TAXATION LAW I

Outline Part 6

INCOME TAXATION

I. INCOME TAX ON CORPORATIONS

AFISCO INSURANCE CORPORATION vs. COURT OF APPEALS

G.R. No. 112675. January 25, 1999
The petitioners are 41 non-life insurance corporations, organized and existing under
the laws of the Philippines. Upon issuance by them of Erection, Machinery Breakdown,
Boiler Explosion and Contractors All Risk insurance policies, the petitioners on August 1,
1965 entered into a Quota Share Reinsurance Treaty and a Surplus Reinsurance Treaty with
the Munchener Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident
foreign insurance corporation. The reinsurance treaties required petitioners to form a
[p]ool.Accordingly, a pool composed of the petitioners was formed on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial statement and
filed an Information Return of Organization Exempt from Income Tax for the year ending in
1975, on the basis of which it was assessed by the Commissioner of Internal Revenue
deficiency corporate taxes in the amount of P1,843,273.60, and withholding taxes in the
amount of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the petitioners,
respectively. These assessments were protested by the petitioners through its auditors Sycip,
Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as Pool of Machinery Insurers, to pay deficiency income tax,
interest, and with[h]olding tax.
ISSUE: Whether or not that the pool of machinery insurers was a partnership taxable as a
corporation.
RULING: YES.
Article 1767 of the Civil Code recognizes the creation of a contract of partnership when
two or more persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves. Its requisites are: (1)
mutual contribution to a common stock, and (2) a joint interest in the profits. In other words,
a partnership is formed when persons contract to devote to a common purpose either money,
property, or labor with the intention of dividing the profits between themselves. Meanwhile,
an association implies associates who enter into a joint enterprise x x x for the transaction of
business.
In the case before us, the ceding companies entered into a Pool Agreement or an
association that would handle all the insurance businesses covered under their quota-share
reinsurance treaty and surplus reinsurance treaty with Munich. The following unmistakably
indicates a partnership or an association covered by Section 24 of the NIRC: (1) The pool
has a common fund, consisting of money and other valuables that are deposited in the name
and credit of the pool. This common fund pays for the administration and operation expenses
of the pool. (2) The pool functions through an executive board, which resembles the board
of directors of a corporation, composed of one representative for each of the ceding

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companies. (3) True, the pool itself is not a reinsurer and does not issue any insurance policy;
however, its work is indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have received their
premiums. The ceding companies share in the business ceded to the pool and in the expenses
according to a Rules of Distribution annexed to the Pool Agreement. Profit motive or
business is, therefore, the primordial reason for the pools formation.
This Court rules that the Court of Appeals, in affirming the CTA which had previously
sustained the internal revenue commissioner, committed no reversible error. Section 24 of
the NIRC, as worded in the year ending 1975, provides: SEC. 24. Rate of tax on corporations.
(a) Tax on domestic corporations. A tax is hereby imposed upon the taxable net income
received during each taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or organized, but not
including duly registered general co-partnership (companias colectivas), general professional
partnerships, private educational institutions, and building and loan associations xxx.
Ineludibly, the Philippine legislature included in the concept of corporations those entities
that resembled them such as unregistered partnerships and associations. Parenthetically, the
NLRCs inclusion of such entities in the tax on corporations was made even clearer by the
Tax Reform Act of 1997, which amended the Tax Code. The Court of Appeals did not err in
applying Evangelista, which involved a partnership that engaged in a series of transactions
spanning more than ten years, as in the case before us.

A. Kinds of Corporations
1. Domestic Corporation
2. Foreign Corporation
a. Resident Foreign Corporation
b. Non-Resident Foreign Corporation

N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES vs CIR

G.R. No. L-46029 June 23, 1988

CIR assessed petitioner N.V. Reederij "Amsterdam" in the amounts of P193,973.20

and P262,904.94 as deficiency income tax for 1963 and 1964, respectively, as "a non-resident
foreign corporation not engaged in trade or business in the Philippines under Section 24 (b)
(1) of the Tax Code.

On the assumption that the said petitioner is a foreign corporation engaged in trade or
business in the Philippines, petitioner Royal Interocean Lines filed an income tax return of
the vessels computed at the exchange rate of P2.00 to USs1.00 and paid the tax thereon
pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the National Internal Revenue
Code and Section 163 of Revenue Regulations No. 2.

ISSUE: Whether or not petitioner is liable for income tax as a foreign corporation
engaged in trade and business within the Philippines.

RULING: NO.

Petitioner N.V. Reederij "Amsterdam" is a non-resident foreign corporation,

organized and existing under the laws of The Netherlands with principal office in Amsterdam
and not licensed to do business in the Philippines. As a non-resident foreign corporation, it is

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thus a foreign corporation, not engaged in trade or business within the Philippines and not
having any office or place of business therein.

It is therefore taxable on income from all sources within the Philippines, as interest,
dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits and
income and capital gains, and the tax is equal to thirty per centum of such amount, under
Section 24(b) (1) of the Tax Code. Accordingly, petitioner N. V. Reederij "Amsterdam" being
a non-resident foreign corporation, its taxable income for purposes of our income tax law
consists of its gross income from all sources within the Philippines.

COMMISIONER OF INTERNAL REVENUE vs BOAC

G.R. No. L-65773-74 April 30, 1987

British Overseas Airways Corp (BOAC) is a 100% British Government-owned

corporation engaged in international airline business and is a member of the Interline Air
Transport Association, and thus, it operates air transportation services and sells
transportation tickets over the routes of the other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines
and thus, did not carry passengers and/or cargo to or from the Philippines but maintained a
general sales agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways
- which was responsible for selling BOAC tickets covering passengers and cargoes. The
Commissioner of Internal Revenue assessed deficiency income taxes against BOAC.

ISSUE: Whether or not BOAC is a non-resident foreign corporation which should be

taxed on its gross income from all sources within the Philippines.

RULING: YES

BOAC, having no landing rights in the Philippines, is a foreign corporation not

engaged in trade or business within the Philippines. Being so, they are taxable on their gross
income derived within the Philippines. The test of taxability is the "source"; and the source of
an income is that activity which produced the income. Unquestionably, the passage
documentations in these cases were sold in the Philippines and the revenue therefrom was
derived from an activity regularly pursued within the Philippines. Even if the BOAC tickets
sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter
the fact that income from the sale of tickets was derived from the Philippines.

Presidential Decree No. 1355 provided a statutory definition of the term "gross
Philippine billings which ensures that international airlines are taxed on their income from
Philippine sources. The 2-½ % tax on gross Philippine billings is an income tax. If it had been
intended as an excise or percentage tax it would have been place under Title V of the Tax
Code covering Taxes on Business.

COMMISSIONER OF INTERNAL REVENUE vs JAL

G.R. No. 60714 October 4, 1991

Respondent Japan Air Lines, Inc. (hereinafter referred to as JAL for brevity), is a
foreign corporation engaged in the business of international air carriage. JAL did not have
planes that lifted or landed passengers and cargo in the Philippines. However, JAL had
maintained an office at the Filipinas Hotel, Roxas Boulevard, Manila. Said office did not sell

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tickets but was maintained merely for the promotion of the company's public relations and to
hand out brochures, literature and other information playing up the attractions of Japan as a
tourist spot and the services enjoyed in JAL planes.

JAL constituted the Philippine Air Lines (PAL), as its general sales agent in the
Philippines. As an agent, PAL, among other things, sold for and in behalf of JAL, plane
tickets and reservations for cargo spaces which were used by the passengers or customers on
the facilities of JAL.

JAL received deficiency income tax assessment notices and a demand letter from
petitioner Commissioner of Internal Revenue. It protested said assessments alleging that as a
non-resident foreign corporation, it was taxable only on income from Philippine sources as
determined under Section 37 of the Tax Code, and there being no such income during the
period in question, it was not liable for the deficiency income tax liabilities assessed .

ISSUE: Whether or not JAL is a non-resident foreign corporation and should be taxed
accordingly as such.

RULING: NO.

There being no dispute that JAL constituted PAL as local agent to sell its airline
tickets, there can be no conclusion other than that JAL is a resident foreign corporation, doing
business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline
business, the generation of sales being the paramount objective (Commissioner of Internal
Revenue vs. British Overseas Airways Corporation, supra). The case of CIR vs. American
Airlines, Inc. (supra) sums it up as follows:

"x x x, foreign airline companies which sold tickets in the Philippines through their
local agents, whether called liaison offices, agencies or branches, were considered resident
foreign corporations engaged in trade or business in the country. Such activities show
continuity of commercial dealings or arrangements and performance of acts or works or the
exercise of some functions normally incident to and in progressive prosecution of commercial
gain or for the purpose and object of the business organization."

The applicable law in the case at bar is that resident foreign corporations are taxed
thirty percentum (30%) upon the amount by which their total net income exceed one hundred
thousand pesos.

 Condominium Corporation
 Real Estate Investment Trust
 R.A. No. 9856

B. Income Taxes Applicable to Corporations

1. Normal Corporate Income Tax
2. Gross Income Tax
3. Final Tax
a. Capital Gains Tax

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 CIR vs CITY TRUST INVESTMENT PHILS, INC.
G.R. No. 139786 September 27, 2006

Citytrust, respondent, is a domestic corporation engaged in quasi-banking activities.

In 1994, Citytrust reported the amount of P110,788,542.30 as its total gross receipts and paid
the amount of P5,539,427.11 corresponding to its 5% GRT.
Petitioner Commissioner of Internal Revenue (Commissioner) assails the Court of Appeals
Decision dated August 17, 1999 in CA-G.R. SP No. 52707 affirming the Court of Tax
Appeals (CTA) Decision ordering the refund or issuance of tax credit certificate in favor of
respondent Citytrust Investment Philippines., Inc. (Citytrust).

ISSUE: Does the twenty percent (20%) final withholding tax (FWT) on a bank's passive
income form part of the taxable gross receipts for the purpose of computing the five percent (5%) gross
receipts tax (GRT)?

RULING: NO.

Under Revenue Regulations No. 12-80 and No. 17-84, as well as several numbered
rulings, the BIR has consistently ruled that the term "gross receipts" does not admit of any
deduction. This interpretation has remained unchanged throughout the various re-
enactments of the present Section 121 of the Tax Code. A catena of cases are unanimous in
defining "gross receipts" as "the entire receipts without any deduction." We quote the
Court's enlightening ratiocination in CIR v Bank of the Philippines Islands,thus:

The Tax Code does not provide a definition of the term "gross receipts". Accordingly,
the term is properly understood in its plain and ordinary meaning and must be taken to
comprise of the entire receipts without any deduction.

in CIR vs Bank of Commerce, it held that:

The word "gross" must be used in its plain and ordinary meaning. It is defined as
"whole, entire, total, without deduction." A common definition is "without deduction."
"Gross" is also defined as "taking in the whole; having no deduction or abatement; whole,
total as opposed to a sum consisting of separate or specified parts." Gross is the antithesis
of net.

In fine, let it be stressed that tax exemptions are highly disfavored. It is a governing
principle in taxation that tax exemptions are to be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority and should be granted only by clear and
unmistakable terms.

4. Special / Preferential Income Tax

5. Minimum Corporate Income Tax
a. Relief from MCIT
i. Prolonged Labor Dispute
ii. Force Majeure
iii. Legitimate Business Reverses

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 CREBA vs ROMULO
G.R. No. 160756 March 9, 2010

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance
Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax
(MCIT) on corporations and creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98.Petitioner argues that the MCIT violates the due process clause
because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and
2.58.2 of RR 2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules
and procedures for the collection of CWT on the sale of real properties categorized as ordinary
assets.Petitioner contends that these revenue regulations are contrary to law for two
reasons:first, they ignore the different treatment by RA 8424 of ordinary assets and capital
assets andsecond, respondent Secretary of Finance has no authority to collect CWT, much
less, to base the CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue
regulations violate the due process clause because, like the MCIT, the government collects
income tax even when the net income has not yet been determined. They contravene the equal
protection clause as well because the CWT is being levied upon real estate enterprises but not
on other business enterprises, more particularly those in the manufacturing sector.

ISSUE: Whether or not the excess MCIT can be carried-forward.

RULING: YES

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal
corporate income tax imposed under Section 27(A).4 If the regular income tax is higher than
the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal
tax shall be carried forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27(E) of RA 8424 provides:

Sec. 2.27(E) [MCIT] on Domestic Corporations. –

(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of
the end of the taxable year (whether calendar or fiscal year, depending on the accounting
period employed) is hereby imposed upon any domestic corporation beginning the fourth
(4th) taxable year immediately following the taxable year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of minimum corporate income
tax is greater than the normal income tax due from such corporation.

(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward

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and credited against the normal income tax for the three (3) immediately succeeding taxable
years.

COMMISSIONER OF INTERNAL REVENUE vs PHILIPPINE AIRLINES

GR 180066

PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable
for Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES,
INC. did not pay the Minimum Corporate Income Tax using as basis its franchise which exempts it
from “all other taxes” upon payment of whichever is lower of either (a) the basic corporate income
tax based on the net taxable income or (b) a franchise tax of 2%.

ISSUE: Is PAL liable for Minimum Corporate Income Tax?

RULING:
NO. PHILIPPINE AIRLINES, INC.’s franchise clearly refers to "basic corporate income tax"
which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under
the Tax Code between taxable income, which is the basis for basic corporate income tax under Sec.
27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax under Section
27 (E). The two terms have their respective technical meanings and cannot be used interchangeably.
Not being covered by the Charter which makes PAL liable only for basic corporate income tax, then
Minimum Corporate Income Tax is included in "all other taxes" from which PHILIPPINE
AIRLINES, INC. is exempted.
The CIR also can not point to the “Substitution Theory” which states that Respondent may
not invoke the “in lieu of all other taxes” provision if it did not pay anything at all as basic corporate
income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts
Respondent but the exercise of its option. The Court even pointed out the fallacy of the argument in
that a measly sum of one peso would suffice to exempt PAL from other taxes while a zero liability
would not and said that there is really no substantial distinction between a zero tax and a one-peso tax
liability. Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL
does more than just clarify a previous regulation and goes beyond mere internal administration and
thus cannot be given effect without previous notice or publication to those who will be affected
thereby.

REPUBLIC OF THE PHILPPINES vs PHILIPPINE AIRLINES

The case stemmed from a claim for a refund by respondent Philippine Airlines, Inc. (PAL) of
the amount of ₱4,469,199.98 representing the alleged erroneously paid excise tax for the period
covering July 2005 to February 2006. On 18 January 2007, PAL filed written claims for a refund with
the Bureau of Internal Revenue (BIR). For failure of the BIR to act on the administrative claim, PAL
filed two separate Petitions for Review with the CTA on 30 July 2007 and 21December2007, docketed
as C.T.A. Case Nos. 7665 and 7713, respectively.

The CTA ruled that respondent PAL was entitled to a refund of excise taxes paid on the latter's
commissary supplies. The appellate court explained that the exemption granted to PAL under P.D.
1590 was not expressly repealed by R.A. 9334. The CTA found that PAL had opted to pay the latter's
basic corporate income tax for the fiscal year ending 31 March 2006. The court also found that the
articles imported were intended for the operations of PAL and were not locally available in reasonable
quantity, quality or price. The latter is therefore entitled to a refund of erroneously paid excise tax in
the total amount of ₱4,469,199.98.

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ISSUE: Whether Sections 6 and 10 of R.A. 9334 repealed Section 13 of P .D. 1590.

RULING:

The court finds no merit in the Petitions.

The controversy before the Court is not novel. In CIR v. PAL,6 the Court has already passed
upon the very same issues raised by the same petitioners. The only differences are the taxable period
involved and the amount of refundable tax.

A reading of the pertinent provisions of P.D. 1590 and R.A. 9334 shows that there was no
express repeal of the grant of exemption: PRESIDENTIAL DECREE N0.1590. Upon the amendment
of the 1997 NIRC, Section 2211 of R.A. 933712 abolished the franchise tax and subjected PAL and
similar entities to corporate income tax and value-added tax (VAT). PAL nevertheless remains exempt
from taxes, duties, royalties, registrations, licenses, and other fees and charges, provided it pays
corporate income tax as granted in its franchise agreement. Accordingly, PAL is left with no other
option but to pay its basic corporate income tax, the payment of which shall be in lieu of all other
taxes, except VAT, and subject to certain conditions provided in its charter.

In this case, the CT A found that PAL had paid basic corporate income tax for fiscal year
ending 31 March 2006.13 Consequently, PAL may now claim exemption from taxes, duties, charges,
royalties, or fees due on all importations of its commissary and catering supplies, provided it shows
that 1) such articles or supplies or materials are imported for use in its transport and nontransport
operations and other activities incidental thereto; and 2) they are not locally available in reasonable
quantity, quality, or price.

As to the issue of PAL' s noncompliance with the conditions set by Section 13 of P.D. 1509
for the imported supplies to be exempt from excise tax, it must be noted that these are factual
determinations that are best left to the CT A. The appellate court found that PAL had complied with
these conditions.

COMMISSIONER OF INTERNAL REVENUE vs PHILIPPINE AIRLINES, INC.

Overseas Communications Tax

PHILIPPINE AIRLINES, INC paid the 10% Overseas Communications Tax (OCT) for
overseas telephone calls made through PLDT. It then later filed with the BIR a claim for refund of the
amount paid as Overseas Communications Tax, claiming that other than being liable for basic
corporate income tax or the franchise tax, whichever was lower, it was exempted from all other taxes
by virtue of the "in lieu of all taxes" clause in its charter.

ISSUE: Is PHILIPPINE AIRLINES, INC liable for the Overseas Communications Tax?

RULING: NO.

The language of PHILIPPINE AIRLINES, INC’s franchise is clearly all-inclusive --- the basic
corporate income tax or franchise tax paid by respondent shall be "in lieu of all other taxes” except
only real property tax. It is not the fact of tax payment that exempts it, but the exercise of its option.
In the event that respondent incurs a net loss, it shall have zero liability for basic corporate income
tax, the lowest possible tax liability. There being no qualification to the exercise of its options, then
Respondent is free to choose basic corporate income tax, even if it would have zero liability.

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 6. Branch Profits Remittance Tax
7. Improperly Accumulated Earnings Tax

C. Domestic Corporations
1. Proprietary Educational Institutions
2. Non-profit Hospitals
3. Income Subject to Final Tax
4. Capital Gains Tax
5. Intercorporate Dividends
6. Minimum Corporate Income Tax

D. Resident Foreign Corporations

1. Gross Income Tax
2. Minimum Corporate Income Tax
3. Special / Preferential Income Tax
a. International Carriers
b. Gross Philippine Billings

COMMISSIONER OF INTERNAL REVENUE vs BRITISH OVERSEAS AIRWAYS

CORPORATION

British Overseas Airways Corp (BOAC) is a 100% British Government-owned corporation

engaged in international airline business and is a member of the Interline Air Transport Association,
and thus, it operates air transportation services and sells transportation tickets over the routes of the
other airline members.

From 1959 to 1972, BOAC had no landing rights for traffic purposes in the Philippines and
thus, did not carry passengers and/or cargo to or from the Philippines but maintained a general sales
agent in the Philippines - Warner Barnes & Co. Ltd. and later, Qantas Airways - which was responsible
for selling BOAC tickets covering passengers and cargoes. The Commissioner of Internal Revenue
assessed deficiency income taxes against BOAC.

ISSUE: Whether the revenue derived by BOAC from ticket sales in the Philippines, constitute income of
BOAC from Philippine sources, and accordingly taxable.

RULING: The source of an income is the property, activity, or service that produced the income.
For the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. Herein, the sale of tickets in the Philippines is
the activity that produced the income. The tickets exchanged hands here and payment for fares were
also made here in the Philippine currency.

The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within Philippine territory, enjoying the protection accorded by the Philippine government.
In consideration of such protection, the flow of wealth should share the burden of supporting the
government. PD 68, in relation to PD 1355, ensures that international airlines are taxed on their
income from Philippine sources. The 2 1/2% tax on gross billings is an income tax. If it had been
intended as an excise tax or percentage tax, it would have been placed under Title V of the Tax Code
covering taxes on business.

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 SOUTH AFRICAN AIRWAYS vs COMMISSIONER OF INTERNAL REVENUE

Petitioner South African Airways is a foreign corporation organized and existing under and
by virtue of the laws of the Republic of South Africa. Its principal office is located at Airways Park,
Jones Road, Johannesburg International Airport, South Africa. In the Philippines, it is an internal air
carrier having no landing rights in the country. Petitioner has a general sales agent in the Philippines,
Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents for compensation or
commission for petitioner’s off-line flights for the carriage of passengers and cargo between ports or
points outside the territorial jurisdiction of the Philippines. Petitioner is not registered with the
Securities and Exchange Commission as a corporation, branch office, or partnership. It is not licensed
to do business in the Philippines. It paid a corporate tax in the rate of 32% of its gross billings.
However, it subsequently claim for refund contending that its income should be taxed at the rate of 2
1/2% of its gross billings.

ISSUE: Whether or not petitioner’s income is sourced within the Philippines and is to be taxed at 32%
of the gross billings?

RULING: YES.

In the instant case, the general rule is that resident foreign corporations shall be liable for a
32% income tax on their income from within the Philippines, except for resident foreign corporations
that are international carriers that derive income “from carriage of persons, excess baggage, cargo and
mail originating from the Philippines” which shall be taxed at 2 1/2% of their Gross Philippine
Billings. Petitioner, being an international carrier with no flights originating from the Philippines, does
not fall under the exception. As such, petitioner must fall under the general rule. This principle is
embodied in the Latin maxim, exception firmat regulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule.

AIR CANADA vs COMMISSIONER OF INTERNAL REVENUE

G.R. 169507

Petitioner Air Canada is a foreign corporation organized and existing under the laws
of Canada. On the 24th of April, 2000, it was granted an authority to operate as an offline
carrier by the Civil Aeronautics Board, subject to certain conditions, which authority would
expire on April 24, 2005. As an offline carrier, petitioner does not have flights originating
from or coming to the Philippines and does not operate any airplane as well.
Then it entered into a Passenger General Sales Agency (GSA) Agreement with Aerotel
Ltd., Corporation for operation in the Philippines. On 2002, Air Canada filed its
administrative claim for refund of Php 5,185,676.77 with the BIR, contending that the
revenue derived by it from its sales of tickets in the Philippines on its off-line flights through
its local General Sales Agent cannot be subject to income tax because the same is not sourced
within the Philippines.

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ISSUE: Whether or not the revenue derived by an international air carrier from sales of
tickets in the Philippines for air transportation, while having no landing rights in the country, constitutes
income of said international air carrier from Philippine source, and accordingly, taxable under Sec.
24(b)(2) of the National Revenue Code.

RULING: YES.

Such revenue constitutes taxable income. This issue has already been laid to rest in a
number of cases by the SC, one of which is the landmark case of CIR v. British Overseas
Airways Corporation. Although Air Canada is not liable to pay the tax as an international air
carrier (2.5% on gross Phil. Billings), it is still liable to pay income tax as a resident foreign
corporation. An off-line international carrier with a General Sales Agent (GSA) in the
Philippines may be considered a resident foreign corporation taxable at 32% on taxable
income derived from Philippine sources.

Moreover, Revenue Regulations No. 6-78 has elaborated that the phrase “doing
business in the Philippines” includes “regular sale of tickets in the Philippines by off-line
international airlines, either by themselves or through their agents.” On the other hand,
income from sale of tickets in the Philippines is considered Philippine sourced. The test of
taxability is the “source” and the source of an income is the activity which produced the
income. The sale of tickets in the Philippines is the activity that produces the income.
Further, by appointment of a GSA whose premises are used as outlet for selling tickets, the
off-line carrier may be deemed to have a permanent establishment in the Philippines, hence
taxable on Philippine sourced income. The petition is DENIED and DISMISSED.

c. Offshore Banking Units

d. Depositary Banks
e. Regional or Area Headquarters of Multinational Corporations
f. Regional Operating Headquarters
g. Tax on Branch Profit Remittances
i. Single Entity Concept
ii. Principal-Agent Relationship Theory

MARUBENI vs COMMISSIONER OF INTERNAL REVENUE

September 14, 1989

Petitioner Marubeni Corporation is a Japanese corporation licensed to engage in

business in the Philippines. When the profits on Marubeni’s investments in Atlantic Gulf and
Pacific Co. of Manila were declared, a 10% final dividend tax was withheld from it, and

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another 15% profit remittance tax based on the remittable amount after the final 10%
withholding tax were paid to the Bureau of Internal Revenue. Marubeni Corp. now claims
for a refund or tax credit for the amount which it has allegedly overpaid the BIR.
The CIR and the CTA denied such claim, stating that, while it was not subject to the
15% profit remittance tax and the 10% intercorporate tax, it was subject to the 25% tax
according to the tax treaty between Japan and the Philippines.

ISSUE: Whether or not Marubeni Corporation is resident foreign corporation.

RULING: NO.

Marubeni is a non-resident foreign corporation. Marubeni is clearly a non-resident

foreign corporation. The alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct income taxpayer from the
branch in the Philippines. The investment (totaling 283.260 shares including that of nominee)
was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni
Japan, but certainly not of the branch in the Philippines.

WHEREFORE, the questioned decision of respondent Court of Tax Appeals dated

February 12, 1986 which affirmed the denial by respondent Commissioner of Internal
Revenue of petitioner Marubeni Corporation's claim for refund is hereby REVERSED.
The Commissioner of Internal Revenue is ordered to refund or grant as tax credit in favor
of petitioner the amount of P144,452.40 representing overpayment of taxes on dividends
received. No costs.

CIR vs BURROUGHS LIMITED AND THE COURT OF TAX APPEALS

G.R. No. L-66653 June 19, 1986

Burroughs Limited is a foreign corporation authorized to engage in trade or business

in the Philippines through a branch office located at De la Rosa corner Esteban Streets,
Legaspi Village, Makati, Metro Manila.

Sometime in March 1979, said branch office applied with the Central Bank for
authority to remit to its parent company abroad, branch profit amounting to P7,647,058.00.
Thus, on March 14, 1979, it paid the 15% branch profit remittance tax, pursuant to Sec. 24
(b) (2) (ii) and remitted to its head office the amount of P6,499,999.30 computed as follows:

Amount applied for remittance................................ P7,647,058.00

Deduct: 15% branch profit

12 | P a g e
 remittance tax ..............................................

Net amount actually remitted.................................. P6,499,999.30

Claiming that the 15% profit remittance tax should have been computed on the basis of the
amount actually remitted (P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a written claim for the
refund or tax credit of the amount of P172,058.90 representing alleged overpaid branch profit
remittance tax.

CTA: Grants tax credit.

CIR: Burroughs no longer entitled to refund because Memorandum Circular No. 8-82 dated
17 March 1982 had revoked and/or repealed the BIR ruling of 21 Jan 1980.

ISSUE: Whether or not Memorandum Circular No. 8-82 (MC 8-82) dated 17 March
1982 can be given retroactive effect.

RULING: NO.

Petitioner's aforesaid contention is without merit. What is applicable in the case at bar
is still the Revenue Ruling of January 21, 1980 because private respondent Burroughs Limited
paid the branch profit remittance tax in question on March 14, 1979. Memorandum Circular
No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light of Section 327
of the National Internal Revenue Code which provides-

Sec. 327. 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 shag not be given retroactive
application if the revocation, modification, or reversal will be prejudicial to the taxpayer
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, or (c) where the taxpayer acted in bad
faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)

The prejudice that would result to private respondent Burroughs Limited by a

retroactive application of Memorandum Circular No. 8-82 is beyond question for it would be
deprived of the substantial amount of P172,058.90. And, insofar as the enumerated
exceptions are concerned, admittedly, Burroughs Limited does not fall under any of them.

WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby

AFFIRMED. No pronouncement as to costs.

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 BANK OF AMERICA NT & SA vs COURT OF TAX APPEALS
G.R. No. 103092 July 21, 1994

Petitioner is a foreign corporation duly licensed to engage in business in the Philippines

with Philippine branch office at BA Lepanto Bldg., Paseo de Roxas, Makati, Metro Manila.
On July 20, 1982 it paid 15% branch profit remittance tax in the amount of P7,538,460.72 on
profit from its regular banking unit operations and P445,790.25 on profit from its foreign
currency deposit unit operations or a total of P7,984,250.97. The tax was based on net profits
after income tax without deducting the amount corresponding to the 15% tax.

Petitioner filed a claim for refund with the Bureau of Internal Revenue of that portion
of the payment which corresponds to the 15% branch profit remittance tax, on the ground
that the tax should have been computed on the basis of profits actually remitted, which is
P45,244,088.85, and not on the amount before profit remittance tax, which is P53,228,339.82.
Subsequently, without awaiting respondent's decision, petitioner filed a petition for review on
June 14, 1984 with this Honorable Court for the recovery of the amount of P1,041,424.03.

CIR contends otherwise and holds that in computing the 15% remittance tax, the tax
should be inclusive of the sum deemed remitted.

ISSUE: Whether or not the branch profit remittance tax should be base on the
amount actually remitted.

RULING: YES.

We agree with the Court of Appeals that not much reliance can be made on our
decision in Burroughs Limited vs. Commission of Internal Revenue (142 SCRA 324), for
there we ruled against the Commissioner mainly on the basis of what the Court so then
perceived as his position in a 21 January 1980 ruling the reversal of which, by his subsequent
ruling of 17 March 1982, could not apply retroactively against Burroughs in conformity with
Section 327 (now Section 246, re: non-retroactivity of rulings) of the National Internal
Revenue Code.

It should be based on the amount actually committed, NOT what was applied for.
There is nothing in Section 24 which indicates that the 15% tax/branch profit remittance is
on the total amount of profit; where the law does NOT qualify that the tax is imposed and
collected at source, the qualification should not be read into law. The rationale of 15% is to
equalize/ share the burden of income taxation with foreign corporations.

WHEREFORE, the decision of the Court of Appeals appealed from is REVERSED

and SET ASIDE, and that of the Court of Tax Appeals is REINSTATED.

h. Income Subject to Final Tax

i. Capital Gains Tax

i. Intercorporate Dividends

E. Nonresident Foreign Corporations

1. Gross income Tax
2. Interest on Foreign Loans

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 3. Intercorporate Dividends
a. Tax Sparing Rule

COMMISSIONER OF INTERNAL REVENUE vs PROCTER & GAMBLE

PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX
APPEALS
G.R. No. L-66838 December 2, 1991

Procter and Gamble Philippines, a domestic corporation wholly owned by Procter and
Gamble USA.

On 5 January 1977, private respondent P&G-Phil. filed with petitioner Commissioner

of Internal Revenue a claim for refund or tax credit in the amount of P4,832,989.26 claiming,
among other things, that pursuant to Section 24 (b) (1) of the National Internal Revenue Code
("NITC"), 1 as amended by Presidential Decree No. 369, the applicable rate of withholding
tax on the dividends remitted was only fifteen percent (15%) (and not thirty-five percent
[35%]) of the dividends.

There being no responsive action on the part of the Commissioner, P&G-Phil., on 13

July 1977, filed a petition for review with public respondent Court of Tax Appeals ("CTA")
docketed as CTA Case No. 2883. On 31 January 1984, the CTA rendered a decision ordering
petitioner Commissioner to refund or grant the tax credit in the amount of P4,832,989.00.

ISSUE: Whether or not Procter and Gamble Philippines is entitled to the preferential 15% tax
rate on dividends declared and remitted to its parent corporation.

RULING: NO.

Procter and Gamble Philippines failed to meet certain conditions necessary in order that
the dividends received by the non-resident parent company in the US may be subject to the
preferential 15% tax instead of 35%, among which are:

a. To show the actual amount credited by the US government against the income tax due
from Procter and Gamble USA;

b. To present the income tax return of its mother company for the years the dividends
were received; and

c. To submit any duly authenticated document showing that the US government credited
the 20% tax deemed paid in the Philippines.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private
respondent's Motion for Reconsideration dated 11 May 1988, to SET ASIDE the Decision
of the and Division of the Court promulgated on 15 April 1988, and in lieu thereof, to
REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No.
2883 dated 31 January 1984 and to DENY the Petition for Review for lack of merit. No
pronouncement as to costs.

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 COMMISSIONER OF INTERNAL REVENUE vs WANDER PHILIPPINES, INC.
G.R. NO. L-68275, April 15, 1988
Private respondents Wander Philippines, Inc. (wander) is a domestic corporation organized
under Philippine laws. It is wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro), a Swiss
corporation not engaged in trade for business in the Philippines.
Wander filed it's witholding tax return for 1975 and 1976 and remitted to its parent
company Glaro dividends from which 35% withholding tax was withheld and paid to the
BIR.
In 1977, Wander filed with the Appellate Division of the Internal Revenue a claim for
reimbursement, contending that it is liable only to 15% withholding tax in accordance with
sec. 24 (b) (1) of the Tax code, as amended by PD nos. 369 and 778, and not on the basis of
35% which was withheld ad paid to and collected by the government. petitioner failed to act
on the said claim for refund, hence Wander filed a petition with Court of Tax Appeals who
in turn ordered to grant a refund and/or tax credit. CIR's petition for reconsideration was
denied hence the instant petition to the Supreme Court.

ISSUE: Whether or not Wander is entitled to the preferential rate of 15% withholding tax on
dividends declared and to remitted to its parent corporation

RULING:
Section 24 (b) (1) of the Tax code, as amended by PD 369 and 778, the law involved
in this case, reads:

sec. 1. The first paragraph of subsection (b) of section 24 of the NIRC, as amended is
hreby further amended to read as follows:

b. Tax on foreign corporations - (1) Non resident corporation -- A foreign corporation

not engaged in trade or business in the Philippines, including a foreign life insurance company
not engaged in life insurance business in the Philippines, shall pay a tax equal to 35% of the
gross income received during its taxable year from all sources within the Philippines, as
interest (except interest on a foreign loans which shall be subject to 15% tax), dividends,
premiums, annuities, compensation, remuneration for technical services or otherwise
emolument, or other fixed determinable annual, periodical ot casual gains, profits and
income, and capital gains: xxx Provided, still further that on dividends received from a
domestic corporation liable to tax under this chapter, the tax shall be 15% of the dividends
received, which shall be collected and paid as provided in sec 53 (d) of this code, subject to
the condition that the country in which the non-resident foreign corporation is domiciled shall
allow a credit against tax due from the non-resident foreign corporation taxes deemed to have
been paid in the Philippines equivalent to 20% which represents the difference between the
regular tax (35%) on corporation and the tax (15%) dividends as provided in this section:
xxx."

From the above-quoted provision, the dividends received from a domestic corporation
liable to tax, the tax shall be 15% of the dividends received, subject to the condition that the
country in which the non-resident foreign corporation is domiciled shall allow a credit against
the tax due from the non-resident foreign corporation taxes deemed to have been paid in the
Philippines equivakent to 20% which represents the difference betqween the regular tax (35%)
on corpoorations and the tax (15%) on dividends.

16 | P a g e
 While it may be true that claims for refund construed strictly against the claimant,
nevertheless, the fact that Switzerland did not impose any tax on the dividends received by
Glaro from the Philippines should be considered as a full satisfaction if the given condition.
For, as aptly stated by respondent Court, to deny private respondent the privilege to withhold
only 15% tax provided for under PD No. 369 amending section 24 (b) (1) of the Tax Code,
would run counter to the very spirit and intent of said law and definitely will adversely affect
foreign corporations interest here and discourage them for investing capital in our country.

COMMISSIONER OF INTERNAL REVENUE vs GOODYEAR PHILIPPINES

GR 216130, August 3, 2016

Respondent is a domestic corporation duly organized and existing under the laws of
the Philippines, and registered with the Bureau of Internal Revenue (BIR) as a large taxpayer
with Taxpayer Identification Number 000-409-561-000.6 On August 19, 2003, the authorized
capital stock of respondent was increased from P400,000,000.00 divided into 4,000,000 shares
with a par value of P100.00 each, to P1,731,863,000.00 divided into 4,000,000 common
shares and 13,318,630 preferred shares with a par value of P100.00 each. Consequently, all
the preferred shares were solely and exclusively subscribed by Goodyear Tire and Rubber
Company (GTRC), which was a foreign company organized and existing under the laws of
the State of Ohio, United States of America (US) and is unregistered in the
Philippines.7chanrobleslaw

On May 30, 2008, the Board of Directors of respondent authorized the redemption of
GTRC's 3,729,216 preferred shares on October 15, 2008 at the redemption price of
P470,653,914.00, broken down as follows: P372,921,600.00 representing the aggregate par
value and P97,732,314.00, representing accrued and unpaid dividends.8chanrobleslaw

On October 15, 2008, respondent filed an application for relief from double taxation
before the International Tax Affairs Division of the BIR to confirm that the redemption was
not subject to Philippine income tax, pursuant to the Republic of the Philippines (RP) - US
Tax Treaty.9 This notwithstanding, respondent still took the conservative approach, and thus,
withheld and remitted the sum of P14,659,847.10 to the BIR on November 3, 2008,
representing fifteen percent (15%) FWT, computed based on the difference of the redemption
price and aggregate par value of the shares.10chanrobleslaw

On October 21, 2010, respondent filed an administrative claim for refund or issuance
of TCC, representing 15% FWT in the sum of P14,659,847.10 before the BIR. Thereafter, or
on November 3, 2010, it filed a judicial claim, by way of petition for review, before the CTA,
docketed as C.T.A. Case No. 8188.11chanrobleslaw

For her part, petitioner maintained that respondent's claim must be denied,
considering that: (a) it failed to exhaust administrative remedies by prematurely filing its
petition before the CTA; and (b) it failed to submit complete supporting documents before the
BIR.

ISSUE: Whether or not the judicial claim of respondent should be dismissed for non-exhaustion
of administrative remedies.

RULING: NO.

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 Section 229 of the Tax Code states that judicial claims for refund must be filed within
two (2) years from the date of payment of the tax or penalty, providing further that the same
may not be maintained until a claim for refund or credit has been duly filed with the
Commissioner of Internal Revenue (CIR), viz.:
SEC. 229. 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 excessively 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 filed after the expiration of two (2)
years from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment x x x. (Emphases and underscoring supplied)

Verily, the primary purpose of filing an administrative claim was to serve as a notice
of warning to the CIR that court action would follow unless the tax or penalty alleged to have
been collected erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code –
[then Section 306 of the old Tax Code] – however does not mean that the taxpayer must await
the final resolution of its administrative claim for refund, since doing so would be tantamount
to the taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-year
prescriptive period expire without the appropriate judicial claim being filed. In CBK Power
Company, Ltd. v. CIR,36 the Court enunciated:

In the foregoing instances, attention must be drawn to the Court's ruling in P.J. Kiener
Co., Ltd. v. David (Kiener), wherein it was held that in no wise does the law, i.e., Section 306
of the old Tax Code (now, Section 229 of the NIRC), imply that the Collector of Internal
Revenue first act upon the taxpayer's claim, and that the taxpayer shall not go to court before
he is notified of the Collector's action. In Kiener, the Court went on to say that the claim with
the Collector of Internal Revenue was intended primarily as a notice of warning that unless
the tax or penalty alleged to have been collected erroneously or illegally is refunded, court
action will follow x x x.37 (Emphases and underscoring supplied)

In the case at bar, records show that both the administrative and judicial claims for
refund of respondent for its erroneous withholding and remittance of FWT were indubitably
filed within the two-year prescriptive period.38 Notably, Section 229 of the Tax Code, as
worded, only required that an administrative claim should first be filed. It bears stressing that
respondent could not be faulted for resorting to court action, considering that the prescriptive
period stated therein was about to expire. Had respondent awaited the action of petitioner
knowing fully well that the prescriptive period was about to lapse, it would have resultantly
forfeited its right to seek a judicial review of its claim, thereby suffering irreparable damage.

Thus, in view of the aforesaid circumstances, respondent correctly and timely sought
judicial redress, notwithstanding that its administrative and judicial claims were filed only 13
days apart.

b. Capital Gains Tax

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 F. Most Favored Nation Clause (Tax Treaty)

COMMISSIONER OF INTERNAL REVENUE vs SC JOHNSON & SON, INCS and

COURT OF APPEALS
G.R. No. 127105. June 25, 1999

Respondent, JOHNSON AND SON, INC a domestic corporation organized and

operating under the Philippine laws, entered into a license agreement with SC Johnson and
Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A.
pursuant to which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and distribute the
products covered by the Agreement and secure assistance in management, marketing and
production from SC Johnson and Son, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board
of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of
Registration No. 8064 . For the use of the trademark or technology, SC JOHNSON AND
SON, INC was obliged to pay SC Johnson and Son, USA royalties based on a percentage
of net sales and subjected the same to 25% withholding tax on royalty payments which
respondent paid for the period covering July 1992 to May 1993.00 On October 29, 1993, SC
JOHNSON AND SON, USA filed with the International Tax Affairs Division (ITAD) of the
BIR a claim for refund of overpaid withholding tax on royalties arguing that, since the
agreement was approved by the Technology Transfer Board, the preferential tax rate of 10%
should apply to the respondent. Respondent submits that royalties paid to SC Johnson and
Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause
of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. The Internal Tax
Affairs Division of the BIR ruled against SC Johnson and Son, Inc. and an appeal was filed
by the former to the Court of tax appeals.
The CTA ruled against CIR and ordered that a tax credit be issued in favor of SC
Johnson and Son, Inc. Unpleased with the decision, the CIR filed an appeal to the CA which
subsequently affirmed in toto the decision of the CTA. Hence, an appeal on certiorari was
filed to the SC.

ISSUE: Whether or not on Sc Johnson and Son, USA is entitled to the most favored nation tax
rate of 10% on ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST
GERMANY TAX TREATY.

RULING:

The concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty could not
apply to taxes imposed upon royalties in the RP-US Tax Treaty since the two taxes imposed under the
two tax treaties are not paid under similar circumstances, they are not containing similar provisions on
tax crediting.

The United States is the state of residence since the taxpayer, S. C. Johnson and Son,
U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of
source are both permitted to tax the royalties, with a restraint on the tax that may be collected
by the state of source. Furthermore, the method employed to give relief from double taxation
is the allowance of a tax credit to citizens or residents of the United States against the United
States tax, but such amount shall not exceed the limitations provided by United States law for
the taxable year. The Philippines may impose one of three rates- 25 percent of the gross

19 | P a g e
amount of the royalties; 15 percent when the royalties are paid by a corporation registered
with the Philippine Board of Investments and engaged in preferred areas of activities; or the
lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under
similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation
clause, the Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US
Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This
would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax
reliefs to residents of the United States in respect of the taxes imposable upon royalties earned
from sources within the Philippines as those allowed to their German counterparts under the
RPGermany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain
similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly
allows crediting against German 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, which is the counterpart provision with respect to relief for double taxation, does
not provide for similar crediting of 20% of the gross amount of
royalties paid.

At the same time, the intention behind the adoption of the provision on relief from
double taxation in the two tax treaties in question should be considered in light of the purpose
behind the most favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party
treatment not less favorable than that which has been or may be granted to the “most favored”
among other countries. It is intended to establish the principle of equality of international
treatment by providing that the citizens or subjects of the contracting nations may enjoy the
privileges accorded by either party to those of the most favored nation. The essence of the
principle is to allow the taxpayer in one state to avail of more liberal provisions granted in
another tax treaty to which the country of residence of such taxpayer is also a party provided
that the subject matter of taxation, in this case royalty income, is the same as that in the tax
treaty under which the taxpayer is liable.

The RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes
paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty,
private respondent cannot be deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on royalties under similar
circumstances.

G. Improperly Accumulated Earnings Tax

1. Coverage
2. Closely-Held Corporations
3. Reasonable Need of Business
a. Immediacy Test
4. Prima Facie Evidence
a. Holding Company
b. Investment Company

COMMISSIONER OF INTERNAL REVENUE vs ANTONIO TUASON, INC. and

CTA
On February 27, 1981, the Commissioner of Internal Revenue, assessed Antonio Tuason,
Inc.
1. P37,491.83 as deficiency income tax for the years 1975,1976, and 1978.

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 2. P161.49 as Deficiency corporate quarterly income tax for the first quarter.
3. P1,151,146.98 as 25% surtax on unreasonable accumulation of surplus for the years
1975-1978.
Antonio Tuason, Inc did not object to the first and second items and paid the amounts
demanded. However, it protested the assessment on a 25% surtax on the third item on the
ground that the accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as real estate broker. The request for
reinvestigation was granted on condition that a waiver of the statute of limitations should be
filed by the private respondent. The latter replied that there was no need of a waiver of the
statute of limitations because the right of the Government to assess said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuazon Inc.'s protest.
In the meantime, the Revenue Commissioner issued warrants of distraint and levy to enforce
collection of the total amount originally assessed including the amounts already paid.
Antonio Tuason, Inc filed a petition for review in the CTA with a request that pending
determination of the case on the merits, an order be issued restraining the Commissioner
and/or his representatives from enforcing the warrants of distraint and levy.
CTA: Ordered the Commissioner to refrain from enforcing the warrants of distraint and
levy.
CIR appealed to this Court, raising the following issues:

ISSUES
1. Whether or not private respondent Antonio Tuason, Inc. is a holding company
and/or investment company;
2. Whether or not private respondent Antonio Tuason, Inc. accumulated surplus for
the years 1975 to 1978; and
3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue
accumulation of surplus for the years 1975 to 1978.

RULING: The petition is meritorious.

Section 25 of the Tax Code at the time the surtax was assessed, provided:
Sec. 25. Additional tax on corporation improperly accumulating profits or surplus.—
(a) Imposition of tax. — If any corporation, except banks, insurance companies, or
personal holding companies, whether domestic or foreign, is formed or availed of for the
purpose of preventing the imposition of the tax upon its shareholders or members or the
shareholders or members of another corporation, through the medium of permitting its gains
and profits to accumulate instead of being divided or distributed, there is levied and assessed
against such corporation, for each taxable year, a tax equal to twenty-five per centum of the
undistributed portion of its accumulated profits or surplus which shall be in addition to the
tax imposed by section twenty-four, and shall be computed, collected and paid in the same
manner and subject to the same provisions of law, including penalties, as that tax.
(b) Prima facie evidence. — The fact that any corporation is a mere holding company
shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment company where at any time during

21 | P a g e
the taxable year more than fifty per centum in value of its outstanding stock is owned, directly
or indirectly, by one person.
(c) Evidence determinative of purpose. — The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members unless the
corporation, by clear preponderance of evidence, shall prove the contrary.
1) The CTA conceded that the Revenue Commissioner's determination that Antonio
Tuason, Inc. was a mere holding or investment company, was "presumptively correct", for
the corporation did not involve itself in the development of subdivisions but merely
subdivided its own lots and sold them for bigger profits. It derived its income mostly from
interest, dividends and rental realized from the sale of realty.
Another circumstance supporting that presumption is that 99.99% in value of the
outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason himself. The
Commissioner "conclusively presumed" that when the corporation accumulated (instead of
distributing to the shareholders) a surplus of over P3 million fron its earnings in 1975 up to
1978, the purpose was to avoid the imposition of the progressive income tax on its
shareholders.
2) The fact that Antonio Tuason, Inc. accumulated surplus profits amounting to
P3,263,305.88 for 1975 up to 1978 is not disputed. However, the Antonio Tuason, Inc.
vehemently denies that its purpose was to evade payment of the progressive income tax on
such dividends by its stockholders. It claims the surplus profits were set aside by the company
to build up sufficient capital for its expansion program which included the construction in
1979-1981 of an apartment building, and the purchase in 1980 of a condominium unit
intended for resale or lease.
However, while these investments were actually made, the Commissioner points out
that the corporation did not use up its surplus profits. Its allegation that P1,525,672.74 was
spent for the construction of an apartment building in 1979 and P1,752,332.87 for the
purchase of a condominium unit in Urdaneta Village in 1980 was refuted by the Declaration
of Real Property on the apartment building (Exh. C) which shows that its market value is only
P429,890.00, and the Tax Declaration on the condominium unit which reflects a market value
of P293,830.00 only. The enormous discrepancy between the alleged investment cost and the
declared market value of these pieces of real estate was not denied nor explained by the
respondent.
3) Since the company as of the time of the assessment in 1981, had invested in its
business operations only P 773,720 out of its accumulated surplus profits of P3,263,305.88 for
1975-1978, its remaining accumulated surplus profits of P2,489,858.88 are therefore subject
to the 25% surtax.
All presumptions are in favor of the correctness of CIR's assessment against the
respondent. It is incumbent upon the taxpayer to prove the contrary (Mindanao Bus
Company vs. Commissioner of Internal Revenue, 1 SCRA 538). Unfortunately, the
respondent failed to overcome the presumption of correctness of the Commissioner's
assessment.
The touchstone of liability is the purpose behind the accumulation of the income and
not the consequences of the accumulation. Thus, if the failure to pay dividends were for the
purpose of using the undistributed earnings and profits for the reasonable needs of the
business, that purpose would not fall within the interdiction of the statute" (Mertens Law of
Federal Income Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila Wine Merchants, Inc. vs.
Commissioner of Internal Revenue, 127 SCRA 483, 493).

22 | P a g e
 It is plain to see that the company's failure to distribute dividends to its stockholders
in 1975-1978 was for reasons other than the reasonable needs of the business, thereby falling
within the interdiction of Section 25 of the Tax Code of 1977.
Dispositive: CTA reversed. The assessment of a 25% surtax against the Antonio
Tuason, Inc. is reinstated but only on the latter's unspent accumulated surplus profits of
P2,489,585.88.

THE MANILA WINE MERCHANTS, INC. VS. THE COMMISSIONER OF

INTERNAL REVENUE
GR NO. L-26145. FEBRUARY 20, 1984

Manila Wine Merchants Inc. is a domestic corporation principally engaged in the

importation and sale of whisky, wines, liquors and distilled spirits.

In 1957 the CIR caused the examination of petitioner’s book of accounts and found the
latter having unreasonably accumulated surplus of P428,934.32 for the calendar year 1947 to
1957, in excess of the reasonable needs of the business subject to the 25% surtax imposed by
Section 25 of the Tax Code.

The total amount due as of February 26, 1963 amounted to P 126,536.12 representing the
surtax and interest thereon.

Respondent contends that petitioner has accumulated earnings beyond the reasonable
needs of its business because the average ratio of the cash dividends declared and paid by
petitioner from 1947 to 1957 was 40.33% of the total surplus available for distribution at the
end of each calendar year.

On the other hand, petitioner contends that in 1957, it distributed 100% of its net earnings
after income tax and part of the surplus for prior years. Respondent further submits that the
accumulated earnings tax should be based on 25% of the total surplus available at the end of
each calendar year while petitioner maintains that the 25% surtax is imposed on the total
surplus or net income for the year after deducting therefrom the income tax due.

Another basis of respondent in assessing petitioner for accumulated earnings tax is its
substantial investment of surplus or profits in unrelated business. These investments are
itemized as follows:

Particulars Amount
1 Acme Commercial Co. Inc. P27,501.00
2 Union Insurance Society of Canton 1,145.76
3 U.S.A. Treasury Bond 347,217.50
4 Wack Wack Golf & Country Club 1.00
TOTAL P 375,865.26

Respondent found that the accumulated surplus in question were invested to ‘unrelated
business’ which were not considered in the ‘immediate needs’ of the Company such that the
25% surtax be imposed therefrom.

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 On appeal to the Court of Tax Appeals, it found that:

The petitioner was not formed for the purpose of preventing the imposition of income tax
upon its shareholders since it has distributed an average of 85.77% of its total surplus available
for distribution at the end of each calendar year for 11 years and not 40.33%.

The investments 1, 2, & 4 were harmless accumulation of surplus and therefore not subject
to surtax.

As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals
ruled that its purchase was in no way related to petitioner’s business of importing and selling
wines, whisky, liquors and distilled spirits.

That it was one for the purpose of preventing the imposition of surtax upon petitioner’s
shareholders by permitting its earnings and profits to accumulate beyond the reasonable needs
of the business. Hence, it modified the respondent’s decision by imposing 25% surtax only on
the USA Treasury Bond in the amount of P86,804.38.

Defenses of petitioner on the USA Treasury Bond:

That the investment made in 1951 would be used in meeting immediate urgent orders
of its local customers.

That they decided sometime in 1957 to hold the bills for a few more years in view of
their plan to buy a lot and construct their own building.

Since they were not yet 60% Filipino owned, they waited until the ownership would
reach that much before making definite plans.

That in 1959 they were already more than 60% Filipino owned and thus in 1961, they
bought a lot.

ISSUES:

1. Whether the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be considered as an
improper accumulation of earnings, and

2. If so, whether the penalty tax of twenty-five percent (25%) can be imposed on such improper
accumulation in 1957 despite the fact that the accumulation occurred in 1951.

RULING:

(1.) Yes the purchase of the U.S.A. Treasury bonds by petitioner in 1951 can be
considered as improper accumulation of earnings. It was an investment to an unrelated
business and was made for the purpose of preventing the imposition of the surtax upon
petitioner’s shareholders by permitting its earnings and profits to accumulate beyond the
reasonable needs of the business.

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 A prerequisite to the imposition of the tax has been that the (1) corporation be formed
or availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or on
the shareholders of any other corporation (2) by permitting the earnings and profits of the
corporation to accumulate instead of dividing them among or distributing them to the
shareholders. If the earnings and profits were distributed, the shareholders would be required
to pay an income tax thereon whereas, if the distribution were not made to them, they would
incur no tax in respect to the undistributed earnings and profits of the corporation. The
touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other
cause, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose does not fall within the interdiction of the statute.

An accumulation of earnings or profits (including undistributed earnings or profits of

prior years) is unreasonable if it is not required for the purpose of the business, considering
all the circumstances of the case.

To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the purchase
of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was an investment
within the reasonable needs of the Corporation. This, the petitioner failed to prove.

To determine the "reasonable needs" of the business in order to justify an

accumulation of earnings, the Courts of the United States have invented the so-called
"Immediacy Test" which construed the words "reasonable needs of the business" to mean the
immediate needs of the business, and it was generally held that if the corporation did not
prove an immediate need for the accumulation of the earnings and profits, the accumulation
was not for the reasonable needs of the business, and the penalty tax would apply. American
cases likewise hold that investment of the earnings and profits of the corporation in stock or
securities of an unrelated business usually indicates an accumulation beyond the reasonable
needs of the business.

The records reveal that from May 1951 when petitioner purchased the U.S.A. Treasury
shares, until 1962 when it finally liquidated the same, it (petitioner) never had the occasion to
use the said shares in aiding or financing its importation. This militates against the purpose
enunciated earlier by petitioner that the shares were purchased to finance its importation
business. To justify an accumulation of earnings and profits for the reasonably anticipated future
needs, such accumulation must be used within a reasonable time after the close of the taxable year.

The arguments of petitioner indicate that it considers the U.S.A. Treasury shares not
only for the purpose of aiding or financing its importation but likewise for the purpose of
buying a lot and constructing a building thereon in the near future, but conditioned upon the
completion of the 60% citizenship requirement of stock ownership of the Company in order
to qualify it to purchase and own a lot. The time when the company would be able to establish
itself to meet the said requirement and the decision to pursue the same are dependent upon
various future contingencies.

In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the taxpayer
is that which is manifested at the time of accumulation not subsequently declared
intentions which are merely the product of afterthought. A speculative and indefinite
purpose will not suffice. The mere recognition of a future problem and the discussion of
possible and alternative solutions is not sufficient. Definiteness of plan coupled with action
taken towards its consummation are essential.

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 Profits may only be accumulated for the reasonable needs of the business, and implicit
in this is further requirement of a reasonable time.

(2.) The petition was wrong in its contention that the 25% surtax should be based on the
surplus accumulated in 1951 and not in 1957.

The rule is now settled in Our jurisprudence that undistributed earnings or profits of prior
years are taken into consideration in determining unreasonable accumulation for purposes of
the 25% surtax. The case of Basilan Estates, Inc. v. Commissioner of Internal Revenue further
strengthen this rule in determining unreasonable accumulation for the year concerned. ’In
determining whether accumulations of earnings or profits in a particular year are within the
reasonable needs of a corporation, it is necessary to take into account prior accumulations,
since accumulations prior to the year involved may have been sufficient to cover the business
needs and additional accumulations during the year involved would not reasonably be
necessary.’

===Basilan Estates vs. CIR

=====Cyanamid Philippines vs C

H. Exempt Corporations
1. Non-stock, Non-profit Educational Institutions, Charitable Institutions and Other
Non-stock, Non-profit Corprations
Cir vs CA
Cir vs. V.G. sinco
CIR vs DLSU
Cir vs St. Lukes
Cir vs Lukes

2. GOCC’s
3. Philippines Airlines

REPUBLIC VS PAL
CIR VS PAL
4. PAGCOR

Pagcor vs BIR
Pagcor vs BIR

BLOOMBERRY RESORTS & HOTELS vs BUREAU OF INTERNAL REVENUE

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 Petition for Certiorari and Prohibition to annul Revenue Memo Circular No. 33-2013 subjecting
contractees and licensees of PAGCOR to income tax.

04/08/09: PAGCOR granted to petitioner a provisional license to operate a resort-casino complex

at the Entertainment City project site of PAGCOR (particularly, Solaire Resort and Casino). Pursuant
to such license and to PAGCOR’s Charter (PD 1869), Petitioner only paid license fees in lieu of taxes.
PAGCOR’s charter provided for exemptions in favour of entities contracting with it.

RA 9337 amended Sec. 27(c) of the NIRC, which excluded PAGCOR from the GOCCs exempt
from paying corporate income tax. In the case of PAGCOR v. BIR, PAGCOR assailed the
constitutionality of the amendment, but the Court upheld its validity. Hence, PAGCOR’s exemption
was removed.

1. BIR then issued the said RMC to implement RA 9337, which provided that in addition to the 5%
franchise tax on its gross revenue, PAGCOR will now have to pay corporate income tax. The said
law also provides that PAGCOR’s contractees and licensees, including entities involving
gambling/recreation, are also subject to income tax.
2. Petitioner (direct to SC): PD 1869 (PAGCOR Charter) as amended by RA 9487, is a valid existing
law, expressly exempting PAGCOR’s contractees and licensees from all taxes except the 5%
franchise tax; that such was not repealed by the deletion of PAGCOR from the list of tax-exempt
entities; that BIR acted with grave abuse of discretion in issuing the RMC as it, in effect,
repealed/amended the Charter; and that the RMC will adversely affect an industry seeking to
promote tourism and generate jobs.
3. Petitioner (justifications): this involves a pure question of law; the gaming industry is one involving
national interest; In essence, Petitioner contends that the CIR cannot issue RMCs that are
inconsistent with law; and that since the RMC would affect the exemption granted, it was issued
by the CIR with grave abuse of discretion.
4. Henares: no grave abuse of discretion as the RMC did not alter, modify, or amend the intent of
the Charter. It merely clarified the taxability of PAGCOR and its contractees and licensees for
income tax purposes.

ISSUE:

1. Whether or not the RMC was issued with grave abuse of discretion: - YES
2. Whether or not the RMC is valid and constitutional despite the exemption granted by the
Charter: - YES
3. Whether or not Petitioner is liable for corporate income tax: - NO

RULING:

1. (As to WN the petition should have been brought directly to SC) Asia International Auctioneers
v. Parayno: RMCs are considered administrative rulings, which are appealable to the CTA, and to no
other Courts. Petitioner should not have brought the petition to the SC directly as it has failed to have
complied with the doctrine of exhaustion of administrative remedies and the rule on hierarchy of
courts. However, pursuant to its jurisdictional prerogative, the SC took cognizance of the case.

2. The Court then referred to the case of PAGCOR v. BIR, wherein it held that (1) RA 9337,
which amended the NIRC and removed the exemption of PAGCOR was valid; (2) PAGCOR’s
income from gaming operations is subject only to the 5% franchise tax; and PAGCOR’s income from
other related services is subject to corporate income tax only. RA 9337 merely reinstated the tax
liability of PAGCOR from other related services (shows, entertainment, etc.), without affecting its tax
privilege (5% franchise tax only) on gaming operations. The Court in that case held that the issuance
of the RMC, subjecting BOTH income from gaming operations AND related services to corporate
income tax, as with grave abuse of discretion.

3. (As to WN the provision applies to contracteRs and licensees of PAGCOR) The Charter
provides for the exemption of PAGCOR and its contractees and licensees from payment of all other
taxes aside from the franchise fee. This includes corporate income tax. The said provision in the
Charter was not amended or repealed, and is thus, still in effect. Hence, the contractees and licensees
are exempt from payment of corporate income tax.

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 1. As the charter states in clear terms that the exemptions shall inure to the benefit of and
extend to the corporations, associations, agencies, or individuals with whom PAGCOR has any
contractual relationship in connection with the operations of casinos authorized to be conducted under
the franchise, so it must be that all contractees and licensees of PAGCOR, upon payment of the
franchise fee, shall likewise be exempted from payment of all kinds of taxes, including corporate
income tax, from the operation of casinos.

2. They shall be liable for corporate income tax for income derived from other related services,
similar to how PAGCOR is liable for such.

CONCLUSION: Petition Granted. BIR ordered to Cease and Desist.

COMMISSIONER OF INTERNAL REVENUE vs SECRETARY

G.R. No. 177387

Petitioner BIR assessed respondent PAGCOR for alleged deficiency value-added tax (VAT),
final withholding tax on fringe benefits, and expanded withholding tax. PAGCOR, objected to the
assessment of deficiency tax since under PD 1869 states that:

No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever
nature, whether National or Local, shall be assessed and collected under this Franchise from the
Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation,
except a Franchise Tax of five percent (5%) of the gross revenue or earnings derived by the Corporation
from its operation under this Franchise.

The CIR argues that PAGCOR's gambling operations are embraced under the phrase sale or
exchange of services, including the use or lease of properties; that such operations are not among those
expressly exempted from the 10% VAT under Section 3 of R.A. No. 7716; and that the legislative
purpose to withdraw PAGCOR's 5% franchise tax was manifested by the language used in Section 20
of R.A. No. 7716.

After trading various pleadings, Respondent Secretary of Justice rendered a decision stating
that PAGCOR would only be liable to its 5% franchise tax.

ISSUES:

(1) Whether or not the Secretary of Justice has jurisdiction to review the disputed assessments;

(2) Whether or not PAGCOR is liable for the payment of VAT; and

(3) whether or not PAGCOR is liable for the payment of withholding taxes.

RULING:

1. No, the DOJ has no jurisdiction in Philippine National Oil Company v. Court of Appeals disputes,
claims and controversies tailing under Section 7 of R.A. No. 1125, even though solely among
government offices, agencies, and instrumentalities, including government-owned and controlled
corporations, remain in the exclusive appellate jurisdiction of the CTA. Hence the Secretary of Justice
has no jurisdiction on the matter.

2. No, PAGCOR is exempt from payment of VAT.

Petitioner is exempt from the payment of VAT, because PAGCORs charter, P.D. No. 1869,
is a special law that grants petitioner exemption from taxes. A special law cannot be repealed or
modified by a subsequently enacted general law in the absence of any express provision in the latter
law to that effect. PAGCOR is undoubtedly exempt from such taxes because the law exempts from

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taxes persons or entities contracting with PAGCOR in casino operations. Although, differently
worded, the provision clearly exempts PAGCOR from indirect taxes. In fact, it goes one step
further by granting tax exempt status to persons dealing with PAGCOR in casino operations.

3. Yes, PAGCOR is liable for the payment of withholding taxes

It is settled that all presumptions are in favor of the correctness of tax assessments. The good
faith of the tax assessors and the validity of their actions are thus presumed. They will be presumed to
have taken into consideration all the facts to which their attention was called.59 Hence, it is incumbent
upon the taxpayer to credibly show that the assessment was erroneous in order to relieve himself from
the liability it imposes. PAGCOR failed in this regard. Hence, except for the assessment for deficiency
expanded withholding taxes pertaining to the payments made to the COA for its audit services and
for the prizes and other promo items, the Court uphold the BIR's assessment for deficiency expanded
withholding taxes.

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