The case involved determining whether interest income subject to a 20% final withholding tax (FWT) should also be included in gross receipts for purposes of calculating the 5% gross receipts tax (GRT) on banks. The Court ruled that the 20% FWT on bank interest income forms part of taxable gross receipts in computing the GRT. It also ruled that subjecting the interest income to both the FWT and including it in gross receipts for the GRT does not constitute double taxation.
The case involved determining whether interest income subject to a 20% final withholding tax (FWT) should also be included in gross receipts for purposes of calculating the 5% gross receipts tax (GRT) on banks. The Court ruled that the 20% FWT on bank interest income forms part of taxable gross receipts in computing the GRT. It also ruled that subjecting the interest income to both the FWT and including it in gross receipts for the GRT does not constitute double taxation.
The case involved determining whether interest income subject to a 20% final withholding tax (FWT) should also be included in gross receipts for purposes of calculating the 5% gross receipts tax (GRT) on banks. The Court ruled that the 20% FWT on bank interest income forms part of taxable gross receipts in computing the GRT. It also ruled that subjecting the interest income to both the FWT and including it in gross receipts for the GRT does not constitute double taxation.
II. INHERENT LIMITATIONS enacted under the police power, it is still unconstitutional because it did not promote the general 1. Planters Products, Inc. vs. Fertiphil Corporation welfare of the people or public interest. (public purpose) FACTS: Petitioner PPI and private respondent Fertiphil ISSUE: Is the levy in this case not for public purpose and are private corporations incorporated under Philippine thus unconstitutional? laws, engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals. Then RULING: YES. The power to tax exists for the general President Marcos issued LOI No. 1465 which provided welfare; hence, implicit in its power is the inherent for the imposition of a capital recovery component limitation that it should be used only for a public (CRC) on the domestic sale of all grades of fertilizers in purpose. When a tax law is only a mask to exact funds the Philippines. Pursuant to the LOI, Fertiphil paid P10 from the public when its true intent is to give undue for every bag of fertilizer it sold in the domestic market benefit and advantage to a private enterprise, that law to the Fertilizer and Pesticide Authority (FPA). FPA then will not satisfy the requirement of public purpose. In remitted the amount collected to the Far East Bank and this case, Firstly the purpose of a law is evident from its Trust Company, the depositary bank of PPI. Fertiphil text which expressly provided that the levy be imposed paid a considerable amount. After the 1986 Edsa to benefit PPI until adequate capital is raised to make it Revolution, FPA voluntarily stopped the imposition of viable. Secondly, the LOI provides that the imposition of the P10 levy. With the return of democracy, Fertiphil the P10 levy was conditional and dependent upon PPI demanded from PPI a refund of the amounts it paid becoming financially viable. Thirdly, the levies paid under LOI No. 1465, but PPI refused to accede to the under the LOI were directly remitted and deposited by demand. Fertiphil filed a complaint for collection and FPA to Far East Bank and Trust Company, the depositary damages against FPA and PPI and questioned the bank of PPI. Fourthly, the levy was used to pay the constitutionality of LOI No. 1465 RTC declared the LOI corporate debts of PPI. These prove that the main 1465 as unconstitutional and held that the levy imposed purpose of the law was to give undue benefit and under the said law was an invalid exercise of the State`s advantage to PPI. Therefore, the levy imposed was not power of taxation inasmuch as it violated the inherent for a public purpose. and constitutional prescription that taxes be levied only (supplementary issues in case mangutana si mam) for public purposes. CA affirmed holding that even on ISSUE: Is the levy and exercise of police power or power the assumption that LOI No. was issued under the of taxation? police power of the state as defendants posits, it is still unconstitutional because it did not promote public RULING: The SC agree with the RTC that the imposition welfare and when a statute`s public purpose is spoiled of the levy was an exercise by the State of its taxation by private interest, the use of police power becomes a power. While it is true that the power of taxation can be travesty which must be struck down for being an used as an implement of police power, the primary arbitrary exercise of government power. PPI insists that purpose of the levy in this caseis revenue generation. If LOI No. 1465 is a valid exercise either of the police the purpose is primarily revenue, or at least, one of the power or the power of taxation. It claims that the LOI real and substantial purposes, then the exaction is was implemented for the purpose of assuring the properly called a tax. fertilizer supply and distribution in the country and for benefiting a foundation created by law to hold in trust ISSUE: for millions of farmers their stock ownership in PPI. Granting that it is in the exercise of police power, is the Fertiphil counters that the LOI is unconstitutional LOI still unconstitutional? because it was enacted to give benefit to a private company. The levy was imposed to pay the corporate RULING: YES. Even if we consider LOI No. 1695 as in payment of the 20% FWT forms part of gross receipts enacted under the police power of the State, it would in computing for the GRT on banks. still be invalid for failing to comply with the test of lawful subjects and lawful means. Jurisprudence states Issue #2: Was there double taxation? the test as follows: (1) the interest of the public requires its exercise; and (2) the means employed are reasonably Ruling: None. Double taxation means taxing the same necessary for the accomplishment of the purpose and property twice when it should be taxed only once; that not unduly oppressive upon individuals. Therefore, LOI is, x x x taxing the same person twice by the same in this case is invalid because it did not promote public jurisdiction for the same thing. It is obnoxious when the interest. The law was enacted to give undue advantage taxpayer is taxed twice, when it should be but once. to a private corporation. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, 2. CIR v. Solidbank ; Siplon for the same purpose, by the same taxing authority, Facts: Calendar year 1995, Solidbank Corporation filed within the same jurisdiction, during the same taxing its Quarterly Percentage Tax Returns reflecting gross period; and they must be of the same kind or character. receipts (5%) in the total amount P1.474M with First, the taxes herein are imposed on two different corresponding gross receipts tax payments P73,734M. subject matters. The subject matter of the FWT is the Solidbank alleges that the total receipts included the passive income generated in the form of interest on representing gross receipts from passive income which deposits and yield on deposit substitutes, while the was already subjected to 20% final withholding tax. The subject matter of the GRT is the privilege of engaging in CTA rendered its decision that the 20% FWT on bank the business of banking. A tax based on receipts is a tax interest income should not form part of the taxable on business rather than on the property; hence, it is an gross receipts for purposes of computing the gross excise rather than a property tax. It is not an income receipts tax. That being said, Solidbank filed with the tax, unlike the FWT. In fact, we have already held that BIR a letter-request for the refund or issuance of tax one can be taxed for engaging in business and further credit certificate representing allegedly gross receipts taxed differently for the income derived therefrom. tax for the year 1995. Without waiting for the decision, Akin to our ruling in Velilla v. Posadas, these two taxes Solidbank filed with CTA for review in order to toll the are entirely distinct and are assessed under different running of the two-year prescriptive period to judicially provisions. Second, although both taxes are national in claim refund of any overpaid internal revenue tax. scope because they are imposed by the same taxing Afterwhich, CTA rendered its decision in favor of authority the national government under the Tax Solidbank of the refund. However, CA rendered that the Codeand operate within the same Philippine 20% FWT on bank interest income did not form part of jurisdiction for the same purpose of raising revenues, the taxable gross receipts in computing 5% GRT, the taxing periods they affect are different. The FWT is because the FWT was not actually received by the bank deducted and withheld as soon as the income is earned, but directly remitted to the government. Hence, this and is paid after every calendar quarter in which it is appel. earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable Issue #1: Whether the 20% FWT on bank interest forms quarter in which it is earned. Third, these two taxes are part of the taxable gross receipts in computing the 5% of different kinds or characters. The FWT is an income gross receipt tax tax subject to withholding, while the GRT is a percentage tax not subject to withholding. In short, Ruling: Yes. In fact, the same issue has been raised there is no double taxation, because there is no taxing recently in China Banking Corporation v. CA, where this twice, by the same taxing authority, within the same Court held that the amount of interest income withheld jurisdiction, for the same purpose, in different taxing periods, some of the property in the territory. Subjecting interest income to a 20% FWT and including ISSUE: WON SC JOHNSON AND SON,USA IS ENTITLED it in the computation of the 5% GRT is clearly not TO THE MOST FAVORED NATION TAX RATE OF 10% ON double taxation. ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY. 3. CIR vs S.C. JOHNSON, 309 SCRA 87 RULING: NO. The concessional tax rate of 10 percent FACTS: Respondent, JOHNSON AND SON, INC a provided for in the RP-Germany Tax Treaty could not domestic corporation organized and operating under apply to taxes imposed upon royalties in the RP-US Tax the Philippine laws, entered into a license agreement Treaty since the two taxes imposed under the two tax with SC Johnson and Son, United States of America treaties are not paid under similar circumstances, they (USA), a non-resident foreign corporation based in the are not containing similar provisions on tax crediting. U.S.A. pursuant to which the [respondent] was granted The United States is the state of residence since the the right to use the trademark, patents and technology taxpayer, S. C. Johnson and Son, U. S. A., is based there. owned by the latter including the right to manufacture, Under the RP-US Tax Treaty, the state of residence and package and distribute the products covered by the the state of source are both permitted to tax the Agreement and secure assistance in management, royalties, with a restraint on the tax that may be marketing and production from SC Johnson and Son, U. collected by the state of source. Furthermore, the S. A. The said License Agreement was duly registered method employed to give relief from double taxation is with the Technology Transfer Board of the Bureau of the allowance of a tax credit to citizens or residents of Patents, Trade Marks and Technology Transfer under the United States against the United States tax, but Certificate of Registration No. 8064 . For the use of the such amount shall not exceed the limitations provided trademark or technology, SC JOHNSON AND SON, INC by United States law for the taxable year. The was obliged to pay SC Johnson and Son, USA royalties Philippines may impose one of three rates- 25 percent based on a percentage of net sales and subjected the of the gross amount of the royalties; 15 percent when same to 25% withholding tax on royalty payments the royalties are paid by a corporation registered with which respondent paid for the period covering July 1992 the Philippine Board of Investments and engaged in to May 1993.00 On October 29, 1993, SC JOHNSON AND preferred areas of activities; or the lowest rate of SON, USA filed with the International Tax Affairs Philippine tax that may be imposed on royalties of the Division (ITAD) of the BIR a claim for refund of overpaid same kind paid under similar circumstances to a withholding tax on royalties arguing that, since the resident of a third state. Given the purpose underlying agreement was approved by the Technology Transfer tax treaties and the rationale for the most favored Board, the preferential tax rate of 10% should apply to nation clause, the Tax Treaty should apply only if the the respondent. Respondent submits that royalties paid taxes imposed upon royalties in the RP-US Tax Treaty to SC Johnson and Son, USA is only subject to 10% and in the RP-Germany Tax Treaty are paid under withholding tax pursuant to the most-favored nation similar circumstances. This would mean that private clause of the RP-US Tax Treaty in relation to the RP- respondent must prove that the RP-US Tax Treaty West Germany Tax Treaty. The Internal Tax Affairs grants similar tax reliefs to residents of the United Division of the BIR ruled against SC Johnson and Son, States in respect of the taxes imposable upon royalties Inc. and an appeal was filed by the former to the Court earned from sources within the Philippines as those of tax appeals. The CTA ruled against CIR and ordered allowed to their German counterparts under the that a tax credit be issued in favor of SC Johnson and RPGermany Tax Treaty. The RP-US and the RP-West Son, Inc. Unpleased with the decision, the CIR filed an Germany Tax Treaties do not contain similar provisions appeal to the CA which subsequently affirmed in toto on tax crediting. Article 24 of the RP-Germany Tax the decision of the CTA. Hence, an appeal on certiorari Treaty, supra, expressly allows crediting against German was filed to the SC. income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, 'trust account' or a 'trust fund,' and that "if a special tax which is the counterpart provision with respect to relief is collected for a specific purpose, the revenue for double taxation, does not provide for similar generated therefrom shall 'be treated as a special fund' crediting of 20% of the gross amount of royalties paid. to be used only for the purpose indicated, and not At the same time, the intention behind the adoption of channeled to another government objective." Petitioner the provision on relief from double taxation in the two further points out that since "a 'special fund' consists of tax treaties in question should be considered in light of monies collected through the taxing power of a State, the purpose behind the most favored nation clause. such amounts belong to the State, although the use thereof is limited to the special purpose/objective for 5. Case: JOHN H. OSMEA vs vs. OSCAR ORBOS, G.R. which it was created." No. 99886 March 31, 1993. Facts: On October 10, 1984, President Ferdinand Issue #2: Whether or not section 8, paragraph 1 (c) of Marcos issued P.D. 1956 creating a Special Account in P.D. No. 1956, as amended by Executive Order No. 137, the General Fund, designated as the Oil Price is constitutional, for "being an undue and invalid Stabilization Fund (OPSF). Subsequently, the OPSF was delegation of legislative power. . to the Energy reclassified into a "trust liability account," in virtue of Regulatory Board". E.O. 1024,7 and ordered released from the National Treasury to the Ministry of Energy. President Corazon Ruling: For a valid delegation of power, it is essential C. Aquino, amended P.D. 1956, expanding the grounds that the law delegating the power must be (1) complete for reimbursement to oil companies for possible cost in itself, that is it must set forth the policy to be under recovery incurred as a result of the reduction of executed by the delegate and (2) it must fix a standard domestic prices of petroleum products, the amount of limits of which are sufficiently determinate or the under recovery being left for determination by the determinable to which the delegate must conform. Ministry of Finance. Now, the petition avers that the The Court finds that the provision conferring creation of the trust fund violates the Constitution that the authority upon the ERB to impose additional if a special tax is collected for a specific purpose, the amounts on petroleum products provides a sufficient revenue generated as a special fund to be used only for standard by which the authority must be exercised. In the purpose indicated. addition to the general policy of the law to protect the local consumer by stabilizing and subsidizing domestic Issue #1: Whether or not creation of the trust fund pump rates, 8(c) of P.D. 1956 expressly authorizes the violates29(3), Article VI of the Constitution. ERB to impose additional amounts to augment the resources of the Fund. Ruling: it seems clear that while the funds collected What petitioner would wish is the fixing of some may be referred to as taxes, they are exacted in the definite, quantitative restriction, or "a specific limit on exercise of the police power of the State. Moreover, how much to tax." The Court is cited to this that the OPSF is a special fund is plain from the special requirement by the petitioner on the premise that what treatment given it by E.O. 137. It is segregated from the is involved here is the power of taxation; but as already general fund; and while it is placed in what the law discussed, this is not the case. What is here involved is refers to as a "trust liability account," the fund not so much the power of taxation as police power. nonetheless remains subject to the scrutiny and review Although the provision authorizing the ERB to impose of the COA. The Court is satisfied that these measures additional amounts could be construed to refer to the comply with the constitutional description of a "special power of taxation, it cannot be overlooked that the fund." Indeed, the practice is not without precedent. overriding consideration is to enable the delegate to act ***Issue #1 arises from the contention of the petitioner with expediency in carrying out the objectives of the that "the monies collected pursuant to. . P.D. 1956, as law which are embraced by the police power of the amended, must be treated as a 'SPECIAL FUND,' not as a State. The interplay and constant fluctuation of the various factors involved in the determination of the department of the government without price of oil and petroleum products, and the frequently infringing upon the theory of separation of shifting need to either augment or exhaust the Fund, do powers. The exception, however, lies in the not conveniently permit the setting of fixed or rigid case of municipal corporations, to which, said parameters in the law as proposed by the petitioner. To theory does not apply. Legislative powers may do so would render the ERB unable to respond be delegated to local governments in respect of effectively so as to mitigate or avoid the undesirable matters of local concern. By necessary consequences of such fluidity. As such, the standard as implication, the legislative power to create it is expressed, suffices to guide the delegate in the political corporations for purposes of local self- exercise of the delegated power, taking account of the government carries with it the power to confer circumstances under which it is to be exercised. on such local governmental agencies the power to tax. Under the 1973 Constitution, local 6. Pepsi-cola vs municipality of Tanauan 69 SCRA 460 governments are granted the autonomous authority to create their own sources of Facts: The plaintiff-appellant, Pepsi-Cola Bottling revenue and to levy taxes. Section 5, Article XI Company of the Philippines, Inc., commenced a provides: "Each local government unit shall complaint with preliminary injunction before the Court have the power to create its sources of revenue of First Instance of Leyte for that court to declare and to levy taxes, subject to such limitations as Section 2 of Republic Act No. 2264, otherwise known as may be provided by law." With that, it cannot the Local Autonomy Act, unconstitutional as an undue be said that Section 2 of Republic Act No. 2264 delegation of taxing authority as well as to declare emanated from beyond the sphere of the Ordinances Nos. 23 and 27, series of 1962, of the legislative power to enact and vest in local municipality of Tanauan, Leyte, null and void. Municipal governments the power of local taxation. Ordinance No. 23, levies and collects "from soft drinks producers and manufacturers a tax of one-sixteenth 2. No. Double taxation, in general, is not forbidden by (1/16) of a centavo for every bottle of soft drink corked. our fundamental law. Double taxation becomes On the other hand, Municipal Ordinance No. 27 levies obnoxious only where the taxpayer is taxed twice for and collects "on soft drinks produced or manufactured the benefit of the same governmental entity or by the within the territorial jurisdiction of this municipality a same jurisdiction for the same purpose, but not in a tax of ONE CENTAVO (P0.01) on each gallon of volume case where one tax is imposed by the State and the capacity. The tax imposed in both Ordinances Nos. 23 other by the city or municipality. As earlier quoted, and 27 is denominated as "municipal production tax.' Ordinance No. 23, levies or collects from soft drinks producers or manufacturers a tax of one-sixteen (1/16) ISSUES: of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used. When it was 1. Is Section 2, Republic Act No. 2264 an undue discovered that the producer or manufacturer could delegation of power, confiscatory and oppressive? increase the volume contents of the bottle and still pay 2. Do Ordinances Nos. 23 and 27 constitute double the same tax rate, the Municipality of Tanauan enacted taxation and impose percentage or specific taxes? Ordinance No. 27, imposing a tax of one centavo (P0.01) 3. Are Ordinances Nos. 23 and 27 unjust and unfair? on each gallon of volume capacity. The difference between the two ordinances clearly lies in the tax rate RULING: of the soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance 1. No. The power of taxation is purely legislative No. 27, it is one centavo (P0.01) on each gallon of and which the central legislative body cannot volume capacity. The intention of the Municipal Council delegate either to the executive or judicial of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that effect.
3. No. The tax of one (P0.01) on each gallon of volume
capacity on all soft drinks, produced or manufactured, or an equivalent of 1- centavos per case, cannot be considered unjust and unfair. An increase in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are allowed much discretion in determining the rates of imposable taxes. This is in line with the constitutional policy of according the widest possible autonomy to local governments in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable. Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local autonomy were to be realized.