FIRST DIVISION Less: Cost of Sales/Services 2,643,049, 769.

00
February 13, 2017 Gross Income From Operation 980,461,847.00
G.R. No. 203514 Add: Non-Operating & Other Income -
COMMISSIONER OF INTERNAL REVENUE, Petitioner Total Gross Income 980,461,847.00
vs. Less: Deductions 481,266,883 .00
ST. LUKE’S MEDICAL CENTER, INC., Respondent Net Income Subject to Tax499, 194,964.00
DECISION XTaxRate 10%
Tax Due 49,919,496.40
DEL CASTILLO, J.: Less: Tax Credits -
Deficiency Income Tax 49,919,496.40
The doctrine of stare decisis dictates that "absent any powerful countervailing Add: Increments
considerations, like cases ought to be decided alike."1 25% Surcharge 12,479,874.10
20% Interest Per Annum (4115/06-4/15/08) 19,995,151.71
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails Compromise Penalty for Late Payment 25,000.00
the May 9, 2012 Decision3 and the September 17, 2012 Resolution4 of the Court of Total increments 32,500,025.81
Tax Appeals (CTA) in CTA EB Case No. 716. Total Amount Due ?82,419,522.21
For Taxable Year 2006:
Factual Antecedents
ASSESSMENT NO. QA-07-000097
On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received
from the Large Taxpayers Service-Documents Processing and Quality Assurance PARTICULARS
Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice
Nos. QA-07-0000965 and QA-07-000097,6 assessing respondent SLMC deficiency [AMOUNT]
income tax under Section 27(B)7 of the 1997 National Internal Revenue Code
(NIRC), as amended, for taxable year 2005 in the amount of ₱78,617,434.54 and for Sales/Revenues/Receipts/Fees ?3,8 l 5,922,240.00
taxable year 2006 in the amount of ₱57,119,867.33. Less: Cost of Sales/Services 2,760,518,437.00
Gross Income From Operation 1,055,403,803.00
On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue Add: Non-Operating & Other Income -
(CIR) an administrative protest8 assailing the assessments. SLMC claimed that as a Total Gross Income 1,055,403,803.00
non-stock, non-profit charitable and social welfare organization under Section 30(E) Less: Deductions 640,147,719.00
and (G)9 of the 1997 NIRC, as amended, it is exempt from paying income tax. Net Income Subject to Tax415,256,084.00
XTaxRate 10%
On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed Tax.Due 41,525,608.40
Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable Less: Tax Credits -
year 2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, Deficiency Income Tax 41,525,608.40
computed as follows: Add: Increments -
25% Surcharge 10,381,402.10
For Taxable Year 2005: 20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44
Compromise Penalty for Late Payment 25,000.00
ASSESSMENT NO. QA-07-000096 Total increments 18,734,277.54
Total Amount Due ?60,259,885.9411
PARTICULARS Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12
AMOUNT docketed as CTA Case No. 7789.

Sales/Revenues/Receipts/Fees ?3,623,511,616.00 Ruling of the Court of Tax Appeals Division


On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not
liable for deficiency income tax under Section 27(B) of the 1997 NIRC, as amended,
since it is exempt from paying income tax under Section 30(E) and (G) of the same
Code. Thus:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-
000097, assessing petitioner for alleged deficiency income taxes for the taxable years
2005 and 2006, respectively, are hereby CANCELLED and SET ASIDE.
SO ORDERED.14
CIR moved for reconsideration but the CTA Division denied the same in its
December 28, 2010 Resolution.15
This prompted CIR to file a Petition for Review16 before the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the
Audit Results/Assessment Notices issued against SLMC. It sustained the findings of
the CTA Division that SLMC complies with all the requisites under Section 30(E)
and (G) of the 1997 NIRC and thus, entitled to the tax exemption provided therein.17
On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
Issue
Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending
that the CTA erred in exempting SLMC from the payment of income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos.
195909 and 195960, entitled Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.,18 finding SLMC not entitled to the tax exemption under
Section 30(E) and (G) of the NIRC of 1997 as it does not operate exclusively for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. Thus, the Court disposed of the case in this manner:
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc
dated 19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No.
6746 are MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the
deficiency income tax in 1998 based on the 10% preferential income tax rate under
Section 27(B) of the National Internal Revenue Code. However, it is not liable for
surcharges and interest on such deficiency income tax under Sections 248 and 249 of
the National Internal Revenue Code. All other parts of the Decision and Resolution of
the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for
violating Section I, Rule 45 of the Rules of Court.
SO ORDERED.19
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing
the Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for
taxable years 1998, 2000-2002, and 2004-2007, as evidenced by the payment
confirmation21 from the BIR, and that it did not pay any surcharge, interest, and
compromise penalty in accordance with the above-mentioned Decision of the Court.
In view of the payment it made, SLMC moved for the dismissal of the instant case on
the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC
is not a competent proof of payment as it is a mere photocopy and does not even
indicate the quarter/sand/or year/s said payment covers.22
In reply,23 SLMC submitted a copy of the Certification24 issued by the Large
Taxpayers Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the
basic deficiency income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006,
2007 are concen1ed, this Office considers the cases closed due to the payment made
on April 30, 2013." SLMC likewise submitted a letter25 from the BIR dated
November 26, 2013 with attached Certification of Payment26 and application for
abatement,27 which it earlier submitted to the Court in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.28
Thereafter, the parties submitted their respective memorandum.
CIR 's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income
tax under Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable
to pay compromise penalty pursuant to Section 248(A)30 of the 1997 NIRC for
failing to file its quarterly income tax returns.31
As to the alleged payment of the basic tax, CIR contends that this does not render the
instant case moot as the payment confirmation submitted by SLMC is not a
competent proof of payment of its tax liabilities.32
SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.)33 positing that earning a profit by a charitable, benevolent
hospital or educational institution does not result in the withdrawal of its tax exempt
privilege.34 SLMC further claims that the income it derives from operating a hospital
is not income from "activities conducted for profit."35 Also, it maintains that in
accordance with the ruling of the Court in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.),36 it is not
liable for compromise penalties.37
In any case, SLMC insists that the instant case should be dismissed in view of its
payment of the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to
the BIR on April 30, 2013.38
Our Ruling
SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997
NIRC insofar as its revenues from paying patients are concerned has been settled in
G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's
Medical Center, Inc.),39 where the Court ruled that:
x x x We hold that Section 27(B) of the NIRC does not remove the income tax
exemption of proprietary non-profit hospitals under Section 30(E) and (G). Section
27(B) on one hand, and Section 30(E) and (G) on the other hand, can be construed
together without the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely,
proprietary non-profit educational institutions and proprietary non-profit hospitals,
among the institutions covered by Section 30, to the 10% preferential rate under
Section 27(B) instead of the ordinary 30% corporate rate under the last paragraph of
Section 30 in relation to Section 27(A)(l).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit
hospitals. The only qualifications for hospitals are that they must be proprietary and
non-profit. 'Proprietary' means private, following the definition of a 'proprietary
educational institution' as 'any private school maintained and administered by private
individuals or groups' with a government permit. 'Non-profit' means no net income or
asset accrues to or benefits any member or specific person, with all the net income or
asset devoted to the institution's purposes and all its activities conducted not for
profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v.
Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club
organized for recreation and entertainment of its stockholders and members. The club
was primarily funded by membership fees and dues. If it had profits, they were used
for overhead expenses and improving its golf course. The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not
charitable. Tue Court defined 'charity' in Lung Center of the Philippines v. Quezon
City as 'a gift, to be applied consistently with existing laws, for the benefit of an
indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or
[by] otherwise lessening the burden of government.' A nonprofit club for the benefit
of its members fails this test. An organization may be considered as non-profit if it
does not distribute any part of its income to stockholders or members. However,
despite its being a tax exempt institution, any income such institution earns from
activities conducted for profit is taxable, as expressly provided in the last paragraph
of Section 30.
To be a charitable institution, however, an organization must meet the substantive test
of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which
lessens the burden of government. In other words, charitable institutions provide for
free goods and services to the public which would otherwise fall on the shoulders of
government. Thus, as a matter of efficiency, the government forgoes taxes which
should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations
from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members
of Congress.' The requirements for a tax exemption are strictly construed against the
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a
charitable institution for the purpose of exemption from real property taxes. This
ruling uses the same premise as Hospital de San Juan and Jesus Sacred Heart College
which says that receiving income from paying patients does not destroy the charitable
nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and
its exemption from taxes simply because it derives income from paying patients,
whether outpatient, or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.
For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that
'[c]haritable institutions, churches and personages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly, and exclusively used for religious, charitable, or educational purposes shall
be exempt from taxation.' The test of exemption is not strictly a requirement on the
intrinsic nature or character of the institution. The test requires that the institution use
property in a certain way, i.e., for a charitable purpose. Thus, the Court held that the
Lung Center of the Philippines did not lose its charitable character when it used a
portion of its lot for commercial purposes. The effect of failing to meet the use
requirement is simply to remove from the tax exemption that portion of the property
not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section
28(3), Article VI of the Constitution. Section 30(E) of the NIRC defines the
corporation or association that is exempt from income tax. On the other hand, Section
28(3), Article VI of the Constitution does not define a charitable institution, but
requires that the institution 'actually, directly and exclusively' use the property for a
charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be
devoted 'exclusively' for charitable purposes. The organization of the institution
refers to its corporate form, as shown by its articles of incorporation, by-laws and
other constitutive documents. Section 30(E) of the NIRC specifically requires that the
corporation or association be non-stock, which is defined by the Corporation Code as
'one where no part of its income is distributable as dividends to its members, trustees,
or officers' and that any profit 'obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or purposes
for which the corporation was organized.' However, under Lung Center, any profit by
a charitable institution must not only be plowed back 'whenever necessary or proper,'
but must be 'devoted or used altogether to the charitable object which it is intended to
achieve.'
The operations of the charitable institution generally refer to its regular activities.
Section 30(E) of the NIRC requires that these operations be exclusive to charity.
There is also a specific requirement that 'no part of [the] net income or asset shall
belong to or inure to the benefit of any member, organizer, officer or any specific
person.' The use of lands, buildings and improvements of the institution is but a part
of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit
charitable institution. However, this does not automatically exempt St. Luke's from
paying taxes. This only refers to the organization of St. Luke's. Even if St. Luke's
meets the test of charity, a charitable institution is not ipso facto tax exempt. To be
exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property 'actually, directly and
exclusively' for charitable purposes. To be exempt from income taxes, Section 30(E)
of the NIRC requires that a charitable institution must be 'organized and operated
exclusively' for charitable purposes. Likewise, to be exempt from income taxes,
Section 30(G) of the NIRC requires that the institution be 'operated exclusively' for
social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized
and operated exclusively' by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever
kind and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as its
not-for-profit activities remain tax exempt. This paragraph qualifies the requirements
in Section 30(E) that the '[n]on-stock corporation or association [must be] organized
and operated exclusively for . . . charitable . . . purposes . . . . ' It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated
exclusively' for the promotion of social welfare.
Thus, even if the charitable institution must be 'organized and operated exclusively'
for charitable purposes, it is nevertheless allowed to engage in 'activities conducted
for profit' without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the 'income of whatever kind and character' of a charitable
institution 'from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax.' Prior to the introduction of Section
27(B), the tax rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax
rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱l.73
billion from paying patients is not an institution 'operated exclusively' for charitable
purposes. Clearly, revenues from paying patients are income received from 'activities
conducted for profit.' Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared ₱l,730,367,965 as 'Revenues from Services to Patients' in
contrast to its 'Free Services' expenditure of ₱218,187,498. In its Comment in G.R.
No. 195909, St. Luke's showed the following 'calculation' to support its claim that
65.20% of its 'income after expenses was allocated to free or charitable services' in
1998.
x x xx
In Lung Center, this Court declared:
'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred
from participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude;
as enjoying a privilege exclusively.' . . . The words 'dominant use' or 'principal use'
cannot be substituted for the words 'used exclusively' without doing violence to the
Constitution and thelaw. Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit.
They cannot be considered any other way. There is a 'purpose to make profit over and
above the cost' of services. The ₱l.73 billion total revenues from paying patients is
not even incidental to St. Luke's charity expenditure of ₱2l8,187,498 for non-paying
patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its
operating income in 1998. However, if a part of the remaining 34.80% of the
operating income is reinvested in property, equipment or facilities used for services to
paying and non-paying patients, then it cannot be said that the income is 'devoted or
used altogether to the charitable object which it is intended to achieve.' The income is
plowed back to the corporation not entirely for charitable purposes, but for profit as
well. In any case, the last paragraph of Section 30 of the NIRC expressly qualifies
that income from activities for profit is taxable 'regardless of the disposition made of
such income.'
Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase 'any activity conducted for profit.' However, it quoted a
deposition of Senator Mariano Jesus Cuenco, who was a member of the Committee
of Conference for the Senate, which introduced the phrase 'or from any activity
conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no
cree V d que es una actividad esencial dicho hospital para el funcionamiento def
colegio de medicina
de dicha universidad?
x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa;
pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente
van enfermos de buena posicion social economica, lo que se paga por estos enfermos
debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para
insertar las palabras o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution
like the College of Medicine of the University of Santo Tomas.1awp++i1 Senator
Cuenco answered that if the hospital has paid rooms generally occupied by people of
good economic standing, then it should be subject to income tax. He said that this
was one of the reasons Congress inserted the phrase 'or any activity conducted for
profit.'
The question in Jesus Sacred Heart College involves an educational institution.
However, it is applicable to charitable institutions because Senator Cuenco's response
shows an intent to focus on the activities of charitable institutions. Activities for
profit should not escape the reach of taxation. Being a non-stock and non-profit
corporation does not, by this reason alone, completely exempt an institution from tax.
An institution cannot use its corporate form to prevent its profitable activities from
being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision
granting tax exemption, but also on the clear and plain text of Section 30(E) and (G).
Section 30(E) and (G) of the NIRC requires that an institution be 'operated
exclusively' for charitable or social welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or (G) does not lose its tax exemption
if it earns income from its for-profit activities. Such income from for-profit activities,
under the last paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate pursuant to Section
27(B).
A tax exemption is effectively a social subsidy granted by the State because an
exempt institution is spared from sharing in the expenses of government and yet
benefits from them. Tax exemptions for charitable institutions should therefore be
lin1ited to institutions beneficial to the public and those which improve social
welfare. A profit-making entity should not be allowed to exploit this subsidy to the
detriment of the government and other taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non-
profit hospital under Section 27(B) of the NIRC as long as it does not distribute any
of its profits to its members and such profits are reinvested pursuant to its corporate
purposes. St. Luke's, as a proprietary non-profit hospital, is entitled to the preferential
tax rate of 10% on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of
the NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June
1990 by the BIR, which opined that St. Luke's is 'a corporation for purely charitable
and social welfare purposes' and thus exempt from income tax. In Michael J Lhuillier,
Inc. v. Commissioner of Internal Revenue, the Court said that 'good faith and honest
belief that one is not subject to tax on the basis of previous interpretation of
government agencies tasked to implement the tax law, are sufficient justification to
delete the imposition of surcharges and interest.'40
A careful review of the pleadings reveals that there is no countervailing consideration
for the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960
(Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under
the doctrine of stare decisis, which states that "[o]nce a case has been decided in one
way, any other case involving exactly the same point at issue x x x should be decided
in the same manner,"41 the Court finds that SLMC is subject to 10% income tax
insofar as its revenues from paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section
30(E) and (G) of the 1997 NIRC requires said institution to operate exclusively for
charitable or social welfare purpose. But in case an exempt institution under Section
30(E) or (G) of the said Code earns income from its for-profit activities, it will not
lose its tax exemption. However, its income from for-profit activities will be subject
to income tax at the preferential 10% rate pursuant to Section 27(B) thereof.
SLMC is not liable for Compromise
Penalty.
As to whether SLMC is liable for compromise penalty under Section 248(A) of the
1997 NIRC for its alleged failure to file its quarterly income tax returns, this has also
been resolved in G.R Nos. 195909 and 195960 (Commissioner of Internal Revenue v.
St. Luke's Medical Center, Inc.),42 where the imposition of surcharges and interest
under Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good
faith and honest belief on the part of SLMC that it is not subject to tax. Thus,
following the ruling of the Court in the said case, SLMC is not liable to pay
compromise penalty under Section 248(A) of the 1997 NIRC.
The Petition is rendered moot by the
payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by SLMC on April 30,
2013, the instant Petition has become moot.1avvphi1
While the Court agrees with the CIR that the payment confirmation from the BIR
presented by SLMC is not a competent proof of payment as it does not indicate the
specific taxable period the said payment covers, the Court finds that the Certification
issued by the Large Taxpayers Service of the BIR dated May 27, 2013, and the letter
from the BIR dated November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents. In fact, in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center,
lnc.,45 the Court dismissed the petition based on a letter issued by CIR confirming
SLMC's payment of taxes, which is the same letter submitted by SLMC in the instant
case.
In fine, the Court resolves to dismiss the instant Petition as the same has been
rendered moot by the payment made by SLMC of the basic taxes for the taxable years
2005 and 2006, in the amounts of ₱49,919,496.40 and ₱4 l,525,608.40,
respectively.46
WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 215427 December 10, 2014
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR),
Petitioner,
vs.
THE BUREAU OF INTERNAL REVENUE, represented by JOSE MARIO
BUNAG, in his capacity as Commissioner of the Bureau of Internal Revenue,
and JOHN DOE and JANE DOE, who are Promulgated: persons acting for, in
behalf or under the authority of respondent, Respondents.
DECISION
PERALTA, J.:
The present petition stems from the Motion for Clarification filed by petitioner
Philippine Amusement and Gaming Corporation (PAGCOR) on September 13, 2013
in the case entitled Philippine Amusement and Gaming Corporation (PAGCOR) v.
The Bureau of Internal Revenue, et al.,1 which was promulgated on March 15, 2011.
The Motion for Clarification essentially prays for the clarification of our Decision in
the aforesaid case, as well the issuance of a Temporary Restraining Order and/or Writ
of Preliminary Injunction against the Bureau of Internal Revenue (BIR), their
employees, agents and any other persons or entities acting or claiming any right on
BIR’s behalf, in the implementation of BIR Revenue Memorandum Circular (RMC)
No. 33-2013 dated April 17, 2013.
At the onset, it bears stressing that while the instant motion was denominated as a
"Motion for Clarification," in the session of the Court En Bancheld on November 25,
2014, the members thereof ruled to treat the same as a new petition for certiorari
under Rule 65 of the Rules of Court, given that petitioner essentially alleges grave
abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction
in issuing RMC No. 33-2013. Consequently, a new docket number has been assigned
thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant
to the Resolution dated November 25,2014, the pertinent portion of which reads:
G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of
Internal Revenue, et al.). – The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary
Restraining Order and/or Preliminary Injunction Application dated September 6,
2013 filed by PAGCOR;
(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for
Clarification, subject to payment of the appropriate docket fees; and
(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for
Clarification within five (5) days from notice hereof. Brion, J., no part and on leave.
Perlas-Bernabe, J., on official leave.
Considering that the parties havefiled their respective pleadings relative to the instant
petition, and the appropriate docket fees have been duly paid by petitioner, this Court
considers the instant petition submitted for resolution.
The facts are briefly summarized as follows:
On April 17, 2006, petitioner filed before this Court a Petition for Review on
Certiorari and Prohibition (With Prayer for the Issuance of a Temporary Restraining
Order and/or Preliminary Injunction) seeking the declaration of nullity of Section 12
of Republic Act (R.A.)No. 93373 insofar as it amends Section 27(C)4 of R.A. No.
8424,5 otherwise known as the National Internal Revenue Code (NIRC) by excluding
petitioner from the enumeration of government-owned or controlled corporations
(GOCCs) exempted from liability for corporate income tax.
On March 15, 2011, this Court rendered a Decision6 granting in part the petition filed
by petitioner. Its fallo reads:
WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No.
9337, amending Section 27(c) of the National Internal Revenue Code of 1997, by
excluding petitioner Philippine Amusement and Gaming Corporation from the
enumeration of government-owned and controlled corporations exempted from
corporate income tax is valid and constitutional, while BIR Revenue Regulations No.
16-2005 insofar as it subjects PAGCOR to 10% VAT is null and void for being
contrary to the National Internal Revenue Code of 1997, as amended by Republic Act
No. 9337.
No costs.
SO ORDERED.7
Both petitioner and respondent filed their respective motions for partial
reconsideration, but the samewere denied by this Court in a Resolution8 dated May
31, 2011.
Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the
Decision dated March 15, 2011 and the Resolution dated May 31, 2011, which
clarifies the "Income Tax and Franchise Tax Due from the Philippine Amusement
and Gaming Corporation (PAGCOR), its Contractees and Licensees." Relevant
portions thereof state:
II. INCOME TAX
Pursuant to Section 1 of R.A.9337, amending Section 27(C) of the NIRC, as
amended, PAGCOR is no longer exempt from corporate income tax as it has been
effectively omitted from the list of government-owned or controlled corporations
(GOCCs) that are exempt from income tax. Accordingly, PAGCOR’s income from
its operations and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gaming pools, and other related operations, are
subject to corporate income tax under the NIRC, as amended. This includes, among
others:
a) Income from its casino operations;
b) Income from dollar pit operations;
c) Income from regular bingo operations; and
d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents’ commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.
Income from "other related operations" includes, butis not limited to:
a) Income from licensed private casinos covered by authorities to operate issued to
private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered
by authorities to operate issued to private operators;
c) Income from private internet casino gaming, internet sports betting and private
mobile gaming operations;
d) Income from private poker operations;
e) Income from junket operations;
f) Income from SM demo units; and
g) Income from other necessary and related services, shows and entertainment.
PAGCOR’s other income that is not connected with the foregoing operations are
likewise subject to corporate income tax under the NIRC, as amended.
PAGCOR’s contractees and licensees are entities duly authorized and licensed by
PAGCOR to perform gambling casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools. These contractees and licensees are subject to
income tax under the NIRC, as amended.
III. FRANCHISE TAX
Pursuant to Section 13(2) (a) of P.D. No. 1869,9 PAGCOR is subject to a franchise
tax of five percent (5%) of the gross revenue or earnings it derives from its operations
and licensing of gambling casinos, gaming clubs and other similar recreation or
amusement places, gaming pools, and other related operations as described above.
On May 20, 2011, petitioner wrote the BIR Commissioner requesting for
reconsideration of the tax treatment of its income from gaming operations and other
related operations under RMC No. 33-2013. The request was, however, denied by the
BIR Commissioner.
On August 4, 2011, the Decision dated March 15, 2011 became final and executory
and was, accordingly, recorded in the Book of Entries of Judgment.10
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-
2013 is an erroneous interpretation and application of the aforesaid Decision, and
seeking clarification with respect to the following:
1. Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other
taxes with respect toits gaming income, pursuant to its Charter – P.D. 1869, as
amended by R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A.
9337.
2. If it is deemed repealed or amended, whether PAGCOR’s gaming income is
subject to both 5% franchise tax and income tax.
3. Whether PAGCOR’s income from operation of related services is subject to both
income tax and 5% franchise tax.
4. Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit
of third parties with contractual relationship with PAGCOR in connection with the
operation of casinos.11
In our Decision dated March 15, 2011, we have already declared petitioner’s income
tax liability in view of the withdrawal of its tax privilege under R.A. No. 9337.
However, we made no distinction as to which income is subject to corporate income
tax, considering that the issue raised therein was only the constitutionality of Section
1 of R.A. No. 9337, which excluded petitioner from the enumeration of GOCCs
exempted from corporate income tax.
For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s
income is classified into two: (1) income from its operations conducted under its
Franchise, pursuant to Section 13(2) (b) thereof (income from gaming operations);
and (2) income from its operation of necessary and related services under Section
14(5) thereof (income from other related services). In RMC No. 33-2013, respondent
further classified the aforesaid income as follows:
1. PAGCOR’s income from its operations and licensing of gambling casinos, gaming
clubs and other similar recreation or amusement places, gaming pools, includes,
among others:
(a) Income from its casino operations;
(b) Income from dollar pit operations;
(c) Income from regular bingo operations; and
(d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents’ commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.
2. Income from "other related operations"includes, but is not limited to:
(a) Income from licensed private casinos covered by authorities to operate issued to
private operators;
(b) Income from traditional bingo, electronic bingo and other bingo variations
covered by authorities to operate issued to private operators;
(c) Income from private internet casino gaming, internet sports betting and private
mobile gaming operations;
(d) Income from private poker operations;
(e) Income from junket operations;
(f) Income from SM demo units; and
(g) Income from other necessary and related services, shows and entertainment.12
After a thorough study of the arguments and points raised by the parties, and in
accordance with our Decision dated March 15, 2011, we sustain petitioner’s
contention that its income from gaming operations is subject only to five percent
(5%) franchise tax under P.D. 1869, as amended, while its income from other related
services is subject to corporate income tax pursuant to P.D. 1869, as amended, as
well as R.A. No. 9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with
respect to its operation of related services. Accordingly, the income tax exemption
ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to
petitioner’sincome from operation of related services. Such income tax exemption
could not have been applicable to petitioner’s income from gaming operations as it is
already exempt therefrom under P.D. 1869, as amended, to wit: SECTION 13.
Exemptions. –
xxxx
(2) Income and other taxes. — (a) Franchise Holder: 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 (5%) percent of the gross revenue or
earnings derived by the Corporation from its operation under this Franchise. Such tax
shall be due and payable quarterly to the National Government and shall be in lieu of
all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial, or national government
authority.13
Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person
or entity involved is subject to tax. This is the most sound and logical interpretation
because petitioner could not have been exempted from paying taxes which it was not
liable to pay in the first place. This is clear from the wordings of P.D. 1869, as
amended, imposing a franchise tax of five percent (5%) on its gross revenue or
earnings derived by petitioner from its operation under the Franchise in lieuof all
taxes of any kind or form, as well as fees, charges or leviesof whatever nature, which
necessarily include corporate income tax.
In other words, there was no need for Congress to grant tax exemption to petitioner
with respect to its income from gaming operations as the same is already exempted
from all taxes of any kind or form, income or otherwise, whether national or local,
under its Charter, save only for the five percent (5%) franchise tax. The exemption
attached to the income from gaming operations exists independently from the
enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright
ridiculous, if not deleterious, since petitioner would be in a worse position if the
exemption was granted (then withdrawn) than when it was not granted at all in the
first place.
Moreover, as may be gathered from the legislative records of the Bicameral
Conference Meeting of the Committee on Ways and Means dated October 27, 1997,
the exemption of petitioner from the payment of corporate income tax was due to the
acquiescence of the Committee on Ways and Means to the request of petitioner that it
be exempt from such tax. Based on the foregoing, it would be absurd for petitioner to
seek exemption from income tax on its gaming operations when under its Charter, it
is already exempted from paying the same.
Second. Every effort must be exerted to avoid a conflict between statutes; so that if
reasonable construction is possible, the laws must be reconciled in that manner.14
As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337.
The former lays down the taxes imposable upon petitioner, as follows: (1) a five
percent (5%) franchise tax of the gross revenues or earnings derived from its
operations conducted under the Franchise, which shall be due and payable in lieu of
all kinds of taxes, levies, fees or assessments of any kind, nature or description,
levied, established or collected by any municipal, provincial or national government
authority;15 (2) income tax for income realized from other necessary and related
services, shows and entertainment of petitioner.16 With the enactment of R.A. No.
9337, which withdrew the income tax exemption under R.A. No. 8424, petitioner’s
tax liability on income from other related services was merely reinstated.
It cannot be gain said, therefore, that the nature of taxes imposable is well defined for
each kind of activity oroperation. There is no inconsistency between the statutes; and
in fact, they complement each other.
Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which
expressly provides the tax treatment of petitioner’s income prevails over R.A. No.
9337, which is a general law. It is a canon of statutory construction that a special law
prevails over a general law — regardless of their dates of passage — and the special
is to be considered as remaining an exception to the general.17 The rationale is:
Why a special law prevails over a general law has been put by the Court as follows: x
xxx
x x x The Legislature consider and make provision for all the circumstances of the
particular case. The Legislature having specially considered all of the facts and
circumstances in the particular case in granting a special charter, it will not be
considered that the Legislature, by adopting a general law containing provisions
repugnant to the provisions of the charter, and without making any mention of its
intention to amend or modify the charter, intended to amend, repeal, or modify the
special act. (Lewis vs. Cook County, 74 I11. App., 151; Philippine Railway Co. vs.
Nolting 34 Phil., 401.)18
Where a general law is enacted to regulate an industry, it is common for individual
franchises subsequently granted to restate the rights and privileges already mentioned
in the general law, or to amend the later law, as may be needed, to conform to the
general law.19 However, if no provision or amendment is stated in the franchise to
effect the provisions of the general law, it cannot be said that the same is the intent of
the lawmakers, for repeal of laws by implication is not favored.20
In this regard, we agree with petitioner that if the lawmakers had intended to
withdraw petitioner’s tax exemption of its gaming income, then Section 13(2)(a) of
P.D. 1869 should have been amended expressly in R.A. No. 9487, or the same, at the
very least, should have been mentioned in the repealing clause of R.A. No. 9337.21
However, the repealing clause never mentioned petitioner’s Charter as one of the
laws being repealed. On the other hand, the repeal of other special laws, namely,
Section 13 of R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is
categorically provided under Section 24 (a) (b) of R.A. No. 9337, to wit:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby
repealed and the persons and/or transactions affected herein are made subject to the
value-added tax subject to the provisions of Title IV of the National Internal Revenue
Code of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the
National Power Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the
sales of generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and
regulations or parts thereof which are contrary to and inconsistent with any
provisions of this Act are hereby repealed, amended or modified accordingly.22
When petitioner’s franchise was extended on June 20, 2007 without revoking or
withdrawing itstax exemption, it effectively reinstated and reiterated all of
petitioner’s rights, privileges and authority granted under its Charter. Otherwise,
Congress would have painstakingly enumerated the rights and privileges that it wants
to withdraw, given that a franchise is a legislative grant of a special privilege to a
person. Thus, the extension of petitioner’s franchise under the sameterms and
conditions means a continuation of its tax exempt status with respect to its income
from gaming operations. Moreover, all laws, rules and regulations, or parts thereof,
which are inconsistent with the provisions ofP.D. 1869, as amended, a special law,
are considered repealed, amended and modified, consistent with Section 2 of R.A.
No. 9487, thus:

SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations,
rules and regulations and other issuances, or parts thereof, which are inconsistent
with the provisions of this Act, are hereby repealed, amended and modified.
It is settled that where a statute is susceptible of more than one interpretation, the
court should adopt such reasonable and beneficial construction which will render the
provision thereof operative and effective, as well as harmonious with each other.23
Given that petitioner’s Charter is notdeemed repealed or amended by R.A. No. 9337,
petitioner’s income derived from gaming operations is subject only to the five percent
(5%)franchise tax, in accordance with P.D. 1869, as amended. With respect to
petitioner’s income from operation of other related services, the same is subject to
income tax only. The five percent (5%) franchise tax finds no application with
respect to petitioner’s income from other related services, inview of the express
provision of Section 14(5) of P.D. 1869, as amended, to wit:
Section 14. Other Conditions.
xxxx
(5) Operation of related services. — The Corporation is authorized to operate such
necessary and related services, shows and entertainment. Any income that may be
realized from these related services shall not be included as part of the income of the
Corporation for the purpose of applying the franchise tax, but the same shall be
considered as a separate income of the Corporation and shall be subject to income
tax.24
Thus, it would be the height of injustice to impose franchise tax upon petitioner for
its income from other related services without basis therefor.
For proper guidance, the first classification of PAGCOR’s income under RMC No.
33-2013 (i.e., income from its operations and licensing of gambling casinos, gaming
clubs and other similar recreation or amusement places, gambling pools) should be
interpreted in relation to Section 13(2) of P.D. 1869, which pertains to the income
derived from issuing and/or granting the license to operate casinos to PAGCOR’s
contractees and licensees, as well as earnings derived by PAGCOR from its own
operations under the Franchise. On the other hand, the second classification of
PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related
operations) should be interpreted in relation to Section 14(5) of P.D. 1869, which
pertains to income received by PAGCOR from its contractees and licensees in the
latter’s operation of casinos, as well as PAGCOR’s own income from operating
necessary and related services, shows and entertainment.
As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax
inures to the benefit of third parties with contractual relationship with petitioner in
connection with the operation of casinos, we find no reason to rule upon the same.
The resolution of the instant petition is limited to clarifying the tax treatment of
petitioner’s income vis-à-visour Decision dated March 15, 2011. This Decision is not
meant to expand our original Decision by delving into new issues involving
petitioner’s contractees and licensees. For one, the latter are not parties to the instant
case, and may not therefore stand to benefit or bear the consequences of this
resolution. For another, to answer the fourth issue raised by petitioner relative to its
contractees and licensees would be downright premature and iniquitous as the same
would effectively countenance sidesteps to judicial process.
In view of the foregoing disquisition, respondent, therefore, committed grave abuse
of discretion amounting to lack of jurisdiction when it issued RMC No. 33-2013
subjecting both income from gaming operations and other related services to
corporate income tax and five percent (5%) franchise tax.1âwphi1 This unduly
expands our Decision dated March 15, 2011 without due process since the imposition
creates additional burden upon petitioner. Such act constitutes an overreach on the
part of the respondent, which should be immediately struck down, lest grave injustice
results. More, it is settled that in case of discrepancy between the basic law and a rule
or regulation issued to implement said law, the basic law prevails, because the said
rule or regulation cannot go beyond the terms and provisions of the basic law.
In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending
Section 27(c) of R.A. No. 8424, by excluding petitioner from the enumeration of
GOCCs exempted from corporate income tax, is valid and constitutional. In addition,
we hold that:
1. Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all
other taxes with respect to its income from gaming operations, pursuant to P.D. 1869,
as amended, is not repealed or amended by Section l(c) ofR.A. No. 9337;
2. Petitioner's income from gaming operations is subject to the five percent (5%)
franchise tax only; and
3. Petitioner's income from other related services is subject to corporate income tax
only.
In view of the above-discussed findings, this Court ORDERS the respondent to cease
and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1)
corporate income tax on petitioner's income derived from its gaming operations; and
(2) franchise tax on petitioner's income from other related services.
WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is
ORDERED to cease and desist the implementation of RMC No. 33-2013 insofar as it
imposes: (1) corporate income tax on petitioner's income derived from its gaming
operations; and (2) franchise tax on petitioner's income from other related services.
SO ORDERED.
SECOND DIVISION
February 22, 2017
G.R. No. 215705-07
COMMISSIONER OF INTERNAL REVENUE AND COMMISSIONER OF
CUSTOMS, Petitioners
vs.
PHILIPPINE AIRLINES, INC., Respondent
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari seeking the reversal and setting
aside of the Decision1 and Resolution2 of the Court of Tax Appeals (CTA) En Banc,
dated April 30, 2014 and December 16, 2014, respectively, in CTA EB Nos. 1029,
1031 and 1032. The assailed judgment affirmed the January 17, 2013 Decision3 and
June 4, 2013 Resolution4 of the CTA Special 2nd Division in CTA Case No. 8153.
The controversy in the instant case, which gave rise to the present petition for review
on certiorari, revolves around the interpretation of the provisions of Presidential
Decree No. 1590 (PD 1590), otherwise known as "An Act Granting a New Franchise
to Philippine Airlines, Inc. to Establish, Operate, and Maintain Air Transport Services
in the Philippines and Other Countries" vis-a-vis Republic Act No. 9334 (RA 9334),
otherwise known as "An Act Increasing the Excise Tax Rates Imposed on Alcohol
and Tobacco Products, Amending for the Purpose Sections 131, 141, 142, 145, and
228 of the National Internal Revenue Code of 1997." PD 1590 was enacted on June
11, 1978, while RA 9334 took effect on January 1, 2005.
Prior to the effectivity of RA 9334, Republic Act No. 8424 (RA 8424), otherwise
known as the "Tax Reform Act of 1997," was enacted and took effect on January 1,
1998, thereby amending the National Internal Revenue Code (NIRC). Section 131 of
the NIRC, as amended by RA 8424, provides:
SEC. 131. Payment of Excise Taxes on Imported Articles. –
(A) Persons Liable. - Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the
Department of Finance and before the release of such articles from the customs
house, or by the person who is found in possession of articles which are exempt from
excise taxes other than those legally entitled to exemption.
In the case of tax-free articles brought or imported into the Philippines by persons,
entitles, or agencies exempt from tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or entitles, the purchasers or
recipients shall be considered the importers thereof, and shall be liable for the duty
and internal revenue tax due on such importation.
The provision of any special or general law to the contrary notwithstanding, the
importation of cigars and cigarettes, distilled spirits and wines into the Philippines,
even if destined for tax and duty free shops, shall be subject to all applicable taxes,
duties, charges, including excise taxes due thereon: Provided, however, That this
shall not apply to cigars and cigarettes, distilled spirits and wines brought directly
into the duly chartered or legislated freeports of the Subic Special Economic and
Freeport Zone, crated under Republic Act No. 7227; the Cagayan Special Economic
Zone and Freeport, created under Republic Act No. 7922; and the Zamboanga City
Special Economic Zone, created under Republic Act No. 7903, and are not
transshipped to any other port in the Philippines: Provided, further, That importations
of cigars and cigarettes, distilled spirits and wines by a government-owned and
operated duty-free shop, like the DutyFree Philippines (DFP), shall be exempted from
all applicable taxes, duties, charges, including excise tax due thereon: Provided,
still.further, That if such articles directly imported by a government-owned and
operated duty-free shop like the Duty-Free Philippines, shall be labeled "tax and
duty-free" and "not for resale": Provided, still further, That is such articles brought
into the duly chartered or legislated freeports under Republic Acts No. 7227, 7922
and 7903 are subsequently introduced into the Philippine customs territory, then such
articles shall, upon such introduction, be deemed imported into the Philippines and
shall be subject to all imposts and excise taxes provided herein and other statutes:
Provided, finally, That the removal and transfer of tax and duty-free goods, products,
machinery, equipment and other similar articles, from one freeport to another
freeport, shall not be deemed an introduction into the Philippine customs territory.
Articles confiscated shall be disposed of in accordance with the rules and regulations
to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner of Customs and Internal Revenue, upon consultation with the
Secretary of Tourism and the General manager of the Philippine Tourism Authority.
The tax due on any such goods, products, machinery, equipment or other similar
articles shall constitute a lien on the article itself, and such lien shall be superior to all
other charges or liens, irrespective of the possessor thereof.
(B) Rate and Basis of the Excise Tax on Imported Articles. - Unless otherwise
specified imported articles shall be subject to the same rates and basis of excise taxes
applicable to locally manufactured articles.5
On January 1, 2005, RA 9334 took effect, Section 6 of which amended the
abovequoted Section 131 of the NIRC and, accordingly, reads as follows:
SEC. 131. Payment of Excise Taxes on Imported Articles. –
(A) Persons Liable. - Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the
Department of Finance and before the release of such articles from the customs
house, or by the person who is found in possession of articles which are exempt from
excise taxes other than those legally entitled to exemption. "In the case of tax-free
articles brought or imported into the Philippines by persons, entities, or agencies
exempt from tax which are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers or recipients shall be
considered the importers thereof, and shall be liable for the duty and internal revenue
tax due on such importation.
"The provision of any special or general law to the contrary notwithstanding, the
importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into
the Philippines, even if destined for tax and duty-free shops, shall be subject to all
applicable taxes, duties, charges, including excise taxes due thereon. This shall apply
to cigars and cigarettes, distilled spirits, fermented liquors and wines brought directly
into the duly chartered or legislated freeports of the Subic Special Economic and
Freeport Zone, created under Republic Act No. 7227; the Cagayan Special Economic
Zone and Freeport, created under Republic Act No. 7922; and the Zamboanga City
Special Economic Zone, created under Republic Act No. 7903, and such other
freeports as may hereafter be established or created by law: Provided, further, That
importations of cigars and cigarettes, distilled spirits, fermented liquors and wines
made directly by a governmentowned and operated duty-free shop, like the Duty-Free
Philippines (DFP), shall be exempted from all applicable duties only: Provided, still
further, That such articles directly imported by a government-owned and operated
duty-free shop, like the DutyFree Philippines, shall be labeled 'duty-free' and 'not for
resale': Provided, finally, That the removal and transfer of tax and duty-free goods,
products, machinery, equipment and other similar articles other than cigars and
cigarettes, distilled spirits, fermented liquors and wines, from one freeport to another
freeport, shall not be deemed an introduction into the Philippine customs territory."
"Cigars and cigarettes, distilled spirits and wines within the premises of all duty-free
shops which are not labelled as hereinabove required, as well as tax and duty-free
articles obtained from a duty-free shop and subsequently found in a non-duty-free
shop to be offered for resale shall be confiscated, and the perpetrator of such non-
labelling or re-selling shall be punishable under the applicable provisions of this
Code.
"Articles confiscated shall be disposed of in accordance with the rules and regulations
to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioners of Customs and Internal Revenue, upon consultation with the
Secretary of Tourism and the General Manager of the Philippine Tourism Authority.
"The tax due on any such goods, products, machinery, equipment or other similar
articles shall constitute a lien on the article itself, and such lien shall be superior to all
other charges or liens, irrespective of the possessor thereof.
"(B) Rate and Basis of the Excise Tax on Imported Articles. - Unless otherwise
specified, imported articles shall be subject to the same rates and basis of excise taxes
applicable to locally manufactured articles."6
The amendment increased the rates of excise tax imposed on alcohol and tobacco
products. It also removed the exemption from taxes, duties and charges, including
excise taxes, on importations of cigars, cigarettes, distilled spirits, wines and
fermented liquor into the Philippines.
Thereafter, PAL's importations of alcohol and tobacco products which were intended
for use inits commissary supplies during international flights, were subjected to
excise taxes. For the said imported articles, which arrived in Manila between October
3, 2007 and December 22, 2007, PAL was assessed excise taxes amounting to a total
of ₱6,329,735.21.
On September 5, 2008, PAL paid under protest. On March 5, 2009, PAL filed an
administrative claim for refund of the above excise taxes it paid with the Bureau of
Internal Revenue (BIR) contending that it is entitled to tax privileges under Section
13 of PD 1590, which provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee
shall pay to the Philippine Government during the life of this franchise whichever of
subsections (a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income
computed in accordance with the provisions of the National Internal Revenue Code;
or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee
from all sources, without distinction as to transport or nontransport operations;
provided, that with respect to international air-transport service, only the gross
passenger, mail, and freight revenues from its outgoing flights shall be subject to this
tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of
all other taxes, duties, royalties, registration, license, and other fees and charges of
any kind, nature, or description, imposed, levied, established, assessed, or collected
by any municipal, city, provincial, or national authority or government agency, now
or in the future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee
of aviation gas, fuel, and oil, whether refined or in crude form, and whether such
taxes, duties, charges, royalties, or fees are directly due from or imposable upon the
purchaser or the seller, producer, manufacturer, or importer of said petroleum
products but are billed or passed on the grantee either as part of the price or cost
thereof or by mutual agreement or other arrangement; provided, that all such
purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be
for exclusive use in its transport and nontransport operations and other activities
incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on
all importations by the grantee of aircraft, engines, equipment, machinery, spare
parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil,
whether refined or in crude form and other articles, supplies, or materials; provided,
that such articles or supplies or materials are imported for the use of the grantee in its
transport and transport operations and other activities incidental thereto and are not
locally available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors,
whether foreign or domestic, of aircraft, engines, equipment, machinery, spare parts,
and other property rented, leased, or chartered by the grantee where the payment of
such taxes is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and other
obligations incurred by the grantee where the payment of such taxes is assumed by
the grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition, and
transfer of aircraft, equipment, motor vehicles, and all other personal and real
property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with
existing law.
For purposes of computing the basic corporate income tax as provided herein, the
grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate
of depreciation; and
(b) To carry over as a deduction from taxable income any net loss incurred in any
year up to five years following the year of such loss.7
Considering that the two-year prescriptive period for filing a judicial claim for refund
was about to expire and the BIR was yet to act on its claims, PAL filed a judicial
claim for refund, via a petition for review, with the CTA on September 2, 2010. The
case, docketed as CTA Case No. 8153, was raffled-off to the Second Division of the
tax court.
Respondent CIR filed his Answer, while respondent COC was declared in default for
failure to file his Answer and Pre-Trial Brief. Thereafter, trial ensued.
On January 17, 2013, the CTA Second Division issued a Decision8 partially granting
PAL's claim for refund. The dispositive portion of the said Decision reads:
WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondents are hereby ORDERED to REFUND to petitioner the
amount of ₱2,094,985.21, representing petitioner's erroneously-paid excise tax on
September 5, 2008.
SO ORDERED.9
The CTA Second Division found that PAL was able to sufficiently prove its
exemption from the payment of excise taxes pertaining to its importation of alcoholic
products and since it already paid the disputed excise taxes on the subject
importation, it is entitled to refund. However, the tax court ruled that, with respect to
its subject importation of tobacco products, PAL failed to discharge its burden of
proving that the said product were not locally available in reasonable quantity, quality
or price, in accordance with the requirements of the law. Thus, it is not entitled to
refund for the excise taxes paid on such importation.
The herein parties filed separate motions for reconsideration, but these were all
denied by the CTA Second Division in its Resolution dated June 4, 2013.
Consequently, the parties appealed to the CTA En Banc via separate petitions for
review, docketed as CTA EB Nos. 1029, 1031and1032, which were later
consolidated.
On April 30, 2014, the CTA En Banc rendered a Decision dismissing the
consolidated petitions and affirming in toto the assailed Decision of the CTA Second
Division.

The parties filed their respective motions for reconsideration, but the CTA En Banc
denied them in its Resolution dated December 16, 2014.
Hence, the instant petition for review on certiorari raising a sole issue, to wit:
Whether PAL's alcohol and tobacco importations for its commissary supplies are
subject to excise tax.10
In the present petition, petitioner argues that:
I.
Section 131 of the NIRC revoked PAL's tax privilege under Section 13 of P.D No.
1590 with respect to excise tax on its alcohol and tobacco importation.
II
Assuming that it is still entitled to the tax privilege, PAL failed to adequately prove
that the conditions under Section 13 of P.D. No. 1590 were met in this case.11
The main question raised in the instant case is whether the tax privilege of PAL
provided in Section 13 of PD 1590 has been revoked by Section 131 of the NIRC of
1997, as amended by Section 6 of RA 9334.
The Court rules in the negative.
This issue is not novel. Thus, as in previous cases resolving the same question and
involving substantially similar factual backgrounds, the ruling will not change.
In the fairly recent case of Commissioner of Internal Revenue and Commissioner of
Customs v. Philippine Airlines, Inc.,12 the core issue raised was whether or not
PAL's importations of alcohol and tobacco products for its commissary supplies are
subject to excise tax. This Court, ruling in favor of PAL, held that:
It is a basic principle of statutory construction that a later law, general in terms and
not expressly repealing or amending a prior special law, will not ordinarily affect the
special provisions of such earlier statute. So it must be here.
Indeed, as things stand, PD 1590 has not been revoked by the NIRC of 1997, as
amended. Or to be more precise, the tax privilege of PAL provided in Sec. 13 of PD
1590 has not been revoked by Sec. 131 of the NIRC of 1997, as amended by Sec. 6 of
RA 9334. We said as much in Commissioner of Internal Revenue v. Philippine Air
Lines, Inc [GR. No. 180066, July 7, 2009, 609 Phil. 695]:
That the Legislature chose not to amend or repeal [PD] 1590 even after PAL was
privatized reveals the intent of the Legislature to let PAL continue to enjoy, as a
private corporation, the very same rights and privileges under the terms and
conditions stated in said charter. x x x
To be sure, the manner to effectively repeal or at least modify any specific provision
of PAL's franchise under PD 1590, as decreed in the aforequoted Sec. 24, has not
been demonstrated. And as aptly held by the CTA en banc, borrowing from the same
Commissioner of Internal Revenue case:
While it is true that Sec. 6 of RA 9334 as previously quoted states that "the
provisions of any special or general law to the contrary notwithstanding," such phrase
left alone cannot be considered as an express repeal of the exemptions granted under
PAL's franchise because it fails to specifically identify PD 1590 as one of the acts
intended to be repealed. x x x
Noteworthy is the fact that PD 1590 is a special law, which governs the franchise of
PAL. Between the provisions under PD 1590 as against the provisions under the
NIRC of 1997, as amended by 9334, which is a general law, the former necessary
prevails. This is in accordance with the rule that on a specific matter, the special law
shall prevail over the general law, which shall be resorted only to supply deficiencies
in the former. In addition, where there are two statutes, the earlier special and the
later general - the terms of the general broad enough to include the matter provided
for in the special - the fact that one is special and other general creates a presumption
that the special is considered as remaining an exception tothe general, one as a
general law of the land and the other as the law of a particular case.
Any lingering doubt, however, as to the continued entitlement of PAL under Sec. 13
of its franchise to excise tax exemption on otherwise taxable items contemplated
therein, e.g., aviation gas, wine, liquor or cigarettes, should once and for all be put to
rest by the fairly recent pronouncement in Philippine Airlines, Inc. v. Commissioner
of Internal Revenue. In that case, the Court, on the premise that the "propriety of a tax
refund is hinged on the kind of exemption which forms its basis," declared in no
uncertain terms that PAL has "sufficiently prove[d]" its entitlement to a tax refund of
the excise taxes and that PAL's payment of either the franchise tax or basic corporate
income tax in the amount fixed thereat shall be in lieu of all other taxes or duties, and
inclusive of all taxes on all importations of commissary and catering supplies, subject
to the condition of their availability and eventual use.x x x13
In the more recent consolidated cases of Republic of the Philippines v. Philippine
Airlines, Inc. (PAL)14 and Commissioner of Internal Revenue v. Philippine Airlines,
Inc. (PAL),15 this Court, echoing the ruling in the abovecited case of CIR v. PAL,
held that:
In other words, the franchise of PAL remains the governing law on its exemption
from taxes. Its payment of either basic corporate income tax or franchise tax -
whichever is lower - shall be in lieu of all other taxes, duties, royalties, registrations,
licenses, and other fees and charges, except only real property tax. The phrase "in lieu
of all other taxes" includes but is not limited to taxes, duties, charges, royalties, or
fees due on all importations by the grantee of the commissary and catering supplies,
provided that such articles or supplies or materials are imported for the use of the
grantee in its transport and nontransport operations and other activities incidental
thereto and are not locally available in reasonable quantity, quality, or price.16
On July 1, 2005, Republic Act No. 9337 (RA 9337) took effect thereby further
amending certain provisions of the NIRC.1âwphi1 Section 22 of RA 9337
specifically provides as follows:
SEC. 22. Franchises of Domestic Airlines. - The provisions of P.D. No. 1590 on the
franchise tax of Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu
Air, Inc., R.A. No. 7583 on the franchise tax of Aboitiz Air Transport Corporation,
R.A. No. 7909 on the franchise tax of Pacific Airways Corporation, R.A. No. 8339 on
the franchise tax of Air Philippines, or any other franchise agreement or law
pertaining to a domestic airline to the contrary notwithstanding:
(A) The franchise tax is abolished;
(B) The franchisee shall be liable to the corporate income tax;
(C) The franchisee shall register for value-added tax under Section 236, and to
account under Title IV of the National Internal Revenue Code of 1997, as amended,
for value-added tax on its sale of goods, property or services and its lease of property;
and
(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties,
registration, license, and other fees and charges, as may be provided by their
respective franchise agreement.17
Thus, this Court held in the abovecited PAL consolidated cases:
However, upon the amendment of the 1997 NIRC, Section 22 of R.A. 9337 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.18
It bears to note that the repealing clause of RA 933 7 enumerated the laws or
provisions of laws which it repeals. However, there is nothing in the repealing clause,
nor in any other provisions of the said law, which makes specific mention of PD 1590
as one of the acts intended to be repealed.
Lastly, as in the abovecited cases, petitioners in the present petition again raise the
issue regarding PAL's alleged failure to comply with the conditions set by Section 13
of PD 1590 for its imported tobacco and alcohol products to be exempt from excise
tax. These conditions are: (1) such supplies are imported for the use of the franchisee
in its transport/nontransport operations and other incidental activities; and (2) they are
not locally available in reasonable quantity, quality and price.19 However, as this
Court has previously held, the matter as to PAL's supposed noncompliance with the
conditions set by Section 13 of P.D. 1590 for its imported supplies to be exempt from
excise tax, are factual determinations that are best left to the CTA, which found that
PAL had, in fact, complied with the above conditions.20 The CTA is a highly
specialized body that reviews tax cases and conducts trial de nova. Thus, without any
showing that the findings of the CTA are unsupported by substantial evidence, its
findings are binding on this Court.21
WHEREFORE, the instant petition for review on certiorari is DENIED. The assailed
Decision and Resolution of the Court of Tax Appeals En Banc, dated April 30, 2014
and December 16, 2014, respectively, in CTA EB Nos. 1029, 1031 and 1032 are
AFFIRMED.
SO ORDERED.
FIRST DIVISION
Present:
COMMISSIONER OF INTERNAL REVENUE,
Petitioner,
JULIANE BAIER-NICKEL, as
represented by Marina Q. Guzman (Attorney-in-fact)
Respondent.
Promulgated:
Panganiban, C.J. (Chairperson),
- versus - Ynares-Santiago,
Austria-Martinez,
Callejo, Sr., and
Chico-Nazario, JJ.
G.R. No. 153793 August 29, 2006

x ---------------------------------------------------------------------------------------- x
DECISION
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18,
2002 Decision[1] of the Court of Appeals in CA-G.R. SP No. 59794, which granted
the tax refund of respondent Juliane Baier-Nickel and reversed the June 28, 2000
Decision[2] of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5633. Petitioner
also assails the May 8, 2002 Resolution[3] of the Court of Appeals denying its
motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen,
is the President of JUBANITEX, Inc., a domestic corporation engaged in
[m]anufacturing, marketing on wholesale only, buying or otherwise acquiring,
holding, importing and exporting, selling and disposing embroidered textile
products.[4] Through JUBANITEXs General Manager, Marina Q. Guzman, the
corporation appointed and engaged the services of respondent as commission agent.
It was agreed that respondent will receive 10% sales commission on all sales actually
concluded and collected through her efforts.[5]
In 1995, respondent received the amount of P1,707,772.64, representing her sales
commission income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the Bureau of
Internal Revenue (BIR). On October 17, 1997, respondent filed her 1995 income tax
return reporting a taxable income of P1,707,772.64 and a tax due of P170,777.26.[6]
On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26
alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR.
Respondent contended that her sales commission income is not taxable in the
Philippines because the same was a compensation for her services rendered in
Germany and therefore considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending
that no action was taken by the BIR on her claim for refund.[7] On June 28, 2000, the
CTA rendered a decision denying her claim. It held that the commissions received by
respondent were actually her remuneration in the performance of her duties as
President of JUBANITEX and not as a mere sales agent thereof. The income derived
by respondent is therefore an income taxable in the Philippines because JUBANITEX
is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA,
holding that respondent received the commissions as sales agent of JUBANITEX and
not as President thereof. And since the source of income means the activity or service
that produce the income, the sales commission received by respondent is not taxable
in the Philippines because it arose from the marketing activities performed by
respondent in Germany. The dispositive portion of the appellate courts Decision,
reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax
Appeals dated June 28, 2000 is hereby REVERSED and SET ASIDE and the
respondent court is hereby directed to grant petitioner a tax refund in the amount of
Php 170,777.26.
SO ORDERED.[8]
Petitioner filed a motion for reconsideration but was denied.[9] Hence, the instant
recourse.
Petitioner maintains that the income earned by respondent is taxable in the
Philippines because the source thereof is JUBANITEX, a domestic corporation
located in the City of Makati. It thus implied that source of income means the
physical source where the income came from. It further argued that since respondent
is the President of JUBANITEX, any remuneration she received from said
corporation should be construed as payment of her overall managerial services to the
company and should not be interpreted as a compensation for a distinct and separate
service as a sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for
her marketing services. She contended that income of nonresident aliens like her is
subject to tax only if the source of the income is within the Philippines. Source,
according to respondent is the situs of the activity which produced the income. And
since the source of her income were her marketing activities in Germany, the income
she derived from said activities is not subject to Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the
Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the
Philippines shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources
within the Philippines. A nonresident alien individual who shall come to the
Philippines and stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a nonresident alien doing
business in the Philippines, Section 22(G) of this Code notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the
Philippines. There shall be levied, collected and paid for each taxable year upon the
entire income received from all sources within the Philippines by every nonresident
alien individual not engaged in trade or business within the Philippines x x x a tax
equal to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not
engaged in trade or business, are subject to Philippine income taxation on their
income received from all sources within the Philippines. Thus, the keyword in
determining the taxability of non-resident aliens is the incomes source. In construing
the meaning of source in Section 25 of the NIRC, resort must be had on the origin of
the provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act
No. 2833,[10] which took effect on January 1, 1920.[11] Under Section 1 thereof,
nonresident aliens are likewise subject to tax on income from all sources within the
Philippine Islands, thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon
the entire net income received in the preceding calendar year from all sources by
every individual, a citizen or resident of the Philippine Islands, a tax of two per
centum upon such income; and a like tax shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding calendar year from all
sources within the Philippine Islands by every individual, a nonresident alien,
including interest on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916
as amended by U.S. Revenue Law of 1917.[12] Being a law of American origin, the
authoritative decisions of the official charged with enforcing it in the U.S. have
peculiar persuasive force in the Philippines.[13]
The Internal Revenue Code of the U.S. enumerates specific types of income to be
treated as from sources within the U.S. and specifies when similar types of income
are to be treated as from sources outside the U.S.[14] Under the said Code,
compensation for labor and personal services performed in the U.S., is generally
treated as income from U.S. sources; while compensation for said services performed
outside the U.S., is treated as income from sources outside the U.S.[15] A similar
provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services performed in the
Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of
the U.S., are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that
income may be derived from three possible sources only: (1) capital and/or (2) labor;
and/or (3) the sale of capital assets. While the three elements of this attempt at
definition need not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from sources within the United States and
suggest an investigation into the nature and location of the activities or property
which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it
is done in this country, the income should be from sources within the United States. If
the income is from capital, the place where the capital is employed should be
decisive; if it is employed in this country, the income should be from sources within
the United States. If the income is from the sale of capital assets, the place where the
sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term source in this fundamental
light. It is not a place, it is an activity or property. As such, it has a situs or location,
and if that situs or location is within the United States the resulting income is taxable
to nonresident aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the
1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to
make the test of taxability the source, or situs of the activities or property which
produce the income. The result is that, on the one hand, nonresident aliens and
nonresident foreign corporations are prevented from deriving income from the United
States free from tax, and, on the other hand, there is no undue imposition of a tax
when the activities do not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the recipient thereof must
be resident within the jurisdiction, or the property or activities out of which the
income issues or is derived must be situated within the jurisdiction so that the source
of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is protection of life and
property and that the income rightly to be levied upon to defray the burdens of the
United States Government is that income which is created by activities and property
protected by this Government or obtained by persons enjoying that protection. [16]
The important factor therefore which determines the source of income of personal
services is not the residence of the payor, or the place where the contract for service
is entered into, or the place of payment, but the place where the services were
actually rendered.[17]
In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,[18] the Court
addressed the issue on the applicable source rule relating to reinsurance premiums
paid by a local insurance company to a foreign insurance company in respect of risks
located in the Philippines. It was held therein that the undertaking of the foreign
insurance company to indemnify the local insurance company is the activity that
produced the income. Since the activity took place in the Philippines, the income
derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law of Federal
Income Taxation, the Court emphasized that the technical meaning of source of
income is the property, activity or service that produced the same. Thus:
The source of an income is the property, activity or service that produced the income.
The reinsurance premiums remitted to appellants by virtue of the reinsurance
contracts, accordingly, had for their source the undertaking to indemnify
Commonwealth Insurance Co. against liability. Said undertaking is the activity that
produced the reinsurance premiums, and the same took place in the Philippines. x x x
the reinsured, the liabilities insured and the risk originally underwritten by
Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity
were based, were all situated in the Philippines. x x x[19]
In Commissioner of Internal Revenue v. British Overseas Airways Corporation
(BOAC),[20] the issue was whether BOAC, a foreign airline company which does
not maintain any flight to and from the Philippines is liable for Philippine income
taxation in respect of sales of air tickets in the Philippines, through a general sales
agent relating to the carriage of passengers and cargo between two points both
outside the Philippines. Ruling in the affirmative, the Court applied the case of
Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the
rule that the source of income is that activity which produced the income. It was held
that the sale of tickets in the Philippines is the activity that produced the income and
therefore BOAC should pay income tax in the Philippines because it undertook an
income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of Internal
Revenue v. British Overseas Airways Corporation in support of their arguments, but
the correct interpretation of the said case favors the theory of respondent that it is the
situs of the activity that determines whether such income is taxable in the Philippines.
The conflict between the majority and the dissenting opinion in the said case has
nothing to do with the underlying principle of the law on sourcing of income. In fact,
both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue. The divergence in opinion centered on whether the sale of tickets in the
Philippines is to be construed as the activity that produced the income, as viewed by
the majority, or merely the physical source of the income, as ratiocinated by Justice
Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina
Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that
gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to
support its view that source of income is the physical source of the money earned. If
such was the interpretation of the majority, the Court would have simply stated that
source of income is not the business activity of BOAC but the place where the person
or entity disbursing the income is located or where BOAC physically received the
same. But such was not the import of the ruling of the Court. It even explained in
detail the business activity undertaken by BOAC in the Philippines to pinpoint the
taxable activity and to justify its conclusion that BOAC is subject to Philippine
income taxation. Thus
BOAC, during the periods covered by the subject assessments, maintained a general
sales agent in the Philippines. That general sales agent, from 1959 to 1971, was
engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series
of trips each trip in the series corresponding to a different airline company; (3)
receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through
the mode of interline settlement as prescribed by Article VI of the Resolution No. 850
of the IATA Agreement. Those activities were in exercise of the functions which are
normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales being the
paramount objective. There should be no doubt then that BOAC was engaged in
business in the Philippines through a local agent during the period covered by the
assessments. x x x[21]
xxxx

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. In BOAC's
case, the sale of tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made here in
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.
A transportation ticket is not a mere piece of paper. When issued by a common
carrier, it constitutes the contract between the ticket-holder and the carrier. It gives
rise to the obligation of the purchaser of the ticket to pay the fare and the
corresponding obligation of the carrier to transport the passenger upon the terms and
conditions set forth thereon. The ordinary ticket issued to members of the traveling
public in general embraces within its terms all the elements to constitute it a valid
contract, binding upon the parties entering into the relationship.[22]
The Court reiterates the rule that source of income relates to the property, activity or
service that produced the income. With respect to rendition of labor or personal
service, as in the instant case, it is the place where the labor or service was performed
that determines the source of the income. There is therefore no merit in petitioners
interpretation which equates source of income in labor or personal service with the
residence of the payor or the place of payment of the income.
Having disposed of the doctrine applicable in this case, we will now determine
whether respondent was able to establish the factual circumstances showing that her
income is exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent
received the income, but the sufficiency of evidence to prove that the services she
rendered were performed in Germany. Though not raised as an issue, the Court is
clothed with authority to address the same because the resolution thereof will settle
the vital question posed in this controversy.[23]
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi juris against the taxpayer.[24] To those therefore, who claim a
refund rest the burden of proving that the transaction subjected to tax is actually
exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX
stipulated that the activity or the service which would entitle her to 10% commission
income, are sales actually concluded and collected through [her] efforts.[25] What
she presented as evidence to prove that she performed income producing activities
abroad, were copies of documents she allegedly faxed to JUBANITEX and bearing
instructions as to the sizes of, or designs and fabrics to be used in the finished
products as well as samples of sales orders purportedly relayed to her by clients.
However, these documents do not show whether the instructions or orders faxed
ripened into concluded or collected sales in Germany. At the very least, these pieces
of evidence show that while respondent was in Germany, she sent instructions/orders
to JUBANITEX. As to whether these instructions/orders gave rise to consummated
sales and whether these sales were truly concluded in Germany, respondent presented
no such evidence. Neither did she establish reasonable connection between the
orders/instructions faxed and the reported monthly sales purported to have transpired
in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco,
petitioners counsel at the hearing before the Court of Tax Appeals. She pointed out
that respondent presented no contracts or orders signed by the customers in Germany
to prove the sale transactions therein.[26] Likewise, in her Comment to the Formal
Offer of respondents evidence, she objected to the admission of the faxed documents
bearing instruction/orders marked as Exhibits R,[27] V, W, and X,[28] for being self
serving.[29] The concern raised by petitioners counsel as to the absence of substantial
evidence that would constitute proof that the sale transactions for which respondent
was paid commission actually transpired outside the Philippines, is relevant because
respondent stayed in the Philippines for 89 days in 1995. Except for the months of
July and September 1995, respondent was in the Philippines in the months of March,
May, June, and August 1995,[30] the same months when she earned commission
income for services allegedly performed abroad. Furthermore, respondent presented
no evidence to prove that JUBANITEX does not sell embroidered products in the
Philippines and that her appointment as commission agent is exclusively for Germany
and other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute
substantial evidence, or that relevant evidence that a reasonable mind might accept as
adequate to support the conclusion[31] that it was in Germany where she performed
the income producing service which gave rise to the reported monthly sales in the
months of March and May to September of 1995. She thus failed to discharge the
burden of proving that her income was from sources outside the Philippines and
exempt from the application of our income tax law. Hence, the claim for tax refund
should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,[32] a
previous case for refund of income withheld from respondents remunerations for
services rendered abroad, the Court in a Minute Resolution dated February 17,
2003,[33] sustained the ruling of the Court of Appeals that respondent is entitled to
refund the sum withheld from her sales commission income for the year 1994. This
ruling has no bearing in the instant controversy because the subject matter thereof is
the income of respondent for the year 1994 while, the instant case deals with her
income in 1995. Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that rendered the
judgment must have jurisdiction over the subject matter and the parties; (3) it must be
a judgment on the merits; (4) there must be between the two cases identity of parties,
of subject matter, and of causes of action. [34] The instant case, however, did not
satisfy the fourth requisite because there is no identity as to the subject matter of the
previous and present case of respondent which deals with income earned and
activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and
May 8, 2002 Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are
REVERSED and SET ASIDE. The June 28, 2000 Decision of the Court of Tax
Appeals in C.T.A. Case No. 5633, which denied respondents claim for refund of
income tax paid for the year 1995 is REINSTATED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. Nos. L-44501-05 July 19, 1990
JOHN L. GARRISON, FRANK ROBERTSON, ROBERT H. CATHEY,
JAMES W. ROBERTSON, FELICITAS DE GUZMAN and EDWARD
McGURK, petitioners,
vs.
COURT OF APPEALS and REPUBLIC OF THE PHILIPPINES, respondents.
Quasha, Asperilla, Ancheta, Valmonte, Peña & Marcos for petitioners.
NARVASA, J.:
Sought to be overturned in these appeals is the judgment of the Court of Appeals, 1
which affirmed the decision of the Court of First Instance of Zambales at Olongapo
City convicting the petitioners "of violation of Section 45 (a) (1) (b) of the National
Internal Revenue Code, as amended, by not filing their respective income tax returns
for the year 1969" and sentencing "each of them to pay a fine of Two Thousand
(P2,000.00) Pesos, with subsidiary imprisonment in case of insolvency, and to pay
the costs proportionately.2
The petitioners have adopted the factual findings of the Court of Appeals, 3 viz.:
1. JOHN L. GARRISON "was born in the Philippines and . . . lived in this
country since birth up to 1945, when he was repatriated and returned to the United
States. He stayed in the United States for the following twenty years until May 5,
1965, when he entered the Philippines through the Clark Air Base. The said accused
lived in the Philippines since his return on May 6, 1965. He lives with his Filipino
wife and their children at No. 4 Corpus Street, West Tapinac, Olongapo City, and
they own the house and lot on which they are presently residing. His wife acquired by
inheritance six hectares of agricultural land in Quezon Province."
2. JAMES W. ROBERTSON "was born on December 22, 1915 in Olongapo,
Zambales and he grew up in this country. He and his family were repatriated to the
United States in 1945. They stayed in Long Beach, California until the latter part of
1946 or the early part of 1947, when he was re-assigned overseas, particularly to the
Pacific area with home base in Guam. His next arrival in the Philippines was in 1958
and he stayed in this country from that time up to the present. He is presently residing
at No. 25 Elicaño, Street, East Bajac-Bajac, Olongapo City, and his house and lot are
declared in his name for tax purposes."
3. FRANK W. ROBERTSON "was born in the Philippines and he lived in this
country up to 1945, when he was repatriated to the United States along with his
brother, his co-accused James W. Robertson. He stayed in the United States for about
one year, during which time he resided in Magnolia Avenue, Long Beach, California.
Sometime in 1946 or early 1947, he was assigned to work in the Pacific Area,
particularly Hawaii. At that time he had been visiting the Philippines off and on in
connection with his work. In 1962, he returned once more to the Philippines and he
has been residing here ever since. He is married to a Filipino citizen named Generosa
Juico and they live at No. 3 National Road, Lower Kalaklan, Olongapo City. The
residential lot on which they are presently residing is declared in his wife's name for
tax purposes, while the house constructed thereon was originally declared in his name
and the same was transferred in his wife's name only in February, 1971."
4. ROBERT H. CATHEY was born in Tennessee, United States, on April 8,
1917; his first arrival in the Philippines, as a member of the liberation forces of the
United States, was in 1944. He stayed in the Philippines until April, 1950, when he
returned to the United States, and he came back to the Philippines in 1951. He stayed
in the Philippines since 1951 up to the present."
5. FELICITAS DE GUZMAN "was born in the Philippines in 1935 and her
father was a naturalized American citizen. While she was studying at the University
of Sto. Tomas, Manila, she was recruited to work in the United States Naval Base,
Subic Bay, Philippines. Afterwards, she left the Philippines to work in the United
States Naval Base, Honolulu, Hawaii, and she returned to the Philippines on or about
April 21, 1967. The said accused has not left the Philippines since then. She is
married to Jose de Guzman, a Filipino citizen, and they and their children live at No.
96 Fendler Street, East Tapinac, Olongapo City. Her husband is employed in the
United States Naval Base, Olongapo City, and he also works as an insurance manager
of the Traveller's Life."
6. EDWARD McGURK "came to the Philippines on July 11, 1967 and he
stayed in this country continuously up to the present time."
ALL THE PETITIONERS "are United States citizens, entered this country under
Section 9 (a) of the Philippine Immigration Act of 1940, as amended, and presently
employed in the United States Naval Base, Olongapo City. For the year 1969 John L.
Garrison earned $15,288.00; Frank Robertson, $12,045.84; Robert H. Cathey,
$9,855.20; James W. Robertson, $14,985.54; Felicitas de Guzman, $ 8,502.40; and
Edward McGurk $12,407.99 . . .
ALL SAID PETITIONERS "received separate notices from Ladislao Firmacion,
District Revenue Officer, stationed at Olongapo City, informing them that they had
not filed their respective income tax returns for the year 1969, as required by Section
45 of the National Internal Revenue Code, and directing them to file the said returns
within ten days from receipt of the notice. But the accused refused to file their
income tax returns, claiming that they are not resident aliens but only special
temporary visitors, having entered this country under Section 9 (a) of the Philippine
Immigration Act of 1940, as amended. The accused also claimed exemption from
filing the return in the Philippines by virtue of the provisions of Article XII,
paragraph 2 of the US-RP Military Bases Agreement."
The petitioners contend that given these facts, they may not under the law be deemed
resident aliens required to file income tax returns. Hence, they argue, it was error for
the Court of Appeals —
1) to consider their "physical or bodily presence" in the country as "sufficient
by itself to qualify . . (them) as resident aliens despite the fact that they were not
'residents' of the Philippines immediately before their employment by the U.S.
Government at Subic Naval Base and their presence here during the period concerned
was dictated by their respective work as employees of the United States Naval Base
in the Philippines," and
2) to refuse to recognize their "tax-exempt status . . under the pertinent
provisions of the RP-US Military Bases Agreement."
The provision alleged to have been violated by the petitioners, Section 45 of the
National Internal Revenue Code, as amended, reads as follows:
SEC. 45. — Individual returns. (a) Requirements. (1) The following individuals are
required to file an income tax return, if they have a gross income of at least One
Thousand Eight Hundred Pesos for the taxable
year; . . .
(b) If alien residing in the Philippines, regardless of whether the gross income was
derived from sources within or outside the Philippines.
The sanction for breach thereof is prescribed by Section 73 of the same code, to wit:
SEC. 73.Penalty for failure to file return nor to pay tax. — Anyone liable to pay the
tax, to make a return or to supply information required under this code, who refuses
or neglects to pay such tax, to make such return or to supply such information at the
time or times herein specified each year, shall be punished by a fine of not more than
Two Thousand Pesos or by imprisonment for not more than six months, or
both . . .
The provision under which the petitioners claim exemption, on the other hand, is
contained in the Military Bases Agreement between the Philippines and the United
States, 4 reading as follows:
2. No national of the United States serving in or employed in the Philippines in
connection with construction, maintenance, operation or defense of the bases and
reside in the Philippines by reason only of such employment, or his spouse and minor
children and dependents, parents or her spouse, shall be liable to pay income tax in
the Philippines except in regard to income derived from Philippine sources or sources
other than the US sources.
The petitioners claim that they are covered by this exempting provision of the Bases
Agreement since, as is admitted on all sides, they are all U.S. nationals, all employed
in the American Naval Base at Subic Bay (involved in some way or other in
"construction, maintenance, operation or defense" thereof), and receive salary
therefrom exclusively and from no other source in the Philippines; and it is their
intention, as is shown by the unrebutted evidence, to return to the United States on
termination of their employment.
That claim had been rejected by the Court of Appeals with the terse statement that the
Bases Agreement "speaks of exemption from the payment of income tax, not from
the filing of the income tax returns . ." 5
To be sure, the Bases Agreement very plainly Identifies the persons NOT "liable to
pay income tax in the Philippines except in regard to income derived from Philippine
sources or sources other than the US sources." They are the persons in whom concur
the following requisites, to wit:
1) nationals of the United States serving in or employed in the Philippines;
2) their service or employment is "in connection with construction,
maintenance, operation or defense of the bases;"
3) they reside in the Philippines by reason only of such employment; and
4) their income is derived exclusively from "U.S. sources."
Now, there is no question (1) that the petitioners are U.S. nationals serving or
employed in the Philippines; (2) that their employment is "in connection with
construction, maintenance, operation or defense" of a base, Subic Bay Naval Base;
(3) they reside in the Philippines by reason only of such employment since, as is
undisputed, they all intend to depart from the country on termination of their
employment; and (4) they earn no income from Philippine sources or sources other
than the U.S. sources. Therefore, by the explicit terms of the Bases Agreement, none
of them "shall be liable to pay income tax in the Philippines . . ." Indeed, the
petitioners' claim for exemption pursuant to this Agreement had been sustained by the
Court of Tax Appeals which set aside and cancelled the assessments made against
said petitioners by the BIR for deficiency income taxes for the taxable years 1969-
1972. 6 The decision of the Court of Tax Appeals to this effect was contested in this
Court by the Commissioner of Internal Revenue, 7 but the same was nonetheless
affirmed on August 12, 1986. 8
But even if exempt from paying income tax, said petitioners were, it is contended by
the respondents, not excused from filing income tax returns. For the Internal Revenue
Code (Sec. 45, supra) requires the filing of an income tax return also by any "alien
residing in the Philippines, regardless of whether the gross income was derived from
sources within or outside the Philippines;" and since the petitioners, although aliens
residing within the Philippines, had failed to do so, they had been properly prosecuted
and convicted for having thus violated the Code.
"What the law requires," states the challenged judgment of the Court of Appeals, "is
merely physical or bodily presence in a given place for a period of time, not the
intention to make it a permanent place of abode. It is on this proposition, taken in the
light of the established facts on record to the effect that almost all of the appellants
were born here, repatriated to the US and to come back, in the latest in 1967, and to
stay in the Philippines up to the present time, that makes appellants resident aliens not
merely transients or sojourners which residence for quite a long period of time,
coupled with the amount and source of income within the Philippines, renders
immaterial, for purposes of filing the income tax returns as contra-distinguished from
the payment of income tax, their intention to go back to the United States."
Each of the petitioners does indeed fall within the letter of the codal precept that an
"alien residing in the Philippines" is obliged "to file an income tax return." None of
them may be considered a non-resident alien, "a mere transient or sojourner," who is
not under any legal duty to file an income tax return under the Philippine Tax Code.
This is made clear by Revenue Relations No. 2 of the Department of Finance of
February 10, 1940, 9 which lays down the relevant standards on the matter:
An alien actually present in the Philippines who is not a mere transient or sojourner is
a resident of the Philippines for purposes of income tax. Whether he is a transient or
not is determined by his intentions with regards to the length and nature of his stay. A
mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him as transient. If he lives in the Philippines and has no
definite intention as to his stay, he is a resident. One who comes to the Philippines for
a definite purpose which in its nature may be promptly accomplished is a transient.
But if his purpose is of such a nature that an extended stay may be necessary to its
accomplishment, and to that end the alien makes his home temporarily in the
Philippines, he becomes a resident, though it may be his intention at all times to
return to his domicile abroad when the purpose for which he came has been
consummated or abandoned.
The petitioners concede that the foregoing standards have been "a good yardstick,"
and are in fact not at substantial variance from American jurisprudence. 10 They
acknowledge, too, that "their exemption under the Bases Agreement relates simply to
non-liability for the payment of income tax, not to the filing of . . . (a return)." But,
they argue 11 —
. . . after having expressly recognized that petitioners need not pay income tax here,
there appears to be no logic in requiring them to file income tax returns which
anyhow would serve no practical purpose since their liability on the amounts stated
thereon can hardly be exacted. The more practical view, taking into account policy
considerations that prompted the Government of the Republic of the Philippines to
exempt the petitioners, as well as other American citizens similarly situated, from the
payment of income tax here, is to recognize the lesser act of filing within the
exemption granted. This is simply being consistent with the reason behind the grant
of tax-exempt status to petitioners.
Pointing out further to what they consider "the administrative implementation of that
(tax-exemption) provision (of the Bases Agreement) by both governments for about
22 years (which did not require the filing of income tax returns by American citizen-
employees holding 9-A special visas like petitioners), and to "the higher plane of
political realities which prompted the Philippine Government to partially surrender its
inherent right to tax," petitioners submit that "the particular problem involved in these
cases is a matter that has to find solution and ought to be dealt with in conference
tables rather than before the court of law. " 12
Quite apart from the evidently distinct and different character of the requirement to
pay income tax in contrast to the requirement to file a tax return, it appears that the
exemption granted to the petitioners by the Bases Agreement from payment of
income tax is not absolute. By the explicit terms of the Bases Agreement, it exists
only as regards income derived from their employment "in the Philippines in
connection with construction, maintenance, operation or defense of the bases;" it does
not exist in respect of other income, i.e., "income derived from Philippine sources or
sources other than the US sources." Obviously, with respect to the latter form of
income, i.e., that obtained or proceeding from "Philippine sources or sources other
than the US sources," the petitioners, and all other American nationals who are
residents of the Philippines, are legally bound to pay tax thereon. In other words, so
that American nationals residing in the country may be relieved of the duty to pay
income tax for any given year, it is incumbent on them to show the Bureau of Internal
Revenue that in that year they had derived income exclusively from their
employment in connection with the U.S. bases, and none whatever "from Philippine
sources or sources other than the US sources." They have to make this known to the
Government authorities. It is not in the first instance the latter's duty or burden to
make unaided verification of the sources of income of American residents. The duty
rests on the U.S. nationals concerned to invoke and prima facie establish their tax-
exempt status. It cannot simply be presumed that they earned no income from any
other sources than their employment in the American bases and are therefore totally
exempt from income tax. The situation is no different from that of Filipino and other
resident income-earners in the Philippines who, by reason of the personal exemptions
and permissible deductions under the Tax Code, may not be liable to pay income tax
year for any particular year; that they are not liable to pay income tax, no matter how
plain or irrefutable such a proposition might be, does not exempt them from the duty
to file an income tax return.

These considerations impel affirmance of the judgments of the Court of Appeals and
the Trial Court.

WHEREFORE, the petition for review on certiorari is DENIED, and the challenged
decision of the Court of Appeals is AFFIRMED. Costs against petitioners.

SO ORDERED.