BLEIZEL D.

TEODOSIO LAW III-B

1. PHILEX MINING CORPORATION V. CIR, G.R. NO. 125704, AUGUST 28, 1998

FACTS:

On August 5, 1992, the BIR sent a letter to Philex asking it to settle its excise tax liabilities
amounting to P123,821,982.52. 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 P119,977,037.02 plus interest. Therefore, these claims for tax
credit/refund should be applied against the tax liabilities. In reply, the BIR held that since these
pending claims have not yet been established or determined with certainty, it follows that no legal
compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount
plus interest within 30 days from the receipt of the letter.

Philex raised the issue to the Court of Tax Appeals and in the course of the proceedings, the BIR
issued a Tax Credit Certificate in the amount of P13,144,313.88 which, applied to the total tax
liabilities of Philex of P123,821,982.52; effectively lowered the latter’s tax obligation of
P110,677,688.52. Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay
the remaining balance, elucidating its reason that “taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract.

Philex’s appeal to the Court of Appeals was denied. Philex filed a motion for reconsideration which
was again denied. However, a few days after the denial of its motion for reconsideration, Philex
was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also
for 1992 and1994, computed amounting to 205,595,289.20. In view of the grant of its VAT input
credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities
since both had already become “due and demandable, as well as fully liquidated;” hence, legal
compensation can properly take place.

ISSUE:
Whether or not the VAT tax credit obtained by Philex for the taxable year 1992 to 1994 be off-set
with the Philex’s excise tax liabilities?

RULING:

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.
2. COMMISSIONER OF INTERNAL REVENUE vs. ITOGON-SUYOC MINES, INC.,
and THE COURT OF TAX APPEALS, G.R. No. L-25299, July 29, 1969

FACTS:
Itogon-Suyoc Mines filed its income tax return for the fiscal year 1959 to 1960. Four months later,
it filed an amended income tax return, reporting a loss. It thus sought a refund from the
Commissioner. When it filed its income tax return on the next year, it deducted an amount
representing alleged tax credit for overpayment for the preceding fiscal year. The Commissioner
imposed an amount P1,512.83 as 1% monthly interest on the amount of P13,155.20 from January
to December 1962. The basis for such assessment was allegedly the absence of a legal right to
deduct said amount before the tax credit or refund is approved by the Commissioner.

ISSUE:

Whether or not the alleged tax credit due Itogon-Suyoc Mines may be deducted from its tax
liability before approval by CIR.

HELD:

The Tax Code provides that interest upon the amount determined as a deficiency shall be assessed
and shall be paid upon notice and demand from the Commissioner at the rate therein specified. It
made clear, however, in an earlier provision found in the same section that if in any preceding
year, the taxpayer was entitled to a refund of any amount due as tax, such amount, if not refunded,
may be deducted from the tax to be paid. Although the imposition of monthly interest does not
constitute penalty but a just compensation to the State for the delay in paying the tax and for the
concomitant use by the taxpayer of funds that rightfully should be in government’s hands; in light
of the overpayment for 1959 and 1960, it cannot be said that the taxpayer was guilty of delay
enabling it to utilize the money.

There is no question respondent was entitled to a refund. Instead of waiting for the sum involved
to be delivered to it, it deducted the said amount from the tax that it had to pay. That it had a right
to do according to the law. It is true a doubt could have arisen due to the fact that as of the time
such a deduction was made, the Commissioner of Internal Revenue had not as yet approved such
a refund. It is an admitted fact though that respondent was clearly entitled to it, and petitioner did
not allege otherwise. Nor could he do so. Under all the circumstances disclosed therefore, the
applicability of the legal provision allowing such a deduction from the amount of the tax to be paid
cannot be disputed.

The company is entitled to refund.

3. CIR VS FILINVEST DEVELOPMENT CORPORATION, G.R. NO. 163653, JULY 19,
2011

FACTS:
Filinvest Development Corporation extended advances in favor of its affiliates and supported the
same with instructional letters and cash and journal vouchers. The BIR assessed Filinvest for
deficiency income tax by imputing an “arm’s length” interest rate on its advances to affiliates.
Filinvest disputed this by saying that the CIR lacks the authority to impute theoretical interest and
that the rule is that interests cannot be demanded in the absence of a stipulation to the effect.

ISSUE:
Can the CIR impute theoretical interest on the advances made by Filinvest to its affiliates?

HELD:
NO. Despite the seemingly broad power of the CIR to distribute, apportion and allocate gross
income under (now) Section 50 of the Tax Code, the same does not include the power to impute
theoretical interests even with regard to controlled taxpayers’ transactions. This is true even if the
CIR is able to prove that interest expense (on its own loans) was in fact claimed by the lending
entity. The term in the definition of gross income that even those income “from whatever source
derived” is covered still requires that there must be actual or at least probable receipt or realization
of the item of gross income sought to be apportioned, distributed, or allocated. Finally, the rule
under the Civil Code that “no interest shall be due unless expressly stipulated in writing” was also
applied in this case.

The Court also ruled that the instructional letters, cash and journal vouchers qualify as loan
agreements that are subject to DST.
4. CALAMBA STEEL CENTER, INC. (formerly JS STEEL CORPORATION) vs.
COMMISSIONER OF INTERNAL REVENUE, G.R. No. 151857. April 28, 2005

FACTS:

Petitioner is a domestic corporation engaged in the manufacture of steel blanks for the use
by manufacturer of automotives, electrical, electronics in industrial and household appliances.In
its amended Corporate Annual Income Tax Return on 1996 it declared a net taxable income of Php
9.4 Million, tax credits of Php 6.7 Million and tax due in the amount of Php 3.3Million. It also
reported quarterly payments for the second and third quarters of 1995 in the amount of Php 2.3 M
and Php 1.08 M respectively. The petitioner contended in the 1997 case that it is entitled to a
refund. The refund was due to the income tax withheld and remitted in its behalf by withholding
agents. Such withheld as indicated in the 1997 return were no utilized in 1996 due to its income
loss for the three quarters of 1996.

ISSUE:

Whether or not a tax refund may be claimed even beyond the taxable year following the tax credit
arises.

HELD:

Yes. But the claimant must prove that it is entitled to such refund. Tax refund has the same nature
of tax exemption and such must be construed strictly against the one claiming it. NIRC provided
that the only limitation as regards the tax refund is that such must be made within two years for the
payment. Calamba Steel had complied with such requirement. The act of the counsel in submitting
the final adjustment after the trial has been conducted was accepted by the court because the rules
of ordinary procedure are applied suppletorily. Moreover the Court said that Judicial notice could
have been taken by the CA and the CTA of the 1996 final adjustment return made by Calamba
Steel in another case pending in the CTA.
5. CIR vs PHILIPPINE AIRLINES, GR NO. 180066, JULY 7, 2009

FACTS:
PHILIPPINE AIRLINES, INC. had zero taxable income for the fiscal year ending March 31,
2001 but would have been liable for Minimum Corporate Income Tax based on its gross income.
However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate Income Tax using
as basis its franchise which exempts it from “all other taxes” upon payment of whichever is
lower of either (a) the basic corporate income tax based on the net taxable income or (b) a
franchise tax of 2%.

ISSUE:

Is PAL liable for Minimum Corporate Income Tax?

HELD:

NO. PHILIPPINE AIRLINES, INC.’s franchise clearly refers to "basic corporate income tax"
which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction
under the Tax Code between taxable income, which is the basis for basic corporate income tax
under Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax
under Section 27 (E). The two terms have their respective technical meanings and cannot be used
interchangeably. Not being covered by the Charter which makes PAL liable only for basic
corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes" from
which PHILIPPINE AIRLINES, INC. is exempted.

The CIR also cannot point to the “Substitution Theory” which states that Respondent may not
invoke the “in lieu of all other taxes” provision if it did not pay anything at all as basic corporate
income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts
Respondent but the exercise of its option. The Court even pointed out the fallacy of the argument
in that a measly sum of one peso would suffice to exempt PAL from other taxes while a zero
liability would not and said that there is really no substantial distinction between a zero tax and a
one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the applicability of the
MCIT to PAL does more than just clarify a previous regulation and goes beyond mere internal
administration and thus cannot be given effect without previous notice or publication to those
who will be affected thereby.