax other than the option it chooses: either the basic corporate income tax or the 2% gross revenue tax.