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Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. 109289 October 3, 1994


RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 109446 October 3, 1994
CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO
O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.
Rufino R. Tan for and in his own behalf.
Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:
These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and,
in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.
Petitioners claim to be taxpayers adversely affected by the continued implementation of the
amendatory legislation.
In G.R. No. 109289, it is asserted that the enactment of Republic Act
No. 7496 violates the following provisions of the Constitution:
Article VI, Section 26(1) Every bill passed by the Congress shall embrace only
one subject which shall be expressed in the title thereof.
Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

Article III, Section 1 No person shall be deprived of . . . property without due


process of law, nor shall any person be denied the equal protection of the laws.
In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.
The Solicitor General espouses the position taken by public respondents.
The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.
G.R. No. 109289
Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for
the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).
The full text of the title actually reads:
An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections
21 and 29 of the National Internal Revenue Code, as Amended.
The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Code, as now amended, provide:
Sec. 21. Tax on citizens or residents.
xxx xxx xxx
(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. A tax is hereby imposed upon the taxable net income
as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the Philippines who is selfemployed or practices his profession herein, determined in accordance with the
following schedule:
Not over P10,000 3%
Over P10,000 P300 + 9%
but not over P30,000 of excess over P10,000
Over P30,000 P2,100 + 15%
but not over P120,00 of excess over P30,000
Over P120,000 P15,600 + 20%
but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%


of excess over P350,000
Sec. 29. Deductions from gross income. In computing taxable income subject to
tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:
(a) Raw materials, supplies and direct labor;
(b) Salaries of employees directly engaged in activities in the course of or pursuant to
the business or practice of their profession;
(c) Telecommunications, electricity, fuel, light and water;
(d) Business rentals;
(e) Depreciation;
(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and
(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.
For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as
deductions to answer for business or professional expenses as the case may be.
On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having
still retained the netincome, taxation scheme. The allowance for deductible items, it is true, may
have significantly been reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross income is neither
discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be well provided under the
new law.
Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
legislation intended to unite the members of the legislature who favor any one of unrelated subjects
in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly
apprise the people, through such publications of its proceedings as are usually made, of the subjects
of legislation. 1 The above objectives of the fundamental law appear to us to have been sufficiently met.
Anything else would be to require a virtual compendium of the law which could not have been the
intendment of the constitutional mandate.
Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that
taxation "shall be uniform and equitable" in that the law would now attempt to tax single

proprietorships and professionals differently from the manner it imposes the tax on corporations and
partnerships. The contention clearly forgets, however, that such a system of income taxation has
long been the prevailing rule even prior to Republic Act No. 7496.
Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan
Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to
the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).
What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach 2 in the income taxation of
individual taxpayers and to maintain, by and large, the present global treatment 3 on taxable corporations.
We certainly do not view this classification to be arbitrary and inappropriate.
Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the amendatory
law and those who are not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court
cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.
Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for
being violative of due process must perforce fail. The due process clause may correctly be invoked
only when there is a clear contravention of inherent or constitutional limitations in the exercise of the
tax power. No such transgression is so evident to us.
G.R. No. 109446
The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.
The questioned regulation reads:
Sec. 6. General Professional Partnership The general professional partnership
(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said
law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as direct cost, are
not deductible from his gross income.
The real objection of petitioners is focused on the administrative interpretation of public respondents
that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the
Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's

privilege speech by way of commenting on the questioned implementing regulation of public


respondents following the effectivity of the law, thusly:
MR. ALBANO, Now Mr. Speaker, I would like to get the correct
impression of this bill. Do we speak here of individuals who are
earning, I mean, who earn through business enterprises and
therefore, should file an income tax return?
MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.
(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).
Other deliberations support this position, to wit:
MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?
MR. PEREZ. That is correct, Mr. Speaker.
(Id. at 6:40 P.M.; Emphasis ours).
In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate
version of the SNITS, it is categorically stated, thus:
This bill, Mr. President, is not applicable to business corporations or
to partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)
The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax
treatment between individuals engaged in business or in the practice of their respective professions
and partners in general professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership (which is treated as a corporation
for income tax purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on
the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act
7496, is explicit:
Sec. 23. Tax liability of members of general professional partnerships. (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each
partner

(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and
(2) Shall be deemed to have elected the itemized deductions, unless
he declares his distributive share of the gross income undiminished
by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed, outside of the gross compensation
income tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.
We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act
No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view
can easily become myopic, however, when the law is understood, as it should be, as only forming
part of, and subject to, the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in
levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income
taxable base (that can subject non-resident aliens and foreign corporations to income tax on their
income from Philippine sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpusand as to income).
Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances, such
as in the application of the "constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the payment
of income tax.
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example. 4Here, the partners themselves, not the
partnership (although it is still obligated to file an income tax return [mainly for administration and data]),
are liable for the payment of income tax in their individual capacity computed on their respective and
distributive shares of profits. In the determination of the tax liability, a partner does so as an individual,
and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such income to, respectively, each of the
individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act

No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either before
or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.
WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.
SO ORDERED.
Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno,
Kapunan and Mendoza, JJ., concur.
Padilla and Bidin, JJ., are on leave.
PhilippineLaw.info Jurisprudence 1964 July
PhilippineLaw.info Jurisprudence SCRA Vol. 11

G.R. Nos. L-18169, L-18262 & L21434, Commissioner of Internal


Revenue v. Lednicky and Lednicky, 11
SCRA 603
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
July 31, 1964
G.R. Nos. L-18169, L-18262 & L-21434
COMMISSIONER OF INTERNAL REVENUES, petitioner,
vs.
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.
REYES, J.B.L., J.:

The above-captioned cases were elevated to this Court under


separate petitions by the Commissioner for review of the
corresponding decisions of the Court of Tax Appeals. Since these
cases involve the same parties and issues akin to each case
presented, they are herein decided jointly.
The respondents, V. E. Lednicky and Maria Valero Lednicky, are
husband and wife, respectively, both American citizens residing in
the Philippines, and have derived all their income from Philippine
sources for the taxable years in question.
In compliance with local law, the aforesaid respondents, on 27
March 1957, filed their income tax return for 1956, reporting therein
a gross income of P1,017,287. 65 and a net income of P733,809.44
on which the amount of P317,395.4 was assessed after deducting
P4,805.59 as withholding tax. Pursuant to the petitioner's
assessment notice, the respondents paid the total amount of
P326,247.41, inclusive of the withheld taxes, on 15 April 1957.
On 17 March 1959, the respondents Lednickys filed an amended
income tax return for 1956. The amendment consists in a claimed
deduction of P205,939.24 paid in 1956 to the United States
government as federal income tax for 1956. Simultaneously with the
filing of the amended return, the respondents requested the refund
of P112,437.90.
When the petitioner Commissioner of Internal Revenue failed to
answer the claim for refund, the respondents filed their petition with
the Tax Court on 11 April 1959 as CTA Case No. 646, which is now G.
R. No. L-18286 in the Supreme Court.
G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for
refund in the amount of P150,269.00, as alleged overpaid income
tax for 1955, the facts of which are as follows:

On 28 February 1956, the same respondents-spouses filed their


domestic income tax return for 1955, reporting a gross income of
P1,771,124.63 and a net income of P1,052,550.67. On 19 April
1956, they filed an amended income tax return, the amendment
upon the original being a lesser net income of P1,012,554.51, and,
on the basis of this amended return, they paid P570,252.00,
inclusive of withholding taxes. After audit, the petitioner determined
a deficiency of P16,116.00, which amount, the respondents paid on
5 December 1956.
Back in 1955, however, the Lednickys filed with the U.S. Internal
Revenue Agent in Manila their federal income tax return for the
years 1947, 1951, 1952, 1953, and 1954 on income from Philippine
sources on a cash basis. Payment of these federal income taxes,
including penalties and delinquency interest in the amount of
P264,588.82, were made in 1955 to the U.S. Director of Internal
Revenue, Baltimore, Maryland, through the National City Bank of
New York, Manila Branch. Exchange and bank charges in remitting
payment totaled P4,143.91.
Wherefore, the parties respectfully pray that the foregoing
stipulation of facts be admitted and approved by this Honorable
Court, without prejudice to the parties adducing other evidence to
prove their case not covered by this stipulation of facts.
On 11 August 1958, the said respondents amended their Philippine
income tax return for 1955 to include the following deductions:
U.S. Federal income taxes

P471,867.32

Interest accrued up to May 15, 1955

40,333.92

Exchange and bank charges

4,143.91

P516,345.15
Total
and therewith filed a claim for refund of the sum of P166,384.00,
which was later reduced to P150,269.00.
The respondents Lednicky brought suit in the Tax Court, which was
docketed therein as CTA Case No. 570.
In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but
refer to respondents Lednickys' income tax return for 1957, filed on
28 February 1958, and for which respondents paid a total sum of
P196,799.65. In 1959, they filed an amended return for 1957,
claiming deduction of P190,755.80, representing taxes paid to the
U.S. Government on income derived wholly from Philippine sources.
On the strength thereof, respondents seek refund of P90 520.75 as
overpayment. The Tax Court again decided for respondents.
The common issue in all three cases, and one that is of first
impression in this jurisdiction, is whether a citizen of the United
States residing in the Philippines, who derives income wholly from
sources within the Republic of the Philippines, may deduct from his
gross income the income taxes he has paid to the United States
government for the taxable year on the strength of section 30 (C-1)
of the Philippine Internal Revenue Code, reading as follows:
SEC. 30. Deduction from gross income. In computing net income
there shall be allowed as deductions
(a) ...
(b) ...

(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable
year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes
imposed by the authority of any foreign country; but
this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his
desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credit
for foreign countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed. (Emphasis supplied)
The Tax Court held that they may be deducted because of the
undenied fact that the respondent spouses did not "signify" in
their income tax return a desire to avail themselves of the
benefits of paragraph 3 (B) of the subsection, which reads:
Par. (c) (3) Credits against tax for taxes of foreign countries.
If the taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this Title shall
be credited with
(A) ...;
(B) Alien resident of the Philippines. In the case of an
alien resident of the Philippines, the amount of any such
taxes paid or accrued during the taxable year to any
foreign country, if the foreign country of which such alien

resident is a citizen or subject, in imposing such taxes,


allows a similar credit to citizens of the Philippines
residing in such country;
It is well to note that the tax credit so authorized is limited
under paragraph 4 (A and B) of the same subsection, in the
following terms:
Par. (c) (4) Limitation on credit. The amount of the credit
taken under this section shall be subject to each of the
following limitations:
(A) The amount of the credit in respect to the tax paid or
accrued to any country shall not exceed the same
proportion of the tax against which such credit is taken,
which the taxpayer's net income from sources within such
country taxable under this Title bears to his entire net
income for the same taxable year; and
(B) The total amount of the credit shall not exceed the
same proportion of the tax against which such credit is
taken, which the taxpayer's net income from sources
without the Philippines taxable under this Title bears to
his entire net income for the same taxable year.
We agree with appellant Commissioner that the
Construction and wording of Section 30 (c) (1) (B) of the
Internal Revenue Act shows the law's intent that the right
to deduct income taxes paid to foreign government from
the taxpayer's gross income is given only as an
alternative or substitute to his right to claim a tax credit
for such foreign income taxes under section 30 (c) (3) and
(4); so that unless the alien resident has a right to claim
such tax credit if he so chooses, he is precluded from
deducting the foreign income taxes from his gross

income. For it is obvious that in prescribing that such


deduction shall be allowed in the case of a taxpayer who
does not signify in his return his desire to have to any
extent the benefits of paragraph (3) (relating to credits for
taxes paid to foreign countries), the statute assumes that
the taxpayer in question also may signify his desire to
claim a tax credit and waive the deduction; otherwise, the
foreign taxes would always be deductible, and their
mention in the list of non-deductible items in Section
30(c) might as well have been omitted, or at least
expressly limited to taxes on income from sources outside
the Philippine Islands.
Had the law intended that foreign income taxes could be
deducted from gross income in any event, regardless of
the taxpayer's right to claim a tax credit, it is the latter
right that should be conditioned upon the taxpayer's
waiving the deduction; in which Case the right to
reduction under subsection (c-1-B) would have been
made absolute or unconditional (by omitting foreign taxes
from the enumeration of non-deductions), while the right
to a tax credit under subsection (c-3) would have been
expressly conditioned upon the taxpayer's not claiming
any deduction under subsection (c-1). In other words, if
the law had been intended to operate as contended by
the respondent taxpayers and by the Court of Tax Appeals
section 30 (subsection (c-1) instead of providing as at
present:
SEC. 30. Deduction from gross income. In computing net
income there shall be allowed as deductions
(a) .
(b) ...

(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable
year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes
imposed by the authority of any foreign country; but
this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire
to have to any extent the benefits of paragraph (3)
of this subsection (relating to credit for taxes of
foreign countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
would have merely provided:
SEC. 30. Decision from grow income. In computing net income
there shall be allowed as deductions:
(a) ...
(b) ...
(c) Taxes paid or accrued within the taxable year, EXCEPT
(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:

Income, war profits and excess profits taxes imposed by


authority of any foreign country on income earned within the
Philippines if the taxpayer does not claim the benefits under
paragraph 3 of this subsection;
(C) Estate, inheritance or gift taxes;
(D) Taxes assessed against local benefits of a kind tending to
increase the value of the property assessed.
while subsection (c-3) would have been made conditional in the
following or equivalent terms:
(3) Credits against tax for taxes of foreign countries. If the
taxpayer has not deducted such taxes from his gross income
but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ... (etc.)
Petitioners admit in their brief that the purpose of the law is to
prevent the taxpayer from claiming twice the benefits of his
payment of foreign taxes, by deduction from gross income (subs. c1) and by tax credit (subs. c-3). This danger of double credit
certainly can not exist if the taxpayer can not claim benefit under
either of these headings at his option, so that he must be entitled to
a tax credit (respondent taxpayers admittedly are not so entitled
because all their income is derived from Philippine sources), or the
option to deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are
not allowed to deduct the income taxes they are required to pay to
the government of the United States in their return for Philippine
income tax, they would be subjected to double taxation. What
respondents fail to observe is that double taxation becomes
obnoxious only where the taxpayer is taxed twice for the benefit of
the same governmental entity(cf. Manila vs. Interisland Gas Service,

52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). In the
present case, while the taxpayers would have to pay two taxes on
the same income, the Philippine government only receives the
proceeds of one tax. As between the Philippines, where the income
was earned and where the taxpayer is domiciled, and the United
States, where that income was not earned and where the taxpayer
did not reside, it is indisputable that justice and equity demand that
the tax on the income should accrue to the benefit of the
Philippines. Any relief from the alleged double taxation should come
from the United States, and not from the Philippines, since the
former's right to burden the taxpayer is solely predicated on his
citizenship, without contributing to the production of the wealth that
is being taxed.
Aside from not conforming to the fundamental doctrine of income
taxation that the right of a government to tax income emanates
from its partnership in the production of income, by providing the
protection, resources, incentive, and proper climate for such
production, the interpretation given by the respondents to the
revenue law provision in question operates, in its application, to
place a resident alien with only domestic sources of income in an
equal, if not in a better, position than one who has both domestic
and foreign sources of income, a situation which is manifestly unfair
and short of logic.
Finally, to allow an alien resident to deduct from his gross income
whatever taxes he pays to his own government amounts to
conferring on the latter the power to reduce the tax income of the
Philippine government simply by increasing the tax rates on the
alien resident. Everytime the rate of taxation imposed upon an alien
resident is increased by his own government, his deduction from
Philippine taxes would correspondingly increase, and the proceeds
for the Philippines diminished, thereby subordinating our own taxes
to those levied by a foreign government. Such a result is

incompatible with the status of the Philippines as an independent


and sovereign state.
IN VIEW OF THE FOREGOING, the decisions of the Court of Tax
Appeals are reversed, and, the disallowance of the refunds claimed
by the respondents Lednicky is affirmed, with costs against said
respondents-appellees.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,
Paredes, Regala and Makalintal, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172231

February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
ISABELA CULTURAL CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision 1 of the
Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision 2 of the Court of
Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices
for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue
(BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding
tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co., 3 for the year ending December
31, 1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985. 5
(c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6
(2) The alleged understatement of ICCs interest income on the three promissory notes due
from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.7
On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the
said notices. Hence, it brought the case to the CTA which held that the petition is premature because
the final notice of assessment cannot be considered as a final decision appealable to the tax court.
This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the
payment of deficiency tax, amounts to a final decision on the protested assessment and may
therefore be questioned before the CTA. This conclusion was sustained by this Court on July 1,
2001, in G.R. No. 135210.8 The case was thus remanded to the CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security services
were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC
in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory notes. It
found that it was the BIR which made an overstatement of said income when it compounded the
interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the
absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance,
like delay in payment or breach of contract, that would justify the application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation receipts it
presented as evidence. The dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges
and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time,
hence, it could be considered as deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not understate its interest income from the

promissory notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on
the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said
years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable
year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding
tax assessment, petitioner invoked the presumption that the assessment notices issued by the BIR
are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICCs gross income; and (2) held that ICC did
not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC
withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary
and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been
paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by
receipts, records or other pertinent papers.11
The requisite that it must have been paid or incurred during the taxable year is further qualified by
Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual
method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when they
are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer
who is authorized to deduct certain expenses and other allowable deductions for the current year but
failed to do so cannot deduct the same for the next year.13
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them,
in opposition to actual receipt or payment, which characterizes the cash method of accounting.
Amounts of income accrue where the right to receive them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing
of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the

amount of income or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The all-events test is
satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within the taxable
year. The amount of liability does not have to be determined exactly; it must be determined
with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something
less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable year.
[16] Accrual method of accounting presents largely a question of fact; such that the taxpayer bears
the burden of proof of establishing the accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications. And since
a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.18
In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the
law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by the
Treasurer of ICC, the firm has been its counsel since the 1960s. 19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be expected to have
reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when
they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of
these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method of accounting.
For another, it could have reasonably determined the amount of legal and retainer fees owing to its
familiarity with the rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firms performance of its services in connection with the 1984
tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the
amount of its liability, or whether it does or does not possess the information necessary to compute
the amount of said liability with reasonable accuracy, are questions of fact which ICC never
established. It simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with knowledge of the
reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for
the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC
failed to present evidence showing that even with only "reasonable accuracy," as the standard to
ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which
said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue

Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the
said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by
ICC in 198620and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one should
have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the
application of compounded interest. 21 Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts. 22 Hence, the Assessment Notice for
deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency
income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for
security services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for
professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment
Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural
Corporation for professional and security services, is declared valid only insofar as the expenses for
the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under
Assessment Notice No. FAS-1-86-90-000680.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-66838 April 15, 1988
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.

PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX
APPEALS,respondents.

PARAS, J.:
This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal
Revenue, seeking the reversal of the decision of the Court of Tax Appeals dated January 31, 1984 in
CTA Case No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. Bureau
of Internal Revenue," which declared petitioner therein, Procter and Gamble Philippine
Manufacturing Corporation to be entitled to the sought refund or tax credit in the amount of
P4,832,989.00 representing the alleged overpaid withholding tax at source and ordering payment
thereof.
The antecedent facts that precipitated the instant petition are as follows:
Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred
to as PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine
laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and
Gamble, U.S.A. herein referred to as PMC-USA), a non-resident foreign corporation in the
Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the sole shareholder
or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil.
and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In
addition, PMC-Phil has a legal personality separate and distinct from PMC-U.S.A. (Rollo, pp. 122123).
For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of
P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to P25%35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code, the pertinent
portion of which reads:
SEC. 24. Rates of tax on corporation. 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 geting 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 per cent upon the amount by which the taxable net income does not
exceed one hundred thousand pesos; and
Thirty-five per cent upon the amount by which the taxable net income exceeds one
hundred thousand pesos.
After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of
its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of
P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23
as provided for in Section 24(b) of the Philippine Tax Code which reads in full:

SECTION 1. The first paragraph of subsection (b) of Section 24 of the National


Bureau Internal Revenue Code, as amended, is hereby further amended to read as
follows:
(b) Tax on foreign corporations. 41) Non-resident corporation. A
foreign corporation not engaged in trade or business in the
Philippines, including a foreign life insurance company not engaged
in the life insurance business in the Philippines, shall pay a tax equal
to 35% of the gross income received during its taxable year from all
sources within the Philippines, as interest (except interest on foreign
loans which shall be subject to 15% tax), dividends, rents, royalties,
salaries, wages, premiums, annuities, compensations, remunerations
for technical services or otherwise, emoluments or other fixed or
determinable, annual, periodical or casual gains, profits, and income,
and capital gains: Provided, however, That premiums shall not
include re-insurance premium Provided, further, That cinematograpy
film owners, lessors, or distributors, shall pay a tax of 15% on their
gross income from sources within the Philippines: Provided, still
further That on dividends received from a domestic corporation hable
to tax under this Chapter, the tax shall be 15% of the dividends
received, 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: Provided, finally That regional or area headquarters
established in the Philippines by multinational corporations 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
shall not be subject to tax.
For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of
P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00,
thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again
declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.
In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as
the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMCU.S.A., filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of
the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the
alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of
P4,832,989.00," computed as follows:
Dividend
Income

Tax
withhel
d

15%
tax
under

Alleged
of

PMCU.S.A.

at
source

tax
sparing

over

at
35%

proviso

payme
nt

P17,707
,460

P6,196
,611

P2,656
,119

P3,541
,492

6,457,48
5

2,260,1
19

968,62
2

1,291,4
97

P24,164
,946

P8,457
,731

P3,624
,941

P4,832
,989

There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the
intervention of the CTA when on July 13, 1977 it filed with herein respondent court a petition for
review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine Manufacturing
Corporation vs. The Commissioner of Internal Revenue," praying that it be declared entitled to the
refund or tax credit claimed and ordering respondent therein to refund to it the amount of
P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund. (Rollo, p. 41)
On the other hand therein respondent, Commissioner of qqqInterlaal Revenue, in his answer, prayed
for the dismissal of said Petition and for the denial of the claim for refund. (Rollo, p. 48)
On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the
herein petitioner, the dispositive portion of the same reading as follows:
Accordingly, petitioner is entitled to the sought refund or tax credit of the amount
representing the overpaid withholding tax at source and the payment therefor by the
respondent hereby ordered. No costs.
SO ORDERED.
Hence this petition.
The Second Division of the Court without giving due course to said petition resolved to require the
respondents to comment (Rollo, p. 74). Said comment was filed on November 8, 1984 (Rollo, pp.
83-90). Thereupon this Court by resolution dated December 17, 1984 resolved to give due course to
the petition and to consider respondents' comulent on the petition as Answer. (Rollo, p. 93)
Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on
May 13, 1985 (Rollo, p. 107), while private respondent PMC Phil filed its brief on August 22, 1985.
Petitioner raised the following assignments of errors:
I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN
LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE MANUFACTURING
CORPORATION (PMC-PHIL. FOR SHORT)IS ENTITLED TO THE SOUGHT REFUND OR TAX
CREDIT OF P4,832,989.00, REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER WITHHELD

BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF


P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA FOR SHORT).
II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND IN
LAW, THAT PMC-USA, A NON-RESIDENT FOREIGN CORPORATION UNDER SECTION 24(b) (1)
OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION DOMICILED IN THE UNITED
STATES, IS ENTITLED UNDER THE U.S. TAX CODE AGAINST ITS U.S. FEDERAL TAXES TO A
UNITED STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20 PERCENTAGEPOINT PORTION (OF THE 35 PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE
CONSIDERED OR DEEMED PAID BY THE PHILIPPINE GOVERNMENT.
The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax
rate on dividends declared and remitted to its parent corporation.
From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and
they are (1) Whether or not PMC-Phil. is the proper party to claim the refund and (2) Whether or not
the U. S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends?
The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or
payor of the dividend income, and a mere withholding agent for and in behalf of the Philippine
Government, which should be legally entitled to receive the refund if any. (Rollo, p. 129)
It will be observed at the outset that petitioner raised this issue for the first time in the Supreme
Court. He did not raise it at the administrative level, nor at the Court of Tax Appeals. As clearly ruled
by Us "To allow a litigant to assume a different posture when he comes before the court and
challenges the position he had accepted at the administrative level," would be to sanction a
procedure whereby the Court-which is supposed to review administrative determinations would not
review, but determine and decide for the first time, a question not raised at the administrative forum."
Thus it is well settled that under the same underlying principle of prior exhaustion of administrative
remedies, on the judicial level, issues not raised in the lower court cannot generally be raised for the
first time on appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A.,
102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]),
Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in
matters involving taxation. The errors of certain administrative officers should never be allowed to
jeopardize the government's financial position.
The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent
of the government and therefore cannot claim reimbursement of the alleged over paid taxes, is
completely meritorious. The real party in interest being the mother corporation in the United States, it
follows that American entity is the real party in interest, and should have been the claimant in this
case.
Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a
non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an
American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code
to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the
35% dividend tax) spared or waived as otherwise considered or deemed paid by the government.
The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by

Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received
from foreign corporations, which to the extent applicable reads:
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(1) to the extent such dividends are paid by such foreign corporation
out of accumulated profits [as defined in subsection (c) (1) (a)] of a
year for which such foreign corporation is not 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 (determined
without regard to Section 78) bears to the amount of such
accumulated profits in excess of such income, war profits, and
excess profits taxes (other than those deemed paid); and
(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.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined - For purpose 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, was profits, and
excess profits taxes 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 earnings. .. (Rollo, pp. 55-56)
To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed
15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent
failed to meet certain conditions necessary in order that the dividends received by the non-resident
parent company in the United States may be subject to the preferential 15% tax instead of 35%.
Among other things, the private respondent failed: (1) to show the actual amount credited by the
U.S. government against the income tax due from PMC-U.S.A. on the dividends received from
private respondent; (2) to present the income tax return of its mother company for 1975 when the
dividends were received; and (3) to submit any duly authenticated document showing that the U.S.
government credited the 20% tax deemed paid in the Philippines.
PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is
REVERSED and SET ASIDE.
SO ORDERED.

HIRD DIVISION

COMMISSIONER OF INTERNAL G.R. No. 159647


REVENUE,
Petitioner, Present:
Panganiban, J.,
Chairman,
Sandoval-Gutierrez,
- versus - Corona,
Carpio Morales, and
Garcia, JJ
CENTRAL LUZON DRUG Promulgated:

CORPORATION,
Respondent. April 15, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- x

DECISION

PANGANIBAN, J.:

he 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[1] under Rule 45 of


the Rules of Court, seeking to set aside the August 29,
2002 Decision[2] and the August 11, 2003 Resolution[3] 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.[4]

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
[5]
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.
xxxxxxxxx

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,[6] 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 credited by petitioner
was not erroneously paid or illegally collected. We take exception
to the CTAs sweeping but unfounded statement that both tax
refund and tax credit are modes of recovering taxes which are
either erroneously or illegally paid to the government. 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 tax
credit and it does not in any way refer to illegally collected or
erroneously paid taxes, x x x.[7]

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 unintended benefit from the law, but
rather a just compensation for the taking of private
property for public use.

Hence this Petition.[8]

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.[9]

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[10] grants to senior citizens the


privilege of obtaining a 20 percent discount on their
purchase of medicine from any private establishment in
the country.[11] The latter may then claim the cost of the
discount as a tax credit.[12] 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,[13] tax credit generally refers to an amount that is
subtracted directly from ones total tax liability. [14] It is an
allowance against the tax itself[15] or a deduction from
what is owed[16] by a taxpayer to the government.
Examples of tax credits are withheld taxes, payments of
estimated tax, and investment tax credits.[17]

Tax credit should be understood in relation to other tax


concepts. One of these is tax deduction -- defined as a
subtraction from income for tax purposes,[18] or an
amount that is allowed by law to reduce income prior to
[the] application of the tax rate to compute the amount
of tax which is due.[19] An example of a tax deduction is
any of the allowable deductions enumerated in Section
34[20] 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 tax that is determined

after applying the corresponding tax rates to taxable


income.[21] A tax deduction, on the other, reduces the
income that is subject to tax [22] in order to arrive
at taxable income.[23] 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
credit can 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.

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 against which any tax
creditcan be applied.[24] For the establishment to choose
the

immediate

premature

and

availment

of

impracticable.

a tax

credit will

Nevertheless,

be
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 creditmay 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 VATregistered

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 supplies, when such amount -- as
computed -- is higher than the actual VAT paid on the
said

items.[25]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 creditcertificate
for the amount of creditable input taxes merely due -again not necessarily paid to -- the government and
attributable to such sales, to the extent that the input
taxes have not been applied against output taxes.
[26]

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

domiciliary

country in an amount equivalent to taxes that are merely


deemed paid.[27] 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 deductionfrom


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 foregone or spared.[28]

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 latter.
[29]

Apparently, payment is made to the state of source,

not

thestate

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
percent of the net value earned, or five or ten percent of
the net local content of exports.[30] 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 correctly held that the
availment under RA 7432 did not require prior tax

payments
[31]

by

private

establishments

concerned.

However, we do not agree with its finding[32] that the

carry-over of tax credits under 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.
[33]

In turn, the Implementing Rules and Regulations,

issued pursuant thereto, provide the procedures for its


availment.[34] 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 other percentage tax purposes.[35] 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.[36] To be more precise, it is in business parlance
a deduction or lowering of an amount of money;[37] or a

reduction from the full amount or value of something,


especially a price.[38] In business there are many kinds of
discount, the most common of which is that affecting
the income statement[39] or financial report upon which
the income 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.[40] It is a reduction in price offered to the


purchaser if payment is made within a shorter period of
time than the maximum time specified.[41] 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

terms as 5/10, n/30.[42]

A quantity discount, however, is a reduction in price


allowed for purchases made in large quantities, justified
by savings in packaging, shipping, and handling. [43] It is
also called a volume or bulk discount.[44]

A percentage reduction from the list price x x x allowed


by manufacturers to wholesalers and by wholesalers to
retailers[45] 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 valued at
the net price actually charged the buyer.[46] The purpose
for the discount is to encourage trading or increase
sales, and the prices at which the purchased goods may
be resold are also suggested.[47] Even a chain discount -a series of discounts from one list price -- is recorded at
net.[48]

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 the [formers] distribution

system.[49] 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 the country, this type of
discount is reflected in the income statement[50] as a line
item deducted -- along with returns, allowances, rebates
and other similar expenses -- from gross sales to arrive
at net sales.[51] 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 manual
and computerized books of accounts and reflected in the
financial statements at the gross amounts of the
invoices.[52] 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 method, and produces no material errors over
time.[53]

However,

under

the net

method used

in

recording trade, chain or functional discounts, only the

net amounts of the invoices -- after the discounts have


been

deducted

--

are

recorded

in

the books

of

accounts[54] and reflected in the financial statements. A


separate line item cannot be shown, [55] 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 returns, allowances and cost of
goods sold[56] -- is deducted from gross sales to come up
with the gross income, profit or margin[57] derived from
business.[58] In

another

provision

therein, sales

discounts that 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 given.
[59]

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

discounts are

two

amounts

from gross sales.

provisions
that

are

affirm

that sales

always

deductible

Reason for the Senior Citizen Discount:


The Law, Not Prompt Payment

A distinguishing feature of the implementing rules of RA


7432 is the private establishments outright deduction of
the discount from the invoice price of the medicine sold
to the senior citizen.[60] 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 perfection of the sale.[61] 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
theavailment or use of its tax credit benefit. While the
former

is

deduction after,

deduction before,
the income

the

tax is

latter
computed.

is

a
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
fromgross

income for income


sales for

VAT

or

tax purposes,

other

percentage

or
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
the income 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

mere

regulation. In fact, a regulation that operates to create a


rule out of harmony with

the statute is a mere nullity;[62] 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 whose duty it is to enforce it x x
x.[63] In the scheme of judicial tax administration, the
need

for

certainty

implementation

of

and

tax

predictability

laws

is

in

crucial.[64] Our

the
tax

authorities fill in the details that Congress may not have


the

opportunity

or

competence

to

provide. [65] The

regulations these authorities issue are relied upon by


taxpayers, who are certain that these will be followed by
the courts.[66] 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 engraft


additional

requirements

not

contemplated

by

the

legislature.[67]

In case of conflict, the law must prevail.[68] A regulation


adopted

pursuant

to

law

is

law.[69] Conversely,

regulation or any portion thereof not adopted pursuant


to law is no law and has neither the force nor the effect
of law.[70]

Availment of Tax
Credit Voluntary

Third, the word may in the text of the statute[71] implies


that the

availability

of

the tax

credit benefit

is

neither

unrestricted nor mandatory.[72] 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 collection to be at the sole control and discretion of
the

taxpayer.[73] For

the

tax

authorities

to

compel

respondent to deduct the 20 percent discount from


either its gross income or its gross sales[74] 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 none, the credit cannot be
used and will just have to be carried over and
revalidated[75] 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 without attempted interpretation.[76]

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 public use.[77]

The concept of public use is no longer confined to the


traditional

notion

of use

by

the

public,

but

held

synonymous with public interest, public benefit, public


welfare, andpublic convenience.[78] 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 in its
revenues.[79]

Besides, the taxation power can also be used as an


implement for the exercise of the power of eminent
domain.[80] Tax measures are but enforced contributions
exacted on pain of penal sanctions[81] and clearly imposed
for a public purpose.[82] In recent years, the power to tax

has indeed become a most effective tool to realize social


justice, public welfare, and the equitable distribution of
wealth.[83]

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 intended
to take away rights from a person and give them to
another who is not entitled thereto.[84] 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[85] -- 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 itsgross sales.
Operating at a loss through no fault of its own, it will
realize that the tax 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 beneficial to them. [86]These
objectives are consonant with the constitutional policy of
making health x x x services available to all the people at
affordable cost[87] and of giving priority for the needs of
the x x x elderly.[88] 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
theavailment 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:

"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".


[89]

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 the special law shall
prevail over the general law, which shall

be resorted to only to supply deficiencies in the former.


[90]

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 as remaining an exception to the general,
[91]

one as a general law of the land, the other as the law

of a particular case.[92] 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 the special provisions of such earlier


statute.[93]

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 creditmay be
claimed, then the requirement of prior tax payments
under certain provisions of the latter, as discussed
above, cannot be made to apply. Neither can the
instances of or references to a tax deduction under the
Tax Code[94] 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.

SECOND DIVISION
COMMISSIONER OF INTERNAL G.R. No. 148512
REVENUE,
Petitioner, Present:
PUNO, J., Chairperson,
- versus SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
CENTRAL LUZON DRUG
CORPORATION, Promulgated:
Respondent.
June 26, 2006
x ---------------------------------------------------------------------------------------- x

DECISION
AZCUNA, J.:
This is a petition for review under Rule 45 of the Rules of Court seeking the
nullification of the Decision, dated May 31, 2001, of the Court of Appeals (CA) in

CA-G.R. SP No. 60057, entitled Central Luzon Drug Corporation v. Commissioner


of Internal Revenue, granting herein respondent Central Luzon Drug Corporations
claim for tax credit equal to the amount of the 20% discount that it extended to
senior citizens on the latters purchase of medicines pursuant to Section 4(a) of
Republic Act (R.A.) No. 7432, entitled An Act to Maximize the Contribution
of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and
for other Purposes otherwise known as the Senior Citizens Act.
The antecedents are as follows:
Central Luzon Drug Corporation has been a retailer of medicines and other
pharmaceutical products since December 19, 1994. In 1995, it opened three (3)
drugstores as a franchisee under the business name and style of Mercury Drug.
For the period January 1995 to December 1995, in conformity to the
mandate of Sec. 4(a) of R.A. No. 7432, petitioner granted a 20% discount on the
sale of medicines to qualified senior citizens amounting to P219,778.
Pursuant to Revenue Regulations No. 2-94[1] implementing R.A. No. 7432, which
states that the discount given to senior citizens shall be deducted by the
establishment from its gross sales for value-added tax and other percentage tax
purposes, respondent deducted the total amount of P219,778 from its gross income
for the taxable year 1995. For said taxable period, respondent reported a net loss
of P20,963 in its corporate income tax return. As a consequence, respondent did
not pay income tax for 1995.
Subsequently, on December 27, 1996, claiming that according to Sec. 4(a) of
R.A. No. 7432, the amount of P219,778 should be applied as a tax credit,
respondent filed a claim for refund in the amount of P150,193, thus:

Net Sales P 37,014,807.00


Add: Cost of 20% Discount
to Senior Citizens 219,778.00
Gross Sales P 37,234,585.00
Less: Cost of Sales
Merchandise Inventory, beg P 1,232,740.00
Purchases 41,145,138.00
Merchandise Inventory, end 8,521,557.00 33,856,621.00
Gross Profit P 3,377,964.00
Miscellaneous Income 39,014.00
Total Income 3,416,978.00
Operating Expenses 3,199,230.00
Net Income Before Tax P 217,748.00
Income Tax (35%) 69,585.00
Less: Tax Credit
(Cost of 20% Discount
to Senior Citizens) 219,778.00
Income Tax Payable (P 150,193.00)
Income Tax Actually Paid -0Tax Refundable/Overpaid Income Tax (P 150,193.00)

As shown above, the amount of P150,193 claimed as a refund represents the tax
credit allegedly due to respondent under R.A. No. 7432. Since the Commissioner
of Internal Revenue was not able to decide the claim for refund on time,
[2]
respondent filed a Petition for Review with the Court of Tax Appeals (CTA)
on March 18, 1998.
On April 24, 2000, the CTA dismissed the petition, declaring that even if the
law treats the 20% sales discounts granted to senior citizens as a tax credit, the
same cannot apply when there is no tax liability or the amount of the tax credit is
greater than the tax due. In the latter case, the tax credit will only be to the extent
of the tax liability.[3] Also, no refund can be granted as no tax was erroneously,
illegally and actually collected based on the provisions of Section 230, now
Section 229, of the Tax Code. Furthermore, the law does not state that a refund can
be claimed by the private establishment concerned as an alternative to the tax
credit.
Thus, respondent filed with the CA a Petition for Review on August 3, 2000.

On May 31, 2001, the CA rendered a Decision stating that Section 229 of the Tax
Code does not apply in this case. It concluded that the 20% discount given to
senior citizens which is treated as a tax credit pursuant to Sec. 4(a) of R.A. No.
7432 is considered just compensation and, as such, may be carried over to the next
taxable period if there is no current tax liability. In view of this, the CA held:
WHEREFORE, the instant petition is hereby GRANTED and the
decision of the CTA dated 24 April 2000 and its resolution dated 06 July
2000 are SET ASIDE. A new one is entered granting petitioners claim
for tax credit in the amount of Php: 150,193.00. No costs.
SO ORDERED.[4]

Hence, this petition raising the sole issue of whether the 20% sales discount
granted by respondent to qualified senior citizens pursuant to Sec. 4(a) of R.A. No.
7432 may be claimed as a tax credit or as a deduction from gross sales in
accordance with Sec. 2(1) of Revenue Regulations No. 2-94.
Sec. 4(a) of R.A. No. 7432 provides:
Sec. 4. Privileges for the Senior citizens. The senior citizens shall
be entitled to the following:
(a)

the grant of twenty percent (20%) discount from all


establishments relative to utilization of transportations
services, hotels and similar lodging establishments,
restaurants and recreation centers and purchase of
medicines anywhere in the country: Provided, That private
establishments may claim the cost as tax credit.

The CA and the CTA correctly ruled that based on the plain wording of the
law discounts given under R.A. No. 7432 should be treated as tax credits, not
deductions from income.
It is a fundamental rule in statutory construction that the legislative intent
must be determined from the language of the statute itself especially when the
words and phrases therein are clear and unequivocal. The statute in such a case

must be taken to mean exactly what it says. [5] Its literal meaning should be
followed;[6] to depart from the meaning expressed by the words is to alter the
statute.[7]
The above provision explicitly employed the word tax credit. Nothing in the
provision suggests for it to mean a deduction from gross sales. To construe it
otherwise would be a departure from the clear mandate of the law.
Thus, the 20% discount required by the Act to be given to senior citizens is a
tax credit, not a deduction from the gross sales of the establishment concerned. As
a corollary to this, the definition of tax credit found in Section 2(1) of Revenue
Regulations No. 2-94 is erroneous as it refers to tax credit as the amount
representing the 20% discount that shall be deducted by the said establishment
from their gross sales for value added tax and other percentage tax purposes. This
definition is contrary to what our lawmakers had envisioned with regard to the
treatment of the discount granted to senior citizens.
Accordingly, 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.[8] The law cannot be amended by a mere
regulation. The administrative agencies issuing these regulations may not enlarge,
alter or restrict the provisions of the law they administer.[9] In fact, a regulation that
operates to create a rule out of harmony with the statute is a mere nullity.[10]
Finally, for purposes of clarity, Sec. 229 [11] of the Tax Code does not apply to
cases that fall under Sec. 4 of R.A. No. 7432 because the former provision governs
exclusively all kinds of refund or credit of internal revenue taxes that were
erroneously or illegally imposed and collected pursuant to the Tax Code while the
latter extends the tax credit benefit to the private establishments concerned even
before tax payments have been made. The tax credit that is contemplated under the
Act is a form of just compensation, not a remedy for taxes that were erroneously or
illegally assessed and collected. In the same vein, prior payment of any tax liability
is not a precondition before a taxable entity can benefit from the tax credit. The
credit may be availed of upon payment of the tax due, if any. Where there is no tax
liability or where a private establishment reports a net loss for the period, the tax
credit can be availed of and carried over to the next taxable year.

It must also be stressed that unlike in Sec. 229 of the Tax Code wherein the
remedy of refund is available to the taxpayer, Sec. 4 of the law speaks only of a tax
credit, not a refund.
As earlier mentioned, the tax credit benefit granted to the establishments can
be deemed as their just compensation for private property taken by the State for
public use. The privilege enjoyed by the senior citizens does not come directly
from the State, but rather from the private establishments concerned.[12]
WHEREFORE, the petition is DENIED. The Decision of the Court of
Appeals in CA-G.R. SP No. 60057, dated May 31, 2001, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 148083

July 21, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
BICOLANDIA DRUG CORPORATION (Formerly known as ELMAS DRUG CO.), respondent.
DECISION
VELASCO, JR., J.:
In cases of conflict between the law and the rules and regulations implementing the law, the law
shall always prevail. Should Revenue Regulations deviate from the law they seek to implement, they
will be struck down.
The Facts
In 1992, Republic Act No. 7432, otherwise known as "An Act to Maximize the Contribution of Senior
Citizens to Nation Building, Grant Benefits and Special Privileges and For Other Purposes," granted
senior citizens several privileges, one of which was obtaining a 20 percent discount from all

establishments relative to the use of transportation services, hotels and similar lodging
establishments, restaurants and recreation centers and purchase of medicines anywhere in the
country.1 The law also provided that the private establishments giving the discount to senior citizens
may claim the cost as tax credit.2 In compliance with the law, the Bureau of Internal Revenue issued
Revenue Regulations No. 2-94, which defined "tax credit" as follows:
Tax Credit refers to the amount representing the 20% discount granted to a qualified
senior citizen by all establishments relative to their utilization of transportation services,
hotels and similar lodging establishments, restaurants, halls, circuses, carnivals and other
similar places of culture, leisure and amusement, which discount 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 other percentage tax purposes. 3
In 1995, respondent Bicolandia Drug Corporation, a corporation engaged in the business of retailing
pharmaceutical products under the business style of "Mercury Drug," granted the 20 percent sales
discount to qualified senior citizens purchasing their medicines in compliance with R.A. No.
7432.4 Respondent treated this discount as a deduction from its gross income in compliance with
Revenue Regulations No. 2-94, which implemented R.A. No. 7432. 5 On April 15, 1996, respondent
filed its 1995 Corporate Annual Income Tax Return declaring a net loss position with nil income tax
liability.6
On December 27, 1996, respondent filed a claim for tax refund or credit in the amount of PhP
259,659.00 with the Appellate Division of the Bureau of Internal Revenuebecause its net losses for
the year 1995 prevented it from benefiting from the treatment of sales discounts as a deduction from
gross sales during the said taxable year.7 It alleged that the petitioner Commissioner of Internal
Revenue erred in treating the 20 percent sales discount given to senior citizens as a deduction from
its gross income for income tax purposes or other percentage tax purposes rather than as a tax
credit.8
On April 6, 1998, respondent appealed to the Court of Tax Appeals in order to toll the running of two
(2)-year prescriptive period to file a claim for refund pursuant to Section 230 of the Tax Code
then.9 Respondent argued that since Section 4 of R.A. No. 7432 provided that discounts granted to
senior citizens may be claimed as tax credit, Section 2(i) of Revenue Regulations No. 2-94, which
referred to the 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 other percentage tax purposes," 10 is illegal, void and without effect for
being inconsistent with the statute it implements.
Petitioner maintained that Revenue Regulations No. 2-94 is valid since the law tasked the
Department of Finance, among other government offices, with the issuance of the necessary rules
and regulations to carry out the objectives of the law.11
Ruling of the Court of Tax Appeals
The Court of Tax Appeals declared that the provisions of R.A. No. 7432 would prevail over Section
2(i) of Revenue Regulations No. 2-94, whose definition of "tax credit" deviated from the intendment
of the law; and as a result, partially granted the respondent's claim for a refund. After examining the
evidence on record, the Court of Tax Appeals reduced the claimed 20 percent sales discount, thus
reducing the refund to be given. It ruled that "Respondent is hereby ORDERED to REFUND in favor
of Petitioner the amount of P236,321.52, representing overpaid income tax for the year 1995." 12
Ruling of the Court of Appeals

On appeal, the Court of Appeals modified the decision of the Court of Tax Appeals as the law
provided for a tax credit, not a tax refund. The fallo of the Decision states:
WHEREFORE, premises considered, the present appeal is hereby GRANTED and the
Decision of the Court of Tax Appeals in C.T.A. Case No. 5599 is hereby MODIFIED in the
sense that the award of tax refund is ANNULLED and SET ASIDE. Instead, the petitioner is
hereby ORDERED to issue a tax credit certificate in favor of the respondent in the amount of
P 236,321.52.
No pronouncement as to costs.13
The Issue
Petitioner now argues that the Court of Appeals erred in holding that the 20 percent sales discount
granted to qualified senior citizens by the respondent pursuant to R.A. No. 7432 may be claimed as
a tax credit, instead of a deduction from gross income or gross sales.14
The Court's Ruling
The petition is not meritorious.
Redefining "Tax Credit" as "Tax Deduction"
The problem stems from the issuance of Revenue Regulations No. 2-94, which was supposed to
implement R.A. No. 7432, and the radical departure it made when it defined the "tax credit" that
would be granted to establishments that give 20 percent discount to senior citizens. Under Revenue
Regulations No. 2-94, the tax credit is "the amount representing the 20 percent discount granted to a
qualified senior citizen by all establishments relative to their utilization of transportation services,
hotels and similar lodging establishments, restaurants, drugstores, recreation centers, theaters,
cinema houses, concert halls, circuses, carnivals and other similar places of culture, leisure and
amusement, which discount 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 other percentage tax
purposes."15 It equated "tax credit" with "tax deduction," contrary to the definition in Black's Law
Dictionary, which defined tax credit as:
An amount subtracted from an individual's or entity's tax liability to arrive at the total tax
liability. A tax credit reduces the taxpayer's liability x x x, compared to a deduction which
reduces taxable income upon which the tax liability is calculated. A credit differs from
deduction to the extent that the former is subtracted from the tax while the latter is subtracted
from income before the tax is computed.16
The interpretation of an administrative government agency, which is tasked to implement the statute,
is accorded great respect and ordinarily controls the construction of the courts. 17 Be that as it may,
the definition laid down in the questioned Revenue Regulations can still be subjected to scrutiny.
Courts will not hesitate to set aside an executive interpretation when it is clearly erroneous. There is
no need for interpretation when there is no ambiguity in the rule, or when the language or words
used are clear and plain or readily understandable to an ordinary reader.18 The definition of the term
"tax credit" is plain and clear, and the attempt of Revenue Regulations No. 2-94 to define it differently
is the root of the conflict.
Tax Credit is not Tax Refund

Petitioner argues that the tax credit is in the nature of a tax refund and should be treated as a return
for tax payments erroneously or excessively assessed against a taxpayer, in line with Section 204(c)
of Republic Act No. 8424, or the National Internal Revenue Code of 1997. Petitioner claims that
there should first be payment of the tax before the tax credit can be claimed. However, in the
National Internal Revenue Code, we see at least one instance where this is not the case. Any VATregistered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years
after the close of the taxable quarter when the sales were made, apply for the issuance of a tax
credit certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against output tax. 19 It
speaks of a tax credit for tax due, so payment of the tax has not yet been made in that particular
example.
The Court of Appeals expressly recognized the differences between a "tax credit" and a "tax refund,"
and stated that the same are not synonymous with each other, which is why it modified the ruling of
the Court of Tax Appeals.
Revenue Regulations No. 2-94 vs. R.A. No. 7432 and
R.A. No. 7432 vs. the National Internal Revenue Code
Petitioner contends that since R.A. No. 7432 used the word "may," the availability of the tax credit to
private establishments is only permissive and not absolute or mandatory. From that starting point,
petitioner further argues that the definition of the term "tax credit" in Revenue Regulations No. 2-94
was validly issued under the authority granted by the law to the Department of Finance to formulate
the needed guidelines. It further explained that Revenue Regulations No. 2-94 can be harmonized
with R.A No. 7432, such that the definition of the term "tax credit" in Revenue Regulations No. 2-94
is controlling. It claims that to do otherwise would result in Section 4(a) of R.A. No. 7432 impliedly
repealing Section 204 (c) of the National Internal Revenue Code.
These arguments must also fail.
Revenue Regulations No. 2-94 is still subordinate to R.A. No. 7432, and in cases of conflict, the
implementing rule will not prevail over the law it seeks to implement. While seemingly conflicting
laws must be harmonized as far as practicable, in this particular case, the conflict cannot be
resolved in the manner the petitioner wishes. There is a great divide separating the idea of "tax
credit" and "tax deduction," as seen in the definition in Black's Law Dictionary.
The claimed absurdity of Section 4(a) of R.A. No. 7432 impliedly repealing Section 204(c) of the
National Internal Revenue Code could only come about if it is accepted that a tax credit is akin to a
tax refund wherein payment of taxes must be made in order for it to be claimed. But as shown in
Section 112(a) of the National Internal Revenue Code, it is not always necessary for payment to be
made for a tax credit to be available.
Looking into R.A. No. 7432
Finally, petitioner argues that should private establishments, which count respondent in their number,
be allowed to claim tax credits for discounts given to senior citizens, they would be earning and not
just be reimbursed for the discounts given.
It cannot be denied that R.A. No. 7432 has a laudable goal. Moreover, it cannot be argued that it
was the intent of lawmakers for private establishments to be the primary beneficiaries of the law.
However, while the purpose of the law to benefit senior citizens is praiseworthy, the concerns of the
affected private establishments were also considered by the lawmakers. As in other cases wherein

private property is taken by the State for public use, there must be just compensation. In this
particular case, it took the form of the tax credit granted to private establishments, purposely chosen
by the lawmakers. In the similar case of Commissioner of Internal Revenue v. Central Luzon Drug
Corporation,20 scrutinizing the deliberations of the Bicameral Conference Committee Meeting on
Social Justice on February 5, 1992 which finalized R.A. No. 7432, the discussions of the lawmakers
clearly showed the intent that the cost of the 20 percent discount may be claimed by the private
establishments as a tax credit. An excerpt from the deliberations is as follows:
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 preparation of (inaudible) income.
SEN. ANGARA. I-tax credit na lang natin para walang cash-out?
REP. AQUINO. Oo, tax credit. Tama. Okay. Hospitals ba o lahat ng establishments na
covered.
THE CHAIRMAN. 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 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. Tax credit.
SEN. ANGARA. As a tax credit [rather] than a kuwan deduction, Okay.21
It is clear that the lawmakers intended the grant of a tax credit to complying private establishments
like the respondent.
If the private establishments appear to benefit more from the tax credit than originally intended, it is
not for petitioner to say that they shouldn't. The tax credit may actually have provided greater
incentive for the private establishments to comply with R.A. No. 7432, or quicker relief from the cut
into profits of these businesses.

Revenue Regulations No. 2-94 Null and Void


From the above discussion, it must be concluded that Revenue Regulations No. 2-94 is null and void
for failing to conform to the law it sought to implement. In case of discrepancy between the basic law
and a rule or regulation issued to implement said law, the basic law prevails because said rule or
regulation cannot go beyond the terms and provisions of the basic law.22
Revenue Regulations No. 2-94 being null and void, it must be ruled then that under R.A. No. 7432,
which was effective at the time, respondent is entitled to its claim of a tax credit, and the ruling of the
Court of Appeals must be affirmed.
But even as this particular case is decided in this manner, it must be noted that the concerns of the
petitioner regarding tax credits granted to private establishments giving discounts to senior citizens
have been addressed. R.A. No. 7432 has been amended by Republic Act No. 9257, the "Expanded
Senior Citizens Act of 2003." In this, the term "tax credit" is no longer used. The 20 percent discount
granted by hotels and similar lodging establishments, restaurants and recreation centers, and in the
purchase of medicines in all establishments for the exclusive use and enjoyment of senior citizens is
treated in the following manner:
The establishment may claim the discounts granted under (a), (f), (g) and (h) as tax
deduction based on the net cost of the goods sold or services rendered: Provided, That the
cost of the discount shall be allowed as deduction from gross income for the same taxable
year that the discount is granted. Provided, further, that the total amount of the claimed tax
deduction net of value added tax if applicable, shall be included in their gross sales receipts
for tax purposes and shall be subject to proper documentation and to the provisions of the
National Internal Revenue Code, as amended. 23
This time around, there is no conflict between the law and the implementing Revenue Regulations.
Under Revenue Regulations No. 4-2006, "(o)nly the actual amount of the discount granted or a sales
discount not exceeding 20% of the gross selling price can be deducted from the gross income, net of
value added tax, if applicable, for income tax purposes, and from gross sales or gross receipts of the
business enterprise concerned, for VAT or other percentage tax purposes." 24 Under the new law,
there is no tax credit to speak of, only deductions.
Petitioner can find some vindication in the amendment made to R.A. No. 7432 by R.A. No. 9257,
which may be more in consonance with the principles of taxation, but as it was R.A. No. 7432 in
force at the time this case arose, this law controls the result in this particular case, for which reason
the petition must fail.
This case should remind all heads of executive agencies which are given the power to promulgate
rules and regulations, that they assume the roles of lawmakers. It is well-settled that a regulation
should not conflict with the law it implements. Thus, those drafting the regulations should study well
the laws their rules will implement, even to the extent of reviewing the minutes of the deliberations of
Congress about its intent when it drafted the law. They may also consult the Secretary of Justice or
the Solicitor General for their opinions on the drafted rules. Administrative rules, regulations and
orders have the efficacy and force of law so long as they do not contravene any statute or the
Constitution.25 It is then the duty of the agencies to ensure that their rules do not deviate from or
amend acts of Congress, for their regulations are always subordinate to law.
WHEREFORE, the Petition is hereby DENIED. The assailed Decision of the Court of Appeals
is AFFIRMED. There is no pronouncement as to costs.

SO ORDERED.
Quisumbing, Chairman, Carpio-Morales, Tinga, J.J., concur.
Carpio, J., on official leave.

SECOND DIVISION
BICOLANDIA DRUG CORPORATION G.R. No. 142299
(FORMERLY ELMAS DRUG
COPRORATION), Present:
Petitioner,
PUNO, J., Chairperson,
- versus - SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.
COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent.
June 22, 2006
x ---------------------------------------------------------------------------------------- x

DECISION
AZCUNA, J.:
This is a petition for review[1] by Bicolandia Drug Corporation, formerly known as
Elmas Drug Corporation, seeking the nullification of the Decision and Resolution
of the Court of Appeals, dated October 19, 1999 and February 18, 2000,
respectively, in CA-G.R SP No. 49946 entitled Commissioner of Internal Revenue
v. Elmas Drug Corporation.
The controversy primarily involves the proper interpretation of the term cost
in Section 4 of Republic Act (R.A.) No. 7432, otherwise known as An Act to
Maximize
the
Contribution
of
Senior
Citizens
to Nation

Building, Grant Benefits and Special Privileges and for Other Purposes.
The facts[2] of the case are as follows:
Petitioner Bicolandia Drug Corporation is a domestic corporation principally
engaged in the retail of pharmaceutical products. Petitioner has a drugstore located
in Naga Cityunder the name and business style of Mercury Drug.
Pursuant to the provisions of R.A. No. 7432, entitled An Act to Maximize the
Contribution of Senior Citizens to Nation Building, Grant Benefits and Special
Privileges and for Other Purposes, also known as the Senior Citizens Act, and
Revenue Regulations No. 2-94, petitioner granted to qualified senior citizens a
20% sales discount on their purchase of medicines covering the period from July
19, 1993 to December 31, 1994.
When petitioner filed its corresponding corporate annual income tax returns for
taxable years 1993 and 1994, it claimed as a deduction from its gross income the
respective amounts of P80,330 and P515,000 representing the 20% sales discount
it granted to senior citizens.
On March 28, 1995, however, alleging error in the computation and claiming that
the aforementioned 20% sales discount should have been treated as a tax credit
pursuant to R.A. No. 7432 instead of a deduction from gross income, petitioner
filed a claim for refund or credit of overpaid income tax for 1993 and 1994,
amounting to P52,215 and P334,750, respectively. Petitioner computed the
overpayment as follows:

Income tax benefit of tax credit 100%


Income tax benefit of tax deduction 35%
Differential 65%
For 1993
20% discount granted in 1993 P80,330
Multiply by 65% x 65%
Overpaid corporate income tax P52,215
For 1994
20% discount granted in 1993 P515,000
Multiply by 65% x 65%
Overpaid corporate income tax P334,750

On December 29, 1995, petitioner filed a Petition for Review with the Court of Tax
Appeals (CTA) in order to toll the running of the two-year prescriptive period for
claiming for a tax refund under Section 230, now Section 229, of the Tax Code.
It contended that Section 4 of R.A. No. 7432 provides in clear and unequivocal
language that discounts granted to senior citizens may be claimed as a tax
credit. Revenue Regulations No. 2-94, therefore, which is merely an implementing
regulation cannot modify, alter or depart from the clear mandate of Section 4 of
R.A. No. 7432, and, thus, is null and void for being inconsistent with the very
statute it seeks to implement.
The Commissioner of Internal Revenue, on the other hand, maintained that the
aforesaid section providing for a 20% sales discount to senior citizens is a
misnomer as it runs counter to the solemn duty of the government to collect taxes.
The Commissioner likewise pointed out that the provision in question employs the
word may, thereby implying that the availability of the remedy of tax credit is not
absolute and mandatory and it does not confer an absolute right on the taxpayer to
avail of the tax credit scheme if he so chooses. The Commissioner further stated
that in statutory construction, the contemporaneous construction of a statute by

executive officers of the government whose duty is to execute it is entitled to great


respect and should ordinarily control in its interpretation.
Thus, addressing the matter of the proper construction of Section 4(a) of R.A. No.
7432 regarding the treatment of the 20% sales discount given to senior citizens on
their medicine purchases, the CTA ruled on the issue of whether or not the discount
should be deductible from gross sales of value-added tax or other percentage tax
purposes as prescribed under Revenue Regulations No. 2-94 or as a tax credit
deductible from the tax due.
In its Decision, dated August 27, 1998, the CTA declared that:
xxx
Revenue Regulations No. 2-94 gave a new meaning to the phrase
tax credit, interpreting it to mean that the 20% discount granted to
qualified senior citizens is an amount deductible from the establishments
gross sales, which is completely contradictory to the literal or widely
accepted meaning of the said phrase, as an amount subtracted from an
individuals or entitys tax liability to arrive at the total tax
liability (Blacks Law Dictionary).
In view of such apparent discrepancy in the interpretation of the
term tax credit, the provisions of the law under R.A. 7432 should prevail
over the subordinate regulation issued by the respondent under Revenue
Regulation No. 2-94. x x x
Having settled the legal issue involved in the case at bar, We are
now tasked to resolve the factual issues of whether or not petitioner is
entitled to the claim for refund of its overpaid income taxes for the years
1993 and 1994 based on the evidence at hand.
Contrary to the findings of the independent CPA, aside from the
unverifiable 20% sales discounts in the amount of P18,653.70 (Exh. R3), the Court noted some material discrepancies. Not all the details listed
in the 1994 Summary of Sales and Discounts Given to Senior Citizens
correspond with the cash slips presented. There are various sales
discounts granted which were not properly computed and there were also
some cash slips left unsigned by the buyers.

xxx
After a careful scrutiny of the documents presented, the Court,
allows only the amount of sales discounts duly supported by the premarked cash slips x x x.
Hence, only the above amounts which are properly documented
can be used as base in computing for the cost of 20% discount as tax
credit. The overpaid income tax therefore is computed as follows: [3]
For 1993
Net Sales P31,080,508.00
Add: 20% Discount to Senior Citizens 80,330.00
Gross Sales P31,160,838.00
Less: Cost of Sales
Merchandise Inventory, beg. P 4,226,588.00
Add Purchases 29,234,361.00
Total Goods available for Sale P33,460,947.00
Less: Merchandise Inventory, End P 4,875.944.00 P28,585,003.00
Gross Income P 2,575,835.00
Less: Operating Expenses 1,706,491.00
Net Operating Income P 869,344.00
Add: Miscellaneous Income 72,680.00
Net Income P 942,024.00
Less: Interest Income Subject to Final Tax 21,140.00
Net Taxable Income P 920,884.00
Tax Due (P920,884 x 35%) P 322,309.40
Less: 1) Tax Credit (Cost of 20% Discount)
[(28,585,003.00/31,160,838.00)
x 80,330.34] P 73,690.03
2) Income Tax Payment for the Year 294,194.00 P 367,884.03
AMOUNT REFUNDABLE P 45,574.63
For 1994
Net Sales P 29,904,734.00
Add: 20% Discount to Senior Citizens 515,000.00
Gross Sales P 30,419,734.00
Less: Cost of Sales

Merchandise Inventory, beg. P 4,875,944.00


Add Purchases 28,138,103.00
Total Goods available for Sales P 33,014,047.00
Less: Merchandise Inventory, End 5,036.117.00 27,977,930.00
Gross Income P 2,441,804.00
Less: Operating Expenses 1,880,153.00
Net Operating Income P 561,651.00
Add: Miscellaneous Income 82,207.00
Net Income P 643,858.00
Less: Interest Income Subject to Final Tax 30,618.00
Net Taxable Income P 613,240.00
Tax Due (613,240 x 35%) P 214,634.00
Less: 1) Tax Credit (Cost of 20% Discount)
[(28,585,003.00/31,160,838.00) x
80,330.34] P316,156.48
2) Income Tax Payment for the Year 34,384.00 P 350,540.48
AMOUNT REFUNDABLE P 135,906.48
WHEREFORE, in view of all the foregoing, petitioners claim for
refund is hereby partially GRANTED. Respondent is hereby ORDERED
to REFUND, or in the alternative, to ISSUE a tax credit certificate in
favor of the petitioner the amounts of P45,574.63 and P135,906.48,
representing overpaid income tax for the years 1993 and 1994,
respectively.
SO ORDERED.[4]

Both the Commissioner and petitioner moved for a reconsideration of the


above decision. Petitioner, in its Motion for Partial Reconsideration, claimed that
the cost that private establishments may claim as tax credit under Section 4 of R.A.
No. 7432 should be construed to mean the full amount of the 20% sales discount
granted to senior citizens instead of the formula --[Tax Credit = Cost of
Sales/Gross Sales x 20% discount] used by the CTA in computing for the amount
of the tax credit. In view of this, petitioner prayed for the refund of the amount of
income tax it allegedly overpaid in the aggregate amount of P45,574.63
and P135,906.48, respectively, for the taxable years 1993 and 1994 as a result of
treating the sales discount of 20% as a tax deduction rather than as a tax credit.

The Commissioner, on the other hand, moved for a re-computation of


petitioners tax liability averring that the sales discount of 20% should be deducted
from gross income to arrive at the taxable income. Such discount cannot be
considered a tax credit because the latter, being in the nature of a tax refund, is
treated as a return of tax payments erroneously or excessively

assessed and collected as provided under Section 204(3) of the Tax Code, to wit:
(3) x x x 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.

In its Resolution, dated December 7, 1998, the CTA modified its earlier decision,
thus:
ACCORDINGLY, the petitioners Motion for Partial
Reconsideration is hereby GRANTED. Respondent is hereby
ORDERED to ISSUE tax credit certificates in favor of petitioner [in] the
amounts of P45,574.63 and P135,906.48 representing overpaid income
tax for the years 1993 and 1994, as prayed for in its motion. On the other
hand, the Respondents Motion for Reconsideration is DENIED for lack
of merit.
SO ORDERED.[5]

Consequently, the Commissioner filed a petition for review with the Court of
Appeals asking for the reversal of the CTA Decision and Resolution.
The Court of Appeals rendered its assailed Decision on October 19, 1999, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing premises, the petition is hereby
GRANTED IN PART. The resolution issued by the Court of Tax Appeals

dated December [7], 1998 is SET ASIDE and the Decision rendered by
the latter is AFFIRMED IN TOTO.
No costs.
SO ORDERED.[6]

Hence, this petition positing that:


THE COURT OF APPEALS ERRED IN RULING THAT IN
COMPUTING THE TAX CREDIT TO BE ALLOWED PETITIONER
FOR DISCOUNTS GRANTED TO SENIOR CITIZENS ON THEIR
PURCHASE OF MEDICINES, THE ACQUISITION COST RATHER
THAN THE ACTUAL DISCOUNT GRANTED TO SENIOR
CITIZENS SHOULD BE THE BASIS.[7]

Otherwise stated, the matter to be determined is the amount of tax credit that may
be claimed by a taxable entity which grants a 20% sales discount to qualified
senior citizens on their purchase of medicines pursuant to Section 4(a) of R.A. No.
7432 which states:
Sec. 4. Privileges for the Senior citizens. The senior citizens shall be
entitled to the following:
a)

the grant of twenty percent (20%) discount from all


establishments relative to utilization of transportation services,
hotels and similar lodging establishments, restaurants and
recreation centers and purchase of medicines anywhere in the
country: Provided, That private establishments may claim
the cost[8] as tax credit.

The term cost in the above provision refers to the amount of the 20%
discount extended by a private establishment to senior citizens in their purchase of
medicines. This amount shall be applied as a tax credit, and may be deducted from
the tax liability of the entity concerned. If there is no current tax due or the
establishment reports a net loss for the period, the credit may be carried over to the
succeeding taxable year. This is in line with the interpretation of this Court
in Commissioner
of
Internal
Revenue
v.
Central
Luzon
Drug

Corporation[9] wherein it affirmed that R.A. No. 7432 allows private


establishments to claim as tax credit the amount of discounts they grant to senior
citizens.
The Court notes that petitioner, while praying for the reinstatement of the
CTA Resolution, dated December 7, 1998, directing the issuance of tax certificates
in favor of petitioner for the respective amounts of P45,574.63 and P135,906.48
representing overpaid income tax for 1993 and 1994, asks for the refund of the
same.[10]
In this regard, petitioners claim for refund must be denied. The law
expressly provides that the discount given to senior citizens may be claimed as a
tax credit, and not a refund. Thus, where the words of a statute are clear, plain and
free from ambiguity, it must be given its literal meaning and applied without
attempted interpretation.[11]
WHEREFORE, the petition is PARTLY GRANTED. The Decision and
Resolution of the Court of Appeals, dated October 19, 1999 and February 18, 2000,
respectively, in CA-G.R SP No. 49946 are REVERSED and SET ASIDE. The
Resolution of the Court of Tax Appeals, dated December 7, 1998, directing the
issuance of tax credit certificates in favor of petitioner in the amounts
of P45,574.63 and P135,906.48 is hereby REINSTATED. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC

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.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:p
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:
xxx xxx xxx

(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&G-USA 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 902 and 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
xxx xxx xxx
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
xxx xxx xxx
(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.

xxx xxx xxx


(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 8for a 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&GUSA. 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&GPhil. 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&GPhil. 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. . . .
xxx xxx xxx

(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&G-USA, 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 thirtyfive 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 thirtyfive 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;
xxx xxx xxx
(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 by P&G-USA net of RP and US
====== taxes after Section 902 tax credit.
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


xxx xxx xxx
(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.
xxx xxx xxx
(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.
Narvasa, Gutierrez, Jr., Grio-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.