COMMISSIONER OF INTERNAL REVENUE VS.

ST LUKE'S MEDICAL CENTER

G.R. NO. 203514 MARCH 13, 2017

Facts:St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-
profit corporation. St. Luke’s accepts both paying and non-paying patients. The BIR assessed St.
Luke’s deficiency taxes for 1998 comprised of deficiency income tax, value-added tax, and
withholding tax. The BIR claimed that St. Luke’s should be liable for income tax at a preferential
rate of 10% as provided for by Section 27(B). Further, 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. On the other hand, St. Luke’s maintained that it is a non-stock and
non-profit institution for charitable and social welfare purposes exempt from income tax 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 or not 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: Yes. 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.

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. 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.” 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 Sec. 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

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. (Emphasis supplied)

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.

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.

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%.

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).

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.”

WHEREFORE, 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(8) 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.
Secretary Purisima, et al. vs. Philippine Tobacco Institute, Inc.
G.R. No. 210251 April 17, 2017

Facts:
On 20 December 2012, President Benigno S. Aquino III signed Republic Act No. 10351[5] (RA
10351), otherwise known as the Sin Tax Reform Law. RA 10351 restructured the excise tax on
alcohol and tobacco products by amending pertinent provisions of Republic Act No. 8424,[6]
known as the Tax Reform Act of 1997 or the National Internal Revenue Code of 1997 (NIRC).
Section 5 of RA 10351, which amended Section 145(C) of the NIRC, increased the excise tax rate
of cigars and cigarettes and allowed cigarettes packed by machine to be packed in other
packaging combinations of not more than 20.
On 21 December 2012, the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue (CIR), issued RR 17-2012. Section 11 of RR 17-2012 imposes
an excise tax on individual cigarette pouches of 5's and 10's even if they are bundled or packed
in packaging combinations not exceeding 20 cigarettes.
Pursuant to Section 11 of RR 17-2012, the CIR issued RMC 90-2012 dated 27 December 2012.
Annex "D-1" of RMC 90-2012 provides for the initial classifications in tabular form, effective 1
January 2013, of locally-manufactured cigarette brands packed by machine according to the tax
rates prescribed under RA 10351 based on the (1) 2010 Bureau of Internal Revenue (BIR) price
survey of these products, and (2) suggested net retail price declared in the latest sworn
statement filed by the local manufacturer or importer.
PMFTC, Inc., a member of respondent Philippine Tobacco Institute, Inc. (PTI), paid the excise
taxes required under RA 10351, RR 17-2012, and RMC 90-2012 in order to withdraw cigarettes
from its manufacturing facilities. However, on 16 January 2012, PMFTC wrote the CIR prior to
the payment of the excise taxes stating that payment was being made under protest and
without prejudice to its right to question said issuances through remedies available under the
law.
As a consequence, on 26 February 2013, PTI filed a petition [7] for declaratory relief with an
application for writ of preliminary injunction with the RTC.
In a Decision dated 7 October 2013, the RTC granted the petition for declaratory relief.
Issue:Whether or not the RTC erred in nullifying Section 11 of RR 17-2012 and Annex "D-1" of
RMC 90-2012 in imposing excise tax to packaging combinations of 5's, 10's, etc. not exceeding
20 cigarette sticks packed by machine.
Ruling:The petition lacks merit.Section 145(C) of the NIRC is clear that the excise tax on
cigarettes packed by machine is imposed per pack. "Per pack" was not given a clear definition
by the NIRC. However, a "pack" would normally refer to a number of individual components
packaged as a unit.[10] Under the same provision, cigarette manufacturers are permitted to
bundle cigarettes packed by machine in the maximum number of 20 sticks and aside from 20's,
the law also allows packaging combinations of not more than 20's - it can be 4 pouches of 5
cigarette sticks in a pack (4 x 5's), 2 pouches of 10 cigarette sticks in a pack (2 x 10's), etc.
The RTC, in its Decision dated 7 October 2013, ruled in favor of PTI and declared that RA 10351
intends to tax the packs of 20's as a whole, regardless of whether they are further repacked by
10's or 5's, as long as they total 20 sticks in all. Thus, the tax rate to be imposed shall only be
either for a net retail price of (1) less than P11.50, or (2) more than P11.50, applying the two
excise tax rates from 2013 until 2016 as mentioned under RA 10351. The RTC added "that the
fact the law allows 'packaging combinations,' as long as they will not exceed a total of 20 sticks,
is indicative of the lawmakers' foresight that these combinations shall be sold at retail
individually. Yet, the lawmakers did not specify in the law that the tax rate shall be imposed on
each packaging combination." Thus, the RTC concluded that the interpretation made by the
Secretary of Finance and the CIR has no basis in the law.
We agree.
the lawmakers intended to impose the excise tax on every pack of cigarettes that come in 20
sticks. Individual pouches or packaging combinations of 5's and 10's for retail purposes are
allowed and will be subjected to the same excise tax rate as long as they are bundled together
by not more than 20 sticks. Thus, by issuing Section 11 of RR 17-2012 and Annex "D-1" on
Cigarettes Packed by Machine of RMC 90-2012, the BIR went beyond the express provisions of
RA 10351.
It is an elementary rule in administrative law that administrative rules and regulations enacted
by administrative bodies to implement the law which they are entrusted to enforce have the
force of law and are entitled to great weight and respect. However, these implementations of
the law must not override, supplant, or modify the law but must remain consistent with the law
they intend to implement. It is only Congress which has the power to repeal or amend the law.
In sum, we agree with the ruling of the RTC that Section 11 of RR 17-2012 and Annex "D-1" on
Cigarettes Packed by Machine of RMC 90-2012 are null and void. Excise tax on cigarettes
packed by machine shall be imposed on the packaging combination of 20 cigarette sticks as a
whole and not to individual packaging combinations or pouches of 5's, 10's, etc.
WHEREFORE, we DENY the petition.
COMMISSIONER OF INTERNAL REVENUE V.S APO CEMENT CORPORATION
G.R. NO. 193381 FEBRUARY 8, 2017

Facts:
BIR sent Apo cement a Final Assessment Notice (FAN) for deficiency taxes for the
taxable year 1999, totaling to more than 144 million pesos. Apo Cement protested
the FAN. However, BIR denied the protest. A Final Decision on Disputed Assessment
(FDDA) was issued.

Apo Cement petitioned for review with the CTA. The CIR admitted that Apo Cement
had already paid the deficiency assessment in the FDDA, except the documentary
stamp taxes (DST) based on several real property transactions.

In the meantime, Apo Cement availed of the tax amnesty under Republic Act No.
9480, particularly affecting the 1999 deficiency. Hence, it filed a motion to cancel tax
assessment. The CTA granted the motion.

The CIR motioned for reconsideration and appealed but failed. One of the
requirements for tax amnesty under said law is the submission of SALN. The CIR
wished to question the correctness of Apo Cement's SALN.
Issue:Whether or not respondent had fully complied with all the requirements to avail of the
tax amnesty granted under Republic Act No.9480?

Ruling:Yes, respondent is entitled to tax amnesty. Submission of the documentary

requirements and payment of the amnesty tax is considered full compliance with
Republic Act No. 9480 and the taxpayer can immediately enjoy the immunities and
privileges enumerated in Section 6 of the law.
The plain and straightforward conditions were obviously meant to encourage taxpayers to avail
of the amnesty program, thereby enhancing revenue administration and collection. It is
undisputed that respondent had submitted all the documentary requirements.
The Court of Tax Appeals further found that there was nothing in the records, which would
show that proceedings to question the correctness of the Statement of Assets, Liabilities, and
Net Worth (SALN) have been filed within the one-year period stated in Section 4 of the
law. Hence, it concluded that respondent had duly complied with the requisites enumerated
under Republic Act No. 9480 and is therefore entitled to the benefits under Section 6.