2018 TAXATION LAW SYLLABUS

I. GENERAL PRINCIPLES OF TAXATION

A. Definition, Concept, Scope and Purpose of Taxation

B. Nature and Characteristics of Taxation

C. Power of Taxation as distinguished from Police Power and Power of Eminent Domain

D. Theory and Basis of Taxation

E. Principles of a Sound Tax System

F. Scope and Limitations of Taxation

1. Inherent limitations

2. Constitutional limitations

G. Situs of Taxation

H. Stages or Aspects of Taxation

I. Definition, Nature and Characteristics of Taxes

J. Requisites of a Valid Tax

K. Tax as distinguished from other forms of exactions

L. Kinds/Classification of Taxes

M. Sources of Tax Laws

N. Principles of Sound Tax System

O. Construction and Interpretation of

1. Tax Laws

2. Tax Exemptions and Exclusions

3. Tax Rules and Regulations

4. Penal provisions of Tax Laws

5. Non-retroactive application to Taxpayers

P. Doctrines in Taxation

1. Prospectivity of Tax Laws

2. Imprescriptibility of Taxes

3. Double Taxation

4. Scope of Legislature to Tax

5. Power to Tax involves Power to Destroy

6. Escape from Taxation

a) Shifting of Tax Burden

b) Tax Avoidance
 c) Tax Evasion

d) Tax Exclusions

e) Others

7. Exemption from Taxation

8. Doctrine of Equitable Recoupment

9. Compensation and Set-off

10. Compromise and Tax Amnesty

11. Most Favored Nation Clause
12. Taxpayer’s Suit
a) Nature and Concept

b) As distinguished from a citizen’s suit

c) Requisites of a taxpayer’s suit challenging the constitutionality of a tax measure or act of a

taxing authority; concept of locus standi, doctrine of transcendental importance and ripeness
for judicial determination

13. Constitutional Limitations

14. Inherent Limitations

II. NATIONAL TAXATION (NATIONAL INTERNAL REVENUE CODE OF 1997, as amended with TRAIN LAW)

A. Organization and Functions of the Bureau of Internal Revenue

1. Rule-making authority of the Secretary of Finance

a) Authority of the Secretary of Finance to promulgate rules and regulations

b) Specific provisions to be contained in rules and regulations

2. Jurisdiction, Power and Functions of the Commissioner of

Internal Revenue

a) Powers and duties of the Bureau of Internal Revenue

b) Power of the Commissioner to interpret tax laws and to decide tax cases

c) Revenue Issuances by the Commission

d) Non-retroactivity of rulings

e) Power of the Commissioner to Obtain Information, and to Summon, Examine and Take
Testimony of Persons

f) Power of the Commissioner to Make Assessments and Prescribe Additional Requirements

for Tax Administration and Enforcement

g) Best Evidence Obtainable

h) Power of the Commissioner to Suspend the Business Operation of a Taxpayer

B. Income Tax w/ Amendments of TRAIN LAW

1. Definition, Nature and General Principles

 a) Income Tax systems – Global, Schedular and Semischedular or Semi-Global Taxpayer’s
income

b) Features of the Philippine Income Tax Law

c) Criteria in imposing Philippine income tax

d) Types of Philippine income taxes

e) Taxable period

f) Kinds of taxpayers

2. Income Tax

a) Definition, Nature and General principles

b) Income

(1) Definition and nature

(2) When income is taxable

i. Existence of income

ii. Realization of income

iii. Recognition of income

iv. Cash method of accounting versus Accrual method of accounting

(3) Tests in determining whether income is earned for tax purposes

i. Realization test

ii. Claim of right doctrine or doctrine of ownership, command or control

iii. Economic benefit test, doctrine of proprietary interest

iv. Severance test

v. All events test

c) Classification of income

d) Situs of Income Taxation

3. Gross Income

a) Definition

b) Concept of income from whatever source derived

c) Gross income vis-à-vis net income vis-à-vis taxable income

d) Sources of income subject to tax

e) Classification of income subject to tax

(1) Compensation income

(2) Fringe benefits

(3) Professional income

(4) Income from business

 (5) Income from dealings in property

(6) Passive investment income

(7) Annuities, proceeds from life insurance or other types of insurance

(8) Prizes and awards

(9) Pensions, retirement benefit or separation pay

(10)Income from any source whatever

f) Exclusions from gross income

(1) Rationale for the exclusions

(2) Taxpayers who may avail of the exclusions

(3) Exclusions distinguished from deductions and tax credits

(4) Exclusions under the Constitution

(5) Exclusions under the Tax Code

(6) Exclusions under special laws

4. Deductions from Gross Income

a) General rules

b) Return of capital

c) Itemized deductions
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad Debts
6. Depreciation/Depletion
7. Charitable and Other Contributions
8. Research and other contributions
9. Pensions trusts
10. Additional Requirements for deductibility

d) Optional Standard Deduction

e) Items not deductible

5. Income Tax on Individuals

a) Income Tax on Resident Citizens, Non-resident Citizens and Resident Aliens

(1) Coverage – Income from all sources within and without the Philippines; exceptions

(2) Taxation on compensation income

(i) Inclusions – monetary and nonmonetary compensation

(ii) Exclusions – Fringe benefits subject to tax; De Minimis benefits; 13th

month pay and other benefits and payments specifically excluded from
taxable compensation income

(iii) Deductions – Personal and additional exemptions; Health and

hospitalization insurance
 (3) Taxation of business income/income from practice of profession

(4) Taxation of Passive Income

(5) Taxation of Capital Gains

(6) Application of Schedular Rate or 8% Monthly Payments

b) Income Tax on Non-Resident Aliens Engaged in Trade or Business

c) Income Tax on Non-Resident Aliens Not Engaged in

Trade or Business

d) Individual Taxpayers Exempt from Income Tax

(1) Senior citizens

(2) Minimum wage earners

(3) Exemptions granted under international agreements

6. Income Tax on Corporations

a) Income Tax on Domestic Corporations and Resident Foreign Corporations

(1) Regular tax

(2) Minimum Corporate Income Tax (MCIT)

(3) Branch Profit Remittance Tax

(4) Allowable deductions

i. Itemized deductions

ii. Optional Standard Deductions

(5) Taxation of Passive Income

(6) Taxation of Capital Gains

b) Income Tax on Non-Resident Foreign Corporations

c) Income Tax on Special Corporations

(1) Domestic Corporations

i. Proprietary educational institutions and hospitals

ii. Non-profit hospitals

iii. Government-owned or controlled corporations, agencies or

instrumentalities

iv. Depository banks (foreign currency deposit units)

(2) Resident Foreign Corporations

i. International carriers doing business in the Philippines

ii. Off-shore banking units

iii. Resident depository banks (foreign currency deposit units)

iv. Regional or Area Headquarters and Regional Operating Headquarters of

Multinational Companies
 (3) Improperly Accumulated Earnings Tax (IAET)

(4) Exemptions from Tax on Corporations

(5) Tax on other Business Entities: General Partnerships, General

Professional
Partnerships, Co-ownerships, Joint Ventures and Consortia

7. Non-deductible expenses

8. Capital Gains and Losses

9. Special Topics
a. Accounting for Long Term Contracts
b. Installment Method

10. Filing of Returns and Payment of Income Tax

a) Definition of a Tax Return and Information Return

b) Period within which to file Income Tax Return of

Individuals and Corporations

c) Persons liable to file Income Tax Returns

(1) Individual taxpayers

(i) General rule and exceptions

(ii) Substituted filing

(2) Corporate taxpayers

d) Where to file Income Tax Returns

e) Penalties for Non-filing of Returns

11. Withholding of taxes

a) Concept of withholding taxes

b) Kinds of Withholding Taxes

c) Returns and Payment of Taxes Witheld at Source

CASES

1. CIR vs Isabela Cultural Corp

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice no. FAS-1-86-
90000680 (680 for brevity) for deficiency income tax in the amount of PhP 333,196.86 and assessment notice no. FAS-1-
86-90-000681 (681 for brevity) for deficiency expanded withholding tax in the amount of PhP 4,897.79, inclusive of
surcharge and interest both for the taxable year 1986. The deficiency income tax of PhP 333,196 arose from BIR
disallowance of ICC claimed expenses deductions for professional and security services billed to and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed PhP244,890 deduction for security services.
Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC in 1984 and 1985,
the cost of the service was not yet determinable at that time, hence, it could be considered as deductible expenses only in
1986 when ICC received the billing statement for said service. It further ruled that ICC did not state its interest income from
the promissory notes of Realty Investment and that ICC properly withheld the remitted taxes on the payment for security
services for the taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 9185 should have been declared as deductions from income during the said years and the failure of
ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986.

ISSUE (1): WON CA is correct in sustaining the deduction of the expenses for professionals and security services form
ICC gross income?
HELD: NO
Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting, expenses not being
claimed as deductions by a tax payer in the current year when they are incurred cannot be claimed as deductions from the
income for the succeeding year.

ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc; that ICC withheld the required 1% withholding tax from the deduction for security services.
HELD:
Sustaining the finding of the CTA and CA that no such understatement exist and that only simple interest computation and
not a compounded one should have been applied by the BIR. There is no indeed no stipulation between the latter and ICC
on the application of compound interest.
Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.

2. CIR vs. Marubeni

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in
general import and export trading, financing and the construction business. It is duly registered to engage in such business
in the Philippines and maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books
of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of
the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of
which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection
with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality
of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
construction of an ammonia storage complex also at the Leyte Industrial Development Estate.
On March 1, 1986, petitioner’s revenue examiners recommended an assessment for deficiency income, branch profit
remittance, contractor’s and commercial broker’s taxes. Respondent questioned this assessment in a letter dated June 5,
1986.
Petitioner found that the NDC and Philphos contracts were made on a “turn-key” basis and that the gross income from the
two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the
construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine
sources, hence, subject to internal revenue taxes.

Issue: Whether or not respondent is liable to pay the income, branch profit remittance, and contractor’s taxes
assessed by petitioner

Held:

A contractor’s tax is imposed in the National Internal Revenue Code (NIRC) as follows:
“Sec. 205. Contractors, proprietors or operators of dockyards, and others.—A contractor’s tax of four percent of the gross
receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in
the business of selling or rendering the following services for a fee or compensation:
 (a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;
(b) (q) Other independent contractors. The term “independent contractors” includes persons (juridical or natural) not
enumerated above (but not including individuals subject to the occupation tax under the Local Tax Code) whose
activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance
of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees.
It does not include regional or area headquarters established in the Philippines by multinational corporations,
including their alien executives, and which headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region.
Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the sale of
all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of
the physical or mental faculties of such contractors or their employees. The word “contractor” refers to a person who, in the
pursuit of independent business, undertakes to do a specific job or piece of work for other persons, using his own means
and methods without submitting himself to control as to the petty details.
A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax
on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the
person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges
or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an
occupation or privilege outside the taxing district.
In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject
contracts.

Clearly, the service of “design and engineering, supply and delivery, construction, erection and installation, supervision,
direction and control of testing and commissioning, coordination…”of the two projects involved two taxing
jurisdictions. These acts occurred in two countries – Japan and the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely
designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC
project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already
finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such
as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when
shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All
services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen
Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines
and are therefore not subject to contractor’s tax.

Facts:
CIR assails the CA decision which affirmed CTA, ordering CIR to desist from collecting the 1985 deficiency income, branch
profit remittance and contractor’s taxes from Marubeni Corp after finding the latter to have properly availed of the tax
amnesty under EO 41 & 64, as amended.

Marubeni, a Japanese corporation, engaged in general import and export trading, financing and construction, is duly
registered in the Philippines with Manila branch office. CIR examined the Manila branch’s books of accounts for fiscal year
ending March 1985, and found that respondent had undeclared income from contracts with NDC and Philphos for
construction of a wharf/port complex and ammonia storage complex respectively.

On August 27, 1986, Marubeni received a letter from CIR assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine sources, hence subject to internal revenue taxes. On Sept 1986,
respondent filed 2 petitions for review with CTA: the first, questioned the deficiency income, branch profit remittance and
contractor’s tax assessments and second questioned the deficiency commercial broker’s assessment.

On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid income taxes for 1981-85, and that taxpayers who wished to
avail this should on or before Oct 31, 1986. Marubeni filed its tax amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41’s scope to include estate and donor’s taxes under Title 3 and business tax under
Chap 2, Title 5 of NIRC, extended the period of availment to Dec 15, 1986 and stated those who already availed amnesty
under EO 41 should file an amended return to avail of the new benefits. Marubeni filed a supplemental tax amnesty return
on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax amnesty and deemed cancelled the deficiency taxes. CA affirmed on
appeal.
Issue:
W/N Marubeni is exempted from paying tax

Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty because it falls under the exception in Sec 4b of EO 41:

“Sec. 4. Exceptions.—The following taxpayers may not avail themselves of the amnesty herein granted: xxx b) Those with
income tax cases already filed in Court as of the effectivity hereof;”
Petitioner argues that at the time respondent filed for income tax amnesty on Oct 30, 1986, a case had already been filed
and was pending before the CTA and Marubeni therefore fell under the exception. However, the point of reference is the
date of effectivity of EO 41 and that the filing of income tax cases must have been made before and as of its effectivity.

EO 41 took effect on Aug 22, 1986. The case questioning the 1985 deficiency was filed with CTA on Sept 26, 1986. When
EO 41 became effective, the case had not yet been filed. Marubeni does not fall in the exception and is thus, not disqualified
from availing of the amnesty under EO 41 for taxes on income and branch profit remittance.

The difficulty herein is with respect to the contractor’s tax assessment (business tax) and respondent’s availment of the
amnesty under EO 64, which expanded EO 41’s coverage. When EO 64 took effect on Nov 17, 1986, it did not provide for
exceptions to the coverage of the amnesty for business, estate and donor’s taxes. Instead, Section 8 said EO provided that:

“Section 8. The provisions of Executive Orders Nos. 41 and 54 which are not contrary to or inconsistent with this amendatory
Executive Order shall remain in full force and effect.”
Due to the EO 64 amendment, Sec 4b cannot be construed to refer to EO 41 and its date of effectivity. The general rule is
that an amendatory act operates prospectively. It may not be given a retroactive effect unless it is so provided expressly or
by necessary implication and no vested right or obligations of contract are thereby impaired.

2. On situs of taxation
Marubeni contends that assuming it did not validly avail of the amnesty, it is still not liable for the deficiency tax because the
income from the projects came from the “Offshore Portion” as opposed to “Onshore Portion”. It claims all materials and
equipment in the contract under the “Offshore Portion” were manufactured and completed in Japan, not in the
Philippines, and are therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with government corporations NDC and Philphos. In the contracts, the
prices were broken down into a Japanese Yen Portion (I and II) and Philippine Pesos Portion and financed either by OECF
or by supplier’s credit. The Japanese Yen Portion I corresponds to the Foreign Offshore Portion, while Japanese Yen Portion
II and the Philippine Pesos Portion correspond to the Philippine Onshore Portion. Marubeni has already paid the Onshore
Portion, a fact that CIR does not deny.)

CIR argues that since the two agreements are turn-key, they call for the supply of both materials and services to the client,
they are contracts for a piece of work and are indivisible. The situs of the two projects is in the Philippines, and the materials
provided and services rendered were all done and completed within the territorial jurisdiction of the Philippines. Accordingly,
respondent’s entire receipts from the contracts, including its receipts from the Offshore Portion, constitute income from
Philippine sources. The total gross receipts covering both labor and materials should be subjected to contractor’s tax (a tax
on the exercise of a privilege of selling services or labor rather than a sale on products).
Marubeni, however, was able to sufficiently prove in trial that not all its work was performed in the Philippines because some
of them were completed in Japan (and in fact subcontracted) in accordance with the provisions of the contracts. All services
for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were
made and completed in Japan. These services were rendered outside Philippines’ taxing jurisdiction and are
therefore not subject to contractor’s tax.Petition denied.

3. CIR vs. British Overseas Airways Corp

"The source of an income is the property, activity or service that produced the income. For such source to be considered
as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines."

FACTS: Petitioner CIR seeks a review of the CTA's decision setting aside petitioner's assessment of deficiency income
taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959 to 1971. BOAC is a 100%
British Government-owned corporation organized and existing under the laws of the United Kingdom, and is engaged in the
international airline business. During the periods covered by the disputed assessments, it is admitted that BOAC had no
landing rights for traffic purposes in the Philippines. Consequently, it did not carry passengers and/or cargo to or from the
Philippines, although during the period covered by the assessments, it maintained a general sales agent in the Philippines
— Wamer Barnes and Company, Ltd., and later Qantas Airways — which was responsible for selling BOAC tickets covering
passengers and cargoes. The CTA sided with BOAC citing that the proceeds of sales of BOAC tickets do not constitute
BOAC income from Philippine sources since no service of carriage of passengers or freight was performed by BOAC within
the Philippines and, therefore, said income is not subject to Philippine income tax. The CTA position was that income from
transportation is income from services so that the place where services are rendered determines the source.

ISSUE: Are the revenues derived by BOAC from sales of ticket for air transportation, while having no landing rights here,
constitute income of BOAC from Philippine sources, and accordingly, taxable?

HELD: Yes. 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 site 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.

FACTS: British overseas airways corp. (BOAC) a wholly owned British Corporation, is engaged in international airlines
business. From 1959to 1972, it has no loading rights for traffic purposes in the Philippines but maintained a general sales
agent in the Philippines which was responsible for selling, BOAC tickets covering passengers and cargoes the CIR
assessed deficiency income taxes against.

ISSUE: Is BOAC liable to pay taxes?

RULING: Yes. The source of income is the property, activity of service that produces the income. For the source of income
to be considered coming from the Philippines, it is sufficient that the income is derived from the activity coming from the
Philippines. The tax code provides that for revenue to be taxable, it must constitute income from Philippine sources. In this
case, the sale of tickets is the source of income. The situs of the source of payments is the Philippines.

4. South African Airways vs CIR

Lessons Applicable: Taxes can be offset if intimately related, unless exempted assumed within the purview of general
rule, liabilities and tax credit must first be determined before offset can take place

Laws Applicable:

Facts:

▪ South African Airways, a foreign corporation with no license to do business in the Philippines, sells passage documents
for off-line flights through Aerotel Limited, general sales agent in the Philippines
▪ Feb 5, 2003: Petitioner filed a claim for refund erroneously paid tax on Gross Philippine Billing (GPB) for the year 2010.
▪ CTA: denied - petitioner is a resident foreign corp. engaged in trade or business in the Philippines and therefore is NOT
liable to pay tax on GPB under the Sec. 28 (A) (3) (a) of the 1997 NIRC but cannot be allowed refund because liable
for the 32% income tax from its sales of passage documents.
▪ This is upheld by the CTA and CTA En Banc

Issue:
1. W/N petitioner is engaged in trade or business in the Philippines is subject to 32% income tax.
2. W/N petitioner is entitled to refund

HELD: CTA En Banc decision is set side

1. Yes. Since it does not maintain flights to or from the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997
NIRC. This much was also found by the CTA. But petitioner further posits the view that due to the non-applicability of Sec.
28(A)(3)(a) to it, it is precluded from paying any other income tax for its sale of passage documents in the Philippines. But,
Sec. 28 (A)(1) of the 1997 NIRC does not exempt all international air carriers from the coverage of Sec. 28 (A) (1) of the
1997 NIRC being a general rule. Petitioner, being an international carrier with no flights originating from the Philippines,
does not fall under the exception. As such, petitioner must fall under the general rule. This principle is embodied in the Latin
maxim, exception firmat regulam in casibus non exceptis, which means, a thing not being excepted must be regarded as
coming within the purview of the general rule.

2. Underterminable. Although offsetting of tax refund with tax deficiency is unavailing under Art. 1279 of the Civil Code, in
CIR v. CTA it granted when deficiency assessment is intimately related and inextricably intertwined with the right to claim
for a tax refund. Sec. 72 Chapter XI of 1997 NIRC is not applicable where petitioner's tax refund claim assumes that the
tax return that it filed were correct because petitioner is liable under Sec. 28 (A)(1), the correctness is now put in doubt and
refund cannot be granted. It cannot be assumed that the liabilities for two different provisions would be the same. There is
a necessity for the CTA to receive evidence and establish the correct amount before a refund can be granted.

5. Garrison vs CA

Doctrine: 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.

Facts:
➢ Petitioners, John Garrison, Frank Robertson, Robert Cathey, James Robertson, Felicitas de Guzman and Edward
McGurk (PETITIONERS) are US Citizens who entered the country through the Philippine Immigration Act of 1940
and are employed in the US Naval Base in Olongapo City. They earn no Philippine source income and it is also
their intention to return to the US as soon as their employment has ended.
➢ The BIR sent notices to Petitioners stating that they did not file their Income Tax Returns (ITR) for 1969. The BIR
claimed that they were resident aliens and required them to file their returns
➢ Under then then Internal Revenue Code resident aliens may be taxed regardless of whether the gross income was
derived from Philippine sources.
➢ Petitioners refused stating that they were not resident aliens but only special temporary visitors. Hence, they were
not required to file ITRs. They also claimed exemption by virtue of the RP-US Military Bases Agreement.
➢ Under Military Bases Agreement, a “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” is only liable for tax on Philippine sources of income.
➢ The Court of Appeals held that the Bases Agreement “speaks of exemption from the payment of income tax, not
from the filing of the income tax returns . . .”

Issue:
1. Whether or not Petitioners can be considered resident aliens.
2. Whether or not Petitioners are exempt from income tax under the RP-US Military Bases Agreement.
3. Whether or not Petitioners must still file ITR notwithstanding the exemption.

Held:
1. Yes.

Revenue Regulations No. 2 Section 5 provides: “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 or not an alian is a transient or not
is further 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.” The Section 5 further provides that if the alien is in the Philippines
for a definite purpose which by its nature may be promptly accomplished, he is considered a transient. However,
if an extended stay is necessary for him to accomplsh his purpose, he is considered 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.”

2. Yes.

Notwithstanding the fact that the Petitioners are resident aliens who are generally taxable, their class is nonetheless exempt
from paying taxes on income derived from their employment in the naval base by virtue of the RP-US Military bases
agreement.The Bases Agreement 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.”

3. Yes

Even though the petitioners are exempt from paying taxes from their employment in the Naval Base, they must nevertheless
file an ITR. The Supreme Court held that the filing of an ITR and the payment of taxes are two distinct obligations. While
income derived from employment connected with the Naval Base is exempt, income from Philippine Sources is not. The
requirement of filing an ITR is so that the BIR can determine whether or not the US National should be taxed. “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.”

6. Banco de Oro vs. Republic of the Philippines

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACE Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-
NGO would have been obliged to pay the 20%final withholding tax on the interest or discount from the PEACE Bonds. A
notice by the Bureau of Treasury (BTr) to all Government Securities Eligible Dealer (GSED) entitled Public Offering of
Treasury Bonds denominated as the Poverty Eradication and Alleviation Certificates or the PEACE Bonds, announced that
P30 Billion worth of 10-year Zero-Coupon Bonds will be auctioned on Oct. 16, 2011. The notice stated that the Bonds “shall
be issued to not more than 19 buyers/lenders. Lastly, it stated that “while taxable shall not be subject to the 20% final
withholding tax” pursuant to the BIR Revenue Regulation No. 020 2001. After the auction, RCBC which participated on
behalf of CODE-NGO was declared as the winning bidder having tendered the lowest bids. On October 7, 2011, “the BIR
issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds and directing the BTr to withhold said
final tax at the maturity thereof. Furthermore the Bureau of Internal Revenue issued BIR Ruling No. DA 378-201157
clarifying that the final withholding tax due on the discount or interest earned on the PEACE Bonds should “be imposed and
withheld not only on RCBC/CODE NGO but also onall subsequent holders of the Bonds. Banco de Oro, et al. filed a petition
for Certiorari, Prohibition and Mandamus under Rule 65 to the Supreme Court contending that the assailed 2011 BIR Ruling
which ruled that “all treasury bonds are ‘deposit substitutes’ regardless of the number of lenders, in clear disregard of the
requirement of twenty (20) or more lenders mandated under the NIRC. Furthermore it will cause substantial impairment of
their vested rights under the Bonds since the ruling imposes new conditions by “subjecting the PEACE Bonds to the twenty
percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof as previously represented
by the Government, through respondents BTr and BIR, expressly state that it is not subject to final withholding tax upon
their maturity.” The Commissioner of the Internal Revenue countered that the BTr has no power to contractually grant a tax
exemption in favour of Banco de Oro, et al.. Moreover, they contend that the word “any” in Section 22(Y) of the National
Internal Revenue Code plainly indicates that the period contemplated is the entire term of the bond and not merely the point
of origination or issuance.

ISSUE: Is the 10-year zero-coupon treasury bonds issued by the Bureau of Treasury subject to 20% Final Withholding Tax?

RULING Under Sections 24(B)(1), 27(D)(1), and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholding
tax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements. Under Section 22(Y), deposit substitute is an alternative
form of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate
lenders at any one time). Hence, the number of lenders is determinative of whether a debt instrument should be considered
a deposit substitute and consequently subject to the 20% final withholding tax. Furthermore the phrase “at any one time”
for purposes of determining the “20 or more lenders” would mean every transaction executed in the primary or secondary
market in connection with the purchase or sale of securities. In the case at bar, it may seem that there was only one lender
— RCBC on behalf of CODE-NGO — to whom the PEACE Bonds were issued at the time of origination. However, a reading
of the underwriting agreement and RCBC term sheet reveals that the settlement dates for the sale and distribution by RCBC
Capital (as underwriter for CODE-NGO) of the PEACE Bonds to various undisclosed investors. At this point, however, we
do not know as to how many investors the PEACE Bonds were sold to by RCBC Capital. Should there have been a
simultaneous sale to 20 or more lenders/investors, the PEACE Bonds are deemed deposit substitutes within the meaning
of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC Capital/CODE-NGO would have been obliged to
pay the 20%final withholding tax on the interest or discount from the PEACE Bonds. Further, the obligation to withhold the
20% final tax on the corresponding interest from the PEACE Bonds would likewise be required of any lender/investor had
the latter turned around and sold said PEACE Bonds, whether in whole or part, simultaneously to 20 or more lenders or
investors.
 7. CIR vs St. Luke’s Medical Center

Facts:

1. Luke’s Medical Center, Inc. is a hospital organized as a non-stock and non-profit corporation.
2. The BIR assessed St. Luke’s deficiency taxes amounting to P76,063,116.06 for 1998, comprised of deficiency income
tax, VAT, withholding tax on compensation and expanded withholding tax.
3. Luke’s filed an administrative protest with the BIR against the deficiency tax assessments.
4. The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10% preferential tax rate on the
income of proprietary non-profit hospitals, should be applicable to St. Luke’
5. The BIR claimed that St. Luke’s was actually operating for profit in 1998 because only 13% of its revenues came from
charitable purposes. Moreover, the hospital’s board of trustees, officers and employees directly benefit from its profits
and assets. St. Luke’s had total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in
1998.
6. Luke’s contended that the BIR should not consider its total revenues, because its free services to patients was
P218,187,498 or 65.20% of its 1998 operating income of P334,642,615. St. Luke’s also claimed that its income does
not inure to the benefit of any individual.
7. Luke’s maintained that it is a non-stock and non-profit institution for charitable and social welfare purposes under Section
30(E) and (G) of the NIRC. It argued that the making of profit per se does not destroy its income tax exemption.

Issue: Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC, which imposes a
preferential tax rate of 10% on the income of proprietary non-profit hospitals.

Ruling:

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction of Section 27(B) in the NIRC of
1997 vis-à-vis Section 30(E) and (G) on the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational institutions and proprietary non-profit
hospitals

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)(1).

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.”

The 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.”

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.
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.

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 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.

For real property taxes, the incidental generation of income is permissible because the test of exemption is the use of the
property. 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 the 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.

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:

• A non-stock corporation or association;

• Organized exclusively for charitable purposes;
• Operated exclusively for charitable purposes;
• 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 “obtained 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, 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 1998, St. Luke’s had total revenues of P1,730,367,965 from services to paying patients. It cannot be disputed that a
hospital which receives approximately P1.73 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 P1,730,367,965 as “Revenues
from Services to Patients” in contrast to its “Free Services” expenditure of P218,187,498.
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 P1.73 billion total revenues from paying patients is not even
incidental to St. Luke’s charity expenditure of P218,187,498 for non-paying patients.

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.

8. CIR vs DLSU

The Commissioner submits the following arguments:

DLSU's rental income is taxable regardless of how such income is derived, used or disposed of. DLSU's operations
of canteens and bookstores within its campus even though exclusively serving the university community do not
negate income tax liability.
Article XIV, Section 4 (3) of the Constitution and Section 30 (H) of the Tax Code
“the income of whatever kind and character of [a non-stock and non-profit educational institution] from any
of [its] properties, real or personal, or from any of (its] activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed by this Code.”

The Commissioner posits that a tax-exempt organization like DLSU is exempt only from property tax but not
from income tax on the rentals earned from property. Thus, DLSU's income from the leases of its real properties
is not exempt from taxation even if the income would be used for educational purposes. 41
DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear that all assets and revenues of non-stock, non-
profit educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and
duties.

ISSUE: Whether DLSU's income and revenues proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.

RULING: YES.
The requisites for availing the tax exemption under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under
the classification non-stock, non-profit educational institution; and (2) the income it seeks to be exempted from
taxation is used actually, directly and exclusively for educational purposes.
A plain reading of the Constitution would show that Article XIV, Section 4 (3) does not require that the revenues
and income must have also been sourced from educational activities or activities related to the purposes of an
educational institution. The phrase all revenues is unqualified by any reference to the source of revenues. Thus, so
long as the revenues and income are used actually, directly and exclusively for educational purposes, then said
revenues and income shall be exempt from taxes and duties.
Thus, when a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and
exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. On the other hand,
when it also shows that it uses its assets in the form of real property for educational purposes, it shall be exempted
from RPT.
We further declare that the last paragraph of Section 30 of the Tax Code is without force and effect for being contrary
to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purpose. We make this declaration in the exercise
of and consistent with our duty to uphold the primacy of the Constitution. We stress that our holding here pertains
only to non-stock, non-profit educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to have been used actually,
directly and exclusively for educational purposes are exempt from duties and taxes.
 9. Atlas Consolidated Mining & Devt Corp vs CIR

FACTS: For the year 1958, the Commissioner of Internal Revenue assessed Atlas for deficiency income tax of P761,789.12
which covers the disallowance of items claimed, particularly the stockholders relation service fee paid to P.K. Macker &
Company, by Atlas as deductible from gross income. It appears that on December 27, 1957, Atlas increased its capital
stock from P15,000,000 to P18,325,000. It was claimed by Atlas that its shares of stock worth P3,325,000 were sold in the
United States because of the services rendered by the public relations firm, P. K. Macker & Company.

On Appeal, the Court of Tax Appeals ruled that the information about Atlas given out and played up in the mass
communication media resulted in full subscription of the additional shares issued by Atlas; consequently, the questioned
item, stockholders relation service fee, was in effect spent for the acquisition of additional capital, ergo, a capital expenditure.

ISSUE: Whether or not the expenses paid for the services rendered by a public relations firm P.K MacKer & Co. labelled
as stockholders relation service fee is an allowable deduction as business expense under Section 30 (a) (1) of the National
Internal Revenue Code.

RULING: No. The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision
of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the
law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income
tax is Section 30 (a) (1) of the National Internal Revenue which allows a deduction of "all the ordinary and necessary
expenses paid or incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to
be deductible under this section of the statute, must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three
conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in carrying in a trade or business. 6 In addition, not only must the taxpayer
meet the business test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise,
the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does
not justify its deduction. 7

We sustain the ruling of the tax court that the expenditure of P25,523.14 paid to P.K. Macker & Co. as compensation for
services carrying on the selling campaign in an effort to sell Atlas' additional capital stock of P3,325,000 is not an ordinary
expense in line with the decision of U.S. Board of Tax Appeals in the case of Harrisburg Hospital Inc. vs. Commissioner of
Internal Revenue. 14 Accordingly, as found by the Court of Tax Appeals, the said expense is not deductible from Atlas gross
income in 1958 because expenses relating to recapitalization and reorganization of the corporation (Missouri-Kansas Pipe
Line vs. Commissioner of Internal Revenue, 148 F. (2d), 460; Skenandos Rayon Corp. vs. Commissioner of Internal
Revenue, 122 F. (2d) 268, Cert. denied 314 U.S. 6961), the cost of obtaining stock subscription (Simons Co., 8 BTA 631),
promotion expenses (Beneficial Industrial Loan Corp. vs. Handy, 92 F. (2d) 74), and commission or fees paid for the sale
of stock reorganization (Protective Finance Corp., 23 BTA 308) are capital expenditures.

That the expense in question was incurred to create a favorable image of the corporation in order to gain or maintain the
public's and its stockholders' patronage, does not make it deductible as business expense. As held in the case of Welch vs.
Helvering, efforts to establish reputation are akin to acquisition of capital assets and, therefore, expenses related thereto
are not business expense but capital expenditures.

10. Filipinas Synthetic Fiber Corporation vs CA

Lessons Applicable: Apply accrual method equally for both deduction and income, estoppel applies in CTA tax disputes

Laws Applicable:

FACTS:

▪ Filipinas Synthetic Fiber Corp. received a letter of demand for deficiency withholding tax on interest loans, royalties
and guarantee fees paid by it non-resident corporations.
▪ It filed a protest on the ground that: "For Philippine Internal Revenue Tax purposes, the liability to withhold is from the
time of accrual or remittance citing BIR ruling No. 71-3003 and 24-71-003-154-84.
▪ It then filed a Petition for Review at the CTA and CA who denied its petition that it can be paid upon remittance.
ISSUE: W/N liability to withhold tax at source on income payments to non-resident foreign corporations arises upon
remittance of the amount due rather than upon accrual.

HELD: No.

▪ Section 53 (c) he is held personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of
Internal Revenue and his deputies are not made liable to law.
▪ Since there was a definite clear liability and imminent certainty that it was going to earn income it should already be
taxable.
▪ Moreover, petitioner is estopped for he has already claimed deductions as there were incurred as a business expense
in the form of interest and royalties paid.

Facts: Filipinas Synthetic Fiber Corp., a domestic corporation received on December 27, 1979 a letter of demand from the
Commissioner of Internal Revenue assessing it for deficiency withholding tax at source in the total amount of
P829,748.77 inclusive of interest and compromise penalties, for the period from the fourth quarter of 1974 to the fourth
quarter of 1975. The assessment was seasonably protested by petitioner through its auditor, SGV and Company.
Respondent denied the protest on May 14, 1985 on the following ground: “For Philippine internal revenue tax purposes, the
liability to withhold and pay income tax withheld at source from certain payments due to a foreign corporation is at the time
of accrual and not at the time of actual payment or remittance thereof.”

On June 28, 1985, petitioner brought a petition for review before the Court of Tax Appeals, the said court came out with its
decision on June 15, 1993, which is against the petitioner.

With the denial of its motion for reconsideration, petitioner appealed the CTA disposition to the Count of Appeals, which
affirmed in toto the appealed decision. So, petitioner found its way to this count via petition for review on certiorari.

Issue: Whether the liability to withhold tax at source on income payments to non-resident foreign corporation arises upon
remittance of the amounts due to the foreign creditors, or upon accrual thereof

Held: The Supreme Court held that since Sec. 53, NIRC (now, Sec. 57 of 1997 NIRC) in relation to Sec. 54 (now Sec. 58)
is silent as to when the duty to withhold arises, it is necessary to look into the nature of the accrual method of accounting,
which was used by therein petitioner corporation. Inasmuch as under the accrual basis, income is reportable when all the
events have occurred to fix taxpayer’s right to receive the income and the amounts can be determined with reasonable
accuracy, hence, it is the right to receive income, and not the actual receipt thereof, that determines when the amount is
includible in gross income. Thus, the duty of the withholding agent to withhold the corresponding tax arises at the time of
such accrual. The withholding agent/corporation is then obliged to remit the tax to the Government since it already and
properly belongs to the Government. If a withholding agent who is personally liable for income tax withheld at source fails
to pay said withholding tax, an assessment for said deficiency withholding tax would, therefore, be legal and proper.

11. Philex Mining Corp. vs CIR

FACTS: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals affirming the Court of Tax Appeals
decision ordering it to pay the amount of P110.7 M as excise tax liability for the period from the 2nd quarter of 1991 to the
2nd quarter of 1992 plus 20% annual interest from 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code
of 1977. Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input
credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P120 M plus interest. Therefore these claims
for tax credit/refund should be applied against the tax liabilities.

ISSUE: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax refund of the petitioner?

HELD: No. Philex's claim is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the
government and so should be collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical
reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.

To be sure, Philex cannot be allowed to refuse the payment of its tax liabilities on the ground that it has a pending tax claim
for refund or credit against the government which has not yet been granted.Taxes cannot be subject to compensation for
the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. xxx There can be no off-setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount
equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the
government.