Republic of the Philippines The DOF, DBM, NEDA, BIR, BOC and the Civil Service Commission (CSC)
, DBM, NEDA, BIR, BOC and the Civil Service Commission (CSC) were
SUPREME COURT
Manila
EN BANC
G.R. No. 166715 August 14, 2008
ABAKADA GURO PARTY LIST (formerly AASJS)1 OFFICERS/MEMBERS
SAMSON S. ALCANTARA, ED VINCENT S. ALBANO, ROMEO R. ROBISO,
RENE B. GOROSPE and EDWIN R. SANDOVAL, petitioners,
vs.
HON. CESAR V. PURISIMA, in his capacity as Secretary of Finance, HON.
GUILLERMO L. PARAYNO, JR., in his capacity as Commissioner of the
Bureau of Internal Revenue, and HON. ALBERTO D. LINA, in his Capacity
as Commissioner of Bureau of Customs, respondents.
DECISION
CORONA, J.:
This petition for prohibition1 seeks to prevent respondents from implementing and
enforcing Republic Act (RA) 93352 (Attrition Act of 2005).
RA 9335 was enacted to optimize the revenue-generation capability and
collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs
(BOC). The law intends to encourage BIR and BOC officials and employees to
exceed their revenue targets by providing a system of rewards and sanctions
through the creation of a Rewards and Incentives Fund (Fund) and a Revenue
Performance Evaluation Board (Board).3 It covers all officials and employees of
the BIR and the BOC with at least six months of service, regardless of
employment status.4
The Fund is sourced from the collection of the BIR and the BOC in excess of
their revenue targets for the year, as determined by the Development Budget and
Coordinating Committee (DBCC). Any incentive or reward is taken from the fund
and allocated to the BIR and the BOC in proportion to their contribution in the
excess collection of the targeted amount of tax revenue.5
The Boards in the BIR and the BOC are composed of the Secretary of the
Department of Finance (DOF) or his/her Undersecretary, the Secretary of the
Department of Budget and Management (DBM) or his/her Undersecretary, the
Director General of the National Economic Development Authority (NEDA) or
his/her Deputy Director General, the Commissioners of the BIR and the BOC or
their Deputy Commissioners, two representatives from the rank-and-file
employees and a representative from the officials nominated by their recognized
organization.6
Each Board has the duty to (1) prescribe the rules and guidelines for the
allocation, distribution and release of the Fund; (2) set criteria and procedures for
removing from the service officials and employees whose revenue collection falls
short of the target; (3) terminate personnel in accordance with the criteria
adopted by the Board; (4) prescribe a system for performance evaluation; (5)
perform other functions, including the issuance of rules and regulations and (6)
submit an annual report to Congress.7
tasked to promulgate and issue the implementing rules and regulations of RA
9335,8 to be approved by a Joint Congressional Oversight Committee created for
such purpose.9
Petitioners, invoking their right as taxpayers filed this petition challenging the
constitutionality of RA 9335, a tax reform legislation. They contend that, by
establishing a system of rewards and incentives, the law "transform[s] the
officials and employees of the BIR and the BOC into mercenaries and bounty
hunters" as they will do their best only in consideration of such rewards. Thus,
the system of rewards and incentives invites corruption and undermines the
constitutionally mandated duty of these officials and employees to serve the
people with utmost responsibility, integrity, loyalty and efficiency.
Petitioners also claim that limiting the scope of the system of rewards and
incentives only to officials and employees of the BIR and the BOC violates the
constitutional guarantee of equal protection. There is no valid basis for
classification or distinction as to why such a system should not apply to officials
and employees of all other government agencies.
In addition, petitioners assert that the law unduly delegates the power to fix
revenue targets to the President as it lacks a sufficient standard on that matter.
While Section 7(b) and (c) of RA 9335 provides that BIR and BOC officials may
be dismissed from the service if their revenue collections fall short of the target
by at least 7.5%, the law does not, however, fix the revenue targets to be
achieved. Instead, the fixing of revenue targets has been delegated to the
President without sufficient standards. It will therefore be easy for the President
to fix an unrealistic and unattainable target in order to dismiss BIR or BOC
personnel.
Finally, petitioners assail the creation of a congressional oversight committee on
the ground that it violates the doctrine of separation of powers. While the
legislative function is deemed accomplished and completed upon the enactment
and approval of the law, the creation of the congressional oversight committee
permits legislative participation in the implementation and enforcement of the
law.
In their comment, respondents, through the Office of the Solicitor General,
question the petition for being premature as there is no actual case or
controversy yet. Petitioners have not asserted any right or claim that will
necessitate the exercise of this Courts jurisdiction. Nevertheless, respondents
acknowledge that public policy requires the resolution of the constitutional issues
involved in this case. They assert that the allegation that the reward system will
breed mercenaries is mere speculation and does not suffice to invalidate the law.
Seen in conjunction with the declared objective of RA 9335, the law validly
classifies the BIR and the BOC because the functions they perform are distinct
from those of the other government agencies and instrumentalities. Moreover,
the law provides a sufficient standard that will guide the executive in the
implementation of its provisions. Lastly, the creation of the congressional
oversight committee under the law enhances, rather than violates, separation of
powers. It ensures the fulfillment of the legislative policy and serves as a check to
1
any over-accumulation of power on the part of the executive and the
implementing agencies.
After a careful consideration of the conflicting contentions of the parties, the
Court finds that petitioners have failed to overcome the presumption of
constitutionality in favor of RA 9335, except as shall hereafter be discussed.
Actual Case And Ripeness
An actual case or controversy involves a conflict of legal rights, an assertion of
opposite legal claims susceptible of judicial adjudication. 10 A closely related
requirement is ripeness, that is, the question must be ripe for adjudication. And a
constitutional question is ripe for adjudication when the governmental act being
challenged has a direct adverse effect on the individual challenging it. 11 Thus, to
be ripe for judicial adjudication, the petitioner must show a personal stake in the
outcome of the case or an injury to himself that can be redressed by a favorable
decision of the Court.12
In this case, aside from the general claim that the dispute has ripened into a
judicial controversy by the mere enactment of the law even without any further
overt act,13 petitioners fail either to assert any specific and concrete legal claim or
to demonstrate any direct adverse effect of the law on them. They are unable to
show a personal stake in the outcome of this case or an injury to themselves. On
this account, their petition is procedurally infirm.
This notwithstanding, public interest requires the resolution of the constitutional
issues raised by petitioners. The grave nature of their allegations tends to cast a
cloud on the presumption of constitutionality in favor of the law. And where an
action of the legislative branch is alleged to have infringed the Constitution, it
becomes not only the right but in fact the duty of the judiciary to settle the
dispute.14
Accountability of
Public Officers
Section 1, Article 11 of the Constitution states:
Sec. 1. Public office is a public trust. Public officers and employees must
at all times be accountable to the people, serve them with utmost
responsibility, integrity, loyalty, and efficiency, act with patriotism, and
justice, and lead modest lives.
Public office is a public trust. It must be discharged by its holder not for his own
personal gain but for the benefit of the public for whom he holds it in trust. By
demanding accountability and service with responsibility, integrity, loyalty,
efficiency, patriotism and justice, all government officials and employees have
the duty to be responsive to the needs of the people they are called upon to
serve.
Public officers enjoy the presumption of regularity in the performance of their
duties. This presumption necessarily obtains in favor of BIR and BOC officials
and employees. RA 9335 operates on the basis thereof and reinforces it by
providing a system of rewards and sanctions for the purpose of encouraging the
officials and employees of the BIR and the BOC to exceed their revenue targets
and optimize their revenue-generation capability and collection.15
The presumption is disputable but proof to the contrary is required to rebut it. It
cannot be overturned by mere conjecture or denied in advance (as petitioners
would have the Court do) specially in this case where it is an underlying principle
to advance a declared public policy.
Petitioners claim that the implementation of RA 9335 will turn BIR and BOC
officials and employees into "bounty hunters and mercenaries" is not only without
any factual and legal basis; it is also purely speculative.
A law enacted by Congress enjoys the strong presumption of constitutionality. To
justify its nullification, there must be a clear and unequivocal breach of the
Constitution, not a doubtful and equivocal one.16 To invalidate RA 9335 based on
petitioners baseless supposition is an affront to the wisdom not only of the
legislature that passed it but also of the executive which approved it.
Public service is its own reward. Nevertheless, public officers may by law be
rewarded for exemplary and exceptional performance. A system of incentives for
exceeding the set expectations of a public office is not anathema to the concept
of public accountability. In fact, it recognizes and reinforces dedication to duty,
industry, efficiency and loyalty to public service of deserving government
personnel.
In United States v. Matthews,17 the U.S. Supreme Court validated a law which
awards to officers of the customs as well as other parties an amount not
exceeding one-half of the net proceeds of forfeitures in violation of the laws
against smuggling. Citing Dorsheimer v. United States,18 the U.S. Supreme Court
said:
The offer of a portion of such penalties to the collectors is to stimulate
and reward their zeal and industry in detecting fraudulent attempts to
evade payment of duties and taxes.
In the same vein, employees of the BIR and the BOC may by law be entitled to a
reward when, as a consequence of their zeal in the enforcement of tax and
customs laws, they exceed their revenue targets. In addition, RA 9335
establishes safeguards to ensure that the reward will not be claimed if it will be
either the fruit of "bounty hunting or mercenary activity" or the product of the
irregular performance of official duties. One of these precautionary measures is
embodied in Section 8 of the law:
SEC. 8. Liability of Officials, Examiners and Employees of the BIR and
the BOC. The officials, examiners, and employees of the [BIR] and the
[BOC] who violate this Act or who are guilty of negligence, abuses or
acts of malfeasance or misfeasance or fail to exercise extraordinary
diligence in the performance of their duties shall be held liable for any
loss or injury suffered by any business establishment or taxpayer as a
result of such violation, negligence, abuse, malfeasance, misfeasance or
failure to exercise extraordinary diligence.
Equal Protection
Equality guaranteed under the equal protection clause is equality under the same
conditions and among persons similarly situated; it is equality among equals, not
similarity of treatment of persons who are classified based on substantial
differences in relation to the object to be accomplished.19When things or persons
2
are different in fact or circumstance, they may be treated in law differently.
InVictoriano v. Elizalde Rope Workers Union,20 this Court declared:
The guaranty of equal protection of the laws is not a guaranty of equality
in the application of the laws upon all citizens of the [S]tate. It is not,
therefore, a requirement, in order to avoid the constitutional prohibition
against inequality, that every man, woman and child should be affected
alike by a statute. Equality of operation of statutes does not mean
indiscriminate operation on persons merely as such, but on persons
according to the circumstances surrounding them. It guarantees
equality, not identity of rights. The Constitution does not require that
things which are different in fact be treated in law as though they
were the same. The equal protection clause does not forbid
discrimination as to things that are different. It does not prohibit
legislation which is limited either in the object to which it is
directed or by the territory within which it is to operate.
The equal protection of the laws clause of the Constitution allows
classification. Classification in law, as in the other departments of
knowledge or practice, is the grouping of things in speculation or
practice because they agree with one another in certain particulars. A
law is not invalid because of simple inequality. The very idea of
classification is that of inequality, so that it goes without saying that the
mere fact of inequality in no manner determines the matter of
constitutionality. All that is required of a valid classification is that it
be reasonable, which means that the classification should be
based on substantial distinctions which make for real differences,
that it must be germane to the purpose of the law; that it must not
be limited to existing conditions only; and that it must apply
equally to each member of the class. This Court has held that the
standard is satisfied if the classification or distinction is based on a
reasonable foundation or rational basis and is not palpably
arbitrary.
In the exercise of its power to make classifications for the purpose of
enacting laws over matters within its jurisdiction, the state is recognized
as enjoying a wide range of discretion. It is not necessary that the
classification be based on scientific or marked differences of things or in
their relation. Neither is it necessary that the classification be made with
mathematical nicety. Hence, legislative classification may in many cases
properly rest on narrow distinctions, for the equal protection guaranty
does not preclude the legislature from recognizing degrees of evil or
harm, and legislation is addressed to evils as they may
appear.21 (emphasis supplied)
The equal protection clause recognizes a valid classification, that is, a
classification that has a reasonable foundation or rational basis and not
arbitrary.22 With respect to RA 9335, its expressed public policy is the
optimization of the revenue-generation capability and collection of the BIR and
the BOC.23 Since the subject of the law is the revenue- generation capability and
collection of the BIR and the BOC, the incentives and/or sanctions provided in
the law should logically pertain to the said agencies. Moreover, the law concerns
only the BIR and the BOC because they have the common distinct primary
function of generating revenues for the national government through the
collection of taxes, customs duties, fees and charges.
The BIR performs the following functions:
Sec. 18. The Bureau of Internal Revenue. The Bureau of Internal
Revenue, which shall be headed by and subject to the supervision and
control of the Commissioner of Internal Revenue, who shall be
appointed by the President upon the recommendation of the Secretary
[of the DOF], shall have the following functions:
(1) Assess and collect all taxes, fees and charges and account for
all revenues collected;
(2) Exercise duly delegated police powers for the proper performance of
its functions and duties;
(3) Prevent and prosecute tax evasions and all other illegal economic
activities;
(4) Exercise supervision and control over its constituent and subordinate
units; and
(5) Perform such other functions as may be provided by law.24
xxx xxx xxx (emphasis supplied)
On the other hand, the BOC has the following functions:
Sec. 23. The Bureau of Customs. The Bureau of Customs which shall
be headed and subject to the management and control of the
Commissioner of Customs, who shall be appointed by the President
upon the recommendation of the Secretary[of the DOF] and hereinafter
referred to as Commissioner, shall have the following functions:
(1) Collect custom duties, taxes and the corresponding fees,
charges and penalties;
(2) Account for all customs revenues collected;
(3) Exercise police authority for the enforcement of tariff and customs
laws;
(4) Prevent and suppress smuggling, pilferage and all other economic
frauds within all ports of entry;
(5) Supervise and control exports, imports, foreign mails and the
clearance of vessels and aircrafts in all ports of entry;
(6) Administer all legal requirements that are appropriate;
(7) Prevent and prosecute smuggling and other illegal activities in all
ports under its jurisdiction;
(8) Exercise supervision and control over its constituent units;
(9) Perform such other functions as may be provided by law.25
xxx xxx xxx (emphasis supplied)
Both the BIR and the BOC are bureaus under the DOF. They principally perform
the special function of being the instrumentalities through which the State
exercises one of its great inherent functions taxation. Indubitably, such
substantial distinction is germane and intimately related to the purpose of the
3
law. Hence, the classification and treatment accorded to the BIR and the BOC
under RA 9335 fully satisfy the demands of equal protection.
Undue Delegation
Two tests determine the validity of delegation of legislative power: (1) the
completeness test and (2) the sufficient standard test. A law is complete when it
sets forth therein the policy to be executed, carried out or implemented by the
delegate.26 It lays down a sufficient standard when it provides adequate
guidelines or limitations in the law to map out the boundaries of the delegates
authority and prevent the delegation from running riot.27 To be sufficient, the
standard must specify the limits of the delegates authority, announce the
legislative policy and identify the conditions under which it is to be implemented. 28
RA 9335 adequately states the policy and standards to guide the President in
fixing revenue targets and the implementing agencies in carrying out the
provisions of the law. Section 2 spells out the policy of the law:
SEC. 2. Declaration of Policy. It is the policy of the State to optimize
the revenue-generation capability and collection of the Bureau of Internal
Revenue (BIR) and the Bureau of Customs (BOC) by providing for a
system of rewards and sanctions through the creation of a Rewards and
Incentives Fund and a Revenue Performance Evaluation Board in the
above agencies for the purpose of encouraging their officials and
employees to exceed their revenue targets.
Section 4 "canalized within banks that keep it from overflowing"29 the delegated
power to the President to fix revenue targets:
SEC. 4. Rewards and Incentives Fund. A Rewards and Incentives
Fund, hereinafter referred to as the Fund, is hereby created, to be
sourced from the collection of the BIR and the BOC in excess of their
respective revenue targets of the year, as determined by the
Development Budget and Coordinating Committee (DBCC), in the
following percentages:
Excess of Collection of the Excess Percent (%) of the Excess Collection to Accrue
the Revenue Targets to the Fund
30% or below 15%
More than 30% 15% of the first 30% plus 20% of the remaining
excess
The Fund shall be deemed automatically appropriated the year
immediately following the year when the revenue collection target was
exceeded and shall be released on the same fiscal year.
Revenue targets shall refer to the original estimated revenue
collection expected of the BIR and the BOC for a given fiscal year
as stated in the Budget of Expenditures and Sources of Financing
(BESF) submitted by the President to Congress. The BIR and the
BOC shall submit to the DBCC the distribution of the agencies revenue
targets as allocated among its revenue districts in the case of the BIR,
and the collection districts in the case of the BOC.
xxx xxx xxx (emphasis supplied)
Revenue targets are based on the original estimated revenue collection expected
respectively of the BIR and the BOC for a given fiscal year as approved by the
DBCC and stated in the BESF submitted by the President to Congress.30 Thus,
the determination of revenue targets does not rest solely on the President as it
also undergoes the scrutiny of the DBCC.
On the other hand, Section 7 specifies the limits of the Boards authority and
identifies the conditions under which officials and employees whose revenue
collection falls short of the target by at least 7.5% may be removed from the
service:
SEC. 7. Powers and Functions of the Board. The Board in the agency
shall have the following powers and functions:
xxx xxx xxx
(b) To set the criteria and procedures for removing from service
officials and employees whose revenue collection falls short of the
target by at least seven and a half percent (7.5%), with due
consideration of all relevant factors affecting the level of
collection as provided in the rules and regulations promulgated under
this Act, subject to civil service laws, rules and regulations and
compliance with substantive and procedural due process: Provided,
That the following exemptions shall apply:
1. Where the district or area of responsibility is newly-created,
not exceeding two years in operation, as has no historical
record of collection performance that can be used as basis for
evaluation; and
2. Where the revenue or customs official or employee is a
recent transferee in the middle of the period under consideration
unless the transfer was due to nonperformance of revenue
targets or potential nonperformance of revenue targets:
Provided, however, That when the district or area of
responsibility covered by revenue or customs officials or
employees has suffered from economic difficulties brought
about by natural calamities orforce majeure or economic causes
as may be determined by the Board, termination shall be
considered only after careful and proper review by the Board.
(c) To terminate personnel in accordance with the criteria adopted in the
preceding paragraph: Provided, That such decision shall be immediately
executory: Provided, further, That the application of the criteria for the
separation of an official or employee from service under this Act
shall be without prejudice to the application of other relevant laws
on accountability of public officers and employees, such as the
Code of Conduct and Ethical Standards of Public Officers and
Employees and the Anti-Graft and Corrupt Practices Act;
xxx xxx xxx (emphasis supplied)
Clearly, RA 9335 in no way violates the security of tenure of officials and
employees of the BIR and the BOC. The guarantee of security of tenure only
means that an employee cannot be dismissed from the service for causes other
4
than those provided by law and only after due process is accorded the
employee.31 In the case of RA 9335, it lays down a reasonable yardstick for
removal (when the revenue collection falls short of the target by at least 7.5%)
with due consideration of all relevant factors affecting the level of collection. This
standard is analogous to inefficiency and incompetence in the performance of
official duties, a ground for disciplinary action under civil service laws. 32 The
action for removal is also subject to civil service laws, rules and regulations and
compliance with substantive and procedural due process.
At any rate, this Court has recognized the following as sufficient standards:
"public interest," "justice and equity," "public convenience and welfare" and
"simplicity, economy and welfare."33 In this case, the declared policy of
optimization of the revenue-generation capability and collection of the BIR and
the BOC is infused with public interest.
Separation Of Powers
Section 12 of RA 9335 provides:
SEC. 12. Joint Congressional Oversight Committee. There is hereby
created a Joint Congressional Oversight Committee composed of seven
Members from the Senate and seven Members from the House of
Representatives. The Members from the Senate shall be appointed by
the Senate President, with at least two senators representing the
minority. The Members from the House of Representatives shall be
appointed by the Speaker with at least two members representing the
minority. After the Oversight Committee will have approved the
implementing rules and regulations (IRR) it shall thereafter
become functus officio and therefore cease to exist.
The Joint Congressional Oversight Committee in RA 9335 was created for the
purpose of approving the implementing rules and regulations (IRR) formulated by
the DOF, DBM, NEDA, BIR, BOC and CSC. On May 22, 2006, it approved the
said IRR. From then on, it became functus officio and ceased to exist. Hence, the
issue of its alleged encroachment on the executive function of implementing and
enforcing the law may be considered moot and academic.
This notwithstanding, this might be as good a time as any for the Court to
confront the issue of the constitutionality of the Joint Congressional Oversight
Committee created under RA 9335 (or other similar laws for that matter).
The scholarly discourse of Mr. Justice (now Chief Justice) Puno on the concept
of congressional oversight in Macalintal v. Commission on Elections34 is
illuminating:
Concept and bases of congressional oversight
Broadly defined, the power of oversight embraces all activities
undertaken by Congress to enhance its understanding of and
influence over the implementation of legislation it has enacted.
Clearly, oversight concerns post-enactment measures undertaken
by Congress: (a) to monitor bureaucratic compliance with program
objectives, (b) to determine whether agencies are properly
administered, (c) to eliminate executive waste and dishonesty, (d)
to prevent executive usurpation of legislative authority, and (d) to
assess executive conformity with the congressional perception of
public interest.
The power of oversight has been held to be intrinsic in the grant of
legislative power itself and integral to the checks and balances inherent
in a democratic system of government. x x x x x x x x x
Over the years, Congress has invoked its oversight power with
increased frequency to check the perceived "exponential accumulation
of power" by the executive branch. By the beginning of the 20th century,
Congress has delegated an enormous amount of legislative authority to
the executive branch and the administrative agencies. Congress, thus,
uses its oversight power to make sure that the administrative agencies
perform their functions within the authority delegated to them. x x x x x x
xxx
Categories of congressional oversight functions
The acts done by Congress purportedly in the exercise of its oversight
powers may be divided into three categories,
namely: scrutiny, investigation and supervision.
a. Scrutiny
Congressional scrutiny implies a lesser intensity and continuity
of attention to administrative operations. Its primary purpose is
to determine economy and efficiency of the operation of
government activities. In the exercise of legislative scrutiny,
Congress may request information and report from the other
branches of government. It can give recommendations or pass
resolutions for consideration of the agency involved.
xxx xxx xxx
b. Congressional investigation
While congressional scrutiny is regarded as a passive process
of looking at the facts that are readily available, congressional
investigation involves a more intense digging of facts. The
power of Congress to conduct investigation is recognized by the
1987 Constitution under section 21, Article VI,
xxx xxx xxx
c. Legislative supervision
The third and most encompassing form by which Congress exercises its
oversight power is thru legislative supervision. "Supervision" connotes a
continuing and informed awareness on the part of a congressional
committee regarding executive operations in a given administrative area.
While both congressional scrutiny and investigation involve inquiry
into past executive branch actions in order to influence future executive
branch performance, congressional supervision allows Congress to
scrutinize the exercise of delegated law-making authority, and permits
Congress to retain part of that delegated authority.
Congress exercises supervision over the executive agencies through its
veto power. It typically utilizes veto provisions when granting the
President or an executive agency the power to promulgate regulations
5
with the force of law. These provisions require the President or an
agency to present the proposed regulations to Congress, which retains a
"right" to approve or disapprove any regulation before it takes
effect. Such legislative veto provisions usually provide that a proposed
regulation will become a law after the expiration of a certain period of
time, only if Congress does not affirmatively disapprove of the regulation
in the meantime. Less frequently, the statute provides that a proposed
regulation will become law if Congress affirmatively approves it.
Supporters of legislative veto stress that it is necessary to maintain the
balance of power between the legislative and the executive branches of
government as it offers lawmakers a way to delegate vast power to the
executive branch or to independent agencies while retaining the option
to cancel particular exercise of such power without having to pass new
legislation or to repeal existing law. They contend that this arrangement
promotes democratic accountability as it provides legislative check on
the activities of unelected administrative agencies. One proponent thus
explains:
It is too late to debate the merits of this delegation policy: the
policy is too deeply embedded in our law and practice. It
suffices to say that the complexities of modern government
have often led Congress-whether by actual or perceived
necessity- to legislate by declaring broad policy goals and
general statutory standards, leaving the choice of policy options
to the discretion of an executive officer. Congress articulates
legislative aims, but leaves their implementation to the judgment
of parties who may or may not have participated in or agreed
with the development of those aims. Consequently, absent
safeguards, in many instances the reverse of our constitutional
scheme could be effected: Congress proposes, the Executive
disposes. One safeguard, of course, is the legislative power to
enact new legislation or to change existing law. But without
some means of overseeing post enactment activities of the
executive branch, Congress would be unable to determine
whether its policies have been implemented in accordance with
legislative intent and thus whether legislative intervention is
appropriate.
Its opponents, however, criticize the legislative veto as undue
encroachment upon the executive prerogatives. They urge that any
post-enactment measures undertaken by the legislative branch
should be limited to scrutiny and investigation; any measure
beyond that would undermine the separation of powers guaranteed
by the Constitution. They contend that legislative veto constitutes an
impermissible evasion of the Presidents veto authority and intrusion into
the powers vested in the executive or judicial branches of government.
Proponents counter that legislative veto enhances separation of powers
as it prevents the executive branch and independent agencies from
accumulating too much power. They submit that reporting requirements
and congressional committee investigations allow Congress to scrutinize
only the exercise of delegated law-making authority. They do not allow
Congress to review executive proposals before they take effect and they
do not afford the opportunity for ongoing and binding expressions of
congressional intent. In contrast, legislative veto permits Congress to
participate prospectively in the approval or disapproval of "subordinate
law" or those enacted by the executive branch pursuant to a delegation
of authority by Congress. They further argue that legislative veto "is a
necessary response by Congress to the accretion of policy control by
forces outside its chambers." In an era of delegated authority, they point
out that legislative veto "is the most efficient means Congress has yet
devised to retain control over the evolution and implementation of its
policy as declared by statute."
In Immigration and Naturalization Service v. Chadha, the U.S. Supreme
Court resolved the validity of legislative veto provisions. The case
arose from the order of the immigration judge suspending the
deportation of Chadha pursuant to 244(c)(1) of the Immigration and
Nationality Act. The United States House of Representatives passed a
resolution vetoing the suspension pursuant to 244(c)(2) authorizing
either House of Congress, by resolution, to invalidate the decision of the
executive branch to allow a particular deportable alien to remain in the
United States. The immigration judge reopened the deportation
proceedings to implement the House order and the alien was ordered
deported. The Board of Immigration Appeals dismissed the aliens
appeal, holding that it had no power to declare unconstitutional an act of
Congress. The United States Court of Appeals for Ninth Circuit held that
the House was without constitutional authority to order the aliens
deportation and that 244(c)(2) violated the constitutional doctrine on
separation of powers.
On appeal, the U.S. Supreme Court declared 244(c)(2)
unconstitutional. But the Court shied away from the issue of
separation of powers and instead held that the provision violates the
presentment clause and bicameralism. It held that the one-house veto
was essentially legislative in purpose and effect. As such, it is subject to
the procedures set out in Article I of the Constitution requiring the
passage by a majority of both Houses and presentment to the President.
xxxxxxxxx
Two weeks after the Chadha decision, the Court upheld, in
memorandum decision, two lower court decisions invalidating the
legislative veto provisions in the Natural Gas Policy Act of 1978 and the
Federal Trade Commission Improvement Act of 1980. Following this
precedence, lower courts invalidated statutes containing legislative veto
provisions although some of these provisions required the approval of
both Houses of Congress and thus met the bicameralism requirement of
6
 Article I. Indeed, some of these veto provisions were not even
exercised.35(emphasis supplied)
In Macalintal, given the concept and configuration of the power of congressional
oversight and considering the nature and powers of a constitutional body like the
Commission on Elections, the Court struck down the provision in RA 9189 (The
Overseas Absentee Voting Act of 2003) creating a Joint Congressional
Committee. The committee was tasked not only to monitor and evaluate the
implementation of the said law but also to review, revise, amend and approve the
IRR promulgated by the Commission on Elections. The Court held that these
functions infringed on the constitutional independence of the Commission on
Elections.36
With this backdrop, it is clear that congressional oversight is not
unconstitutional per se, meaning, it neither necessarily constitutes an
encroachment on the executive power to implement laws nor undermines the
constitutional separation of powers. Rather, it is integral to the checks and
balances inherent in a democratic system of government. It may in fact even
enhance the separation of powers as it prevents the over-accumulation of power
in the executive branch.
However, to forestall the danger of congressional encroachment "beyond the
legislative sphere," the Constitution imposes two basic and related constraints on
Congress.37 It may not vest itself, any of its committees or its members with
either executive or judicial power.38 And, when it exercises its legislative power, it
must follow the "single, finely wrought and exhaustively considered, procedures"
specified under the Constitution,39 including the procedure for enactment of laws
and presentment.
Thus, any post-enactment congressional measure such as this should be limited
to scrutiny and investigation. In particular, congressional oversight must be
confined to the following:
(1) scrutiny based primarily on Congress power of appropriation and the
budget hearings conducted in connection with it, its power to ask heads
of departments to appear before and be heard by either of its Houses on
any matter pertaining to their departments and its power of
confirmation40 and
(2) investigation and monitoring41 of the implementation of laws pursuant
to the power of Congress to conduct inquiries in aid of legislation.42
Any action or step beyond that will undermine the separation of powers
guaranteed by the Constitution. Legislative vetoes fall in this class.
Legislative veto is a statutory provision requiring the President or an
administrative agency to present the proposed implementing rules and
regulations of a law to Congress which, by itself or through a committee formed
by it, retains a "right" or "power" to approve or disapprove such regulations
before they take effect. As such, a legislative veto in the form of a congressional
oversight committee is in the form of an inward-turning delegation designed to
attach a congressional leash (other than through scrutiny and investigation) to an
agency to which Congress has by law initially delegated broad powers. 43 It
radically changes the design or structure of the Constitutions diagram of power
as it entrusts to Congress a direct role in enforcing, applying or implementing its
own laws.44
Congress has two options when enacting legislation to define national policy
within the broad horizons of its legislative competence.45 It can itself formulate
the details or it can assign to the executive branch the responsibility for making
necessary managerial decisions in conformity with those standards. 46 In the latter
case, the law must be complete in all its essential terms and conditions when it
leaves the hands of the legislature.47 Thus, what is left for the executive branch
or the concerned administrative agency when it formulates rules and regulations
implementing the law is to fill up details (supplementary rule-making) or ascertain
facts necessary to bring the law into actual operation (contingent rule-making).48
Administrative regulations enacted by administrative agencies to implement and
interpret the law which they are entrusted to enforce have the force of law and
are entitled to respect.49 Such rules and regulations partake of the nature of a
statute50 and are just as binding as if they have been written in the statute itself.
As such, they have the force and effect of law and enjoy the presumption of
constitutionality and legality until they are set aside with finality in an appropriate
case by a competent court.51 Congress, in the guise of assuming the role of an
overseer, may not pass upon their legality by subjecting them to its stamp of
approval without disturbing the calculated balance of powers established by the
Constitution. In exercising discretion to approve or disapprove the IRR based on
a determination of whether or not they conformed with the provisions of RA 9335,
Congress arrogated judicial power unto itself, a power exclusively vested in this
Court by the Constitution.
Considered Opinion of
Mr. Justice Dante O. Tinga
Moreover, the requirement that the implementing rules of a law be subjected to
approval by Congress as a condition for their effectivity violates the cardinal
constitutional principles of bicameralism and the rule on presentment.52
Section 1, Article VI of the Constitution states:
Section 1. The legislative power shall be vested in the Congress of
the Philippines which shall consist of a Senate and a House of
Representatives, except to the extent reserved to the people by the
provision on initiative and referendum. (emphasis supplied)
Legislative power (or the power to propose, enact, amend and repeal laws)53 is
vested in Congress which consists of two chambers, the Senate and the House
of Representatives. A valid exercise of legislative power requires the act of both
chambers. Corrollarily, it can be exercised neither solely by one of the two
chambers nor by a committee of either or both chambers. Thus, assuming the
validity of a legislative veto, both a single-chamber legislative veto and a
congressional committee legislative veto are invalid.
Additionally, Section 27(1), Article VI of the Constitution provides:
Section 27. (1) Every bill passed by the Congress shall, before it
becomes a law, be presented to the President. If he approves the
same, he shall sign it, otherwise, he shall veto it and return the same
with his objections to the House where it originated, which shall enter the
7
 objections at large in its Journal and proceed to reconsider it. If, after
such reconsideration, two-thirds of all the Members of such House shall
agree to pass the bill, it shall be sent, together with the objections, to the
other House by which it shall likewise be reconsidered, and if approved
by two-thirds of all the Members of that House, it shall become a law. In
all such cases, the votes of each House shall be determined
by yeas or nays, and the names of the members voting for or against
shall be entered in its Journal. The President shall communicate his veto
of any bill to the House where it originated within thirty days after the
date of receipt thereof; otherwise, it shall become a law as if he had
signed it. (emphasis supplied)
Every bill passed by Congress must be presented to the President for approval
or veto. In the absence of presentment to the President, no bill passed by
Congress can become a law. In this sense, law-making under the Constitution is
a joint act of the Legislature and of the Executive. Assuming that legislative veto
is a valid legislative act with the force of law, it cannot take effect without such
presentment even if approved by both chambers of Congress.
In sum, two steps are required before a bill becomes a law. First, it must be
approved by both Houses of Congress.54 Second, it must be presented to and
approved by the President.55 As summarized by Justice Isagani Cruz56 and Fr.
Joaquin G. Bernas, S.J.57, the following is the procedure for the approval of bills:
A bill is introduced by any member of the House of Representatives or
the Senate except for some measures that must originate only in the
former chamber.
The first reading involves only a reading of the number and title of the
measure and its referral by the Senate President or the Speaker to the
proper committee for study.
The bill may be "killed" in the committee or it may be recommended for
approval, with or without amendments, sometimes after public hearings
are first held thereon. If there are other bills of the same nature or
purpose, they may all be consolidated into one bill under common
authorship or as a committee bill.
Once reported out, the bill shall be calendared for second reading. It is
at this stage that the bill is read in its entirety, scrutinized, debated upon
and amended when desired. The second reading is the most important
stage in the passage of a bill.
The bill as approved on second reading is printed in its final form and
copies thereof are distributed at least three days before the third
reading. On the third reading, the members merely register their votes
and explain them if they are allowed by the rules. No further debate is
allowed.
Once the bill passes third reading, it is sent to the other chamber, where
it will also undergo the three readings. If there are differences between
the versions approved by the two chambers, a conference
committee58 representing both Houses will draft a compromise measure
that if ratified by the Senate and the House of Representatives will then
be submitted to the President for his consideration.
The bill is enrolled when printed as finally approved by the Congress,
thereafter authenticated with the signatures of the Senate President, the
Speaker, and the Secretaries of their respective chambers59
The Presidents role in law-making.
The final step is submission to the President for approval. Once
approved, it takes effect as law after the required publication.60
Where Congress delegates the formulation of rules to implement the law it has
enacted pursuant to sufficient standards established in the said law, the law must
be complete in all its essential terms and conditions when it leaves the hands of
the legislature. And it may be deemed to have left the hands of the legislature
when it becomes effective because it is only upon effectivity of the statute that
legal rights and obligations become available to those entitled by the language of
the statute. Subject to the indispensable requisite of publication under the due
process clause,61 the determination as to when a law takes effect is wholly the
prerogative of Congress.62 As such, it is only upon its effectivity that a law may be
executed and the executive branch acquires the duties and powers to execute
the said law. Before that point, the role of the executive branch, particularly of the
President, is limited to approving or vetoing the law.63
From the moment the law becomes effective, any provision of law that empowers
Congress or any of its members to play any role in the implementation or
enforcement of the law violates the principle of separation of powers and is thus
unconstitutional. Under this principle, a provision that requires Congress or its
members to approve the implementing rules of a law after it has already taken
effect shall be unconstitutional, as is a provision that allows Congress or its
members to overturn any directive or ruling made by the members of the
executive branch charged with the implementation of the law.
Following this rationale, Section 12 of RA 9335 should be struck down as
unconstitutional. While there may be similar provisions of other laws that may be
invalidated for failure to pass this standard, the Court refrains from invalidating
them wholesale but will do so at the proper time when an appropriate case
assailing those provisions is brought before us.64
The next question to be resolved is: what is the effect of the unconstitutionality of
Section 12 of RA 9335 on the other provisions of the law? Will it render the entire
law unconstitutional? No.
Section 13 of RA 9335 provides:
SEC. 13. Separability Clause. If any provision of this Act is declared
invalid by a competent court, the remainder of this Act or any provision
not affected by such declaration of invalidity shall remain in force and
effect.
In Tatad v. Secretary of the Department of Energy,65 the Court laid down the
following rules:
The general rule is that where part of a statute is void as repugnant to
the Constitution, while another part is valid, the valid portion, if separable
from the invalid, may stand and be enforced. The presence of a
8
 separability clause in a statute creates the presumption that the
legislature intended separability, rather than complete nullity of the
statute. To justify this result, the valid portion must be so far independent
of the invalid portion that it is fair to presume that the legislature would
have enacted it by itself if it had supposed that it could not
constitutionally enact the other. Enough must remain to make a
complete, intelligible and valid statute, which carries out the legislative
intent. x x x
The exception to the general rule is that when the parts of a statute are
so mutually dependent and connected, as conditions, considerations,
inducements, or compensations for each other, as to warrant a belief
that the legislature intended them as a whole, the nullity of one part will
vitiate the rest. In making the parts of the statute dependent, conditional,
or connected with one another, the legislature intended the statute to be
carried out as a whole and would not have enacted it if one part is void,
in which case if some parts are unconstitutional, all the other provisions
thus dependent, conditional, or connected must fall with them.
The separability clause of RA 9335 reveals the intention of the legislature to
isolate and detach any invalid provision from the other provisions so that the
latter may continue in force and effect. The valid portions can stand
independently of the invalid section. Without Section 12, the remaining provisions
still constitute a complete, intelligible and valid law which carries out the
legislative intent to optimize the revenue-generation capability and collection of
the BIR and the BOC by providing for a system of rewards and sanctions through
the Rewards and Incentives Fund and a Revenue Performance Evaluation
Board.
To be effective, administrative rules and regulations must be published in full if
their purpose is to enforce or implement existing law pursuant to a valid
delegation. The IRR of RA 9335 were published on May 30, 2006 in two
newspapers of general circulation66 and became effective 15 days
thereafter.67 Until and unless the contrary is shown, the IRR are presumed valid
and effective even without the approval of the Joint Congressional Oversight
Committee.
WHEREFORE, the petition is hereby PARTIALLY GRANTED. Section 12 of RA
9335 creating a Joint Congressional Oversight Committee to approve the
implementing rules and regulations of the law is
declared UNCONSTITUTIONAL and therefore NULL and VOID. The
constitutionality of the remaining provisions of RA 9335 is UPHELD. Pursuant to
Section 13 of RA 9335, the rest of the provisions remain in force and effect.
SO ORDERED.

9
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22074 April 30, 1965
THE PHILIPPINE GUARANTY CO., INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX
APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
reinsurance contracts, on various dates, with foreign insurance companies not
doing business in the Philippines namely: Imperio Compaia de Seguros, La
Union y El Fenix Espaol, Overseas Assurance Corp., Ltd., Socieded Anonima
de Reaseguros Alianza, Tokio Marino & Fire Insurance Co., Ltd., Union
Assurance Society Ltd., Swiss Reinsurance Company and Tariff Reinsurance
Limited. Philippine Guaranty Co., Inc., thereby agreed to cede to the foreign
reinsurers a portion of the premiums on insurance it has originally underwritten in
the Philippines, in consideration for the assumption by the latter of liability on an
equivalent portion of the risks insured. Said reinsurrance contracts were signed
by Philippine Guaranty Co., Inc. in Manila and by the foreign reinsurers outside
the Philippines, except the contract with Swiss Reinsurance Company, which
was signed by both parties in Switzerland.
The reinsurance contracts made the commencement of the reinsurers' liability
simultaneous with that of Philippine Guaranty Co., Inc. under the original
insurance. Philippine Guaranty Co., Inc. was required to keep a register in Manila
where the risks ceded to the foreign reinsurers where entered, and entry therein
was binding upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid for by the
foreign reinsurers. The foreign reinsurers further agreed, in consideration for
managing or administering their affairs in the Philippines, to compensate the
Philippine Guaranty Co., Inc., in an amount equal to 5% of the reinsurance
premiums. Conflicts and/or differences between the parties under the
reinsurance contracts were to be arbitrated in Manila. Philippine Guaranty Co.,
Inc. and Swiss Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc.
ceded to the foreign reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . . P842,466.71
1954 . . . . . . . . . . . . . . . . . . . . . 721,471.85
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross
income when it file its income tax returns for 1953 and 1954. Furthermore, it did
not withhold or pay tax on them. Consequently, per letter dated April 13, 1959,
the Commissioner of Internal Revenue assessed against Philippine Guaranty
Co., Inc. withholding tax on the ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . . P768,580.00
Withholding tax due thereon at 24% . . . . . . . . P184,459.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . 46,114.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P230,673.00
==========
1954
Gross premium per investigation . . . . . . . . . . P780.880.68
Withholding tax due thereon at 24% . . . . . . . . P184,411.00
25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . . P184,411.00
Compromise for non-filing of withholding
100.00
income tax return . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL AMOUNT DUE & COLLECTIBLE . . . . P234,364.00
==========
Philippine Guaranty Co., Inc., protested the assessment on the ground that
reinsurance premiums ceded to foreign reinsurers not doing business in the
Philippines are not subject to withholding tax. Its protest was denied and it
appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this
dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the respective sums of P202,192.00
and P173,153.00 or the total sum of P375,345.00 as withholding income
taxes for the years 1953 and 1954, plus the statutory delinquency
penalties thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of the
Commissioner of Internal Revenue's assessment for withholding tax on the
reinsurance premiums ceded in 1953 and 1954 to the foreign reinsurers.
10
Petitioner maintain that the reinsurance premiums in question did not constitute
income from sources within the Philippines because the foreign reinsurers did not
engage in business in the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against
loses arising from the original insurances in the Philippines were performed in the
Philippines. The liability of the foreign reinsurers commenced simultaneously with
the liability of Philippine Guaranty Co., Inc. under the original insurances.
Philippine Guaranty Co., Inc. kept in Manila a register of the risks ceded to the
foreign reinsurers. Entries made in such register bound the foreign resinsurers,
localizing in the Philippines the actual cession of the risks and premiums and
assumption of the reinsurance undertaking by the foreign reinsurers. Taxes on
premiums imposed by Section 259 of the Tax Code for the privilege of doing
insurance business in the Philippines were payable by the foreign reinsurers
when the same were not recoverable from the original assured. The foreign
reinsurers paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the
ceded premiums, in consideration for administration and management by the
latter of the affairs of the former in the Philippines in regard to their reinsurance
activities here. Disputes and differences between the parties were subject to
arbitration in the City of Manila. All the reinsurance contracts, except that with
Swiss Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in
the Philippines and later signed by the foreign reinsurers abroad. Although the
contract between Philippine Guaranty Co., Inc. and Swiss Reinsurance Company
was signed by both parties in Switzerland, the same specifically provided that its
provision shall be construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to Philippine
law.
Section 24 of the Tax Code subjects foreign corporations to tax on their income
from sources within the Philippines. The word "sources" has been interpreted as
the activity, property or service giving rise to the income.1 The reinsurance
premiums were income created from the undertaking of the foreign reinsurance
companies to reinsure Philippine Guaranty Co., Inc., against liability for loss
under original insurances. Such undertaking, as explained above, took place in
the Philippines. These insurance premiums, therefore, came from sources within
the Philippines and, hence, are subject to corporate income tax.
The foreign insurers' place of business should not be confused with their place of
activity. Business should not be continuity and progression of transactions 2 while
activity may consist of only a single transaction. An activity may occur outside the
place of business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting its income to
tax. It suffices that the activity creating the income is performed or done in the
Philippines. What is controlling, therefore, is not the place of business but the
place ofactivity that created an income.
Petitioner further contends that the reinsurance premiums are not income from
sources within the Philippines because they are not specifically mentioned in
Section 37 of the Tax Code. Section 37 is not an all-inclusive enumeration, for it
merely directs that the kinds of income mentioned therein should be treated as
income from sources within the Philippines but it does not require that other kinds
of income should not be considered likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is a power emanating from
necessity. It is a necessary burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an aggression, a navy to defend its
shores from invasion, a corps of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to
provide. Considering that the reinsurance premiums in question were afforded
protection by the government and the recipient foreign reinsurers exercised rights
and privileges guaranteed by our laws, such reinsurance premiums and
reinsurers should share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the rulings of the
Commissioner of Internal Revenue requiring no withholding of the tax due on the
reinsurance premiums in question relieved it of the duty to pay the corresponding
withholding tax thereon. This defense of petitioner may free if from the payment
of surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to pay such
withholding tax The Government is not estopped from collecting taxes by the
mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines are subject to withholding
tax under Section 53 and 54 of the Tax Code, suffice it to state that this question
has already been answered in the affirmative in Alexander Howden & Co., Ltd.
vs. Collector of Internal Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be computed from the
amount actually remitted to the foreign reinsurers instead of from the total
amount ceded. And since it did not remit any amount to its foreign insurers in
1953 and 1954, no withholding tax was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In the case of
foreign corporations subject to taxation under this Title not engaged in
trade or business within the Philippines and not having any office or
place of business therein, there shall be deducted and withheld at the
source in the same manner and upon the same items as is provided in
Section fifty-three a tax equal to twenty-four per centum thereof, and
such tax shall be returned and paid in the same manner and subject to
the same conditions as provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and general
copartnerships (compaias colectivas), in what ever capacity acting,
including lessees or mortgagors of real or personal property, trustees
acting in any trust capacity, executors, administrators, receivers,
conservators, fiduciaries, employers, and all officers and employees of
the Government of the Philippines having the control, receipt, custody,
11
 disposal, or payment of interest, dividends, rents, salaries, wages,
premiums, annuities, compensation, remunerations, emoluments, or
other fixed or determinable annual or periodical gains, profits, and
income of any nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or place of
business therein, shall (except in the case provided for in subsection [a]
of this section) deduct and withhold from such annual or periodical
gains, profits, and income a tax equal to twelve per
centum thereof: Provided That no deductions or withholding shall be
required in the case of dividends paid by a foreign corporation unless (1)
such corporation is engaged in trade or business within the Philippines
or has an office or place of business therein, and (2) more than eighty-
five per centum of the gross income of such corporation for the three-
year period ending with the close of its taxable year preceding the
declaration of such dividends (or for such part of such period as the
corporation has been in existence)was derived from sources within the
Philippines as determined under the provisions of section thirty-
seven:Provided, further, That the Collector of Internal Revenue may
authorize such tax to be deducted and withheld from the interest upon
any securities the owners of which are not known to the withholding
agent.
The above-quoted provisions allow no deduction from the income therein
enumerated in determining the amount to be withheld. According, in computing
the withholding tax due on the reinsurance premium in question, no deduction
shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine Guaranty
Co., Inc. is hereby ordered to pay to the Commissioner of Internal Revenue the
sums of P202,192.00 and P173,153.00, or a total amount of P375,345.00, as
withholding tax for the years 1953 and 1954, respectively. If the amount of
P375,345.00 is not paid within 30 days from the date this judgement becomes
final, there shall be collected a surcharged of 5% on the amount unpaid, plus
interest at the rate of 1% a month from the date of delinquency to the date of
payment, provided that the maximum amount that may be collected as interest
shall not exceed the amount corresponding to a period of three (3) years. With
costs againsts petitioner.

12
EN BANC
[G.R. No. L-9408. October 31, 1956.]
EMILIO Y. HILADO, Petitioner, vs. THE COLLECTOR OF INTERNAL
REVENUE and THE COURT OF TAX APPEALS, Respondents.
DECISION
BAUTISTA ANGELO, J.:
On March 31, 1952, Petitioner filed his income tax return for 1951 with the
treasurer of Bacolod City wherein he claimed, among other things, the amount of
P12,837.65 as a deductible item from his gross income pursuant to General
Circular No. V-123 issued by the Collector of Internal Revenue. This circular was
issued pursuant to certain rules laid down by the Secretary of Finance On the
basis of said return, an assessment notice demanding the payment of P9,419
was sent toPetitioner, who paid the tax in monthly installments, the last payment
having been made on January 2, 1953.
Meanwhile, on August 30, 1952, the Secretary of Finance, through the Collector
of Internal Revenue, issued General Circular No. V-139 which not only revoked
and declared void his general Circular No. V- 123 but laid down the rule that
losses of property which occurred during the period of World War II from fires,
storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are
deductible in the year of actual loss or destruction of said property. As a
consequence, the amount of P12,837.65 was disallowed as a deduction from the
gross income ofPetitioner for 1951 and the Collector of Internal Revenue
demanded from him the payment of the sum of P3,546 as deficiency income tax
for said year. When the petition for reconsideration filed by Petitioner was denied,
he filed a petition for review with the Court of Tax Appeals. In due time, this court
rendered decision affirming the assessment made by Respondent Collector of
Internal Revenue. This is an appeal from said decision.
It appears that Petitioner claimed in his 1951 income tax return the deduction of
the sum of P12,837.65 as a loss consisting in a portion of his war damage claim
which had been duly approved by the Philippine War Damage Commission under
the Philippine Rehabilitation Act of 1946 but which was not paid and never has
been paid pursuant to a notice served upon him by said Commission that said
part of his claim will not be paid until the United States Congress should make
further appropriation. He claims that said amount of P12,837.65 represents a
business asset within the meaning of said Act which he is entitled to deduct as
a loss in his return for 1951. This claim is untenable.
To begin with, assuming that said a mount represents a portion of the 75% of his
war damage claim which was not paid, the same would not be deductible as a
loss in 1951 because, according to Petitioner, the last installment he received
from the War Damage Commission, together with the notice that no further
payment would be made on his claim, was in 1950. In the circumstance, said
amount would at most be a proper deduction from his 1950 gross income. In the
second place, said amount cannot be considered as a business asset which
can be deducted as a loss in contemplation of law because its collection is not
enforceable as a matter of right, but is dependent merely upon the generosity
and magnanimity of the U. S. government. Note that, as of the end of 1945, there
was absolutely no law under which Petitioner could claim compensation for the
destruction of his properties during the battle for the liberation of the Philippines.
And under the Philippine Rehabilitation Act of 1946, the payments of claims by
the War Damage Commission merely depended upon its discretion to be
exercised in the manner it may see fit, but the non-payment of which cannot give
rise to any enforceable right, for, under said Act, All findings of the Commission
concerning the amount of loss or damage sustained, the cause of such loss or
damage, the persons to whom compensation pursuant to this title is payable, and
the value of the property lost or damaged, shall be conclusive and shall not be
reviewable by any court. (section 113).
It is true that under the authority of section 338 of the National Internal Revenue
Code the Secretary of Finance, in the exercise of his administrative powers,
caused the issuance of General Circular No. V-123 as an implementation or
interpretative regulation of section 30 of the same Code, under which the amount
of P12,837.65 was allowed to be deducted in the year the last installment was
received with notice that no further payment would be made until the United
States Congress makes further appropriation therefor, but such circular was
found later to be wrong and was revoked. Thus, when doubts arose as to the
soundness or validity of such circular, the Secretary of Finance sought the advice
of the Secretary of Justice who, accordingly, gave his opinion the pertinent
portion of which reads as follows:chanroblesvirtuallawlibrary
Yet it might be argued that war losses were not included as deductions for the
year when they were sustained because the taxpayers had prospects that losses
would be compensated for by the United States Government; chan
roblesvirtualawlibrarythat since only uncompensated losses are deductible, they
had to wait until after the determination by the Philippine War Damage
Commission as to the compensability in part or in whole of their war losses so
that they could exclude from the deductions those compensated for by the said
Commission; chan roblesvirtualawlibraryand that, of necessity, such
determination could be complete only much later than in the year when the loss
was sustained. This contention falls to the ground when it is considered that the
Philippine Rehabilitation Act which authorized the payment by the United States
Government of war losses suffered by property owners in the Philippines was
passed only on August 30, 1946, long after the losses were sustained. It cannot
be said therefore, that the property owners had any conclusive assurance during
the years said losses were sustained, that the compensation was to be paid
therefor. Whatever assurance they could have had, could have been based only
on some information less reliable and less conclusive than the passage of the
Act itself. Hence, as diligent property owners, they should adopt the safest
alternative by considering such losses deductible during the year when they were
sustained.
In line with this opinion, the Secretary of Finance, through the Collector of
Internal Revenue, issued General Circular No. V-139 which not only revoked and
declared void his previous Circular No. V 123 but laid down the rule that
losses of property which occurred during the period of World War II from fires,
13
storms, shipwreck or other casualty, or from robbery, theft, or embezzlement are announced by his predecessor in 1924 was not binding upon him. It did not
deductible for income tax purposes in the year of actual destruction of said exempt the Petitioner from tax, This same point was decided in this way in
property. We can hardly argue against this opinion. Since we have already stated Stanford University Bookstore, 29 B. T. A., 1280; chan roblesvirtualawlibraryaffd.,
that the amount claimed does not represent a business asset that may be 83 Fed. (2d) 710. (Southern Maryland Agricultural Fair Association vs.
deducted as a loss in 1951, it is clear that the loss of the corresponding asset or Commissioner of Internal Revenue, 40 B. T. A., 549, 554).
property could only be deducted in the year it was actually sustained. This is in With regard to the contention that General Circular No. V-139 cannot be given
line with section 30 (d) of the National Internal Revenue Code which prescribes retroactive effect because that would affect and obliterate the vested right
that losses sustained are allowable as deduction only within the corresponding acquired by Petitioner under the previous circular, suffice it to say that General
taxable year. Circular No. V-123, having been issued on a wrong construction of the law,
Petitioners contention that during the last war and as a consequence of enemy cannot give rise to a vested right that can be invoked by a taxpayer. The reason
occupation in the Philippines there was no taxable year within the meaning of is obvious:chanroblesvirtuallawlibrary a vested right cannot spring from a wrong
our internal revenue laws because during that period they were unenforceable, is interpretation. This is too clear to require elaboration.
without merit. It is well known that our internal revenue laws are not political in It seems too clear for serious argument that an administrative officer cannot
nature and as such were continued in force during the period of enemy change a law enacted by Congress. A regulation that is merely an interpretation
occupation and in effect were actually enforced by the occupation government. of the statute when once determined to have been erroneous becomes nullity. An
As a matter of fact, income tax returns were filed during that period and income erroneous construction of the law by the Treasury Department or the collector of
tax payment were effected and considered valid and legal. Such tax laws are internal revenue does not preclude or estop the government from collecting a tax
deemed to be the laws of the occupied territory and not of the occupying enemy. which is legally due. (Ben Stocker, et al., 12 B. T. A., 1351.)
Furthermore, it is a legal maxim, that excepting that of a political nature, Law Art. 2254. No vested or acquired right can arise from acts or omissions which
once established continues until changed by some competent legislative power. are against the law or which infringe upon the rights of others. (Article 2254,
It is not changed merely by change of sovereignty. (Joseph H. Beale, Cases on New Civil Code.)
Conflict of Laws, III, Summary section 9, citing Commonwealth vs. Chapman, 13 Wherefore, the decision appealed from is affirmed Without pronouncement as to
Met., 68.) As the same author says, in his Treatise on the Conflict of Laws costs.
(Cambridge, 1916, section 131):chanroblesvirtuallawlibrary There can be no
break or interregnun in law. From the time the law comes into existence with the
first-felt corporateness of a primitive people it must last until the final
disappearance of human society. Once created, it persists until a change takes
place, and when changed it continues in such changed condition until the next
change and so forever. Conquest or colonization is impotent to bring law to an
end; chan roblesvirtualawlibraryinspite of change of constitution, the law
continues unchanged until the new sovereign by legislative act creates a
change. (Co Kim Chan vs. Valdes Tan Keh and Dizon, 75 Phil., 113, 142-143.)
It is likewise contended that the power to pass upon the validity of General
Circular No. V-123 is vested exclusively in our courts in view of the principle of
separation of powers and, therefore, the Secretary of Finance acted without valid
authority in revoking it and approving in lieu thereof General Circular No. V-139.
It cannot be denied, however, that the Secretary of Finance is vested with
authority to revoke, repeal or abrogate the acts or previous rulings of his
predecessor in office because the construction of a statute by those
administering it is not binding on their successors if thereafter the latter become
satisfied that a different construction should be given. [Association of Clerical
Employees vs. Brotherhood of Railways & Steamship Clerks, 85 F. (2d) 152, 109
A.L.R., 345.]
When the Commissioner determined in 1937 that the Petitioner was not exempt
and never had been, it was his duty to determine, assess and collect the tax due
for all years not barred by the statutes of limitation. The conclusion reached and

14
Republic of the Philippines 046-97 dated 3 February 1997, finding that the exchange is among those
SUPREME COURT contemplated under Section 34 (c) (2) of the old National Internal Revenue Code
Manila (NIRC)4 which provides that "(n)o gain or loss shall be recognized if property is
EN BANC transferred to a corporation by a person in exchange for a stock in such
G.R. No. 163653 July 19, 2011 corporation of which as a result of such exchange said person, alone or together
COMMISSIONER OF INTERNAL REVENUE, Petitioner, with others, not exceeding four (4) persons, gains control of said
vs. corporation."5 With the BIRs reiteration of the foregoing ruling upon the 10
FILINVEST DEVELOPMENT CORPORATION, Respondent. February 1997 request for clarification filed by FLI,6 the latter, together with FDC
x - - - - - - - - - - - - - - - - - - - - - - -x and FAI, complied with all the requirements imposed in the ruling.7
G.R. No. 167689 On various dates during the years 1996 and 1997, in the meantime, FDC also
COMMISSIONER OF INTERNAL REVENUE, Petitioner, extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar
vs. Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).8 Duly evidenced by
FILINVEST DEVELOPMENT CORPORATION, Respondent. instructional letters as well as cash and journal vouchers, said cash advances
DECISION amounted toP2,557,213,942.60 in 19969 and P3,360,889,677.48 in 1997.10 On
PEREZ, J.: 15 November 1996, FDC also entered into a Shareholders Agreement with Reco
Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint venture
of the 1997 Rules of Civil Procedure are the decisions rendered by the Court of company called Filinvest Asia Corporation (FAC), tasked to develop and manage
Appeals (CA) in the following cases: (a) Decision dated 16 December 2003 of the FDCs 50% ownership of its PBCom Office Tower Project (the Project). With their
then Special Fifth Division in CA-G.R. SP No. 72992;1 and, (b) Decision dated 26 equity participation in FAC respectively pegged at 60% and 40% in the
January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.2 Shareholders Agreement, FDC subscribed to P500.7 million worth of shares in
The Facts said joint venture company to RHPLs subscription worth P433.8 million. Having
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, paid its subscription by executing a Deed of Assignment transferring to FAC a
Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding portion of its rights and interest in the Project worth P500.7 million, FDC
company which also owned 67.42% of the outstanding shares of Filinvest Land, eventually reported a net loss of P190,695,061.00 in its Annual Income Tax
Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of Exchange Return for the taxable year 1996.11
with FLI whereby the former both transferred in favor of the latter parcels of land On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to
appraised at P4,306,777,000.00. In exchange for said parcels which were pay deficiency income and documentary stamp taxes, plus interests and
intended to facilitate development of medium-rise residential and commercial compromise penalties,12 covered by the following Assessment Notices, viz.: (a)
buildings, 463,094,301 shares of stock of FLI were issued to FDC and FAI. 3 As a Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in
result of the exchange, FLIs ownership structure was changed to the extent the sum ofP150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-
reflected in the following tabular prcis, viz.: 00020-2000 for deficiency documentary stamp taxes in the sum
of P10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000
Number and Percentage of Number of Number and Percentage of
for deficiency income taxes in the sum of P5,716,927.03 for 1997; and (d)
Stockholder Shares Held Prior to the Additional Shares Held After the
Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary
Exchange Shares Issued Exchange
stamp taxes in the sum of P5,796,699.40 for 1997.13 The foregoing deficiency
FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 taxes61.03%
were assessed on the taxable gain supposedly realized by FDC from the
Deed of Exchange it executed with FAI and FLI, on the dilution resulting from the
FAI 0 0 420,877,000 420,877,000 Shareholders
9.96% Agreement FDC executed with RHPL as well as the "arms-length"
interest rate and documentary stamp taxes imposable on the advances FDC
OTHERS 1,226,177,000 32.58% 0 1,226,177,000 extended
29.01%to its affiliates.14
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes in the sum of P1,477,494,638.23 for the
3,763,535,000 100% 463,094,301 4,226,629,000 year(100%)
1997.15 Covered by Assessment Notice No. SP-INC-97-0027-2000,16said
On 13 January 1997, FLI requested a ruling from the Bureau of Internal Revenue deficiency tax was also assessed on the taxable gain purportedly realized by FAI
(BIR) to the effect that no gain or loss should be recognized in the aforesaid from the Deed of Exchange it executed with FDC and FLI.17 On 26 January 2000
transfer of real properties. Acting on the request, the BIR issued Ruling No. S-34- or within the reglementary period of thirty (30) days from notice of the

15
assessment, both FDC and FAI filed their respective requests for
reconsideration/protest, on the ground that the deficiency income and
documentary stamp taxes assessed by the BIR were bereft of factual and legal
basis.18 Having submitted the relevant supporting documents pursuant to the 31
January 2000 directive from the BIR Appellate Division, FDC and FAI filed on 11
September 2000 a letter requesting an early resolution of their request for
reconsideration/protest on the ground that the 180 days prescribed for the
resolution thereof under Section 228 of the NIRC was going to expire on 20
September 2000.19
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to
resolve their request for reconsideration/protest within the aforesaid period, FDC
and FAI filed on 17 October 2000 a petition for review with the Court of Tax
Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed before said
court as CTA Case No. 6182, the petition alleged, among other matters, that as
previously opined in BIR Ruling No. S-34-046-97, no taxable gain should have
been assessed from the subject Deed of Exchange since FDC and FAI
collectively gained further control of FLI as a consequence of the exchange; that
correlative to the CIR's lack of authority to impute theoretical interests on the
cash advances FDC extended in favor of its affiliates, the rule is settled that
interests cannot be demanded in the absence of a stipulation to the effect; that
not being promissory notes or certificates of obligations, the instructional letters
as well as the cash and journal vouchers evidencing said cash advances were
not subject to documentary stamp taxes; and, that no income tax may be
imposed on the prospective gain from the supposed appreciation of FDC's
shareholdings in FAC. As a consequence, FDC and FAC both prayed that the
subject assessments for deficiency income and documentary stamp taxes for the
years 1996 and 1997 be cancelled and annulled.20
On 4 December 2000, the CIR filed its answer, claiming that the transfer of
property in question should not be considered tax free since, with the resultant
diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances FDC
extended to its affiliates were interest free despite the interest bearing loans it
obtained from banking institutions, the CIR invoked Section 43 of the old NIRC
which, as implemented by Revenue Regulations No. 2, Section 179 (b) and (c),
gave him "the power to allocate, distribute or apportion income or deductions
between or among such organizations, trades or business in order to prevent
evasion of taxes." The CIR justified the imposition of documentary stamp taxes
on the instructional letters as well as cash and journal vouchers for said cash
advances on the strength of Section 180 of the NIRC and Revenue Regulations
No. 9-94 which provide that loan transactions are subject to said tax irrespective
of whether or not they are evidenced by a formal agreement or by mere office
memo. The CIR also argued that FDC realized taxable gain arising from the
dilution of its shares in FAC as a result of its Shareholders' Agreement with
RHPL.21
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents
and Issues22 which was admitted in the 16 February 2001 resolution issued by
the CTA. With the further admission of the Formal Offer of Documentary
Evidence subsequently filed by FDC and FAI23 and the conclusion of the
testimony of Susana Macabelda anent the cash advances FDC extended in favor
of its affiliates,24 the CTA went on to render the Decision dated 10 September
2002 which, with the exception of the deficiency income tax on the interest
income FDC supposedly realized from the advances it extended in favor of its
affiliates, cancelled the rest of deficiency income and documentary stamp taxes
assessed against FDC and FAI for the years 1996 and 1997,25 thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition
partly meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000
imposing deficiency income tax on FDC for taxable year 1996, Assessment
Notice No. SP-DST-96-00020-2000 and SP-DST-97-00021-2000 imposing
deficiency documentary stamp tax on FDC for taxable years 1996 and 1997,
respectively and Assessment Notice No. SP-INC-97-0027-2000 imposing
deficiency income tax on FAI for the taxable year 1997 are hereby CANCELLED
and SET ASIDE. However, [FDC] is hereby ORDERED to PAY the amount
of P5,691,972.03 as deficiency income tax for taxable year 1997. In addition,
petitioner is also ORDERED to PAY 20% delinquency interest computed from
February 16, 2000 until full payment thereof pursuant to Section 249 (c) (3) of the
Tax Code.26
Finding that the collective increase of the equity participation of FDC and FAI in
FLI rendered the gain derived from the exchange tax-free, the CTA also ruled
that the increase in the value of FDC's shares in FAC did not result in economic
advantage in the absence of actual sale or conversion thereof. While likewise
finding that the documents evidencing the cash advances FDC extended to its
affiliates cannot be considered as loan agreements that are subject to
documentary stamp tax, the CTA enunciated, however, that the CIR was justified
in assessing undeclared interests on the same cash advances pursuant to his
authority under Section 43 of the NIRC in order to forestall tax evasion. For
persuasive effect, the CTA referred to the equivalent provision in the Internal
Revenue Code of the United States (IRC-US), i.e., Sec. 482, as implemented by
Section 1.482-2 of 1965-1969 Regulations of the Law of Federal Income
Taxation.27
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the
petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to
Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that the
cash advances it extended to its affiliates were interest-free in the absence of the
express stipulation on interest required under Article 1956 of the Civil Code, FDC
questioned the imposition of an arm's-length interest rate thereon on the ground,
among others, that the CIR's authority under Section 43 of the NIRC: (a) does
not include the power to impute imaginary interest on said transactions; (b) is
directed only against controlled taxpayers and not against mother or holding
corporations; and, (c) can only be invoked in cases of understatement of taxable
net income or evident tax evasion.28 Upholding FDC's position, the CA's then
Special Fifth Division rendered the herein assailed decision dated 16 December
2003,29 the decretal portion of which states:
16
WHEREFORE, premises considered, the instant petition is hereby GRANTED.
The assailed Decision dated September 10, 2002 rendered by the Court of Tax
Appeals in CTA Case No. 6182 directing petitioner Filinvest Development
Corporation to pay the amount of P5,691,972.03 representing deficiency income
tax on allegedly undeclared interest income for the taxable year 1997, plus 20%
delinquency interest computed from February 16, 2000 until full payment thereof
is REVERSED and SET ASIDE and, a new one entered annulling Assessment
Notice No. SP-INC-97-00019-2000 imposing deficiency income tax on petitioner
for taxable year 1997. No pronouncement as to costs.30
With the denial of its partial motion for reconsideration of the same 11 December
2002 resolution issued by the CTA,31 the CIR also filed the petition for review
docketed before the CA as CA-G.R. No. 74510. In essence, the CIR argued that
the CTA reversibly erred in cancelling the assessment notices: (a) for deficiency
income taxes on the exchange of property between FDC, FAI and FLI; (b) for
deficiency documentary stamp taxes on the documents evidencing FDC's cash
advances to its affiliates; and (c) for deficiency income tax on the gain FDC
purportedly realized from the increase of the value of its shareholdings in
FAC.32 The foregoing petition was, however, denied due course and dismissed
for lack of merit in the herein assailed decision dated 26 January
200533 rendered by the CA's then Fourteenth Division, upon the following
findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the
29 November 1996 Deed of Exchange resulted in the combined control
by FDC and FAI of more than 51% of the outstanding shares of FLI,
hence, no taxable gain can be recognized from the transaction under
Section 34 (c) (2) of the old NIRC;
2. The instructional letters as well as the cash and journal vouchers
evidencing the advances FDC extended to its affiliates are not subject to
documentary stamp taxes pursuant to BIR Ruling No. 116-98, dated 30
July 1998, since they do not partake the nature of loan agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by
BIR Ruling No. 108-99, dated 15 July 1999, to the effect that
documentary stamp taxes are imposable on inter-office memos
evidencing cash advances similar to those extended by FDC, said latter
ruling cannot be given retroactive application if to do so would be
prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a
consequence of the Shareholders' Agreement it executed with RHPL
cannot be considered taxable income since, until actually converted thru
sale or disposition of said shares, they merely represent unrealized
increase in capital.34
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the
CIR's petitions for review on certiorari assailing the 16 December 2003 decision
in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R. SP No.
74510 were consolidated pursuant to the 1 March 2006 resolution issued by this
Courts Third Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following
ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE
COURT OF TAX APPEALS AND IN HOLDING THAT THE ADVANCES
EXTENDED BY RESPONDENT TO ITS AFFILIATES ARE NOT SUBJECT TO
INCOME TAX.35
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:
I
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE
ABUSE OF DISCRETION IN HOLDING THAT THE EXCHANGE OF
SHARES OF STOCK FOR PROPERTY AMONG FILINVEST
DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI)
MET ALL THE REQUIREMENTS FOR THE NON-RECOGNITION OF
TAXABLE GAIN UNDER SECTION 34 (c) (2) OF THE OLD NATIONAL
INTERNAL REVENUE CODE (NIRC) (NOW SECTION 40 (C) (2) (c) OF
THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE
ERROR IN HOLDING THAT THE LETTERS OF INSTRUCTION OR
CASH VOUCHERS EXTENDED BY FDC TO ITS AFFILIATES ARE
NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY
STAMP TAXES UNDER SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
HOLDING THAT GAIN ON DILUTION AS A RESULT OF THE
INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS IN FAC IS
NOT TAXABLE.36
The Courts Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition
in G.R. No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs
finding that theoretical interests can be imputed on the advances FDC extended
to its affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted
to interest-bearing fund borrowings from commercial banks. Since considerable
interest expenses were deducted by FDC when said funds were borrowed, the
CIR theorizes that interest income should likewise be declared when the same
funds were sourced for the advances FDC extended to its affiliates. Invoking
Section 43 of the 1993 NIRC in relation to Section 179(b) of Revenue Regulation
No. 2, the CIR maintains that it is vested with the power to allocate, distribute or
apportion income or deductions between or among controlled organizations,
trades or businesses even in the absence of fraud, since said power is intended
"to prevent evasion of taxes or clearly to reflect the income of any such
organizations, trades or businesses." In addition, the CIR asseverates that the
17
CA should have accorded weight and respect to the findings of the CTA which,
as the specialized court dedicated to the study and consideration of tax matters,
can take judicial notice of US income tax laws and regulations.37
Admittedly, Section 43 of the 1993 NIRC38 provides that, "(i)n any case of two or
more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions
between or among such organization, trade or business, if he determines that
such distribution, apportionment or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any such organization, trade or
business." In amplification of the equivalent provision39 under Commonwealth Act
No. 466,40 Sec. 179(b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled taxpayer. (A)
DEFINITIONS. When used in this section
(1) The term "organization" includes any kind, whether it be a
sole proprietorship, a partnership, a trust, an estate, or a
corporation or association, irrespective of the place where
organized, where operated, or where its trade or business is
conducted, and regardless of whether domestic or foreign,
whether exempt or taxable, or whether affiliated or not.
(2) The terms "trade" or "business" include any trade or
business activity of any kind, regardless of whether or where
organized, whether owned individually or otherwise, and
regardless of the place where carried on.
(3) The term "controlled" includes any kind of control, direct or
indirect, whether legally enforceable, and however exercisable
or exercised. It is the reality of the control which is decisive, not
its form or mode of exercise. A presumption of control arises if
income or deductions have been arbitrarily shifted.
(4) The term "controlled taxpayer" means any one of two or
more organizations, trades, or businesses owned or controlled
directly or indirectly by the same interests.
(5) The term "group" and "group of controlled taxpayers" means
the organizations, trades or businesses owned or controlled by
the same interests.
(6) The term "true net income" means, in the case of a
controlled taxpayer, the net income (or as the case may be, any
item or element affecting net income) which would have
resulted to the controlled taxpayer, had it in the conduct of its
affairs (or, as the case may be, any item or element affecting
net income) which would have resulted to the controlled
taxpayer, had it in the conduct of its affairs (or, as the case may
be, in the particular contract, transaction, arrangement or other
act) dealt with the other members or members of the group at
arms length. It does not mean the income, the deductions, or
the item or element of either, resulting to the controlled taxpayer
by reason of the particular contract, transaction, or
arrangement, the controlled taxpayer, or the interest controlling
it, chose to make (even though such contract, transaction, or
arrangement be legally binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax
Code is to place a controlled taxpayer on a tax parity with an
uncontrolled taxpayer, by determining, according to the standard of an
uncontrolled taxpayer, the true net income from the property and
business of a controlled taxpayer. The interests controlling a group of
controlled taxpayer are assumed to have complete power to cause each
controlled taxpayer so to conduct its affairs that its transactions and
accounting records truly reflect the net income from the property and
business of each of the controlled taxpayers. If, however, this has not
been done and the taxable net income are thereby understated, the
statute contemplates that the Commissioner of Internal Revenue shall
intervene, and, by making such distributions, apportionments, or
allocations as he may deem necessary of gross income or deductions,
or of any item or element affecting net income, between or among the
controlled taxpayers constituting the group, shall determine the true net
income of each controlled taxpayer. The standard to be applied in every
case is that of an uncontrolled taxpayer. Section 44 grants no right to a
controlled taxpayer to apply its provisions at will, nor does it grant any
right to compel the Commissioner of Internal Revenue to apply its
provisions.
(C) APPLICATION Transactions between controlled taxpayer and
another will be subjected to special scrutiny to ascertain whether the
common control is being used to reduce, avoid or escape taxes. In
determining the true net income of a controlled taxpayer, the
Commissioner of Internal Revenue is not restricted to the case of
improper accounting, to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed to reduce or avoid tax by
shifting or distorting income or deductions. The authority to determine
true net income extends to any case in which either by inadvertence or
design the taxable net income in whole or in part, of a controlled
taxpayer, is other than it would have been had the taxpayer in the
conduct of his affairs been an uncontrolled taxpayer dealing at arms
length with another uncontrolled taxpayer.41
As may be gleaned from the definitions of the terms "controlled" and "controlled
taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would
appear that FDC and its affiliates come within the purview of Section 43 of the
1993 NIRC. Aside from owning significant portions of the shares of stock of FLI,
FAI, DSCC and FCI, the fact that FDC extended substantial sums of money as
cash advances to its said affiliates for the purpose of providing them financial
assistance for their operational and capital expenditures seemingly indicate that
the situation sought to be addressed by the subject provision exists. From the
18
tenor of paragraph (c) of Section 179 of Revenue Regulation No. 2, it may also
be seen that the CIR's power to distribute, apportion or allocate gross income or
deductions between or among controlled taxpayers may be likewise exercised
whether or not fraud inheres in the transaction/s under scrutiny. For as long as
the controlled taxpayer's taxable income is not reflective of that which it would
have realized had it been dealing at arm's length with an uncontrolled taxpayer,
the CIR can make the necessary rectifications in order to prevent evasion of
taxes.
Despite the broad parameters provided, however, we find that the CIR's powers
of distribution, apportionment or allocation of gross income and deductions under
Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does
not include the power to impute "theoretical interests" to the controlled taxpayer's
transactions. Pursuant to Section 28 of the 1993 NIRC,42 after all, the term "gross
income" is understood to mean all income from whatever source derived,
including, but not limited to the following items: compensation for services,
including fees, commissions, and similar items; gross income derived from
business; gains derived from dealings in property;" interest; rents; royalties;
dividends; annuities; prizes and winnings; pensions; and partners distributive
share of the gross income of general professional partnership.43 While it has
been held that the phrase "from whatever source derived" indicates a legislative
policy to include all income not expressly exempted within the class of taxable
income under our laws, the term "income" has been variously interpreted to
mean "cash received or its equivalent", "the amount of money coming to a
person within a specific time" or "something distinct from principal or
capital."44 Otherwise stated, there must be proof of the actual or, at the very
least, probable receipt or realization by the controlled taxpayer of the item of
gross income sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible
showing that the advances FDC extended to its affiliates had resulted to the
interests subsequently assessed by the CIR. For all its harping upon the
supposed fact that FDC had resorted to borrowings from commercial banks, the
CIR had adduced no concrete proof that said funds were, indeed, the source of
the advances the former provided its affiliates. While admitting that FDC obtained
interest-bearing loans from commercial banks,45 Susan Macabelda - FDC's
Funds Management Department Manager who was the sole witness presented
before the CTA - clarified that the subject advances were sourced from the
corporation's rights offering in 1995 as well as the sale of its investment in
Bonifacio Land in 1997.46 More significantly, said witness testified that said
advances: (a) were extended to give FLI, FAI, DSCC and FCI financial
assistance for their operational and capital expenditures; and, (b) were all
temporarily in nature since they were repaid within the duration of one week to
three months and were evidenced by mere journal entries, cash vouchers and
instructional letters."47
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross
income, there would still be no factual basis for the imputation of theoretical
interests on the subject advances and assess deficiency income taxes thereon.
More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code
of the Philippines, no interest shall be due unless it has been expressly stipulated
in writing. Considering that taxes, being burdens, are not to be presumed beyond
what the applicable statute expressly and clearly declares,48 the rule is likewise
settled that tax statutes must be construed strictly against the government and
liberally in favor of the taxpayer.49 Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to
tax laws and the provisions of a taxing act are not to be extended by
implication.50 While it is true that taxes are the lifeblood of the government, it has
been held that their assessment and collection should be in accordance with law
as any arbitrariness will negate the very reason for government itself.51
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in
exchange for the shares of stock of FLI. With respect to the Deed of Exchange
executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC
pertinently provides as follows:
Sec. 34. Determination of amount of and recognition of gain or loss.-
xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a corporation
by a person in exchange for shares of stock in such corporation of which as a
result of such exchange said person, alone or together with others, not
exceeding four persons, gains control of said corporation; Provided, That stocks
issued for services shall not be considered as issued in return of property.
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the
parties,52 the requisites for the non-recognition of gain or loss under the foregoing
provision are as follows: (a) the transferee is a corporation; (b) the transferee
exchanges its shares of stock for property/ies of the transferor; (c) the transfer is
made by a person, acting alone or together with others, not exceeding four
persons; and, (d) as a result of the exchange the transferor, alone or together
with others, not exceeding four, gains control of the transferee.53 Acting on the 13
January 1997 request filed by FLI, the BIR had, in fact, acknowledged the
concurrence of the foregoing requisites in the Deed of Exchange the former
executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97.54 With the
BIR's reiteration of said ruling upon the request for clarification filed by
FLI,55 there is also no dispute that said transferee and transferors subsequently
complied with the requirements provided for the non-recognition of gain or loss
from the exchange of property for tax, as provided under Section 34 (c) (2) of the
1993 NIRC.56
Then as now, the CIR argues that taxable gain should be recognized for the
exchange considering that FDC's controlling interest in FLI was actually
decreased as a result thereof. For said purpose, the CIR calls attention to the
fact that, prior to the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's
3,763,535,000 outstanding capital stock. Upon the issuance of 443,094,000
additional FLI shares as a consequence of the exchange and with only
19
42,217,000 thereof accruing in favor of FDC for a total of 2,579,575,000 shares,
said corporations controlling interest was supposedly reduced to 61%.03 when
reckoned from the transferee's aggregate 4,226,629,000 outstanding shares.
Without owning a share from FLI's initial 3,763,535,000 outstanding shares, on
the other hand, FAI's acquisition of 420,877,000 FLI shares as a result of the
exchange purportedly resulted in its control of only 9.96% of said transferee
corporation's 4,226,629,000 outstanding shares. On the principle that the
transaction did not qualify as a tax-free exchange under Section 34 (c) (2) of the
1993 NIRC, the CIR asseverates that taxable gain in the sum
of P263,386,921.00 should be recognized on the part of FDC and in the sum
of P3,088,711,367.00 on the part of FAI.57
The paucity of merit in the CIR's position is, however, evident from the
categorical language of Section 34 (c) (2) of the 1993 NIRC which provides that
gain or loss will not be recognized in case the exchange of property for stocks
results in the control of the transferee by the transferor, alone or with other
transferors not exceeding four persons. Rather than isolating the same as
proposed by the CIR, FDC's 2,579,575,000 shares or 61.03% control of FLI's
4,226,629,000 outstanding shares should, therefore, be appreciated in
combination with the 420,877,000 new shares issued to FAI which represents
9.96% control of said transferee corporation. Together FDC's 2,579,575,000
shares (61.03%) and FAI's 420,877,000 shares (9.96%) clearly add up to
3,000,452,000 shares or 70.99% of FLI's 4,226,629,000 shares. Since the term
"control" is clearly defined as "ownership of stocks in a corporation possessing at
least fifty-one percent of the total voting power of classes of stocks entitled to one
vote" under Section 34 (c) (6) [c] of the 1993 NIRC, the exchange of property for
stocks between FDC FAI and FLI clearly qualify as a tax-free transaction under
paragraph 34 (c) (2) of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then
Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in
their book Tax Law and Jurisprudence, opined that said provision could be
inapplicable if control is already vested in the exchangor prior to
exchange.58 Aside from the fact that that the 10 September 2002 Decision in
CTA Case No. 6182 upholding the tax-exempt status of the exchange between
FDC, FAI and FLI was penned by no less than Justice Acosta himself,59 FDC and
FAI significantly point out that said authors have acknowledged that the position
taken by the BIR is to the effect that "the law would apply even when the
exchangor already has control of the corporation at the time of the
exchange."60 This was confirmed when, apprised in FLI's request for clarification
about the change of percentage of ownership of its outstanding capital stock, the
BIR opined as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest
Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest
Land, Inc. The term 'control' shall mean ownership of stocks in a corporation by
possessing at least 51% of the total voting power of all classes of stocks entitled
to vote. Control is determined by the amount of stocks received, i.e., total
subscribed, whether for property or for services by the transferor or transferors.
In determining the 51% stock ownership, only those persons who transferred
property for stocks in the same transaction may be counted up to the maximum
of five (BIR Ruling No. 547-93 dated December 29, 1993.61
At any rate, it also appears that the supposed reduction of FDC's shares in FLI
posited by the CIR is more apparent than real. As the uncontested owner of 80%
of the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls
the same percentage of the 420,877,000 shares issued to its said co-transferor
which, by itself, represents 7.968% of the outstanding shares of FLI. Considered
alongside FDC's 61.03% control of FLI as a consequence of the 29 November
1996 Deed of Transfer, said 7.968% add up to an aggregate of 68.998% of said
transferee corporation's outstanding shares of stock which is evidently still
greater than the 67.42% FDC initially held prior to the exchange. This much was
admitted by the parties in the 14 February 2001 Stipulation of Facts, Documents
and Issues they submitted to the CTA.62 Inasmuch as the combined ownership of
FDC and FAI of FLI's outstanding capital stock adds up to a total of 70.99%, it
stands to reason that neither of said transferors can be held liable for deficiency
income taxes the CIR assessed on the supposed gain which resulted from the
subject transfer.
On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange,
drafts, instruments and securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest and others not payable
on sight or demand. On all loan agreements signed abroad wherein the object
of the contract is located or used in the Philippines; bill of exchange (between
points within the Philippines), drafts, instruments and securities issued by the
Government or any of its instrumentalities or certificates of deposits drawing
interest, or orders for the payment of any sum of money otherwise than at sight
or on demand, or on all promissory notes, whether negotiable or non-negotiable,
except bank notes issued for circulation, and on each renewal of any such note,
there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on
each two hundred pesos, or fractional part thereof, of the face value of any such
agreement, bill of exchange, draft, certificate of deposit or note: Provided, That
only one documentary stamp tax shall be imposed on either loan agreement, or
promissory notes issued to secure such loan, whichever will yield a higher tax:
Provided however, That loan agreements or promissory notes the aggregate of
which does not exceed Two hundred fifty thousand pesos (P250,000.00)
executed by an individual for his purchase on installment for his personal use or
that of his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of documentary
stamp tax provided under this Section.
When read in conjunction with Section 173 of the 1993 NIRC,63 the foregoing
provision concededly applies to "(a)ll loan agreements, whether made or signed
in the Philippines, or abroad when the obligation or right arises from Philippine
sources or the property or object of the contract is located or used in the
20
Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations
No. 9-94 provide as follows:
Section 3. Definition of Terms. For purposes of these Regulations, the following
term shall mean:
(b) 'Loan agreement' refers to a contract in writing where one of the parties
delivers to another money or other consumable thing, upon the condition that the
same amount of the same kind and quality shall be paid. The term shall include
credit facilities, which may be evidenced by credit memo, advice or drawings.
The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section
195, both of the Tax Code, as amended, generally refer to distinct and separate
instruments. A loan agreement shall be taxed under Section 180, while a deed of
mortgage shall be taxed under Section 195."
"Section 6. Stamp on all Loan Agreements. All loan agreements whether made
or signed in the Philippines, or abroad when the obligation or right arises from
Philippine sources or the property or object of the contract is located in the
Philippines shall be subject to the documentary stamp tax of thirty centavos
(P0.30) on each two hundred pesos, or fractional part thereof, of the face value
of any such agreements, pursuant to Section 180 in relation to Section 173 of the
Tax Code.
In cases where no formal agreements or promissory notes have been executed
to cover credit facilities, the documentary stamp tax shall be based on the
amount of drawings or availment of the facilities, which may be evidenced by
credit/debit memo, advice or drawings by any form of check or withdrawal slip,
under Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997 qualified as loan
agreements upon which documentary stamp taxes may be imposed. In keeping
with the caveat attendant to every BIR Ruling to the effect that it is valid only if
the facts claimed by the taxpayer are correct, we find that the CA reversibly erred
in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly speaking,
could be invoked only by ASB Development Corporation, the taxpayer who
sought the same. In said ruling, the CIR opined that documents like those
evidencing the advances FDC extended to its affiliates are not subject to
documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the advances
granted by an affiliate company is subject to documentary stamp tax, it is
informed that nothing in Regulations No. 26 (Documentary Stamp Tax
Regulations) and Revenue Regulations No. 9-94 states that the same is subject
to documentary stamp tax. Such being the case, said inter-office memo
evidencing the lendings or borrowings which is neither a form of promissory note
nor a certificate of indebtedness issued by the corporation-affiliate or a certificate
of obligation, which are, more or less, categorized as 'securities', is not subject to
documentary stamp tax imposed under Section 180, 174 and 175 of the Tax
Code of 1997, respectively. Rather, the inter-office memo is being prepared for
accounting purposes only in order to avoid the co-mingling of funds of the
corporate affiliates.1avvphi1
In its appeal before the CA, the CIR argued that the foregoing ruling was later
modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-
office memos evidencing lendings or borrowings extended by a corporation to its
affiliates are akin to promissory notes, hence, subject to documentary stamp
taxes.64 In brushing aside the foregoing argument, however, the CA applied
Section 246 of the 1993 NIRC65 from which proceeds the settled principle that
rulings, circulars, rules and regulations promulgated by the BIR have no
retroactive application if to so apply them would be prejudicial to the
taxpayers.66 Admittedly, this rule does not apply: (a) where the taxpayer
deliberately misstates or omits material facts from his return or in any document
required of him by the Bureau of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or (c) where the taxpayer acted in
bad faith.67 Not being the taxpayer who, in the first instance, sought a ruling from
the CIR, however, FDC cannot invoke the foregoing principle on non-retroactivity
of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and
the CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal
and cash vouchers evidencing the advances FDC extended to its affiliates in
1996 and 1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR
correctly assessed the sum of P6,400,693.62 for documentary stamp
tax, P3,999,793.44 in interests and P25,000.00 as compromise penalty, for a
total ofP10,425,487.06. Alongside the sum of P4,050,599.62 for documentary
stamp tax, the CIR similarly assessedP1,721,099.78 in interests and P25,000.00
as compromise penalty in Assessment Notice No. SP-DST-97-00021-2000 or a
total of P5,796,699.40. The imposition of deficiency interest is justified under
Sec. 249 (a) and (b) of the NIRC which authorizes the assessment of the same
"at the rate of twenty percent (20%), or such higher rate as may be prescribed by
regulations", from the date prescribed for the payment of the unpaid amount of
tax until full payment.68 The imposition of the compromise penalty is, in turn,
warranted under Sec. 25069 of the NIRC which prescribes the imposition thereof
"in case of each failure to file an information or return, statement or list, or keep
any record or supply any information required" on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA
and the CA for invalidating the Assessment Notice issued by the CIR for the
deficiency income taxes FDC is supposed to have incurred as a consequence of
the dilution of its shares in FAC. Anent FDCs Shareholders Agreement with
RHPL, the record shows that the parties were in agreement about the following
factual antecedents narrated in the 14 February 2001 Stipulation of Facts,
Documents and Issues they submitted before the CTA,70 viz.:
"1.11. On November 15, 1996, FDC entered into a Shareholders
Agreement (SA) with Reco Herrera Pte. Ltd. (RHPL) for the formation
of a joint venture company named Filinvest Asia Corporation (FAC)
21
 which is based in Singapore (pars. 1.01 and 6.11, Petition, pars. 1 and
7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is
tasked to develop and manage the 50% ownership interest of FDC in its
PBCom Office Tower Project (Project) with the Philippine Bank of
Communications (par. 6.12, Petition; par. 7, Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity
participation of FDC and RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7
million worth of shares of stock representing a 60% equity participation
in FAC. In turn, RHPL subscribed to P433.8 million worth of shares of
stock of FAC representing a 40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed of
Assignment transferring to FAC a portion of FDCs right and interests in
the Project to the extent of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income
Tax Return for the taxable year 1996."71
Alongside the principle that tax revenues are not intended to be liberally
construed,72 the rule is settled that the findings and conclusions of the CTA are
accorded great respect and are generally upheld by this Court, unless there is a
clear showing of a reversible error or an improvident exercise of
authority.73 Absent showing of such error here, we find no strong and cogent
reasons to depart from said rule with respect to the CTA's finding that no
deficiency income tax can be assessed on the gain on the supposed dilution
and/or increase in the value of FDC's shareholdings in FAC which the CIR, at
any rate, failed to establish. Bearing in mind the meaning of "gross income" as
above discussed, it cannot be gainsaid, even then, that a mere increase or
appreciation in the value of said shares cannot be considered income for taxation
purposes. Since "a mere advance in the value of the property of a person or
corporation in no sense constitute the income specified in the revenue law," it
has been held in the early case of Fisher vs. Trinidad, 74 that it "constitutes and
can be treated merely as an increase of capital." Hence, the CIR has no factual
and legal basis in assessing income tax on the increase in the value of FDC's
shareholdings in FAC until the same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in
G.R. No. 163653 is DENIED for lack of merit and the CAs 16 December 2003
Decision in G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No.
167689 is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in
CA-G.R. SP No. 74510 is MODIFIED.
Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-
00021-2000 issued for deficiency documentary stamp taxes due on the
instructional letters as well as journal and cash vouchers evidencing the
advances FDC extended to its affiliates are declared valid.
The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-
97-00019-2000 and SP-INC-97-0027-2000 issued for deficiency income
assessed on (a) the "arms-length" interest from said advances; (b) the gain from
FDCs Deed of Exchange with FAI and FLI; and (c) income from the dilution
resulting from FDCs Shareholders Agreement with RHPL is, however, upheld.
SO ORDERED.
SECOND DIVISION
[G.R. No. 112024. January 28, 1999]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER
OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT
OF APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution[1] of the Court of Appeals
dated September 22, 1993, affirming the Decision[2] and Resolution[3] of the Court
of Tax Appeals which denied the claims of the petitioner for tax refund and tax
credits, and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED
due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and
its resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for
1985 in the amount of P5,299,749.95 is hereby denied for having been filed
beyond the reglementary period. The 1986 claim for refund amounting
to P234,077.69 is likewise denied since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year. The petition for review is
dismissed for lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this
case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial
banking corporation duly organized under Philippine laws, filed its quarterly
income tax returns for the first and second quarters of 1985, reported profits, and
paid the total income tax of P5,016,954.00. The taxes due were settled by
applying PBComs tax credit memos and accordingly, the Bureau of Internal
Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85
forP3,401,701.00 and P1, 615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its
Annual Income Tax Returns for the year-ended December 31, 1985, it declared a
net loss of P25,317,228.00, thereby showing no income tax liability. For the
succeeding year, ending December 31, 1986, the petitioner likewise reported a
net loss of P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding creditable
taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
22
 On August 7, 1987, petitioner requested the Commissioner of Internal I. Whether taxpayer PBCom -- which relied in good faith on the formal
Revenue, among others, for a tax credit of P5,016,954.00 representing the assurances of BIR in RMC No. 7-85 and did not immediately file
overpayment of taxes in the first and second quarters of 1985. with the CTA a petition for review asking for the refund/tax credit of
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable its 1985-86 excess quarterly income tax payments -- can be
taxes withheld by their lessees from property rentals in 1985 forP282,795.50 and prejudiced by the subsequent BIR rejection, applied retroactively, of
in 1986 for P234,077.69. its assurances in RMC No. 7-85 that the prescriptive period for the
Pending the investigation of the respondent Commissioner of Internal refund/tax credit of excess quarterly income tax payments is not
Revenue, petitioner instituted a Petition for Review on November 18, 1988 before two years but ten (10).[7]
the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. II. Whether the Court of Appeals seriously erred in affirming the CTA
4309 entitled: Philippine Bank of Communications vs. Commissioner of Internal decision which denied PBComs claim for the refund of P234,077.69
Revenue. income tax overpaid in 1986 on the mere speculation, without
The losses petitioner incurred as per the summary of petitioners claims for proof, that there were taxes due in 1987 and that PBCom availed of
refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, tax-crediting that year.[8]
are as follows: Simply stated, the main question is: Whether or not the Court of Appeals
1985 1986 erred in denying the plea for tax refund or tax credits on the ground of
Net (P25,317,228.00) (P14,129,602.00) prescription, despite petitioners reliance on RMC No. 7-85, changing the
Income prescriptive period of two years to ten years?
(Loss) Petitioner argues that its claims for refund and tax credits are not yet barred
Tax Due NIL NIL by prescription relying on the applicability of Revenue Memorandum Circular No.
Quarterly 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are
tax not covered by the two-year prescriptive period under the tax Code and that
Payment 5,016,954.00 --- taxpayers may claim refund or tax credits for the excess quarterly income tax
s Made with the BIR within ten (10) years under Article 1144 of the Civil Code. The
Tax 282,795.50 234,077.69 pertinent portions of the circular reads:
Withheld REVENUE MEMORANDUM CIRCULAR NO. 7-85
at Source SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS
Exce P5,299,749.50*========== P234,077.69========== CORPORATE INCOME TAX RESULTING FROM THE
ss Tax ==== ==== FILING OF THE FINAL ADJUSTMENT RETURN
Payment TO: All Internal Revenue Officers and Others Concerned
s Sections 85 and 86 of the National Internal Revenue Code provide:
*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty- xxxxxxxxx
five centavo difference was noted. The foregoing provisions are implemented by Section 7 of Revenue Regulations
On May 20, 1993, the CTA rendered a decision which, as stated on the Nos. 10-77 which provide:
outset, denied the request of petitioner for a tax refund or credit in the sum xxxxxxxxx
amount of P5,299,749.95, on the ground that it was filed beyond the two-year It has been observed, however, that because of the excess tax payments,
reglementary period provided for by law. The petitioners claim for refund in 1986 corporations file claims for recovery of overpaid income tax with the Court of Tax
amounting to P234,077.69 was likewise denied on the assumption that it was Appeals within the two-year period from the date of payment, in accordance with
automatically credited by PBCom against its tax payment in the succeeding year. Sections 292 and 295 of the National Internal Revenue Code. It is obvious that
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs the filing of the case in court is to preserve the judicial right of the corporation to
decision but the same was denied due course for lack of merit.[6] claim the refund or tax credit.
Thereafter, PBCom filed a petition for review of said decision and resolution It should be noted, however, that this is not a case of erroneously or illegally paid
of the CTA with the Court of Appeals. However on September 22, 1993, the tax under the provisions of Sections 292 and 295 of the Tax Code.
Court of Appeals affirmed in toto the CTAs resolution dated July 20, 1993. Hence In the above provision of the Regulations the corporation may request for the
this petition now before us. refund of the overpaid income tax or claim for automatic tax credit. To insure
The issues raised by the petitioner are: prompt action on corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes, this Office has

23
promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976,
containing the procedure in processing said returns. Under these procedures, the
returns are merely pre-audited which consist mainly of checking mathematical
accuracy of the figures of the return. After which, the refund or tax credit is
granted, and, this procedure was adopted to facilitate immediate action on cases
like this.
In this regard, therefore, there is no need to file petitions for review in the
Court of Tax Appeals in order to preserve the right to claim refund or tax
credit within the two-year period. As already stated, actions hereon by the
Bureau are immediate after only a cursory pre-audit of the income tax
returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue
excess income tax paid under the provisions of Section 86 of the Tax Code
within 10 years from the date of payment considering that it is an obligation
created by law (Article 1144 of the Civil Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position
contrary to its declared circular if it would result to injustice to
taxpayers.Citing ABS-CBN Broadcasting Corporation vs. Court of Tax
Appeals[10] petitioner claims that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers. In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one previously taken where
injustice would result therefrom or where there has been a misrepresentation to
the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code
explicitly provides for this rule as follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of
any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shall
not be given retroactive application if the revocation, modification, or reversal will
be prejudicial to the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his
return or in any document required of him by the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor
General, argues that the two-year prescriptive period for filing tax cases in court
concerning income tax payments of Corporations is reckoned from the date of
filing the Final Adjusted Income Tax Return, which is generally done on April 15
following the close of the calendar year. As precedents, respondent
Commissioner cited cases which adhered to this principle, to wit: ACCRA
Investments Corp. vs. Court of Appeals, et al.,[11] and Commissioner of Internal
Revenue vs. TMX Sales, Inc., et al..[12] Respondent Commissioner also states
that since the Final Adjusted Income Tax Return of the petitioner for the taxable
year 1985 was supposed to be filed on April 15, 1986, the latter had only until
April 15, 1988 to seek relief from the court. Further, respondent Commissioner
stresses that when the petitioner filed the case before the CTA on November 18,
1988, the same was filed beyond the time fixed by law, and such failure is fatal to
petitioners cause of action.
After a careful study of the records and applicable jurisprudence on the
matter, we find that, contrary to the petitioners contention, the relaxation of
revenue regulations by RMC 7-85 is not warranted as it disregards the two-year
prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary
purpose is to generate funds for the State to finance the needs of the citizenry
and to advance the common weal.[13] Due process of law under the Constitution
does not require judicial proceedings in tax cases. This must necessarily be so
because it is upon taxation that the government chiefly relies to obtain the means
to carry on its operations and it is of utmost importance that the modes adopted
to enforce the collection of taxes levied should be summary and interfered with
as little as possible.[14]
From the same perspective, claims for refund or tax credit should be
exercised within the time fixed by law because the BIR being an administrative
body enforced to collect taxes, its functions should not be unduly delayed or
hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now
Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court
proceeding for the recovery of tax erroneously or illegally collected, viz.:
Sec. 230. 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; 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; Provided however, That the
Commissioner may, even without a written claim therefor, refund or credit any
tax, where on the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the
Commissioner of Internal Revenue, within two (2) years after payment of tax,
before any suit in CTA is commenced. The two-year prescriptive period provided,
should be computed from the time of filing the Adjustment Return and final
payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co.,[15] this Court explained the application of Sec. 230 of 1977 NIRC,
as follows:
Clearly, the prescriptive period of two years should commence to run only from
the time that the refund is ascertained, which can only be determined after a final
24
adjustment return is accomplished. In the present case, this date is April 16,
1984, and two years from this date would be April 16, 1986. x x x As we have
earlier said in the TMX Sales case, Sections 68,[16] 69,[17] and 70[18] on Quarterly
Corporate Income Tax Payment and Section 321 should be considered in
conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims of excess
quarterly income tax payments, such circular created a clear inconsistency with
the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. [20] Thus, courts
will not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and implement.[21]
In the case of People vs. Lim,[22] it was held that rules and regulations
issued by administrative officials to implement a law cannot go beyond the terms
and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as
amended, because whereas the prohibition prescribed in said Fisheries Act was
for any single period of time not exceeding five years duration, FAO No. 37-1
fixed no period, that is to say, it establishes an absolute ban for all time. This
discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an
oversight on the part of Secretary of Agriculture and Natural Resources. Of
course, in case of discrepancy, the basic Act prevails, for the reason that the
regulation or rule issued to implement a law cannot go beyond the terms and
provisions of the latter. x x x In this connection, the attention of the technical men
in the offices of Department Heads who draft rules and regulation is called to the
importance and necessity of closely following the terms and provisions of the law
which they intended to implement, this to avoid any possible misunderstanding or
confusion as in the present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by
the mistakes or errors of its officials or agents.[24] As pointed out by the
respondent courts, the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative interpretation which is not
in harmony with Sec. 230 of 1977 NIRC, for being contrary to the express
provision of a statute. Hence, his interpretation could not be given weight for to
do so would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after
promulgating RMC No. 7-85, is estopped by the principle of non-retroactivity of
BIR rulings. Again We do not agree. The Memorandum Circular, stating that a
taxpayer may recover the excess income tax paid within 10 years from date of
payment because this is an obligation created by law, was issued by the Acting
Commissioner of Internal Revenue. On the other hand, the decision, stating that
the taxpayer should still file a claim for a refund or tax credit and the
corresponding petition for review within the two-year prescription period, and that
the lengthening of the period of limitation on refund from two to ten years would
be adverse to public policy and run counter to the positive mandate of Sec. 230,
NIRC, - was the ruling and judicial interpretation of the Court of Tax
Appeals. Estoppel has no application in the case at bar because it was not the
Commissioner of Internal Revenue who denied petitioners claim of refund or tax
credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of
Internal Revenue is an administrative interpretation which is out of harmony with
or contrary to the express provision of a statute (specifically Sec. 230, NIRC),
hence, cannot be given weight for to do so would in effect amend the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But administrative
decisions do not enjoy that level of recognition. A memorandum-circular of a
bureau head could not operate to vest a taxpayer with a shield against judicial
action. For there are no vested rights to speak of respecting a wrong construction
of the law by the administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same.[27] Moreover,
the non-retroactivity of rulings by the Commissioner of Internal Revenue is not
applicable in this case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the Commissioner of Internal Revenue. Lastly, it
must be noted that, as repeatedly held by this Court, a claim for refund is in the
nature of a claim for exemption and should be construed in strictissimi
juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals
seriously erred in affirming CTAs decision denying its claim for refund
of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof,
that PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that
any excess of the total quarterly payments over the actual income tax computed
in the adjustment or final corporate income tax return, shall either (a) be
refunded to the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by
marking the option box provided in the BIR form) its intention, whether to request
for a refund or claim for an automatic tax credit for the succeeding taxable
year. To ease the administration of tax collection, these remedies are in the
alternative, and the choice of one precludes the other.
As stated by respondent Court of Appeals:
25
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of
Tax Appeals, after examining the adjusted final corporate annual income tax
return for taxable year 1986, found out that petitioner opted to apply for automatic
tax credit. This was the basis used (vis-avis the fact that the 1987 annual
corporate tax return was not offered by the petitioner as evidence) by the CTA in
concluding that petitioner had indeed availed of and applied the automatic tax
credit to the succeeding year, hence it can no longer ask for refund, as to [sic]
the two remedies of refund and tax credit are alternative.[30]
That the petitioner opted for an automatic tax credit in accordance with Sec.
69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return,
is a finding of fact which we must respect. Moreover, the 1987 annual corporate
tax return of the petitioner was not offered as evidence to controvert said
fact. Thus, we are bound by the findings of fact by respondent courts, there being
no showing of gross error or abuse on their part to disturb our reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of
Appeals appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.

26
FITNESS BY DESIGN, INC., G.R. No. 177982 respondent, however, disclosed that it has been
Petitioner, operating/doing business and had sales operations for the
Present: year 1995 in the total amount of P7,156,336.08 which it
failed to report in its 1995 ITR. Thus, for the year 1995,
QUISUMBING, J., Chairperson, petitioner filed a fraudulent annual income return with intent
CARPIO MORALES, to evade tax. Likewise, petitioner failed to file Value-Added
- versus - TINGA, Tax (VAT) Return and reported the amount of
VELASCO, JR., and P7,156,336.08 as its gross sales for the year 1995.Hence,
BRION, JJ. for failure to file a VAT return and for filing a fraudulent
income tax return for the year 1995, the corresponding
taxes may be assessed at any time within ten (10) years
COMMISSIONER ON INTERNAL Promulgated: after the discovery of such omission or fraud pursuant to
REVENUE, October 17, 2008 Section 222(a) of the 1997 Tax Code.
Respondent.
x-------------------------------------------------x The subject deficiency tax assessments have
already become final, executory and demandable for failure
DECISION of the petitioner to file a protest within the reglementary
period provided for by law. The alleged protest allegedly filed
on June 25, 2004 at the Legal Division, Revenue Region No.
CARPIO MORALES, J.: 8, Makati City is nowhere to be found in the BIR Records nor
On March 17, 2004, the Commissioner on Internal Revenue reflected in the Record Book of the Legal Division as
(respondent) assessed Fitness by Design, Inc. (petitioner) for deficiency income normally done by our receiving clerk when she receive[s]
taxes for the tax year 1995 in the total amount of P10,647,529.69.[1] Petitioner any document. The respondent, therefore, has legal basis to
protested the assessment on the ground that it was issued beyond the three-year collect the tax liability either by distraint and levy or civil
prescriptive period under Section 203 of the Tax Code.[2] Additionally, petitioner action.[7] (Emphasis and underscoring supplied)
claimed that since it was incorporated only on May 30, 1995, there was no basis
to assume that it had already earned income for the tax year 1995.[3]

On February 1, 2005, respondent issued a warrant of distraint and/or
levy against petitioner,[4] drawing petitioner to file on March 1, 2005 a Petition for
Review (with Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests subject of this
Petition)[5] before the Court of Tax Appeals (CTA) before which it reiterated its
defense of prescription. The petition was docketed as CTA Case No. 7160.
In his Answer,[6] respondent alleged:
The right of the respondent to assess petitioner for
deficiency income tax, VAT and Documentary Stamp Tax for
the year 1995 has not prescribed pursuant to Section 222(a)
of the 1997 Tax Code. Petitioners 1995 Income Tax Return
(ITR) filed on April 11, 1996was false and fraudulent for its
deliberate failure to declare its true sales. Petitioner declared
in its 1995 Income Tax Return that it was on its pre-
operation stage and has not declared its
income. Investigation by the revenue officers of the
The aforecited Section 222(a)[8] of the 1997 Tax Code provides:
In the case of a false or fraudulent return with intent
to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such
tax may be filed without assessment, at any time within
ten (10) years after the discovery of the falsity, fraud, or
omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for
the collection thereof. (Underscoring supplied)
The Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a
criminal complaint before the Department of Justice against the officers and
accountant of petitioner for violation of the provisions of The National Internal

27
Revenue Code of 1977, as amended,[9] covering the taxable year 1995. The
criminal complaint was docketed as I.S. No. 2005-203.
On motion of petitioner in CTA Case No. 7160, a preliminary hearing on
the issue of prescription[10] was conducted during which petitioners former
bookkeeper attested that a former colleague certified public accountant Leonardo
Sablan (Sablan) illegally took custody of petitioners accounting records, invoices,
and official receipts and turned them over to the BIR.[11]
On petitioners request, a subpoena ad testificandum was issued to
Sablan for the hearing before the CTA scheduled onSeptember 4, 2006 but he
failed to appear.[12]
Petitioner thus requested for the issuance of another subpoena ad
testificandum to Sablan for the hearing scheduled on October 23, 2006,[13] and of
subpoena duces tecum to the chief of the National Investigation Division of the
BIR for the production of the Affidavit of the Informer bearing on the assessment
in question.[14] Petitioners requests were granted.[15]
During the scheduled hearing of the case on October 23, 2006, on
respondents counsels manifestation that he was not furnished a copy of
petitioners motion for the issuance of subpoenaes, the CTA ordered petitioner to
file a motion for the issuance of subpoenas and to furnish respondents counsel a
copy thereof.[16] Petitioner complied with the CTA order.[17]
In a related move, petitioner submitted written interrogatories addressed
to Sablan and to Henry Sarmiento and Marinella German, revenue officers of the
National Investigation Division of the BIR.[18]
By Resolution[19] of January 15, 2007, the CTA denied petitioners
Motion for Issuance of Subpoenas and disallowed the submission by petitioner of
written interrogatories to Sablan, who is not a party to the case, and the revenue
officers,[20] it finding that the testimony, documents, and admissions sought are not
relevant.[21] Besides, the CTA found that to require Sablan to testify would violate
Section 2 of Republic Act No. 2338, as implemented by Section 12 of Finance
Department Order No. 46-66, proscribing the revelation of identities of informers
of violations of internal revenue laws, except when the information is proven to be
malicious or false.[22]
In any event, the CTA held that there was no need to issue a
subpoena duces tecum to obtain the Affidavit of the Informer as the same formed
part of the BIR records of the case, the production of which had been ordered by
it.[23]
Petitioners Motion for Reconsideration[24] of the CTA Resolution
of January 15, 2007 was denied,[25] hence, the present Petition for
Certiorari[26] which imputes grave abuse of discretion to the CTA
I.
x x x in holding that the legality of the mode of acquiring the
documents which are the bases of the above discussed
deficiency tax assessments, the subject matter of the
Petition for Review now pending in the Honorable Second
Division, is not material and relevant to the issue of
prescription.
II.
x x x in holding that Mr. Leonardo Sablans testimony, if
allowed, would violate RA 2338 which prohibits the BIR to
reveal the identity of the informer since 1) the purpose of the
subpoena is to elicit from him the whereabouts of the original
accounting records, documents and receipts owned by the
Petitioner and not to discover if he is the informer since the
identity of the informer is not relevant to the issues raised; 2)
RA 2338 cannot legally justify violation of the Petitioners
property rights by a person, whether he is an informer or not,
since such RA cannot allow such invasion of property rights
otherwise RA 2338 would run counter to the constitutional
mandate that no person shall be deprive[d] of life, liberty or
property without due process of law.
III.
x x x in holding that the issuance of subpoena ad
testificandum would constitute a violation of the prohibition to
reveal the identity of the informer because compliance with
such prohibition has been rendered moot and academic by
the voluntary admissions of the Respondent himself.
IV.
x x x in holding that the constitutional right of an accused to
examine the witness against him does not exist in this
case. The Petitioners liability for tax deficiency assessment
which is the main issue in the Petition for Review is currently
pending at the Honorable Second Division. Therefore, it is a
prejudicial question raised in the criminal case filed by the
herein Respondent against the officers of the Petitioner with
the Department of Justice.
28

V.
x x x in dismissing the request for subpoena ad
testificandum because the Opposition thereto submitted by
the Respondent was not promptly filed as provided by the
Rules of Court thus, it is respectfully submitted that,
Respondent has waived his right to object thereto.
VI.
x x x when the Honorable Court of Tax Appeals ruled that
the purpose of the Petitioner in requesting for written
interrogatories is to annoy, embarrass, or oppress the
witness because such ruling has no factual basis since
Respondent never alleged nor proved that the witnesses to
whom the interrogatories are addressed will be annoyed,
embarrassed or oppressed; besides the only obvious
purpose of the Petitioner is to know the whereabouts
of accounting records and documents which are in the
possession of the witnesses to whom the interrogatories are
directed and to ultimately get possession thereof. Granting
without admitting that there is annoyance, embarrassment or
oppression; the same is not unreasonable.
VII.
x x x when it failed to rule that the BIR officers and
employees are not covered by the prohibition under RA
2338 and do not have the authority to withhold from the
taxpayer documents owned by such taxpayer.
VIII.
x x x when it required the clear and unequivocal proof of
relevance of the documents as a condition precedent for the
issuance of subpoena duces tecum.
IX.
x x x when it quashed the subpoena duces tecum as the
Honorable Court had issued an outstanding order to the
Respondent to certify and forward to the CTA all the records
of the case because up to the date of this Petition the BIR
records have not been submitted yet to the CTA.[27]
Grave abuse of discretion implies such capricious and whimsical exercise
of judgment as equivalent to lack of jurisdiction or, in other words, when the power
is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive
duty or a virtual refusal of duty enjoined or to act at all in contemplation of law.[28]
The Court finds that the issuance by the CTA of the questioned
resolutions was not tainted by arbitrariness.
The fact that Sablan was not a party to the case aside, the testimonies,
documents, and admissions sought by petitioner are not indeed relevant to the
issue before the CTA. For in requesting the issuance of the subpoenas and the
submission of written interrogatories, petitioner sought to establish that its
accounting records and related documents, invoices, and receipts which were the
bases of the assessment against it were illegally obtained. The only issues,
however, which surfaced during the preliminary hearing before the CTA, were
whether respondents issuance of assessment against petitioner had prescribed
and whether petitioners tax return was false or fraudulent.
Besides, as the CTA held, the subpoenas and answers to the written
interrogatories would violate Section 2 of Republic Act No. 2338 as implemented
by Section 12 of Finance Department Order No. 46-66.
Petitioner claims, however, that it only intended to elicit information on the
whereabouts of the documents it needs in order to refute the assessment, and not
to disclose the identity of the informer.[29] Petitioners position does not persuade.
The interrogatories addressed to Sablan and the revenue officers show that they
were intended to confirm petitioners belief that Sablan was the informer.Thus the
questions for Sablan read:
1. Under what circumstances do you know
petitioner corporation? Please state in what
capacity, the date or period you obtained said
knowledge.
2. Do you know a Ms. Elnora Carpio, who from
1995 to the early part of 1996 was the book keeper
of petitioner? Please state how you came to know
of Ms. Carpio.
3. At the time that Ms. Carpio was book keeper of
petitioner did she consult you or show any
accounting documents and records of petitioner?
4. What documents, if any, did you obtain from
petitioner?
5. Were these documents that you obtained from
petitioner submitted to the Bureau of Internal
Revenue (BIR)? Please describe said documents
and under what circumstances the same were
submitted.
6. Was the consent of the petitioner, its officers or
employees obtained when the documents that you
29
 obtained were submitted to the BIR? Please state
when and from whom the consent was obtained.
7. Did you execute an affidavit as an informer in
the assessment which was issued by the BIR
against petitioner for the tax year 1995 and other
years?[30] (Underscoring supplied)
while the questions for the revenue officers read:
1. Where did you obtain the documents, particularly the
invoices and official receipts, which [were] used by
your office as evidence and as basis of the
assessment for deficiency income tax and value
added tax for the tax year 1995 issued against
petitioner?
2. Do you know Mr. Leonardo Sablan? Please state under
what circumstance you came to know Mr.
Sablan?[31] (Underscoring supplied)
Petitioner impugns the manner in which the documents in question
reached the BIR, Sablan having allegedly submitted them to the BIR without its
(petitioners) consent. Petitioners lack of consent does not, however, imply that the
BIR obtained them illegally or that the information received is false or
malicious. Nor does the lack of consent preclude the BIR from assessing
deficiency taxes on petitioner based on the documents. Thus Section 5 of the Tax
Code provides:
In ascertaining the correctness of any return, or in
making a return when none has been made, or in
determining the liability of any person for any internal
revenue tax, or in collecting any such liability, or in
evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or
other data which may be relevant or
material to such query;
(B) To obtain on a regular basis from any
person other than the person whose
internal revenue tax liability is subject to
audit or investigation, or from any office
or officer of the national and local
governments, government agencies and
instrumentalities, including the Bangko
Sentral ng Pilipinas and government-
owned and controlled corporations, any
information such as, but not limited to,
costs and volume of production, receipts or
sales and gross incomes of taxpayers, and
the names, addresses, and financial
statements of corporations, mutual fund
companies, insurance companies, regional
operating headquarters of multinational
companies, joint accounts, associations,
joint ventures or consortia and registered
partnerships and their members;
(C) To summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person
having possession, custody, or care of
the books of accounts and other
accounting records containing entries
relating to the business of the person
liable for tax, or any other person, to
appear before the Commissioner or his
duly authorized representatives at a time
and place specified in the summons and to
produce such books, papers, records, or
other data, and to give testimony;
(D) To take such testimony of the person
concerned, under oath, as may be relevant
or material to such inquiry; and
(E) To cause revenue officers and
employees to make a canvass from time to
time of any revenue district or region and
inquire after and concerning all persons
therein who may be liable to pay any
internal revenue tax, and all persons
owning or having the care, management or
possession of any object with respect to
which a tax is imposed.
x x x x (Emphasis and underscoring supplied)
The law thus allows the BIR access to all relevant or material records and
data in the person of the taxpayer,[32] and the BIR can accept documents which
cannot be admitted in a judicial proceeding where the Rules of Court are strictly
observed.[33] To require the consent of the taxpayer would defeat the intent of the
law to help the BIR assess and collect the correct amount of taxes.
30
 Petitioners invocation of the rights of an accused in a criminal prosecution
to cross examine the witness against him and to have compulsory process issued
to secure the attendance of witnesses and the production of other evidence in his
behalf does not lie.CTA Case No. 7160 is not a criminal prosecution, and even
granting that it is related to I.S. No. 2005-203, the respondents in the latter
proceeding are the officers and accountant of petitioner-corporation, not
petitioner. From the complaint and supporting affidavits in I.S. No. 2005-203,
Sablan does not even appear to be a witness against the respondents therein.[34]

AT ALL EVENTS, issuance of subpoena duces tecum for the production

of the documents requested by the petitioner which documents petitioner claims
to be crucial to its defense[35] is unnecessary in view of the CTA order for
respondent to certify and forward to it all the records of the case. [36] If the order
has not been complied with, the CTA can enforce it by citing respondent for
indirect contempt.[37]

WHEREFORE, in light of the foregoing disquisition, the petition is

DISMISSED.

Costs against petitioner.

SO ORDERED.

31
SECOND DIVISION Commission (SEC).[ 9 ] However, the IIPO failed to secure certified copies of the
[G.R. No. 136975. March 31, 2005] respondents 1987 Consumption Entries from the Bureau of Customs since,
COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING according to the custodian thereof, the original copies had been eaten by
CO., INC., respondent. termites.[ 1 0 ]
DECISION In a Letter dated June 28, 1990, the IIPO requested the Chief of the
CALLEJO, SR., J.: Collection Division, Manila International Container Port, and the Acting Chief of
Before us is a petition for review of the Decision [ 1 ] of the Court of Appeals the Collection Division, Port of Manila, to authenticate the machine copies of the
(CA) which reversed the Decision[ 2 ] of the Court of Tax Appeals (CTA) in CTA import entries supplied by the informer. However, Chief of the Collection Division
Case No. 5126, upholding the deficiency income and sales tax assessments Merlita D. Tomas could not do so because the Collection Division did not have
against respondent Hantex Trading Co., Inc. the original copies of the entries. Instead, she wrote the IIPO that, as gleaned
The Antecedents from the records, the following entries had been duly processed and released
The respondent is a corporation duly organized and existing under the laws after the payment of duties and taxes:
of the Philippines. Being engaged in the sale of plastic products, it imports IMPORTER HANTEX TRADING CO., INC. SERIES OF 1987
synthetic resin and other chemicals for the manufacture of its products. For this ENTRY NO. DATE RELEASED ENTRY NO. DATE RELEASED
purpose, it is required to file an Import Entry and Internal Revenue Declaration 03058-87 1-30-87 50265-87 12-09-87
(Consumption Entry) with the Bureau of Customs under Section 1301 of the 09120-87 3-20-87 46427-87 11-27-87
Tariff and Customs Code. 18089-87 5-21-87 30764-87 8-21-87
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter- 19439-87 6-2-87 30833-87 8-20-87
Intelligence Division of the Economic Intelligence and Investigation Bureau 19441-87 6-3-87 34690-87 9-16-87
(EIIB), received confidential information that the respondent had imported 11667-87 4-15-87 34722-87 9-11-87
synthetic resin amounting toP115,599,018.00 but only 23294-87 7-7-87 43234-87 11-2-87
declared P45,538,694.57.[ 3 ] According to the informer, based on photocopies of 45478-87 11-16-87 44850-87 11-16-87
77 Consumption Entries furnished by another informer, the 1987 importations of 45691-87 12-2-87 44851-87 11-16-87
the respondent were understated in its accounting records.[ 4 ] Amoto submitted a 25464-87 7-16-87 46461-87 11-19-87
report to the EIIB Commissioner recommending that an inventory audit of the 26483-87 7-23-87 46467-87 11-18-87
respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of 29950-87 8-11-87 48091-87 11-27-87[ 1 1 ]
the EIIB.[ 5 ] Acting Chief of the Collection Division of the Bureau of Customs Augusto S.
Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, Danganan could not authenticate the machine copies of the import entries as
issued Mission Order No. 398-89[ 6 ] dated November 14, 1989 for the audit and well, since the original copies of the said entries filed with the Bureau of Customs
investigation of the importations of Hantex for 1987. The IIPO issued subpoena had apparently been eaten by termites. However, he issued a certification that
duces tecum and ad testificandum for the president and general manager of the the following enumerated entries were filed by the respondent which were
respondent to appear in a hearing and bring the following: processed and released from the Port of Manila after payment of duties and
1. Books of Accounts for the year 1987; taxes, to wit:
2. Record of Importations of Synthetic Resin and Calcium Carbonate Hantex Trading Co., Inc.
for the year 1987; Entry No. Date Released Entry No. Date Released
3. Income tax returns & attachments for 1987; and 03903 1-29-87 22869 4-8-87
4. Record of tax payments.[ 7 ] 04414 1-20-87 19441 3-31-87
However, the respondents president and general manager refused to 10683 2-17-87 24189 4-21-87
comply with the subpoena, contending that its books of accounts and records of 12611 2-24-87 26431 4-20-87
importation of synthetic resin and calcium bicarbonate had been investigated 12989 2-26-87 45478 7-3-87
repeatedly by the Bureau of Internal Revenue (BIR) on prior occasions. [ 8 ] The 17050 3-13-87 26796 4-23-87
IIPO explained that despite such previous investigations, the EIIB was still 17169 3-13-87 28827 4-30-87
authorized to conduct an investigation pursuant to Section 26-A of Executive 18089 3-16-87 31617 5-14-87
Order No. 127. Still, the respondent refused to comply with the subpoena issued 19439 4-1-87 39068 6-5-87
by the IIPO. The latter forthwith secured certified copies of the Profit and Loss 21189 4-3-87 42581 6-21-87
Statements for 1987 filed by the respondent with the Securities and Exchange 43451 6-29-87 42793 6-23-87

32
42795 6-23-87 45477 7-3-87
35582 not received 85830 11-13-87
45691 7-3-87 86650 not received
46187 7-8-87 87647 11-18-87
46427 7-3-87 88829 11-23-87
57669 8-12-87 92293 12-3-87
62471 8-28-87 93292 12-7-87
63187 9-2-87 96357 12-16-87
66859 9-15-87 96822 12-15-87
67890 9-17-87 98823 not received
68115 9-15-87 99428 12-28-87
69974 9-24-87 99429 12-28-87
72213 10-2-87 99441 12-28-87
77688 10-16-87 101406 1-5-87
84253 11-10-87 101407 1-8-87
85534 11-11-87 03118 1-19-87[ 1 2 ]
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo
Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an
investigation. They relied on the certified copies of the respondents Profit and
Loss Statement for 1987 and 1988 on file with the SEC, the machine copies of
the Consumption Entries, Series of 1987, submitted by the informer, as well as
excerpts from the entries certified by Tomas and Danganan.
Based on the documents/records on hand, inclusive of the machine copies
of the Consumption Entries, the EIIB found that for 1987, the respondent had
importations totaling P105,716,527.00 (inclusive of advance sales tax).
Compared with the declared sales based on the Profit and Loss Statements filed
with the SEC, the respondent had unreported sales in the amount
of P63,032,989.17, and its corresponding income tax liability
was P41,916,937.78, inclusive of penalty charge and interests.
EIIB Commissioner Almonte transmitted the entire docket of the case to the
BIR and recommended the collection of the total tax assessment from the
respondent.[ 1 3 ]
On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a
Memorandum to the BIR Assistant Commissioner for Special Operations Service,
directing the latter to prepare a conference letter advising the respondent of its
deficiency taxes.[ 1 4 ]
Meanwhile, as ordered by the Regional Director, Revenue Enforcement
Officers Saturnino D. Torres and Wilson Filamor conducted an investigation on
the 1987 importations of the respondent, in the light of the records elevated by
the EIIB to the BIR, inclusive of the photocopies of the Consumption Entries.
They were to ascertain the respondents liability for deficiency sales and income
taxes for 1987, if any. Per Torres and Filamors Report dated March 6, 1991
which was based on the report of the EIIB and the documents/records appended
thereto, there was a prima facie case of fraud against the respondent in filing its
1987 Consumption Entry reports with the Bureau of Customs. They found that
the respondent had unrecorded importation in the total amount
of P70,661,694.00, and that the amount was not declared in its income tax return
for 1987. The District Revenue Officer and the Regional Director of the BIR
concurred with the report.[ 1 5 ]
Based on the said report, the Acting Chief of the Special Investigation
Branch wrote the respondent and invited its representative to a conference at
10:00 a.m. of March 14, 1991 to discuss its deficiency internal revenue taxes and
to present whatever documentary and other evidence to refute the
same.[ 1 6 ] Appended to the letter was a computation of the deficiency income and
sales tax due from the respondent, inclusive of increments:
B. Computations:
1. Cost of Sales Ratio A2/A1 85.492923%
2. Undeclared Sales Imported A3/B1 110,079,491.61
3. Undeclared Gross Profit B2-A3 15,969,316.61
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35% 5,589,261.00
50% Surcharge C1 x 50% 2,794,630.50
Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58
2. Deficiency Sales Tax
at 10% 7,290,082.72
at 20% 10,493,312.31
Total Due 17,783,395.03
Less: Advanced Sales Taxes Paid 11,636,352.00
Deficiency Sales Tax 6,147,043.03
50% Surcharge C2 x 50% 3,073,521.52
Interest to 2/28/91 5,532,338.73
Total 14,752,903.28[ 1 7 ]
===========
The invitation was reiterated in a Letter dated March 15, 1991. In his Reply
dated March 15, 1991, Mariano O. Chua, the President and General Manager of
the respondent, requested that the report of Torres and Filamor be set aside on
the following claim:
[W]e had already been investigated by RDO No. 23 under Letters of Authority
Nos. 0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17, 1988 and
0347838 RR dated March 2, 1988, and re-investigated by the Special
Investigation Team on Aug. 17, 1988 under Letter of Authority No. 0357464 RR,
and the Intelligence and Investigation Office on Sept. 27, 1988 under Letter of
Authority No. 0020188 NA, all for income and business tax liabilities for 1987.
The Economic Intelligence and Investigation Bureau on Nov. 20, 1989, likewise,
confronted us on the same information for the same year.
In all of these investigations, save your request for an informal conference, we
welcomed them and proved the contrary of the allegation. Now, with your new
inquiry, we think that there will be no end to the problem.
Madam, we had been subjected to so many investigations and re-investigations
for 1987 and nothing came out except the payment of deficiency taxes as a result
33
of oversight. Tax evasion through underdeclaration of income had never been
proven.[ 1 8 ]
Invoking Section 235[ 1 9 ] of the 1977 National Internal Revenue Code
(NIRC), as amended, Chua requested that the inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through Assistant
Commissioner for Collection Jaime M. Maza, sent a Letter dated April 15, 1991
to the respondent demanding payment of its deficiency income tax
of P13,414,226.40 and deficiency sales tax ofP14,752,903.25, inclusive of
surcharge and interest.[ 2 0 ] Appended thereto were the Assessment Notices of
Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655.[ 2 1 ]
On February 12, 1992, the Chief of the Accounts Receivables/Billing
Division of the BIR sent a letter to the respondent demanding payment of its tax
liability due for 1987 within ten (10) days from notice, on pain of the collection tax
due via a warrant of distraint and levy and/or judicial action. [ 2 2 ] The Warrant of
Distraint and/or Levy[ 2 3 ] was actually served on the respondent on January 21,
1992. On September 7, 1992, it wrote the Commissioner of Internal Revenue
protesting the assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS
LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF OUR
RECORDS WAS EVER MADE BY THE EIIB WHICH
RECOMMENDED ITS ISSUANCE.[ 2 4 ]
II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR
PURCHASES FOR 1987 AMOUNTED TO P105,716,527.00 AS
CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY
INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO
CONSIDER OUR REAL PURCHASES OF P45,538,694.57.[ 2 5 ]
III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS
ALSO BASELESS AND UNFOUNDED CONSIDERING THAT WE
HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR
BUSINESS.[ 2 6 ]
In view of the impasse, administrative hearings were conducted on the
respondents protest to the assessment. During the hearing of August 20, 1993,
the IIPO representative presented the photocopies of the Consumption and
Import Entries and the Certifications issued by Tomas and Danganan of the
Bureau of Customs. The IIPO representative testified that the Bureau of Customs
failed to furnish the EIIB with certified copies of the Consumption and Import
Entries; hence, the EIIB relied on the machine copies from their informer. [ 2 7 ]
The respondent wrote the BIR Commissioner on July 12, 1993 questioning
the assessment on the ground that the EIIB representative failed to present the
original, or authenticated, or duly certified copies of the Consumption and Import
Entry Accounts, or excerpts thereof if the original copies were not readily
available; or, if the originals were in the official custody of a public officer,
certified copies thereof as provided for in Section 12, Chapter 3, Book VII,
Administrative Procedure, Administrative Order of 1987. It stated that the only
copies of the Consumption Entries submitted to the Hearing Officer were mere
machine copies furnished by an informer of the EIIB. It asserted that the letters of
Tomas and Danganan were unreliable because of the following:
In the said letters, the two collection officers merely submitted a listing of alleged
import entry numbers and dates released of alleged importations by Hantex
Trading Co., Inc. of merchandise in 1987, for which they certified that the
corresponding duties and taxes were paid after being processed in their offices.
In said letters, no amounts of the landed costs and advance sales tax and duties
were stated, and no particulars of the duties and taxes paid per import entry
document was presented.
The contents of the two letters failed to indicate the particulars of the importations
per entry number, and the said letters do not constitute as evidence of the
amounts of importations of Hantex Trading Co., Inc. in 1987.[ 2 8 ]
The respondent cited the following findings of the Hearing Officer:
[T]hat the import entry documents do not constitute evidence only indicate that
the tax assessments in question have no factual basis, and must, at this point in
time, be withdrawn and cancelled. Any new findings by the IIPO representative
who attended the hearing could not be used as evidence in this hearing, because
all the issues on the tax assessments in question have already been raised by
the herein taxpayer.[ 2 9 ]
The respondent requested anew that the income tax deficiency assessment
and the sales tax deficiency assessment be set aside for lack of factual and legal
basis.
The BIR Commissioner[ 3 0 ] wrote the respondent on December 10, 1993,
denying its letter-request for the dismissal of the assessments.[ 3 1 ] The BIR
Commissioner admitted, in the said letter, the possibility that the figures
appearing in the photocopies of the Consumption Entries had been tampered
with. She averred, however, that she was not proscribed from relying on other
admissible evidence, namely, the Letters of Torres and Filamor dated August 7
and 22, 1990 on their investigation of the respondents tax liability. The
Commissioner emphasized that her decision was final.[ 3 2 ]
The respondent forthwith filed a petition for review in the CTA of the
Commissioners Final Assessment Letter dated December 10, 1993 on the
following grounds:
First. The alleged 1987 deficiency income tax assessment (including
increments) and the alleged 1987 deficiency sales tax assessment (including
increments) are void ab initio, since under Sections 16(a) and 49(b) of the Tax
Code, the Commissioner shall examine a return after it is filed and, thereafter,
assess the correct amount of tax. The following facts obtaining in this case,
however, are indicative of the incorrectness of the tax assessments in question:
the deficiency interests imposed in the income and percentage tax deficiency
assessment notices were computed in violation of the provisions of Section
249(b) of the NIRC of 1977, as amended; the percentage tax deficiency was
computed on an annual basis for the year 1987 in accordance with the provision
of Section 193, which should have been computed in accordance with Section
162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly
basis; and the BIR official who signed the deficiency tax assessments was the
34
Assistant Commissioner for Collection, who had no authority to sign the same
under the NIRC.
Second. Even granting arguendo that the deficiency taxes and increments
for 1987 against the respondent were correctly computed in accordance with the
provisions of the Tax Code, the facts indicate that the above-stated assessments
were based on alleged documents which are inadmissible in either administrative
or judicial proceedings. Moreover, the alleged bases of the tax computations
were anchored on mere presumptions and not on actual facts. The alleged
undeclared purchases for 1987 were based on mere photocopies of alleged
import entry documents, not the original ones, and which had never been duly
certified by the public officer charged with the custody of such records in the
Bureau of Customs. According to the respondent, the alleged undeclared sales
were computed based on mere presumptions as to the alleged gross profit
contained in its 1987 financial statement. Moreover, even the alleged financial
statement of the respondent was a mere machine copy and not an official copy of
the 1987 income and business tax returns. Finally, the respondent was following
the accrual method of accounting in 1987, yet, the BIR investigator who
computed the 1987 income tax deficiency failed to allow as a deductible item the
alleged sales tax deficiency for 1987 as provided for under Section 30(c) of the
NIRC of 1986.[ 3 3 ]
The Commissioner did not adduce in evidence the original or certified true
copies of the 1987 Consumption Entries on file with the Commission on Audit.
Instead, she offered in evidence as proof of the contents thereof, the photocopies
of the Consumption Entries which the respondent objected to for being
inadmissible in evidence.[ 3 4 ] She also failed to present any witness to prove the
correct amount of tax due from it. Nevertheless, the CTA provisionally admitted
the said documents in evidence, subject to its final evaluation of their relevancy
and probative weight to the issues involved.[ 3 5 ]
On December 11, 1997, the CTA rendered a decision, the dispositive
portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered
DENYING the herein petition. Petitioner is hereby ORDERED TO PAY the
respondent Commissioner of Internal Revenue its deficiency income and sales
taxes for the year 1987 in the amounts of P11,182,350.26 andP12,660,382.46,
respectively, plus 20% delinquency interest per annum on both deficiency taxes
from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of the 1987 Tax
Code, with costs against the petitioner.
SO ORDERED.[ 3 6 ]
The CTA ruled that the respondent was burdened to prove not only that the
assessment was erroneous, but also to adduce the correct taxes to be paid by it.
The CTA declared that the respondent failed to prove the correct amount of taxes
due to the BIR. It also ruled that the respondent was burdened to adduce in
evidence a certification from the Bureau of Customs that the Consumption
Entries in question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of the
CTA. The dispositive portion of the decision reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED
and the December 11, 1997 decision of the CTA in CTA Case No. 5162 affirming
the 1987 deficiency income and sales tax assessments and the increments
thereof, issued by the BIR is hereby REVERSED. No costs.[ 3 7 ]
The Ruling of the Court of Appeals
The CA held that the income and sales tax deficiency assessments issued
by the petitioner were unlawful and baseless since the copies of the import
entries relied upon in computing the deficiency tax of the respondent were not
duly authenticated by the public officer charged with their custody, nor verified
under oath by the EIIB and the BIR investigators.[ 3 8 ] The CA also noted that the
public officer charged with the custody of the import entries was never presented
in court to lend credence to the alleged loss of the originals.[ 3 9 ] The CA pointed
out that an import entry is a public document which falls within the provisions of
Section 19, Rule 132 of the Rules of Court, and to be admissible for any legal
purpose, Section 24, Rule 132 of the Rules of Court should apply. [ 4 0 ] Citing the
ruling of this Court inCollector of Internal Revenue v. Benipayo,[ 4 1 ] the CA ruled
that the assessments were unlawful because they were based on hearsay
evidence. The CA also ruled that the respondent was deprived of its right to due
process of law.
The CA added that the CTA should not have just brushed aside the legal
requisites provided for under the pertinent provisions of the Rules of Court in the
matter of the admissibility of public documents, considering that substantive rules
of evidence should not be disregarded. It also ruled that the certifications made
by the two Customs Collection Chiefs under the guise of supporting the
respondents alleged tax deficiency assessments invoking the best evidence
obtainable rule under the Tax Code should not be permitted to supplant the best
evidence rule under Section 7, Rule 130 of the Rules of Court.
Finally, the CA noted that the tax deficiency assessments were computed
without the tax returns. The CA opined that the use of the tax returns is
indispensable in the computation of a tax deficiency; hence, this essential
requirement must be complied with in the preparation and issuance of valid tax
deficiency assessments.[ 4 2 ]
The Present Petition
The Commissioner of Internal Revenue, the petitioner herein, filed the
present petition for review under Rule 45 of the Rules of Court for the reversal of
the decision of the CA and for the reinstatement of the ruling of the CTA.
As gleaned from the pleadings of the parties, the threshold issues for
resolution are the following: (a) whether the petition at bench is proper and
complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the
December 10, 1991 final assessment of the petitioner against the respondent for
deficiency income tax and sales tax for the latters 1987 importation of resins and
calcium bicarbonate is based on competent evidence and the law; and (c) the
total amount of deficiency taxes due from the respondent for 1987, if any.
On the first issue, the respondent points out that the petition raises both
questions of facts and law which cannot be the subject of an appeal by certiorari
under Rule 45 of the Rules of Court. The respondent notes that the petition is
35
defective because the verification and the certification against forum shopping
were not signed by the petitioner herself, but only by the Regional Director of the
BIR. The respondent submits that the petitioner should have filed a motion for
reconsideration with the CA before filing the instant petition for review.[ 4 3 ]
We find and so rule that the petition is sufficient in form. A verification and
certification against forum shopping signed by the Regional Director constitutes
sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the
Rules of Court. Under Section 10 of the NIRC of 1997,[ 4 4 ] the Regional Director
has the power to administer and enforce internal revenue laws, rules and
regulations, including the assessment and collection of all internal revenue taxes,
charges and fees. Such power is broad enough to vest the Revenue Regional
Director with the authority to sign the verification and certification against forum
shopping in behalf of the Commissioner of Internal Revenue. There is no other
person in a better position to know the collection cases filed under his jurisdiction
than the Revenue Regional Director.
Moreover, under Revenue Administrative Order No. 5-83,[ 4 5 ] the Regional
Director is authorized to sign all pleadings filed in connection with cases referred
to the Revenue Regions by the National Office which, otherwise, require the
signature of the petitioner.
We do not agree with the contention of the respondent that a motion for
reconsideration ought to have been filed before the filing of the instant petition. A
motion for reconsideration of the decision of the CA is not a condition sine qua
non for the filing of a petition for review under Rule 45. As we held in Almora v.
Court of Appeals:[ 4 6 ]
Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:
A party may appeal by certiorari from a judgment of the Court of Appeals, by
filing with the Supreme Court a petition for certiorari within fifteen (15) days from
notice of judgment, or of the denial of his motion for reconsideration filed in due
time. (Emphasis supplied)
The conjunctive or clearly indicates that the 15-day reglementary period for the
filing of a petition for certiorari under Rule 45 commences either from notice of
the questioned judgment or from notice of denial of the appellants motion for
reconsideration. A prior motion for reconsideration is not indispensable for a
petition for review on certiorari under Rule 45 to prosper. [ 4 7 ]
While Rule 45 of the Rules of Court provides that only questions of law may
be raised by the petitioner and resolved by the Court, under exceptional
circumstances, the Court may take cognizance thereof and resolve questions of
fact. In this case, the findings and conclusion of the CA are inconsistent with
those of the CTA, not to mention those of the Commissioner of Internal Revenue.
The issues raised in this case relate to the propriety and the correctness of the
tax assessments made by the petitioner against the respondent, as well as the
propriety of the application of Section 16, paragraph (b) of the 1977 NIRC, as
amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273,
in relation to Section 3, Rule 132 of the Rules of Evidence. There is also an
imperative need for the Court to resolve the threshold factual issues to give
justice to the parties, and to determine whether the CA capriciously ignored,
misunderstood or misinterpreted cogent facts and circumstances which, if
considered, would change the outcome of the case.
On the second issue, the petitioner asserts that since the respondent
refused to cooperate and show its 1987 books of account and other accounting
records, it was proper for her to resort to the best evidence obtainable the
photocopies of the import entries in the Bureau of Customs and the respondents
financial statement filed with the SEC.[ 4 8 ] The petitioner maintains that these
import entries were admissible as secondary evidence under the best evidence
obtainable rule, since they were duly authenticated by the Bureau of Customs
officials who processed the documents and released the cargoes after payment
of the duties and taxes due.[ 4 9 ] Further, the petitioner points out that under the
best evidence obtainable rule, the tax return is not important in computing the tax
deficiency.[ 5 0 ]
The petitioner avers that the best evidence obtainable rule under Section 16
of the 1977 NIRC, as amended, legally cannot be equated to the best evidence
rule under the Rules of Court; nor can the best evidence rule, being procedural
law, be made strictly operative in the interpretation of the best evidence
obtainable rule which is substantive in character.[ 5 1 ] The petitioner posits that the
CTA is not strictly bound by technical rules of evidence, the reason being that the
quantum of evidence required in the said court is merely substantial evidence.[ 5 2 ]
Finally, the petitioner avers that the respondent has the burden of proof to
show the correct assessments; otherwise, the presumption in favor of the
correctness of the assessments made by it stands.[ 5 3 ] Since the respondent was
allowed to explain its side, there was no violation of due process.[ 5 4 ]
The respondent, for its part, maintains that the resort to the best evidence
obtainable method was illegal. In the first place, the respondent argues, the EIIB
agents are not duly authorized to undertake examination of the taxpayers
accounting records for internal revenue tax purposes. Hence, the respondents
failure to accede to their demands to show its books of accounts and other
accounting records cannot justify resort to the use of the best evidence
obtainable method.[ 5 5 ] Secondly, when a taxpayer fails to submit its tax records
upon demand by the BIR officer, the remedy is not to assess him and resort to
the best evidence obtainable rule, but to punish the taxpayer according to the
provisions of the Tax Code.[ 5 6 ]
In any case, the respondent argues that the photocopies of import entries
cannot be used in making the assessment because they were not properly
authenticated, pursuant to the provisions of Sections 24[ 5 7 ] and 25[ 5 8 ] of Rule
132 of the Rules of Court. It avers that while the CTA is not bound by the
technical rules of evidence, it is bound by substantial rules. [ 5 9 ] The respondent
points out that the petitioner did not even secure a certification of the fact of loss
of the original documents from the custodian of the import entries. It simply relied
on the report of the EIIB agents that the import entry documents were no longer
available because they were eaten by termites. The respondent posits that the
two collectors of the Bureau of Customs never authenticated the xerox copies of
the import entries; instead, they only issued certifications stating therein the
36
import entry numbers which were processed by their office and the date the
same were released.[ 6 0 ]
The respondent argues that it was not necessary for it to show the correct
assessment, considering that it is questioning the assessments not only because
they are erroneous, but because they were issued without factual basis and in
patent violation of the assessment procedures laid down in the NIRC of 1977, as
amended.[ 6 1 ] It is also pointed out that the petitioner failed to use the tax returns
filed by the respondent in computing the deficiency taxes which is contrary to
law;[ 6 2 ] as such, the deficiency assessments constituted deprivation of property
without due process of law.[ 6 3 ]
Central to the second issue is Section 16 of the NIRC of 1977, as
amended,[ 6 4 ] which provides that the Commissioner of Internal Revenue has the
power to make assessments and prescribe additional requirements for tax
administration and enforcement. Among such powers are those provided in
paragraph (b) thereof, which we quote:
(b) Failure to submit required returns, statements, reports and other documents.
When a report required by law as a basis for the assessment of any national
internal revenue tax shall not be forthcoming within the time fixed by law or
regulation or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper tax on the
best evidence obtainable.
In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or
other document, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or
otherwise, which shall be prima facie correct and sufficient for all legal
purposes.[ 6 5 ]
This provision applies when the Commissioner of Internal Revenue
undertakes to perform her administrative duty of assessing the proper tax against
a taxpayer, to make a return in case of a taxpayers failure to file one, or to
amend a return already filed in the BIR.
The petitioner may avail herself of the best evidence or other information or
testimony by exercising her power or authority under paragraphs (1) to (4) of
Section 7 of the NIRC:
(1) To examine any book, paper, record or other data which may be relevant or
material to such inquiry;
(2) To obtain information from any office or officer of the national and local
governments, government agencies or its instrumentalities, including the Central
Bank of the Philippines and government owned or controlled corporations;
(3) To summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or care
of the books of accounts and other accounting records containing entries relating
to the business of the person liable for tax, or any other person, to appear before
the Commissioner or his duly authorized representative at a time and place
specified in the summons and to produce such books, papers, records, or other
data, and to give testimony;
(4) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; [ 6 6 ]
The best evidence envisaged in Section 16 of the 1977 NIRC, as amended,
includes the corporate and accounting records of the taxpayer who is the subject
of the assessment process, the accounting records of other taxpayers engaged
in the same line of business, including their gross profit and net profit
sales.[ 6 7 ] Such evidence also includes data, record, paper, document or any
evidence gathered by internal revenue officers from other taxpayers who had
personal transactions or from whom the subject taxpayer received any income;
and record, data, document and information secured from government offices or
agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of
Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and data in
the person of the taxpayer. It places no limit or condition on the type or form of
the medium by which the record subject to the order of the BIR is kept. The
purpose of the law is to enable the BIR to get at the taxpayers records in
whatever form they may be kept. Such records include computer tapes of the
said records prepared by the taxpayer in the course of business.[ 6 8 ] In this era of
developing information-storage technology, there is no valid reason to immunize
companies with computer-based, record-keeping capabilities from BIR
scrutiny. The standard is not the form of the record but where it might shed light
on the accuracy of the taxpayers return.
In Campbell, Jr. v. Guetersloh,[ 6 9 ] the United States (U.S.) Court of Appeals
(5th Circuit) declared that it is the duty of the Commissioner of Internal Revenue
to investigate any circumstance which led him to believe that the taxpayer had
taxable income larger than reported. Necessarily, this inquiry would have to be
outside of the books because they supported the return as filed. He may take the
sworn testimony of the taxpayer; he may take the testimony of third parties; he
may examine and subpoena, if necessary, traders and brokers accounts and
books and the taxpayers book accounts. The Commissioner is not bound to
follow any set of patterns. The existence of unreported income may be shown by
any practicable proof that is available in the circumstances of the particular
situation. Citing its ruling in Kenney v. Commissioner,[ 7 0 ] the U.S. appellate court
declared that where the records of the taxpayer are manifestly inaccurate and
incomplete, the Commissioner may look to other sources of information to
establish income made by the taxpayer during the years in question.[ 7 1 ]
We agree with the contention of the petitioner that the best evidence
obtainable may consist of hearsay evidence, such as the testimony of third
parties or accounts or other records of other taxpayers similarly circumstanced
as the taxpayer subject of the investigation, hence, inadmissible in a regular
proceeding in the regular courts.[ 7 2 ] Moreover, the general rule is that
administrative agencies such as the BIR are not bound by the technical rules of
evidence. It can accept documents which cannot be admitted in a judicial
proceeding where the Rules of Court are strictly observed. It can choose to give
weight or disregard such evidence, depending on its trustworthiness.
37
 However, the best evidence obtainable under Section 16 of the 1977 NIRC,
as amended, does not include mere photocopies of records/documents. The
petitioner, in making a preliminary and final tax deficiency assessment against a
taxpayer, cannot anchor the said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption Entries have no
probative weight if offered as proof of the contents thereof. The reason for this is
that such copies are mere scraps of paper and are of no probative value as basis
for any deficiency income or business taxes against a taxpayer. Indeed, in United
States v. Davey,[ 7 3 ] the U.S. Court of Appeals (2nd Circuit) ruled that where the
accuracy of a taxpayers return is being checked, the government is entitled to
use the original records rather than be forced to accept purported copies which
present the risk of error or tampering.[ 7 4 ]
In Collector of Internal Revenue v. Benipayo,[ 7 5 ] the Court ruled that the
assessment must be based on actual facts. The rule assumes more importance
in this case since the xerox copies of the Consumption Entries furnished by the
informer of the EIIB were furnished by yet another informer. While the EIIB tried
to secure certified copies of the said entries from the Bureau of Customs, it was
unable to do so because the said entries were allegedly eaten by termites. The
Court can only surmise why the EIIB or the BIR, for that matter, failed to secure
certified copies of the said entries from the Tariff and Customs Commission or
from the National Statistics Office which also had copies thereof. It bears
stressing that under Section 1306 of the Tariff and Customs Code, the
Consumption Entries shall be the required number of copies as prescribed by
regulations.[ 7 6 ] The Consumption Entry is accomplished in sextuplicate copies
and quadruplicate copies in other places. In Manila, the six copies are distributed
to the Bureau of Customs, the Tariff and Customs Commission, the Declarant
(Importer), the Terminal Operator, and the Bureau of Internal Revenue.
Inexplicably, the Commissioner and the BIR personnel ignored the copy of the
Consumption Entries filed with the BIR and relied on the photocopies supplied by
the informer of the EIIB who secured the same from another informer. The BIR,
in preparing and issuing its preliminary and final assessments against the
respondent, even ignored the records on the investigation made by the District
Revenue officers on the respondents importations for 1987.
The original copies of the Consumption Entries were of prime importance to
the BIR. This is so because such entries are under oath and are presumed to be
true and correct under penalty of falsification or perjury. Admissions in the said
entries of the importers documents are admissions against interest and
presumptively correct.[ 7 7 ]
In fine, then, the petitioner acted arbitrarily and capriciously in relying on
and giving weight to the machine copies of the Consumption Entries in fixing the
tax deficiency assessments against the respondent.
The rule is that in the absence of the accounting records of a taxpayer, his
tax liability may be determined by estimation. The petitioner is not required to
compute such tax liabilities with mathematical exactness. Approximation in the
calculation of the taxes due is justified. To hold otherwise would be tantamount to
holding that skillful concealment is an invincible barrier to proof. [ 7 8 ] However, the
rule does not apply where the estimation is arrived at arbitrarily and
capriciously.[ 7 9 ]
We agree with the contention of the petitioner that, as a general rule, tax
assessments by tax examiners are presumed correct and made in good faith. All
presumptions are in favor of the correctness of a tax assessment. It is to be
presumed, however, that such assessment was based on sufficient evidence.
Upon the introduction of the assessment in evidence, a prima facie case of
liability on the part of the taxpayer is made.[ 8 0 ] If a taxpayer files a petition for
review in the CTA and assails the assessment, the prima facie presumption is
that the assessment made by the BIR is correct, and that in preparing the same,
the BIR personnel regularly performed their duties. This rule for tax initiated suits
is premised on several factors other than the normal evidentiary rule imposing
proof obligation on the petitioner-taxpayer: the presumption of administrative
regularity; the likelihood that the taxpayer will have access to the relevant
information; and the desirability of bolstering the record-keeping requirements of
the NIRC.[ 8 1 ]
However, the prima facie correctness of a tax assessment does not apply
upon proof that an assessment is utterly without foundation, meaning it is
arbitrary and capricious. Where the BIR has come out with a naked
assessment, i.e., without any foundation character, the determination of the tax
due is without rational basis.[ 8 2 ] In such a situation, the U.S. Court of Appeals
ruled[ 8 3 ] that the determination of the Commissioner contained in a deficiency
notice disappears. Hence, the determination by the CTA must rest on all the
evidence introduced and its ultimate determination must find support in credible
evidence.
The issue that now comes to fore is whether the tax deficiency assessment
against the respondent based on the certified copies of the Profit and Loss
Statement submitted by the respondent to the SEC in 1987 and 1988, as well as
certifications of Tomas and Danganan, is arbitrary, capricious and illegal. The
CTA ruled that the respondent failed to overcome the prima facie correctness of
the tax deficiency assessment issued by the petitioner, to wit:
The issue should be ruled in the affirmative as petitioner has failed to rebut the
validity or correctness of the aforementioned tax assessments. It is incongruous
for petitioner to prove its cause by simply drawing an inference unfavorable to the
respondent by attacking the source documents (Consumption Entries) which
were the bases of the assessment and which were certified by the Chiefs of the
Collection Division, Manila International Container Port and the Port of Manila, as
having been processed and released in the name of the petitioner after payment
of duties and taxes and the duly certified copies of Financial Statements secured
from the Securities and Exchange Commission. Any such inference cannot
operate to relieve petitioner from bearing its burden of proof and this Court has
no warrant of absolution. The Court should have been persuaded to grant the
reliefs sought by the petitioner should it have presented any evidence of
relevance and competence required, like that of a certification from the Bureau of
Customs or from any other agencies, attesting to the fact that those consumption
entries did not really belong to them.
38
The burden of proof is on the taxpayer contesting the validity or correctness of an
assessment to prove not only that the Commissioner of Internal Revenue is
wrong but the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the
presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA,
164 SCRA 524). The burden of proving the illegality of the assessment lies upon
the petitioner alleging it to be so. In the case at bar, petitioner miserably failed to
discharge this duty.[ 8 4 ]
We are not in full accord with the findings and ratiocination of the CTA.
Based on the letter of the petitioner to the respondent dated December 10, 1993,
the tax deficiency assessment in question was based on (a) the findings of the
agents of the EIIB which was based, in turn, on the photocopies of the
Consumption Entries; (b) the Profit and Loss Statements of the respondent for
1987 and 1988; and (c) the certifications of Tomas and Danganan dated August
7, 1990 and August 22, 1990:
In reply, please be informed that after a thorough evaluation of the attending
facts, as well as the laws and jurisprudence involved, this Office holds that you
are liable to the assessed deficiency taxes. The conclusion was arrived at based
on the findings of agents of the Economic Intelligence & Investigation Bureau
(EIIB) and of our own examiners who have painstakingly examined the records
furnished by the Bureau of Customs and the Securities & Exchange Commission
(SEC). The examination conducted disclosed that while your actual sales for
1987 amounted to P110,731,559.00, you declared for taxation purposes, as
shown in the Profit and Loss Statements, the sum of P47,698,569.83 only. The
difference, therefore, of P63,032,989.17 constitutes as undeclared or unrecorded
sales which must be subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount of
underdeclared importations were lifted from uncertified or unauthenticated xerox
copies of consumption entries which are not admissible in evidence. On this
issue, it must be considered that in letters dated August 7 and 22, 1990, the
Chief and Acting Chief of the Collection Division of the Manila International
Container Port and Port of Manila, respectively, certified that the enumerated
consumption entries were filed, processed and released from the port after
payment of duties and taxes. It is noted that the certification does not touch on
the genuineness, authenticity and correctness of the consumption entries which
are all xerox copies, wherein the figures therein appearing may have been
tampered which may render said documents inadmissible in evidence, but for tax
purposes, it has been held that the Commissioner is not required to make his
determination (assessment) on the basis of evidence legally admissible in a
formal proceeding in Court (Mertens, Vol. 9, p. 214, citing Cohen v.
Commissioner). A statutory notice may be based in whole or in part upon
admissible evidence (Llorente v. Commissioner, 74 TC 260 (1980); Weimerskirch
v. Commissioner, 67 TC 672 (1977); and Rosano v. Commissioner, 46 TC 681
(1966). In the case also of Weimerskirch v. Commissioner (1977), the
assessment was given due course in the presence of admissible evidence as to
how the Commissioner arrived at his determination, although there was no
admissible evidence with respect to the substantial issue of whether the taxpayer
had unreported or undeclared income from narcotics sale. [ 8 5 ]
Based on a Memorandum dated October 23, 1990 of the IIPO, the source
documents for the actual cost of importation of the respondent are the machine
copies of the Consumption Entries from the informer which the IIPO claimed to
have been certified by Tomas and Danganan:
The source documents for the total actual cost of importations, abovementioned,
were the different copies of Consumption Entries, Series of 1987, filed by subject
with the Bureau of Customs, marked Annexes F-1 to F-68. The total cost of
importations is the sum of the Landed Costs and the Advance Sales Tax as
shown in the annexed entries. These entries were duly authenticated as having
been processed and released, after payment of the duties and taxes due
thereon, by the Chief, Collection Division, Manila International Container Port,
dated August 7, 1990, Annex-G, and the Port of Manila, dated August 22, 1990,
Annex-H. So, it was established that subject-importations, mostly resins, really
belong to HANTEX TRADING CO., INC.[ 8 6 ]
It also appears on the worksheet of the IIPO, as culled from the photocopies
of the Consumption Entries from its informer, that the total cost of the
respondents importation for 1987 was P105,761,527.00. Per the report of Torres
and Filamor, they also relied on the photocopies of the said Consumption
Entries:
The importations made by taxpayer verified by us from the records of the Bureau
of Customs and xerox copies of which are hereto attached shows the big volume
of importations made and not declared in the income tax return filed by taxpayer.
Based on the above findings, it clearly shows that a prima facie case of fraud
exists in the herein transaction of the taxpayer, as a consequence of which, said
transaction has not been possibly entered into the books of accounts of the
subject taxpayer.[ 8 7 ]
In fine, the petitioner based her finding that the 1987 importation of the
respondent was underdeclared in the amount ofP105,761,527.00 on the
worthless machine copies of the Consumption Entries. Aside from such copies,
the petitioner has no other evidence to prove that the respondent imported goods
costing P105,761,527.00. The petitioner cannot find solace on the certifications
of Tomas and Danganan because they did not authenticate the machine copies
of the Consumption Entries, and merely indicated therein the entry numbers of
Consumption Entries and the dates when the Bureau of Customs released the
same. The certifications of Tomas and Danganan do not even contain the landed
costs and the advance sales taxes paid by the importer, if any. Comparing the
certifications of Tomas and Danganan and the machine copies of the
Consumption Entries, only 36 of the entry numbers of such copies are included in
the said certifications; the entry numbers of the rest of the machine copies of the
Consumption Entries are not found therein.
Even if the Court would concede to the petitioners contention that the
certification of Tomas and Danganan authenticated the machine copies of the
Consumption Entries referred to in the certification, it appears that the total cost
of importations inclusive of advance sales tax is only P64,324,953.00 far from the
39
amount of P105,716,527.00 arrived at by the EIIB and the BIR,[ 8 8 ] or even the the Court of Tax Appeals for further proceedings, conformably with the decision
amount ofP110,079,491.61 arrived at by Deputy Commissioner Deoferio, of this Court. No costs.
Jr.[ 8 9 ] As gleaned from the certifications of Tomas and Danganan, the goods SO ORDERED.
covered by the Consumption Entries were released by the Bureau of Customs,
from which it can be presumed that the respondent must have paid the taxes due
on the said importation. The petitioner did not adduce any documentary evidence
to prove otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and costs of
the importations of the respondent in the amount ofP105,761,527.00 for 1987
have no factual basis, hence, arbitrary and capricious. The petitioner cannot rely
on the presumption that she and the other employees of the BIR had regularly
performed their duties. As the Court held in Collector of Internal Revenue v.
Benipayo,[ 9 0 ] in order to stand judicial scrutiny, the assessment must be based
on facts. The presumption of the correctness of an assessment, being a mere
presumption, cannot be made to rest on another presumption.
Moreover, the uncontroverted fact is that the BIR District Revenue Office
had repeatedly examined the 1987 books of accounts of the respondent showing
its importations, and found that the latter had minimal business tax liability. In this
case, the presumption that the District Revenue officers performed their duties in
accordance with law shall apply. There is no evidence on record that the said
officers neglected to perform their duties as mandated by law; neither is there
evidence aliunde that the contents of the 1987 and 1988 Profit and Loss
Statements submitted by the respondent with the SEC are incorrect.
Admittedly, the respondent did not adduce evidence to prove its correct tax
liability. However, considering that it has been established that the petitioners
assessment is barren of factual basis, arbitrary and illegal, such failure on the
part of the respondent cannot serve as a basis for a finding by the Court that it is
liable for the amount contained in the said assessment; otherwise, the Court
would thereby be committing a travesty.
On the disposition of the case, the Court has two options, namely, to deny
the petition for lack of merit and affirm the decision of the CA, without prejudice to
the petitioners issuance of a new assessment against the respondent based on
credible evidence; or, to remand the case to the CTA for further proceedings, to
enable the petitioner to adduce in evidence certified true copies or duplicate
original copies of the Consumption Entries for the respondents 1987
importations, if there be any, and the correct tax deficiency assessment thereon,
without prejudice to the right of the respondent to adduce controverting evidence,
so that the matter may be resolved once and for all by the CTA. In the higher
interest of justice to both the parties, the Court has chosen the latter option. After
all, as the Tax Court of the United States emphasized in Harbin v. Commissioner
of Internal Revenue,[ 9 1 ] taxation is not only practical; it is vital. The obligation of
good faith and fair dealing in carrying out its provision is reciprocal and, as the
government should never be over-reaching or tyrannical, neither should a
taxpayer be permitted to escape payment by the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals is SET ASIDE. The records are REMANDED to

40
EN BANC
G.R. No. 198756, January 13, 2015
BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS
BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
v. REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL
REVENUE, BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE,
DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU
OF TREASURY, Respondents.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income
arising from the P35 billion worth of 10-year zero-coupon treasury bonds issued
by the Bureau of Treasury on October 18, 2001 (denominated as the Poverty
Eradication and Alleviation Certificates or the PEACe Bonds by the Caucus of
Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling
No. 370-20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding tax. Pursuant to this ruling,
the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on
October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus 2 filed by petitioners
under Rule 65 of the Rules of Court seeking to:chanroblesvirtuallawlibrary
a. ANNUL Respondent BIRs Ruling No. 370-2011 dated 7 October 2011 [and]
other related rulings issued by BIR of similar tenor and import, for being
unconstitutional and for having been issued without jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction. . .;
b. PROHIBIT Respondents, particularly the BTr, from withholding or collecting
the 20% FWT from the payment of the face value of the Government Bonds upon
their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the
face value of the Government Bonds upon maturity. . .; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of
preliminary injunction, enjoining Respondents, particularly the BIR and the BTr,
from withholding or collecting 20% FWT on the Government Bonds and the
respondent BIR from enforcing the assailed 2011 BIR Ruling, as well as other
related rulings issued by the BIR of similar tenor and import, pending the
resolution by [the court] of the merits of [the] Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks
(CODE-NGO) with the assistance of its financial advisors, Rizal Commercial
Banking Corp. (RCBC), RCBC Capital Corp. (RCBC Capital), CAPEX
Finance and Investment Corp. (CAPEX) and SEED Capital Ventures, Inc.
(SEED),5 requested an approval from the Department of Finance for the
issuance by the Bureau of Treasury of 10-year zero-coupon Treasury Certificates
(T-notes).6 The T-notes would initially be purchased by a special purpose vehicle
on behalf of CODE-NGO, repackaged and sold at a premium to investors as the
PEACe Bonds.7 The net proceeds from the sale of the Bonds will be used to
endow a permanent fund (Hanapbuhay Fund) to finance meritorious activities
and projects of accredited non-government organizations (NGOs) throughout the
country.8chanRoblesvirtualLawlibrary
Prior to and around the time of the proposal of CODE-NGO, other proposals for
the issuance of zero-coupon bonds were also presented by banks and financial
institutions, such as First Metro Investment Corporation (proposal dated March 1,
2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security
Bank Corporation and SB Capital Investment Corporation (proposal dated July
25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal dated August 25,
1999).12 [B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng
Fixed Income indicate that the interest income or discount earned on the
proposed zero-coupon bonds would be subject to the prevailing withholding
tax.13chanRoblesvirtualLawlibrary
A zero-coupon bond is a bond bought at a price substantially lower than its face
value (or at a deep discount), with the face value repaid at the time of
maturity.14 It does not make periodic interest payments, or have so-called
coupons, hence the term zero-coupon bond.15 However, the discount to face
value constitutes the return to the bondholder.16chanRoblesvirtualLawlibrary
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODE-NGOs
letters dated May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the
tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001, signed
by then Commissioner of Internal Revenue Ren G. Baez confirmed that the
PEACe Bonds would not be classified as deposit substitutes and would not be
subject to the corresponding withholding tax:chanroblesvirtuallawlibrary
Thus, to be classified as deposit substitutes, the borrowing of funds must be
obtained from twenty (20) or more individuals or corporate lenders at any one
time. In the light of your representation that the PEACe Bonds will be issued only
41
to one entity, i.e., Code NGO, the same shall not be considered as deposit
substitutes falling within the purview of the above definition. Hence, the
withholding tax on deposit substitutes will not apply.18 (Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001
was subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001
and BIR Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the
2001 Rulings). In sum, these rulings pronounced that to be able to determine
whether the financial assets, i.e., debt instruments and securities are deposit
substitutes, the 20 or more individual or corporate lenders rule must
apply. Moreover, the determination of the phrase at any one time for purposes
of determining the 20 or more lenders is to be determined at the time of the
original issuance. Such being the case, the PEACe Bonds were not to be treated
as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo
Sergio G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing
the bonds directly to a special purpose vehicle considering that the latter was not
a Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza
recommended that the issuance of the Bonds be done through the
ADAPS23 and that CODE-NGO should get a GSED to bid in [sic] its
behalf.24chanRoblesvirtualLawlibrary
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury
Bonds25 (Public Offering) dated October 9, 2001, the Bureau of Treasury
announced that P30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]26 The notice stated that the Bonds shall be
issued to not more than 19 buyers/lenders hence, the necessity of a manual
auction for this maiden issue.27 It also required the GSEDs to submit their bids
not later than 12 noon on auction date and to disclose in their bid submissions
the names of the institutions bidding through them to ensure strict compliance
with the 19 lender limit.28 Lastly, it stated that the issue being limited to 19
lenders and while taxable shall not be subject to the 20% final withholding
[tax].29chanRoblesvirtualLawlibrary
On October 12, 2001, the Bureau of Treasury released a memo30 on the
Formula for the Zero-Coupon Bond. The memo stated in part that the formula
(in determining the purchase price and settlement amount) is only applicable to
the zeroes that are not subject to the 20% final withholding due to the 19
buyer/lender limit.31chanRoblesvirtualLawlibrary
A day before the auction date or on October 15, 2001, the Bureau of Treasury
issued the Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be
Issued on October 16, 2001 (Auction Guidelines).32 The Auction Guidelines
reiterated that the Bonds to be auctioned are [n]ot subject to 20% withholding
tax as the issue will be limited to a maximum of 19 lenders in the primary market
(pursuant to BIR Revenue Regulation No. 020 2001).33 The Auction Guidelines,
for the first time, also stated that the Bonds are [e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September
2001)[.]34chanRoblesvirtualLawlibrary
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year
zero-coupon bonds.35 Also on the same date, the Bureau of Treasury issued
another memorandum36 quoting excerpts of the ruling issued by the Bureau of
Internal Revenue concerning the Bonds exemption from 20% final withholding
tax and the opinion of the Monetary Board on reserve
eligibility.37chanRoblesvirtualLawlibrary
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was
very wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the
Bureau of Treasury accepted the auction results.40 The cut-off was at
12.75%.41chanRoblesvirtualLawlibrary
After the auction, RCBC which participated on behalf of CODE-NGO was
declared as the winning bidder having tendered the lowest bids.42 Accordingly,
on October 18, 2001, the Bureau of Treasury issued P35 billion worth of Bonds
at yield-to-maturity of 12.75% to RCBC for approximately P10.17
billion,43resulting in a discount of approximately P24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting
agreement44 with CODE-NGO, whereby RCBC Capital was appointed as the
Issue Manager and Lead Underwriter for the offering of the PEACe
Bonds.45 RCBC Capital agreed to underwrite46 on a firm basis the offering,
distribution and sale of the P35 billion Bonds at the price of
P11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-
NGO represented that [a]ll income derived from the Bonds, inclusive of premium
on redemption and gains on the trading of the same, are exempt from all forms of
taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31
May 2001 and 16 August 2001, respectively.48chanRoblesvirtualLawlibrary
RCBC Capital sold the Government Bonds in the secondary market for an issue
price of P11,995,513,716.51. Petitioners purchased the PEACe Bonds on
different dates.49chanRoblesvirtualLawlibrary
BIR rulings
On October 7, 2011, the BIR issued the assailed 2011 BIR Ruling imposing a
20% FWT on the Government Bonds and directing the BIR to withhold said final
tax at the maturity thereof, [allegedly without] consultation with Petitioners as
bondholders, and without conducting any hearing.50chanRoblesvirtualLawlibrary
It appears that the assailed 2011 BIR Ruling was issued in response to a query
of the Secretary of Finance on the proper tax treatment of the discount or interest
42
income derived from the Government Bonds.51 The Bureau of Internal Revenue,
citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.
007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13,
2004; and BIR Ruling No. 008-0554 dated July 28, 2005, declared the
following:chanroblesvirtuallawlibrary
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be
subject to 20% Final Tax on interest income from deposit substitutes. It is now
settled that all treasury bonds (including PEACe Bonds), regardless of the
number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes. In the case of zero-coupon bonds, the discount (i.e.
difference between face value and purchase price/discounted value of the bond)
is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest
income should have been properly subject to the 20% Final Tax as provided in
Section 27(D)(1) of the Tax Code of 1997. . . .
. . . .
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was
not able to collect the final tax on the discount/interest income realized by RCBC
as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling No.
007-04 dated July 16, 2004 effectively modifies and supersedes the 2001
Rulings by stating that the [1997] Tax Code is clear that the term public means
borrowing from twenty (20) or more individual or corporate lenders at any one
time. The word any plainly indicates that the period contemplated is the entire On November 15, 2011, this court directed respondents to: (1) SHOW CAUSE
term of the bond, and not merely the point of origination or issuance. . . . Thus,
by taking the PEACe bonds out of the ambit of deposits [sic] substitutes and
exempting it from the 20% Final Tax, an exemption in favour of the PEACe
Bonds was created when no such exemption is found in the law.55
On October 11, 2011, a Memo for Trading Participants No. 58-2011 was issued
by the Philippine Dealing System Holdings Corporation and Subsidiaries (PDS
Group). The Memo provides that in view of the pronouncement of the DOF and
the BIR on the applicability of the 20% FWT on the Government Bonds, no
transfer of the same shall be allowed to be recorded in the Registry of Scripless
Securities (ROSS) from 12 October 2011 until the redemption payment date on
18 October 2011. Thus, the bondholders of record appearing on the ROSS as of
18 October 2011, which include the Petitioners, shall be treated by the BTr as the
beneficial owners of such securities for the relevant [tax] payments to be
imposed thereon.56chanRoblesvirtualLawlibrary
On October 17, 2011, replying to an urgent query from the Bureau of Treasury,
the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying
that the final withholding tax due on the discount or interest earned on the
PEACe Bonds should be imposed and withheld not only on RCBC/CODE NGO
but also [on] all subsequent holders of the Bonds.58chanRoblesvirtualLawlibrary rendered
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus (with urgent application for a temporary restraining order and/or writ
of preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order
(TRO)60 enjoining the implementation of BIR Ruling No. 370-2011 against the
[PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income therefrom shall be withheld by the petitioner banks and placed in
escrow pending resolution of [the] petition.61chanRoblesvirtualLawlibrary
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court
to intervene and to admit petition-in-intervention62 dated October 27, 2011, which
was granted by this court on November 15, 2011.63chanRoblesvirtualLawlibrary
Meanwhile, on November 9, 2011, petitioners filed their Manifestation with
Urgent Ex Parte Motion to Direct Respondents to Comply with the TRO.64 They
alleged that on the same day that the temporary restraining order was issued, the
Bureau of Treasury paid to petitioners and other bondholders the amounts
representing the face value of the Bonds, net however of the amounts
corresponding to the 20% final withholding tax on interest income, and that the
Bureau of Treasury refused to release the amounts corresponding to the 20%
final withholding tax.65chanRoblesvirtualLawlibrary
why they failed to comply with the October 18, 2011 resolution; and (2) COMPLY
with the Courts resolution in order that petitioners may place the corresponding
funds in escrow pending resolution of the petition.66chanRoblesvirtualLawlibrary
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit
attached petition-in-intervention with comment on the petition-in-intervention of
RCBC and RCBC Capital).67 The motion was granted by this court on November
22, 2011.68chanRoblesvirtualLawlibrary
On December 1, 2011, public respondents filed their compliance.69 They
explained that: 1) the implementation of [BIR Ruling No. 370-2011], which has
already been performed on October 18, 2011 with the withholding of the 20%
final withholding tax on the face value of the PEACe bonds, is alreadyfait
accompli . . . when the Resolution and TRO were served to and received by
respondents BTr and National Treasurer [on October 19, 2011];70 and 2) the
withheld amount has ipso facto become public funds and cannot be disbursed or
released to petitioners without congressional appropriation.71 Respondents
further aver that [i]nasmuch as the . . . TRO has already become moot . . . the
condition attached to it, i.e., that the 20% final withholding tax on interest income
therefrom shall be withheld by the banks and placed in escrow . . . has also been
moot[.]72chanRoblesvirtualLawlibrary
43
On December 6, 2011, this court noted respondents' mere eleven (11) days before maturity and after several, consistent categorical
compliance.73chanRoblesvirtualLawlibrary declarations that such bonds are exempt from the 20% FWT, without violating
due process80 and the constitutional principle on non-impairment of
On February 22, 2012, respondents filed their consolidated comment74 on the contracts.81 Petitioners aver that at the time they purchased the Bonds, they had
petitions-in-intervention filed by RCBC and RCBC Capital and CODE-NGO. the right to expect that they would receive the full face value of the Bonds upon
maturity, in view of the 2001 BIR Rulings.82 [R]egardless of whether or not the
On November 27, 2012, petitioners filed their Manifestation with Urgent 2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
Reiterative Motion (To Direct Respondents to Comply with the Temporary thereon.83chanRoblesvirtualLawlibrary
Restraining Order).75chanRoblesvirtualLawlibrary
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes
On December 4, 2012, this court: (a) noted petitioners manifestation with urgent as defined under Section 22(Y) of the 1997 National Internal Revenue Code
reiterative motion (to direct respondents to comply with the temporary restraining because there was only one lender (RCBC) to whom the Bureau of Treasury
order); and (b) required respondents to comment issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings
thereon.76chanRoblesvirtualLawlibrary erroneously interpreted that the number of investors that participate in the
secondary market is the determining factor in reckoning the existence or non-
Respondents comment77 was filed on April 15, 2013, and petitioners filed their existence of twenty (20) or more individual or corporate lenders.85 Furthermore,
reply78 on June 5, 2013.cralawred they contend that the Bureau of Internal Revenue unduly expanded the definition
Issues of deposit substitutes under Section 22 of the 1997 National Internal Revenue
Code in concluding that the mere issuance of government debt instruments and
The main issues to be resolved are:ChanRoblesVirtualawlibrary securities is deemed as falling within the coverage of deposit
I. Whether the PEACe Bonds are deposit substitutes and thus subject to substitutes[.]86 Thus, [t]he 2011 BIR Ruling clearly amount[ed] to an
20% final withholding tax under the 1997 National Internal Revenue unauthorized act of administrative legislation[.]87chanRoblesvirtualLawlibrary
Code. Related to this question is the interpretation of the phrase
borrowing from twenty (20) or more individual or corporate lenders at Petitioners further argue that their income from the Bonds is a trading gain,
any one time under Section 22(Y) of the 1997 National Internal which is exempt from income tax.88 They insist that [t]hey are not lenders whose
Revenue Code, particularly on whether the reckoning of the 20 lenders income is considered as interest income or yield subject to the 20% FWT under
includes trading of the bonds in the secondary market; and Section 27 (D)(1) of the [1997 National Internal Revenue Code]89 because they
II. If the PEACe Bonds are considered deposit substitutes, whether the acquired the Government Bonds in the secondary or tertiary
government or the Bureau of Internal Revenue is estopped from market.90chanRoblesvirtualLawlibrary
imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds Even assuming without admitting that the Government Bonds are deposit
a. Will the imposition of the 20% final withholding tax violate the substitutes, petitioners argue that the collection of the final tax was barred by
non-impairment clause of the Constitution? prescription.91 They point out that under Section 7 of DOF Department Order No.
b. Will it constitute a deprivation of property without due process of 141-95,92 the final withholding tax should have been withheld at the time of their
law? issuance[.]93 Also, under Section 203 of the 1997 National Internal Revenue
c. Will it violate Section 245 of the 1997 National Internal Revenue Code, internal revenue taxes, such as the final tax, [should] be assessed within
Code on non-retroactivity of rulings? three (3) years after the last day prescribed by law for the filing of the
return.94chanRoblesvirtualLawlibrary
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO Moreover, petitioners contend that the retroactive application of the 2011 BIR
Ruling without prior notice to them was in violation of their property rights, 95 their
Petitioners argue that [a]s the issuer of the Government Bonds acting through constitutional right to due process96 as well as Section 246 of the 1997 National
the BTr, the Government is obligated . . . to pay the face value amount of PhP35 Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also
Billion upon maturity without any deduction whatsoever.79 They add that the have an adverse effect of colossal magnitude on the investors, both local and
Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively foreign, the Philippine capital market, and most importantly, the countrys
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a standing in the international commercial community.98 Petitioners explained that

44
unless enjoined, the governments threatened refusal to pay the full value of the
Government Bonds will negatively impact on the image of the country in terms of
protection for property rights (including financial assets), degree of legal
protection for lenders rights, and strength of investor protection.99 They cited
the countrys ranking in the World Economic Forum: 75th in the world in its 2011
2012 Global Competitiveness Index, 111thout of 142 countries worldwide and 2nd
to the last among ASEAN countries in terms of Strength of Investor Protection,
and 105th worldwide and last among ASEAN countries in terms of Property
Rights Index and Legal Rights Index.100 It would also allegedly send a
reverberating message to the whole world that there is no certainty, predictability,
and stability of financial transactions in the capital markets[.] 101 [T]he integrity
of Government-issued bonds and notes will be greatly shattered and the credit of
the Philippine Government will suffer102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce investors perception that the
level of regulatory risk for contracts entered into by the Philippine Government is
high,104 thus resulting in higher interest rate for government-issued debt
instruments and lowered credit rating.105chanRoblesvirtualLawlibrary
Petitioners-intervenors RCBC and RCBC Capital contend that respondent
Commissioner of Internal Revenue gravely and seriously abused her discretion
in the exercise of her rule-making power106when she issued the assailed 2011
BIR Ruling which ruled that all treasury bonds are deposit substitutes
regardless of the number of lenders, in clear disregard of the requirement of
twenty (20) or more lenders mandated under the NIRC.107 They argue that [b]y
her blanket and arbitrary classification of treasury bonds as deposit substitutes,
respondent CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds.108 Petitioners-
intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will
cause substantial impairment of their vested rights 109 under the Bonds since the
ruling imposes new conditions by subjecting the PEACe Bonds to the twenty
percent (20%) final withholding tax notwithstanding the fact that the terms and
conditions thereof as previously represented by the Government, through
respondents BTr and BIR, expressly state that it is not subject to final withholding
tax upon their maturity.110 They added that [t]he exemption from the twenty
percent (20%) final withholding tax [was] the primary inducement and principal
consideration for [their] participat[ion] in the auction and underwriting of the
PEACe Bonds.111chanRoblesvirtualLawlibrary
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend
that respondent Commissioner of Internal Revenue violated their rights to due
process when she arbitrarily issued the 2011 BIR Ruling without prior notice and
hearing, and the oppressive timing of such ruling deprived them of the
opportunity to challenge the same.112chanRoblesvirtualLawlibrary
Assuming the 20% final withholding tax was due on the PEACe Bonds,
petitioners-intervenors RCBC and RCBC Capital claim that respondents Bureau
of Treasury and CODE-NGO should be held liable as [these] parties explicitly
represented . . . that the said bonds are exempt from the final withholding
tax.113chanRoblesvirtualLawlibrary
Finally, petitioners-intervenors RCBC and RCBC Capital argue that the
implementation of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-
2011] will have pernicious effects on the integrity of existing securities, which is
contrary to the State policies of stabilizing the financial system and of developing
capital markets.114chanRoblesvirtualLawlibrary
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No.
DA 378-2011 are invalid because they contravene Section 22(Y) of the 1997
[NIRC] when the said rulings disregarded the applicability of the 20 or more
lender rule to government debt instruments[;]115 (b) when [it] sold the PEACe
Bonds in the secondary market instead of holding them until maturity, [it] derived
. . . long-term trading gain[s], not interest income, which [are] exempt . . . under
Section 32(B)(7)(g) of the 1997 NIRC[;]116 (c) the tax exemption privilege
relating to the issuance of the PEACe Bonds . . . partakes of a contractual
commitment granted by the Government in exchange for a valid and material
consideration [i.e., the issue price paid and savings in borrowing cost derived by
the Government,] thus protected by the non-impairment clause of the 1987
Constitution[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings did not validly
revoke the 2001 BIR Rulings since no notice of revocation was issued to [it],
RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR
administrative guidance issued and published[.]118 CODE-NGO additionally
argues that impleading it in a Rule 65 petition was improper because: (a) it
involves determination of a factual question;119 and (b) it is premature and states
no cause of action as it amounts to an anticipatory third-party
claim.120chanRoblesvirtualLawlibrary
Arguments of respondents
Respondents argue that petitioners direct resort to this court to challenge the
2011 BIR Ruling violates the doctrines of exhaustion of administrative remedies
and hierarchy of courts, resulting in a lack of cause of action that justifies the
dismissal of the petition.121 According to them, the jurisdiction to review the
rulings of the [Commissioner of Internal Revenue], after the aggrieved party
exhausted the administrative remedies, pertains to the Court of Tax
Appeals.122 They point out that a case similar to the present Petition was [in
fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351
[and] entitled, Rizal Commercial Banking Corporation and RCBC Capital
Corporation vs. Commissioner of Internal Revenue, et
al.123chanRoblesvirtualLawlibrary
Respondents further take issue on the timeliness of the filing of the petition and
petitions-in-intervention.124 They argue that under the guise of mainly assailing
the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR
45
Rulings, of which the attack is legally prohibited, and the petition insofar as it
seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time
pursuant to Rule 65, Section 4.125chanRoblesvirtualLawlibrary
Respondents contend that the discount/interest income derived from the PEACe
Bonds is not a trading gain but interest income subject to income tax.126 They
explain that [w]ith the payment of the PhP35 Billion proceeds on maturity of the
PEACe Bonds, Petitioners receive an amount of money equivalent to about
PhP24.8 Billion as payment for interest. Such interest is clearly an income of the
Petitioners considering that the same is a flow of wealth and not merely a return
of capital the capital initially invested in the Bonds being approximately
PhP10.2 Billion[.]127chanRoblesvirtualLawlibrary
Maintaining that the imposition of the 20% final withholding tax on the PEACe
Bonds does not constitute an impairment of the obligations of contract,
respondents aver that: The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be
considered a material term of the Bonds[;]128 [t]here has been no change in the
laws governing the taxability of interest income from deposit substitutes and said
laws are read into every contract[;]129[t]he assailed BIR Rulings merely interpret
the term deposit substitute in accordance with the letter and spirit of the Tax
Code[;]130 [t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in
full[;]131 and [i]f there was a breach of contract or a misrepresentation it was
between RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the
PEACe Bonds.132chanRoblesvirtualLawlibrary
Similarly, respondents counter that the withholding of [t]he 20% final withholding
tax on the PEACe Bonds does not amount to a deprivation of property without
due process of law.133 Their imposition of the 20% final withholding tax is not
arbitrary because they were only performing a duty imposed by law;134 [t]he
2011 BIR Ruling is an interpretative rule which merely interprets the meaning of
deposit substitutes [and upheld] the earlier construction given to the term by the
2004 and 2005 BIR Rulings.135 Hence, respondents argue that there was no
need to observe the requirements of notice, hearing, and
publication[.]136chanRoblesvirtualLawlibrary
Nonetheless, respondents add that there is every reason to believe that
Petitioners all major financial institutions equipped with both internal and
external accounting and compliance departments as well as access to both
internal and external legal counsel; actively involved in industry organizations
such as the Bankers Association of the Philippines and the Capital Market
Development Council; all actively taking part in the regular and special debt
issuances of the BTr and indeed regularly proposing products for issue by BTr
had actual notice of the 2004 and 2005 BIR Rulings.137 Allegedly, the sudden
and drastic drop including virtually zero trading for extended periods of six
months to almost a year in the trading volume of the PEACe Bonds after the
release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market
participants, including the Petitioners herein, were aware of the ruling and its
consequences for the PEACe Bonds.138chanRoblesvirtualLawlibrary
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of
the Commissioner of Internal Revenues rule-making power;139 that it and the
2004 and 2005 BIR Rulings did not unduly expand the definition of deposit
substitutes by creating an unwarranted exception to the requirement of having 20
or more lenders/purchasers;140 and the word any in Section 22(Y) of the
National Internal Revenue Code plainly indicates that the period contemplated is
the entire term of the bond and not merely the point of origination or
issuance.141chanRoblesvirtualLawlibrary
Respondents further argue that a retroactive application of the 2011 BIR Ruling
will not unjustifiably prejudice petitioners.142 [W]ith or without the 2011 BIR
Ruling, Petitioners would be liable to pay a 20% final withholding tax just the
same because the PEACe Bonds in their possession are legally in the nature of
deposit substitutes subject to a 20% final withholding tax under the
NIRC.143 Section 7 of DOF Department Order No. 141-95 also provides that
income derived from Treasury bonds is subject to the 20% final withholding
tax.144 [W]hile revenue regulations as a general rule have no retroactive effect, if
the revocation is due to the fact that the regulation is erroneous or contrary to
law, such revocation shall have retroactive operation as to affect past
transactions, because a wrong construction of the law cannot give rise to a
vested right that can be invoked by a taxpayer.145chanRoblesvirtualLawlibrary
Finally, respondents submit that there are a number of variables and factors
affecting a capital market.146 [C]apital market itself is inherently
unstable.147 Thus, [p]etitioners argument that the 20% final withholding tax . . .
will wreak havoc on the financial stability of the country is a mere supposition that
is not a justiciable issue.148chanRoblesvirtualLawlibrary
On the prayer for the temporary restraining order, respondents argue that this
order could no longer be implemented [because] the acts sought to be enjoined
are already fait accompli.149 They add that to disburse the funds withheld to the
Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting money being paid out of the Treasury except in pursuance of an
appropriation made by law[.]150 The remedy of petitioners is to claim a tax
refund under Section 204(c) of the Tax Code should their position be upheld by
the Honorable Court.151chanRoblesvirtualLawlibrary
Respondents also argue that the implementation of the TRO would violate
Section 218 of the Tax Code in relation to Section 11 of Republic Act No. 1125
(as amended by Section 9 of Republic Act No. 9282) which prohibits courts,
except the Court of Tax Appeals, from issuing injunctions to restrain the
46
collection of any national internal revenue tax imposed by the Tax
Code.152chanRoblesvirtualLawlibrary
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital,
and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997
National Internal Revenue Code when it declared that all government
debt instruments are deposit substitutes regardless of the 20-lender rule;
and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
o It constitutes a unilateral amendment of a material term (tax
exempt status) in the Bonds, represented by the government as
an inducement and important consideration for the purchase of
the Bonds;
b) It constitutes deprivation of property without due process because
there was no prior notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National
Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-
government organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse
of discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue
of the Commissioner of Internal Revenues power to interpret the
provisions of the 1997 National Internal Revenue Code and other tax
laws;
b. Commissioner of Internal Revenue merely restates and confirms the
interpretations contained in previously issued BIR Ruling Nos. 007-2004,
DA-491-04, and 008-05, which have already effectively abandoned or
revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her
predecessors rulings especially when the latters rulings are not in
harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have
perpetrated cannot give rise to a vested right. Therefore, the 2011 BIR
Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and
adequate remedy in the ordinary course of law:
a. Petitioners had the basic remedy of filing a claim for refund of the 20%
final withholding tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies
and of hierarchy of courts.
Courts ruling
Procedural Issues
Non-exhaustion of administrative
remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative
rulings are reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide
Tax Cases. - The power to interpret the provisions of this Code and other tax
laws shall be under the exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that [i]f superior administrative officers [can] grant the relief
prayed for, [then] special civil actions are generally not entertained.153 The
remedy within the administrative machinery must be resorted to first and pursued
to its appropriate conclusion before the courts judicial power can be
sought.154chanRoblesvirtualLawlibrary
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:chanroblesvirtuallawlibrary
[The doctrine of exhaustion of administrative remedies] is a relative one and its
flexibility is called upon by the peculiarity and uniqueness of the factual and
circumstantial settings of a case. Hence, it is disregarded (1) when there is a
violation of due process, (2) when the issue involved is purely a legal
question,155 (3) when the administrative action is patently illegal amounting to
lack or excess of jurisdiction,(4) when there is estoppel on the part of the
administrative agency concerned,(5) when there is irreparable injury, (6) when
the respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to
require exhaustion of administrative remedies would be unreasonable, (8) when
it would amount to a nullification of a claim, (9) when the subject matter is a
private land in land case proceedings, (10) when the rule does not provide a
47
plain, speedy and adequate remedy, (11) when there are circumstances
indicating the urgency of judicial intervention.156 (Emphasis supplied, citations
omitted)
The exceptions under (2) and (11) are present in this case. The question
involved is purely legal, namely: (a) the interpretation of the 20-lender rule in the
definition of the terms public and deposit substitutes under the 1997 National
Internal Revenue Code; and (b) whether the imposition of the 20% final
withholding tax on the PEACe Bonds upon maturity violates the constitutional
provisions on non-impairment of contracts and due process. Judicial intervention
is likewise urgent with the impending maturity of the PEACe Bonds on October
18, 2011.
The rule on exhaustion of administrative remedies also finds no application when
the exhaustion will result in an exercise in futility. 157chanRoblesvirtualLawlibrary
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR
Ruling would be a futile exercise because it was upon the request of the
Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of
Internal Revenue. It appears that the Secretary of Finance adopted the
Commissioner of Internal Revenues opinions as his own.158 This position was in
fact confirmed in the letter159 dated October 10, 2011 where he ordered the
Bureau of Treasury to withhold the amount corresponding to the 20% final
withholding tax on the interest or discounts allegedly due from the bondholders
on the strength of the 2011 BIR Ruling.
Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals. The
questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in
connection with the implementation of the 1997 National Internal Revenue Code
on the taxability of the interest income from zero-coupon bonds issued by the
government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as
amended by Republic Act No. 9282,160 such rulings of the Commissioner of
Internal Revenue are appealable to that court, thus:chanroblesvirtuallawlibrary
SEC. 7. Jurisdiction. - The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;
. . . .
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party
adversely affected by a decision, ruling or inaction of the Commissioner of
Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal
with the CTA within thirty (30) days after the receipt of such decision or ruling or
after the expiration of the period fixed by law for action as referred to in Section
7(a)(2) herein.
. . . .
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding
involving matters arising under the National Internal Revenue Code, the Tariff
and Customs Code or the Local Government Code shall be maintained, except
as herein provided, until and unless an appeal has been previously filed with the
CTA and disposed of in accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v.
Blaquera,162 this court emphasized the jurisdiction of the Court of Tax Appeals
over rulings of the Bureau of Internal Revenue, thus:chanroblesvirtuallawlibrary
While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the
Commissioner of Internal Revenue pertains to the Court of Tax Appeals, not to
the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of
pawnshops. . . .
. . . .
Such revenue orders were issued pursuant to petitioner's powers under Section
245 of the Tax Code, which states:chanroblesvirtuallawlibrary
SEC. 245. Authority of the Secretary of Finance to promulgate rules and
regulations. The Secretary of Finance, upon recommendation of the
Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or
analogous to those subject to a rate of sales tax under certain category
enumerated in Section 163 and 165 of this Code shall be without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws,
including ruling on the classification of articles of sales and similar purposes.
48
(Emphasis in the original) the market. Due to the changing positions of the Bureau of Internal Revenue on
this issue, there is a need for a final ruling from this court to stabilize the
.... expectations in the financial market.

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:chanroblesvirtuallawlibrary Finally, non-compliance with the rules on exhaustion of administrative remedies
Plaintiff maintains that this is not an appeal from a ruling of the Collector of and hierarchy of courts had been rendered moot by this courts issuance of the
Internal Revenue, but merely an attempt to nullify General Circular No. V-148, temporary restraining order enjoining the implementation of the 2011 BIR
which does not adjudicate or settle any controversy, and that, accordingly, this Ruling. The temporary restraining order effectively recognized the urgency and
case is not within the jurisdiction of the Court of Tax Appeals. necessity of direct resort to this court.
Substantive issues
We find no merit in this pretense. General Circular No. V-148 directs the officers
charged with the collection of taxes and license fees to adhere strictly to the Tax treatment of deposit substitutes
interpretation given by the defendant to the statutory provisions abovementioned,
as set forth in the Circular. The same incorporates, therefore, a decision of the Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal
Collector of Internal Revenue (now Commissioner of Internal Revenue) on the Revenue Code, a final withholding tax at the rate of 20% is imposed on interest
manner of enforcement of the said statute, the administration of which is on any currency bank deposit and yield or any other monetary benefit from
entrusted by law to the Bureau of Internal Revenue. As such, it comes within the deposit substitutes and from trust funds and similar arrangements. These
purview of Republic Act No. 1125, Section 7 of which provides that the Court of provisions read:chanroblesvirtuallawlibrary
Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal . . SEC. 24. Income Tax Rates.
. decisions of the Collector of Internal Revenue in . . . matters arising under the
National Internal Revenue Code or other law or part of the law administered by . . . .
the Bureau of Internal Revenue.163
(B) Rate of Tax on Certain Passive Income.
In exceptional cases, however, this court entertained direct recourse to it when (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of
dictated by public welfare and the advancement of public policy, or demanded twenty percent (20%) is hereby imposed upon the amount of interest from any
by the broader interest of justice, or the orders complained of were found to be currency bank deposit and yield or any other monetary benefit from deposit
patent nullities, or the appeal was considered as clearly an inappropriate substitutes and from trust funds and similar arrangements; . . . Provided, further,
remedy.164chanRoblesvirtualLawlibrary That interest income from long-term deposit or investment in the form of savings,
common or individual trust funds, deposit substitutes, investment management
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The accounts and other investments evidenced by certificates in such form
Secretary, Department of Interior and Local Government,165 this court noted that prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
the petition for prohibition was filed directly before it in disregard of the rule on imposed under this Subsection: Provided, finally, That should the holder of the
hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over certificate pre-terminate the deposit or investment before the fifth (5th) year, a
the . . . petition and decide the same on its merits in view of the significant final tax shall be imposed on the entire income and shall be deducted and
constitutional issues raised by the parties dealing with the tax treatment of withheld by the depository bank from the proceeds of the long-term deposit or
cooperatives under existing laws and in the interest of speedy justice and prompt investment certificate based on the remaining maturity
disposition of the matter.166chanRoblesvirtualLawlibrary thereof:chanroblesvirtuallawlibrary
Four (4) years to less than five (5) years - 5%;
Here, the nature and importance of the issues raised167 to the investment and Three (3) years to less than four (4) years - 12%; and
banking industry with regard to a definitive declaration of whether government Less than three (3) years - 20%. (Emphasis supplied)
debt instruments are deposit substitutes under existing laws, and the novelty
thereof, constitute exceptional and compelling circumstances to justify resort to SEC. 27. Rates of Income Tax on Domestic Corporations. -
this court in the first instance.
. . . .
The tax provision on deposit substitutes affects not only the PEACe Bonds but
also any other financial instrument or product that may be issued and traded in (D) Rates of Tax on Certain Passive Incomes. -

49
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit between or among banks and quasi-banks shall not be considered as deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A substitute debt instruments. (Emphasis supplied)
final tax at the rate of twenty percent (20%) is hereby imposed upon the amount
of interest on currency bank deposit and yield or any other monetary benefit from Revenue Regulations No. 17-84, issued to implement Presidential Decree No.
deposit substitutes and from trust funds and similar arrangements received by 1959, adopted verbatim the same definition and specifically identified the
domestic corporations, and royalties, derived from sources within the Philippines: following borrowings as deposit substitutes:chanroblesvirtuallawlibrary
Provided, however, That interest income derived by a domestic corporation from SECTION 2. Definitions of Terms. . . .
a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of (h) Deposit substitutes shall mean
such interest income. (Emphasis supplied)
. . . .
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(a) All interbank borrowings by or among banks and non-bank financial
(A) Tax on Resident Foreign Corporations. - institutions authorized to engage in quasi-banking functions evidenced by deposit
substitutes instruments, except interbank call loans to cover deficiency in
. . . . reserves against deposit liabilities as evidenced by interbank loan advice or
repayment transfer tickets.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit (b) All borrowings of the national and local government and its instrumentalities
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from including the Central Bank of the Philippines, evidenced by debt instruments
any currency bank deposit and yield or any other monetary benefit from deposit denoted as treasury bonds, bills, notes, certificates of indebtedness and similar
substitutes and from trust funds and similar arrangements and royalties derived instruments.
from sources within the Philippines shall be subject to a final income tax at the
rate of twenty percent (20%) of such interest: Provided, however, That interest (c) All borrowings of banks, non-bank financial intermediaries, finance
income derived by a resident foreign corporation from a depository bank under companies, investment companies, trust companies, including the trust
the expanded foreign currency deposit system shall be subject to a final income department of banks and investment houses, evidenced by deposit substitutes
tax at the rate of seven and one-half percent (7 1/2%) of such interest income. instruments. (Emphasis supplied)
(Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National
This tax treatment of interest from bank deposits and yield from deposit Internal Revenue Code with the addition of the qualifying phrase for public
substitutes was first introduced in the 1977 National Internal Revenue Code borrowing from 20 or more individual or corporate lenders at any one
through Presidential Decree No. 1739168issued in 1980. Later, Presidential time. Under Section 22(Y), deposit substitute is defined
Decree No. 1959, effective on October 15, 1984, formally added the definition of thus:chanroblesvirtuallawlibrary
deposit substitutes, viz:chanroblesvirtuallawlibrary SEC. 22. Definitions - When used in this Title:
(y) Deposit substitutes shall mean an alternative form of obtaining funds from
the public, other than deposits, through the issuance, endorsement, or . . . .
acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or (Y) The term deposit substitutes shall mean an alternative form of obtaining
financing their own needs or the needs of their agent or dealer. These funds from the public (the term 'public' means borrowing from twenty (20) or
promissory notes, repurchase agreements, certificates of assignment or more individual or corporate lenders at any one time) other than deposits,
participation and similar instrument with recourse as may be authorized by the through the issuance, endorsement, or acceptance of debt instruments for the
Central Bank of the Philippines, for banks and non-bank financial intermediaries borrowers own account, for the purpose of relending or purchasing of
or by the Securities and Exchange Commission of the Philippines for receivables and other obligations, or financing their own needs or the needs of
commercial, industrial, finance companies and either non-financial their agent or dealer. These instruments may include, but need not be limited to,
companies: Provided, however, that only debt instruments issued for inter-bank bankers acceptances, promissory notes, repurchase agreements, including
call loans to cover deficiency in reserves against deposit liabilities including those reverse repurchase agreements entered into by and between the Bangko Sentral

50
ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5)
days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit
substitute debt instruments. (Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined
public to mean twenty (20) or more individual or corporate lenders at any one
time. Hence, the number of lenders is determinative of whether a debt
instrument should be considered a deposit substitute and consequently subject
to the 20% final withholding tax.
20-lender rule
Petitioners contend that there [is] only one (1) lender (i.e. RCBC) to whom the
BTr issued the Government Bonds.169 On the other hand, respondents theorize
that the word any indicates that the period contemplated is the entire term of
the bond and not merely the point of origination or issuance[,]170 such that if the
debt instruments were subsequently sold in secondary markets and so on, in
such a way that twenty (20) or more buyers eventually own the instruments, then
it becomes indubitable that funds would be obtained from the public as defined
in Section 22(Y) of the NIRC.171 Indeed, in the context of the financial market,
the words at any one time create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the
deficit units (mainly business firms and government that need funds to finance
their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial
assets, and the borrowers receive these funds now considered as their financial
liabilities. The transfer of funds is represented by a security, such as stocks and
bonds. Fund suppliers earn a return on their investment; the return is necessary
to ensure that funds are supplied to the financial
markets.172chanRoblesvirtualLawlibrary
The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]173 namely: (1) the money
market, which facilitates the flow of short-term funds (with maturities of one year
or less); and (2) the capital market, which facilitates the flow of long-term funds
(with maturities of more than one year).174chanRoblesvirtualLawlibrary
Whether referring to money market securities or capital market securities,
transactions occur either in the primary market or in the secondary
market.175 Primary markets facilitate the issuance of new
securities. Secondary markets facilitate the trading of existing securities, which
allows for a change in the ownership of the securities.176 The transactions in
primary markets exist between issuers and investors, while secondary market
transactions exist among investors.177chanRoblesvirtualLawlibrary
Over time, the system of financial markets has evolved from simple to more
complex ways of carrying out financial transactions.178 Still, all systems perform
one basic function: the quick mobilization of money from the lenders/investors to
the borrowers.179chanRoblesvirtualLawlibrary
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect
finance; and (3) indirect finance.180chanRoblesvirtualLawlibrary
With direct financing, the borrower and lender meet each other and exchange
funds in return for financial assets181 (e.g., purchasing bonds directly from the
company issuing them). This method provides certain limitations such as: (a)
both borrower and lender must desire to exchange the same amount of funds at
the same time[;]182 and (b) both lender and borrower must frequently incur
substantial information costs simply to find each
other.183chanRoblesvirtualLawlibrary
In semidirect financing, a securities broker or dealer brings surplus and deficit
units together, thereby reducing information costs.184 A broker185 is an
individual or financial institution who provides information concerning possible
purchases and sales of securities. Either a buyer or a seller of securities may
contact a broker, whose job is simply to bring buyers and sellers
together.186 Adealer187 also serves as a middleman between buyers and
sellers, but the dealer actually acquires the sellers securities in the hope of
selling them at a later time at a more favorable price.188 Frequently, a dealer
will split up a large issue of primary securities into smaller units affordable by . . .
buyers . . . and thereby expand the flow of savings into investment. 189 In
semidirect financing, [t]he ultimate lender still winds up holding the borrowers
securities, and therefore the lender must be willing to accept the risk, liquidity,
and maturity characteristics of the borrowers [debt security]. There still must be
a fundamental coincidence of wants and needs between [lenders and borrowers]
for semidirect financial transactions to take place.190chanRoblesvirtualLawlibrary
The limitations of both direct and semidirect finance stimulated the development
of indirect financial transactions, carried out with the help of financial
intermediaries191 or financial institutions, like banks, investment banks, finance
companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit
units.193 Depository institutions [such as banks] accept deposits from surplus
units and provide credit to deficit units through loans and purchase of [debt]
securities.194 Nondepository institutions, like mutual funds, issue securities of
51
their own (usually in smaller and affordable denominations) to surplus units and exempted as within the class of taxable income under our laws.
at the same time purchase debt securities of deficit units.195 By pooling the
resources of [small savers, a financial intermediary] can service the credit needs The definition of gross income is broad enough to include all passive incomes
of large firms simultaneously.196chanRoblesvirtualLawlibrary subject to specific tax rates or final taxes.197 Hence, interest income from
deposit substitutes are necessarily part of taxable income. However, since
The financial market, therefore, is an agglomeration of financial transactions in these passive incomes are already subject to different rates and taxed finally at
securities performed by market participants that works to transfer the funds from source, they are no longer included in the computation of gross income, which
the surplus units (or investors/lenders) to those who need them (deficit units or determines taxable income.198 Stated otherwise . . . if there were no
borrowers). withholding tax system in place in this country, this 20 percent portion of the
passive income of [creditors/lenders] would actually be paid to the
Meaning of at any one time [creditors/lenders] and then remitted by them to the government in payment of
their income tax.199chanRoblesvirtualLawlibrary
Thus, from the point of view of the financial market, the phrase at any one time
for purposes of determining the 20 or more lenders would mean every This court, in Chamber of Real Estate and Builders Associations, Inc. v.
transaction executed in the primary or secondary market in connection with the Romulo,200 explained the rationale behind the withholding tax
purchase or sale of securities. system:chanroblesvirtuallawlibrary
The withholding [of tax at source] was devised for three primary reasons: first, to
For example, where the financial assets involved are government securities like provide the taxpayer a convenient manner to meet his probable income tax
bonds, the reckoning of 20 or more lenders/investors is made at any transaction liability; second, to ensure the collection of income tax which can otherwise be
in connection with the purchase or sale of the Government Bonds, such as: lost or substantially reduced through failure to file the corresponding returns[;]
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the and third, to improve the governments cash flow. This results in administrative
primary market; savings, prompt and efficient collection of taxes, prevention of delinquencies and
2. Sale and distribution by GSEDs to various lenders/investors in the reduction of governmental effort to collect taxes through more complicated
secondary market; means and remedies.201 (Citations omitted)
3. Subsequent sale or trading by a bondholder to another lender/investor in
the secondary market usually through a broker or dealer; or The application of the withholdings system to interest on bank deposits or yield
4. Sale by a financial intermediary-bondholder of its participation interests from deposit substitutes is essentially to maximize and expedite the collection of
in the bonds to individual or corporate lenders in the secondary market. income taxes by requiring its payment at the
source.202chanRoblesvirtualLawlibrary
When, through any of the foregoing transactions, funds are simultaneously
obtained from 20 or more lenders/investors, there is deemed to be a public Hence, when there are 20 or more lenders/investors in a transaction for a
borrowing and the bonds at that point in time are deemed deposit specific bond issue, the seller is required to withhold the 20% final income tax on
substitutes. Consequently, the seller is required to withhold the 20% final the imputed interest income from the bonds.
withholding tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
For debt instruments that are
not deposit substitutes, regular The interest income earned from bonds is not synonymous with the gains
income tax applies contemplated under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue
Code, which exempts gains derived from trading, redemption, or retirement of
It must be emphasized, however, that debt instruments that do not qualify as long-term securities from ordinary income tax.
deposit substitutes under the 1997 National Internal Revenue Code are subject
to the regular income tax. The term gain as used in Section 32(B)(7)(g) does not include interest, which
represents forbearance for the use of money. Gains from sale or exchange or
The phrase all income derived from whatever source in Chapter retirement of bonds or other certificate of indebtedness fall within the general
VI, Computation of Gross Income,Section 32(A) of the 1997 National Internal category of gains derived from dealings in property under Section 32(A)(3),
Revenue Code discloses a legislative policy to include all income not expressly while interest from bonds or other certificate of indebtedness falls within the

52
category of interests under Section 32(A)(4).204 The use of the term gains from
sale in Section 32(B)(7)(g) shows the intent of Congress not to include interest
as referred under Sections 24, 25, 27, and 28 in the
exemption.205chanRoblesvirtualLawlibrary
Hence, the gains contemplated in Section 32(B)(7)(g) refers to: (1) gain realized
from the trading of the bonds before their maturity date, which is the difference
between the selling price of the bonds in the secondary market and the price at
which the bonds were purchased by the seller; and (2) gain realized by the last
holder of the bonds when the bonds are redeemed at maturity, which is the
difference between the proceeds from the retirement of the bonds and the price
at which such last holder acquired the bonds. For discounted instruments, like
the zero-coupon bonds, the trading gain shall be the excess of the selling price
over the book value or accreted value (original issue price plus accumulated
discount from the time of purchase up to the time of sale) of the
instruments.206chanRoblesvirtualLawlibrary
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenues interpretation as expressed in the three 2001
BIR Rulings is not consistent with law.207 Its interpretation of at any one time to
mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the
2004 and 2005 BIR Rulings) that all treasury bonds . . . regardless of the
number of purchasers/lenders at the time of origination/issuance are considered
deposit substitutes.208 Being the subject of this petition, it is, thus, declared void
because it completely disregarded the 20 or more lender rule added by Congress
in the 1997 National Internal Revenue Code. It also created a distinction for
government debt instruments as against those issued by private corporations
when there was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole
act. Their constituent provisions must be read together, endeavoring to make
every part effective, harmonious, and sensible.209 That construction which will
leave every word operative will be favored over one that leaves some word,
clause, or sentence meaningless and insignificant.210chanRoblesvirtualLawlibrary
It may be granted that the interpretation of the Commissioner of Internal Revenue
in charge of executing the 1997 National Internal Revenue Code is an
authoritative construction of great weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a
misapprehension of law an officer has issued an erroneous interpretation, the
error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal
Revenue,211 this court upheld the nullification of Revenue Memorandum Circular
(RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue
because it was contrary to the express provision of Section 230 of the 1977
National Internal Revenue Code and, hence, [cannot] be given weight for to do
so would, in effect, amend the statute.212 Thus:chanroblesvirtuallawlibrary
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing
the prescriptive period of two years to ten years on claims of excess quarterly
income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret
the law; rather it legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general
interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts
will not countenance administrative issuances that override, instead of remaining
consistent and in harmony with, the law they seek to apply and
implement.213 (Citations omitted)
This court further held that [a] memorandum-circular of a bureau head could not
operate to vest a taxpayer with a shield against judicial action [because] there
are no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the
same.214chanRoblesvirtualLawlibrary
In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this
court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-
91, which imposed a 5% lending investor's tax on pawnshops.216 It was held that
the [Commissioner] cannot, in the exercise of [its interpretative] power, issue
administrative rulings or circulars not consistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify
the law, but must remain consistent with the law they intend to carry out. Only
Congress can repeal or amend the law.217chanRoblesvirtualLawlibrary
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary,218 this court stated that the Commissioner of Internal Revenue is not
bound by the ruling of his predecessors,219but, to the contrary, the overruling of
decisions is inherent in the interpretation of laws:chanroblesvirtuallawlibrary
[I]n considering a legislative rule a court is free to make three inquiries: (i)
whether the rule is within the delegated authority of the administrative agency; (ii)
53
whether it is reasonable; and (iii) whether it was issued pursuant to proper
procedure. But the court is not free to substitute its judgment as to the desirability
or wisdom of the rule for the legislative body, by its delegation of administrative
judgment, has committed those questions to administrative judgments and not to
judicial judgments. In the case of an interpretative rule, the inquiry is not into the
validity but into the correctness or propriety of the rule. As a matter of power a
court, when confronted with an interpretative rule, is free to (i) give the force of
law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)
give some intermediate degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner
erred in not considering copra as an agricultural food product within the
meaning of 103(b) of the NIRC. As the Solicitor General contends, copra per
se is not food, that is, it is not intended for human consumption. Simply stated,
nobody eats copra for food. That previous Commissioners considered it so, is
not reason for holding that the present interpretation is wrong. The Commissioner
of Internal Revenue is not bound by the ruling of his predecessors. To the
contrary, the overruling of decisions is inherent in the interpretation of
laws.220 (Emphasis supplied, citations omitted)
22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-
NGO would have been obliged to pay the 20% final withholding tax on the
interest or discount from the PEACe Bonds. Further, the obligation to withhold
the 20% final tax on the corresponding interest from the PEACe Bonds would
likewise be required of any lender/investor had the latter turned around and sold
said PEACe Bonds, whether in whole or part, simultaneously to 20 or more
lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal
Revenue Code, interest income received by individuals from long-term deposits
or investments with a holding period of not less than five (5) years is exempt from
the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face
value of the PEACe Bonds to the bondholders and for the Bureau of Internal
Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, or any lender or investor if such be the case, as the
withholding agents.

Tax treatment of income derived The collection of tax is not

from the PEACe Bonds barred by prescription

The transactions executed for the sale of the PEACe Bonds are: The three (3)-year prescriptive period under Section 203 of the 1997 National
1. The issuance of the P35 billion Bonds by the Bureau of Treasury to Internal Revenue Code to assess and collect internal revenue taxes is extended
RCBC/CODE-NGO at P10.2 billion; and to 10 years in cases of (1) fraudulent returns; (2) false returns with intent to
2. The sale and distribution by RCBC Capital (underwriter) on behalf of evade tax; and (3) failure to file a return, to be computed from the time of
CODE-NGO of the PEACe Bonds to undisclosed investors at P11.996 discovery of the falsity, fraud, or omission. Section 203
billion. states:chanroblesvirtuallawlibrary
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as
It may seem that there was only one lender RCBC on behalf of CODE-NGO provided in Section 222, internal revenue taxes shall be assessed within three (3)
to whom the PEACe Bonds were issued at the time of origination. However, a years after the last day prescribed by law for the filing of the return, and no
reading of the underwriting agreement221and RCBC term sheet222 reveals that the proceeding in court without assessment for the collection of such taxes shall be
settlement dates for the sale and distribution by RCBC Capital (as underwriter for begun after the expiration of such period: Provided, That in a case where a return
CODE-NGO) of the PEACe Bonds to various undisclosed investors at a is filed beyond the period prescribed by law, the three (3)-year period shall be
purchase price of approximately P11.996 would fall on the same day, October counted from the day the return was filed. For purposes of this Section, a return
18, 2001, when the PEACe Bonds were supposedly issued to CODE- filed before the last day prescribed by law for the filing thereof shall be
NGO/RCBC. In reality, therefore, the entire P10.2 billion borrowing received by considered as filed on such last day. (Emphasis supplied)
the Bureau of Treasury in exchange for the P35 billion worth of PEACe Bonds
was sourced directly from the undisclosed number of investors to whom RCBC . . . .
Capital/CODE-NGO distributed the PEACe Bonds all at the time of origination
or issuance. At this point, however, we do not know as to how many investors SEC. 222. Exceptions as to Period of Limitation of Assessment and
the PEACe Bonds were sold to by RCBC Capital. Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure
Should there have been a simultaneous sale to 20 or more lenders/investors, the to file a return, the tax may be assessed, or a proceeding in court for the
PEACe Bonds are deemed deposit substitutes within the meaning of Section collection of such tax may be filed without assessment, at any time within ten

54
(10) years after the discovery of the falsity, fraud or omission: Provided, That in a amounts withheld is a defiance of
fraud assessment which has become final and executory, the fact of fraud shall the temporary restraining order
be judicially taken cognizance of in the civil or criminal action for the collection
thereof. Nonetheless, respondents continued failure to release to petitioners the amount
corresponding to the 20% final withholding tax in order that it may be placed in
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds escrow as directed by this court constitutes a defiance of this courts temporary
to 20 or more lenders/investors, the Bureau of Internal Revenue may still collect restraining order.231chanRoblesvirtualLawlibrary
the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the
discovery of the omission. The temporary restraining order is not moot. The acts sought to be enjoined are
not fait accompli. For an act to be considered fait accompli, the act must have
In view of the foregoing, there is no need to pass upon the other issues raised by already been fully accomplished and consummated.232 It must be irreversible,
petitioners and petitioners-intervenors. e.g., demolition of properties,233 service of the penalty of imprisonment,234 and
Reiterative motion on the temporary restraining order hearings on cases.235 When the act sought to be enjoined has not yet been fully
satisfied, and/or is still continuing in nature,236 the defense of fait accompli cannot
prosper.
Respondents withholding of the
20% final withholding tax on The temporary restraining order enjoins the entire implementation of the 2011
October 18, 2011 was justified BIR Ruling that constitutes both the withholding and remittance of the 20% final
withholding tax to the Bureau of Internal Revenue. Even though the Bureau of
Under the Rules of Court, court orders are required to be served upon the Treasury had already withheld the 20% final withholding tax 237 when it received
parties affected.224 Moreover, service may be made personally or by the temporary restraining order, it had yet to remit the monies it withheld to the
mail.225 And, [p]ersonal service is complete upon actual delivery [of the Bureau of Internal Revenue, a remittance which was due only on November 10,
order.]226 This courts temporary restraining order was received only on October 2011.238 The act enjoined by the temporary restraining order had not yet been
19, 2011, or a day after the PEACe Bonds had matured and the 20% final fully satisfied and was still continuing.
withholding tax on the interest income from the same was withheld.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which
Publication of news reports in the print and broadcast media, as well as on the prescribes to national government agencies such as the Bureau of Treasury the
internet, is not a recognized mode of service of pleadings, court orders, or procedure for the remittance of all taxes it withheld to the Bureau of Internal
processes. Moreover, the news reports227cited by petitioners were posted Revenue, a national agency shall file before the Bureau of Internal Revenue a
minutes before the close of office hours or late in the evening of October 18, Tax Remittance Advice (TRA) supported by withholding tax returns on or before
2011, and they did not give the exact contents of the temporary restraining order. the 10th day of the following month after the said taxes had been
withheld.240 The Bureau of Internal Revenue shall transmit an original copy of
[O]ne cannot be punished for violating an injunction or an order for an injunction the TRA to the Bureau of Treasury,241 which shall be the basis for recording the
unless it is shown that such injunction or order was served on him personally or remittance of the tax collection.242 The Bureau of Internal Revenue will then
that he had notice of the issuance or making of such injunction or record the amount of taxes reflected in the TRA as tax collection in the Journal of
order.228chanRoblesvirtualLawlibrary Tax Remittance by government agencies based on its copies of the
TRA.243 Respondents did not submit any withholding tax return or TRA to prove
At any rate, [i]n case of doubt, a withholding agent may always protect himself or that the 20% final withholding tax was indeed remitted by the Bureau of Treasury
herself by withholding the tax due229 and return the amount of the tax withheld to the Bureau of Internal Revenue on October 18, 2011.
should it be finally determined that the income paid is not subject to
withholding.230 Hence, respondent Bureau of Treasury was justified in Respondent Bureau of Treasurys Journal Entry Voucher No. 11-10-
withholding the amount corresponding to the 20% final withholding tax from the 10395244 dated October 18, 2011 submitted to this court
proceeds of the PEACe Bonds, as it received this courts temporary restraining shows:chanroblesvirtuallawlibrary
order only on October 19, 2011, or the day after this tax had been withheld. Account Code Debit Amount Credit Amount
Bonds Payable-L/T, Dom- 442-360 35,000,000,000.00
Respondents retention of the
Zero
55
Coupon T/Bonds
(Peace Bonds) 10 yr Section 1 of Presidential Decree No. 1967 states:chanroblesvirtuallawlibrary
Section 1. There is hereby appropriated, out of any funds in the National
Sinking Fund-Cash 198-001 30,033,792,203.59 Treasury not otherwise appropriated, such amounts as may be necessary to
(BSF) effect payments on foreign or domestic loans, or foreign or domestic loans
Due to BIR 412-002 4,966,207,796.41 whereon creditors make a call on the direct and indirect guarantee of the
Republic of the Philippines, obtained by:
To record redemption of
10yr Zero coupon (Peace
a. the Republic of the Philippines the proceeds of which were relent to
Bond) net of the 20%
government-owned or controlled corporations and/or government financial
final withholding tax
institutions;
pursuant to BIR Ruling No.
378-2011, value date,
b. government-owned or controlled corporations and/or government financial
October 18, 2011 per BTr
institutions the proceeds of which were relent to public or private institutions;
letter authority and BSP
Bank Statements.
c. government-owned or controlled corporations and/or financial institutions and
guaranteed by the Republic of the Philippines;
The foregoing journal entry, however, does not prove that the amount of
P4,966,207,796.41, representing the 20% final withholding tax on the PEACe d. other public or private institutions and guaranteed by government-owned or
Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on controlled corporations and/or government financial institutions.
October 18, 2011. The entries merely show that the monies corresponding to
20% final withholding tax was set aside for remittance to the Bureau of Internal The amount of P35 billion that includes the monies corresponding to 20% final
Revenue. withholding tax is a lawful and valid obligation of the Republic under the
Government Bonds. Since said obligation represents a public debt, the release
We recall the November 15, 2011 resolution issued by this court directing of the monies requires no legislative appropriation.
respondents to show cause why they failed to comply with the [TRO]; and [to]
comply with the [TRO] in order that petitioners may place the corresponding Section 2 of Republic Act No. 245 likewise provides that the money to be used
funds in escrow pending resolution of the petition.245 The 20% final withholding for the payment of Government Bonds may be lawfully taken from the continuing
tax was effectively placed in custodia legis when this court ordered the deposit of appropriation out of any monies in the National Treasury and is not required to be
the amount in escrow. The Bureau of Treasury could still release the money the subject of another appropriation legislation:chanroblesvirtuallawlibrary
withheld to petitioners for the latter to place in escrow pursuant to this courts SEC. 2. The Secretary of Finance shall cause to be paid out of any moneys in
directive. There was no legal obstacle to the release of the 20% final withholding the National Treasury not otherwise appropriated, or from any sinking funds
tax to petitioners. provided for the purpose by law, any interest falling due, or accruing, on any
portion of the public debt authorized by law. He shall also cause to be paid out of
Congressional appropriation is not required for the servicing of public debts in any such money, or from any such sinking funds the principal amount of any
view of the automatic appropriations clause embodied in Presidential Decree obligations which have matured, or which have been called for redemption or for
Nos. 1177 and 1967. which redemption has been demanded in accordance with terms prescribed by
him prior to date of issue . . . In the case of interest-bearing obligations, he shall
Section 31 of Presidential Decree No. 1177 provides:chanroblesvirtuallawlibrary pay not less than their face value; in the case of obligations issued at a discount
Section 31. Automatic Appropriations. All expenditures for (a) personnel he shall pay the face value at maturity; or if redeemed prior to maturity, such
retirement premiums, government service insurance, and other similar fixed portion of the face value as is prescribed by the terms and conditions under
expenditures, (b) principal and interest on public debt, (c) national government which such obligations were originally issued. There are hereby appropriated as
guarantees of obligations which are drawn upon, are automatically appropriated: a continuing appropriation out of any moneys in the National Treasury not
provided, that no obligations shall be incurred or payments made from funds thus otherwise appropriated, such sums as may be necessary from time to time to
automatically appropriated except as issued in the form of regular budgetary carry out the provisions of this section. The Secretary of Finance shall transmit to
allotments. Congress during the first month of each regular session a detailed statement of

56
all expenditures made under this section during the calendar year immediately
preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for
Treasury bills and bonds shall be made through the National Treasurys account
with the Bangko Sentral ng Pilipinas, to wit:chanroblesvirtuallawlibrary
Section 38. Demand Deposit Account. The Treasurer of the Philippines
maintains a Demand Deposit Account with the Bangko Sentral ng Pilipinas to
which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245,
as amended, shall be credited and all payments for redemption of Treasury Bills
and Bonds shall be charged.
Regarding these legislative enactments ordaining an automatic appropriations
provision for debt servicing, this court has held:chanroblesvirtuallawlibrary
Congress . . . deliberates or acts on the budget proposals of the President, and
Congress in the exercise of its own judgment and wisdom formulates an
appropriation act precisely following the process established by the Constitution,
which specifies that no money may be paid from the Treasury except in
accordance with an appropriation made by law.
Debt service is not included in the General Appropriation Act, since authorization
therefor already exists under RA Nos. 4860 and 245, as amended, and PD 1967.
Precisely in the light of this subsisting authorization as embodied in said Republic
Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, but largely with annual levels and approval
thereof upon due deliberations as part of the whole obligation program for the
year. Upon such approval, Congress has spoken and cannot be said to have
delegated its wisdom to the Executive, on whose part lies the implementation or
execution of the legislative wisdom.246(Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining
order issued by this court, which remained in full force and effect, until set aside,
vacated, or modified. Its conduct finds no justification and is
reprehensible.247chanRoblesvirtualLawlibrarychanrobleslaw
WHEREFORE, the petition for review and petitions-in-intervention
are GRANTED. BIR Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued
retention of the amount corresponding to the 20% final withholding tax despite
this courts directive in the temporary restraining order and in the resolution dated
November 15, 2011 to deliver the amounts to the banks to be placed in escrow
pending resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately release
and pay to the bondholders the amount corresponding to the 20% final
withholding tax that it withheld on October 18, 2011.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch
(petitioner) under Rule 45 of the 1997 Rules of Civil Procedure assailing the
Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 29 May 2009 and
Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code
(NIRC) of 1997, petitioner withheld and remitted to respondent on 21 October
2003 the amount of PHP 67,688,553.51, which represented the fifteen percent
(15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU) net
income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior
taxable years.5
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR
Large Taxpayers Assessment and Investigation Division on 4 October 2005 an
administrative claim for refund or issuance of its tax credit certificate in the total
amount of PHP 22,562,851.17. On the same date, petitioner requested from the
International Tax Affairs Division (ITAD) a confirmation of its entitlement to the
preferential tax rate of 10% under the RP-Germany Tax Treaty.6
Alleging the inaction of the BIR on its administrative claim, petitioner filed a
Petition for Review7 with the CTA on 18 October 2005. Petitioner reiterated its
claim for the refund or issuance of its tax credit certificate for the amount of PHP
22,562,851.17 representing the alleged excess BPRT paid on branch profits
remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second Division found that petitioner indeed
paid the total amount of PHP 67,688,553.51 representing the 15% BPRT on its
RBU profits amounting to PHP 451,257,023.29 for 2002 and prior taxable years.
Records also disclose that for the year 2003, petitioner remitted to DB Germany
the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate
of PHP 63.804:1 EURO), which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the
application for a tax treaty relief was not filed with ITAD prior to the payment by
the former of its BPRT and actual remittance of its branch profits to DB Germany,
57
or prior to its availment of the preferential rate of ten percent (10%) under the
RP-Germany Tax Treaty provision. The court a quo held that petitioner violated
the fifteen (15) day period mandated under Section III paragraph (2) of Revenue
Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations
Corporation (formerly Southern Energy Asia-Pacific Operations [Phils.], Inc.) v.
Commissioner of Internal Revenue9 (Mirant) where the CTA En Banc ruled that
before the benefits of the tax treaty may be extended to a foreign corporation
wishing to avail itself thereof, the latter should first invoke the provisions of the
tax treaty and prove that they indeed apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Divisions Decision dated 29 August
2008 and Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc
held that a ruling from the ITAD of the BIR must be secured prior to the availment
of a preferential tax rate under a tax treaty. Applying the principle of stare decisis
et non quieta movere, the CTA En Banc took into consideration that this Court
had denied the Petition in G.R. No. 168531 filed by Mirant for failure to
sufficiently show any reversible error in the assailed judgment.11 The CTA En
Banc ruled that once a case has been decided in one way, any other case
involving exactly the same point at issue should be decided in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under
RMO No. 1-2000 cannot be relaxed for petitioner, unlike in CBK Power Company
Limited v. Commissioner of Internal Revenue.12 In that case, the rule was relaxed
and the claim for refund of excess final withholding taxes was partially granted.
While it issued a ruling to CBK Power Company Limited after the payment of
withholding taxes, the ITAD did not issue any ruling to petitioner even if it filed a
request for confirmation on 4 October 2005 that the remittance of branch profits
to DB Germany is subject to a preferential tax rate of 10% pursuant to Article 10
of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly
comply with RMO No. 1-2000 will deprive persons or corporations of the benefit
of a tax treaty.
THE COURTS RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be
subject to a tax of 15% based on the total profits applied for or earmarked for
remittance without any deduction of the tax component. However, petitioner
invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which provides
that where a resident of the Federal Republic of Germany has a branch in the
Republic of the Philippines, this branch may be subjected to the branch profits
remittance tax withheld at source in accordance with Philippine law but shall not
exceed 10% of the gross amount of the profits remitted by that branch to the
head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in
the Philippines, remitting to its head office in Germany, the benefit of a
preferential rate equivalent to 10% BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any
availment of the tax treaty relief must be preceded by an application with ITAD at
least 15 days before the transaction. The Order was issued to streamline the
processing of the application of tax treaty relief in order to improve efficiency and
service to the taxpayers. Further, it also aims to prevent the consequences of an
erroneous interpretation and/or application of the treaty provisions (i.e., filing a
claim for a tax refund/credit for the overpayment of taxes or for deficiency tax
liabilities for underpayment).13
The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article
10 of the RP-Germany Tax Treaty, the CTA erred in denying its claim solely on
the basis of RMO No. 1-2000. The filing of a tax treaty relief application is not a
condition precedent to the availment of a preferential tax rate. Further, petitioner
posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial
precedent to deny a claim for refund solely on the basis of noncompliance with
RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-
2000 is mandatory in character. RMO No. 1-2000 was issued pursuant to the
unquestioned authority of the Secretary of Finance to promulgate rules and
regulations for the effective implementation of the NIRC. Thus, courts cannot
ignore administrative issuances which partakes the nature of a statute and have
in their favor a presumption of legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and
noncompliance with this prerequisite is fatal to the taxpayers availment of the
preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Courts minute resolution on Mirant is not a binding precedent.
The Court has clarified this matter in Philippine Health Care Providers, Inc. v.
Commissioner of Internal Revenue14 as follows:
It is true that, although contained in a minute resolution, our dismissal of the
petition was a disposition of the merits of the case. When we dismissed the
petition, we effectively affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final. When a minute resolution denies or
dismisses a petition for failure to comply with formal and substantive
requirements, the challenged decision, together with its findings of fact and legal
conclusions, are deemed sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the
same parties, it constitutes res judicata. However, if other parties or another
subject matter (even with the same parties and issues) is involved, the minute
resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted
that a previous case, CIR v. Baier-Nickel involving the same parties and the
same issues, was previously disposed of by the Court thru a minute resolution
58
dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court
ruled that the previous case "ha(d) no bearing" on the latter case because the
two cases involved different subject matters as they were concerned with the
taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first
paragraph of Section 14, Article VIII of the Constitution that the facts and the law
on which the judgment is based must be expressed clearly and distinctly applies
only to decisions, not to minute resolutions. A minute resolution is signed only by
the clerk of court by authority of the justices, unlike a decision. It does not require
the certification of the Chief Justice. Moreover, unlike decisions, minute
resolutions are not published in the Philippine Reports. Finally, the proviso of
Section 4(3) of Article VIII speaks of a decision. Indeed, as a rule, this Court lays
down doctrines or principles of law which constitute binding precedent in a
decision duly signed by the members of the Court and certified by the Chief
Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision
cannot bind this Court in cases of a similar nature. There are differences in
parties, taxes, taxable periods, and treaties involved; more importantly, the
disposition of that case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international
law as part of the law of the land.15 The time-honored international principle of
pacta sunt servanda demands the performance in good faith of treaty obligations
on the part of the states that enter into the agreement. Every treaty in force is
binding upon the parties, and obligations under the treaty must be performed by
them in good faith.16 More importantly, treaties have the force and effect of law in
this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in
two different jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies
that "tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of the
same subject matter and for identical periods. The apparent rationale for doing
away with double taxation is to encourage the free flow of goods and services
and the movement of capital, technology and persons between countries,
conditions deemed vital in creating robust and dynamic economies. Foreign
investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in
creating such a climate."19
Simply put, tax treaties are entered into to minimize, if not eliminate the
harshness of international juridical double taxation, which is why they are also
known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of
the obligations undertaken."20 Thus, laws and issuances must ensure that the
reliefs granted under tax treaties are accorded to the parties entitled thereto. The
BIR must not impose additional requirements that would negate the availment of
the reliefs provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the availment of
the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which
would indicate a deprivation of entitlement to a tax treaty relief for failure to
comply with the 15-day period. We recognize the clear intention of the BIR in
implementing RMO No. 1-2000, but the CTAs outright denial of a tax treaty relief
for failure to strictly comply with the prescribed period is not in harmony with the
objectives of the contracting state to ensure that the benefits granted under tax
treaties are enjoyed by duly entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not operate
to divest entitlement to the relief as it would constitute a violation of the duty
required by good faith in complying with a tax treaty. The denial of the availment
of tax relief for the failure of a taxpayer to apply within the prescribed period
under the administrative issuance would impair the value of the tax treaty. At
most, the application for a tax treaty relief from the BIR should merely operate to
confirm the entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000.1wphi1 Logically, noncompliance with tax treaties
has negative implications on international relations, and unduly discourages
foreign investors. While the consequences sought to be prevented by RMO No.
1-2000 involve an administrative procedure, these may be remedied through
other system management processes, e.g., the imposition of a fine or penalty.
But we cannot totally deprive those who are entitled to the benefit of a treaty for
failure to strictly comply with an administrative issuance requiring prior
application for tax treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous
interpretation and/or application of the treaty provisions. The objective of the BIR
is to forestall assessments against corporations who erroneously availed
themselves of the benefits of the tax treaty but are not legally entitled thereto, as
well as to save such investors from the tedious process of claims for a refund
due to an inaccurate application of the tax treaty provisions. However, as earlier
discussed, noncompliance with the 15-day period for prior application should not
operate to automatically divest entitlement to the tax treaty relief especially in
claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund
cases, such as the present case, where the very basis of the claim is erroneous
or there is excessive payment arising from non-availment of a tax treaty relief at
the first instance. In this case, petitioner should not be faulted for not complying
with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax
treaty relief within the period prescribed, or 15 days prior to the payment of its
59
BPRT, precisely because it erroneously paid the BPRT not on the basis of the Resolution dated 1 July 2009 are REVERSED and SET ASIDE. A new one is
preferential tax rate under hereby entered ordering respondent Commissioner of Internal Revenue to refund
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. or issue a tax credit certificate in favor of petitioner Deutsche Bank AG Manila
Hence, the prior application requirement becomes illogical. Therefore, the fact Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO
that petitioner invoked the provisions of the RP-Germany Tax Treaty when it THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN
requested for a confirmation from the ITAD before filing an administrative claim CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the
for a refund should be deemed substantial compliance with RMO No. 1-2000. erroneously paid BPRT for 2002 and prior taxable years.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for SO ORDERED.
tax recovery when there has been an erroneous payment of tax.1wphi1 The
outright denial of petitioners claim for a refund, on the sole ground of failure to
apply for a tax treaty relief prior to the payment of the BPRT, would defeat the
purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied though belatedly for a tax
treaty relief, in substantial compliance with RMO No. 1-2000. A ruling by the BIR
would have confirmed whether petitioner was entitled to the lower rate of 10%
BPRT pursuant to the RP-Germany Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as
follows:
Based on the evidence presented, both documentary and testimonial, petitioner
was able to establish the following facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank
AG, a corporation organized and existing under the laws of the Federal
Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of
Final Income Taxes Withheld under BIR Form No. 1601-F and remitted
the amount of P67,688,553.51 as branch profits remittance tax with the
BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having
issued a clearance, petitioner remitted to Frankfurt Head Office the
amount of EUR5,174,847.38 (or P330,175,961.88 at 63.804 Peso/Euro)
representing its 2002 profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT
on its RBU net income, due for remittance to DB Germany amounting to PHP
451,257,023.29 for 2002 and prior taxable years.23
Likewise, both the administrative and the judicial actions were filed within the
two-year prescriptive period pursuant to Section 229 of the NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax
rate of 10% BPRT in accordance with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net
income amounting to PHP 451,257,023.29 for 2002 and prior taxable years,
applying the 10% BPRT. Thus, it is proper to grant petitioner a refund ofthe
difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34
(10% BPRT) or a total of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED.
Accordingly, the Court of Tax Appeals En Banc Decision dated 29 May 2009 and

60