CHAPTER 3- INCOME
The jurisdiction of the CTA is not limited only to cases which involve decisions or
CIR VS. LANCASTER PHILIPPINES INC
Facts:
Lancaster Philippines, Inc. is a domestic corporation engaged in the production,
processing and marketing of tobacco. BIR issued a Letter of Authority (LOA)
authorizing its revenue officers to examine Lancaster’s books of accounts and other
accounting records for all internal revenue taxes due from taxable year 1998 to an
unspecified date.
After the conduct of an examination pursuant to the LOA, the BIR issued a
Preliminary Assessment Notice (PAN) which cited Lancaster for: (1) overstatement of
its purchases for the fiscal year April 1998 to March 1999; (2) noncompliance with the
generally accepted accounting principle of proper matching of cost and revenue; and
(3) disallowance of purchases of tobacco from farmers for the months of February
and March 1998 as deductions against income for the fiscal year April 1998 to March
1999.
Lancaster replied to the PAN contending that it had used an entire “tobacco cropping
season” to determine its total purchases covering a one-year period from October 1 to
September 30 of the following year; that it has been adopting the 6-month timing
difference to conform to the matching concept; and that this has long been installed
as part of the company’s system and consistently applied in its accounting books. It
also argued that the February and March 1998 purchases should not have been
disallowed. It concluded that they correctly posted the subject purchases in the fiscal
year ending March 1999 as it was the only in this year that the gross income from the
crop was realized.
Subsequently, Lancaster received from the BIR a final assessment notice (FAN)
which assessed Lancaster’s deficiency income tax amounting to P11,496,770.18, as
a consequence of the disallowance of purchases claimed for the taxable year ending
March 31, 1999.
Lancaster filed a petition for review before CTA Division.
CTA Division granted the petition filed by Lancaster.
CTA En Banc affirmed the cancellation of assessment against Lancaster.
Issues:
Whether BIR revenue officers exceeded their authority. – YES
Whether CTA can resolve an issue (scope of authority of the revenue examiners)
which was not raised by the parties. – YES
Held:
SC denied the petition for review on certiorari filed by Commissioner of Internal
Revenue.
Jurisdiction of CTA
inactions of the CIR on matters relating to assessments or refunds but also includes
other cases arising from the NIRC or related laws administered by the BIR. This court
has once held that the question of whether or not to impose a deficiency tax
assessment comes within the purview of the words “other matters arising under the
NIRC.” It must be stressed that the assessment of internal revenue taxes is one of the
duties of the BIR. Thus, CIR may authorize the examination of any taxpayer and
correspondingly make an assessment whenever necessary.
Authority of CTA to rule on issues not raised by the parties
Under Section 1 of the Revised Rules of the Court of Tax Appeals, the Court (CTA)
may not limit itself to the issues stipulated by the parties but may also rule upon
related issues necessary to achieve an orderly disposition of the case. The CTA,
therefore, was well within the authority to consider in its decision the question on the
scope of authority of the revenue officers who were named in the LOA even though
the parties had not raised the same in their pleadings or memoranda.
BIR Revenue Officers exceeds the authority granted by LOA
SC agreed with the trial court when it ruled the LOA authorizing BIR Revenue Officers
to examine the books of account of Lancaster for the taxable year 1998 only or since
Lancaster adopted a fiscal year for the period April 1, 1997 to March 31, 1998.
However, the deficiency income tax assessment which the BIR eventually issue
against Lancaster was based on the disallowance of expenses reported in FY 1999,
or for the period April 1, 1998 to March 31, 1999. The CTA concluded that the
revenue examiners had exceeded their authority when they issued the assessment
against Lancaster and, consequently, declared such assessment to be without force
and effect.
The LOA gives notice to the taxpayer that it is under investigation for possible
deficiency tax assessment; at the same time it authorizes or empowers a designated
revenue officer to examine, verify, and scrutinize a taxpayer’s books and records, in
relation to internal revenue tax liabilities for a particular period.
The taxable year covered by the assessment being outside of the period specified in
the LOA in this case, the assessment issued against Lancaster is, therefore, void.
GROSS INCOME
CIR VS. CITYTRUST INVESTMENT PHILS
SUMMARY: Citytrust reported its total gross receipts and paid the 5% GRT
corresponding to it. Citytrust claimed for tax refund, seeking to be reimbursed of
the 5% GRT it paid on the portion of 20% FWT contending that the 20% final tax
on the passive income was already deducted and withheld by various withholding
agents. Hence, the actual or the exact amount received, as its passive income was
less the 20% final tax and to include the same would constitute double taxation.
SC held that the 20% FWT is included in computing the 5% GRT and such does
 not amount to double taxation. The GRT is a percentage tax, while the FWT is an
income tax. The two concepts are different from each other.
DOCTRINE: Double taxation means taxing for the same tax period the same thing
or activity twice, when it should be taxed but once, for the same purpose and with
the same kind of character of tax.
HOW THE CASE REACHED THE SC: PETITIONS for review on certiorari of the
decisions of the CA
FACTS:
G.R. No. 139786
• Citytrust is a domestic corporation engaged in quasi-banking activities.
• In 1994, Citytrust reported the amount of P110,788,542.30 as its total gross
receipts and paid the amount of P5,539,427.11 corresponding to its 5% GRT.
• On January 30, 1996, the CTA, in Asian Bank Corporation v. Commissioner of
Internal Revenue (ASIAN BANK case), ruled that the basis in computing the 5%
GRT is the gross receipts minus the 20% FWT.
• Based on this ruling, Citytrust claimed for tax, seeking to be reimbursed of the
5% GRT it paid on the portion of 20% FWT or the amount of P326,007.01.
• CTA:
• monies or receipts that do not redound to the benefit of the taxpayer are not
part of its gross receipts for the purpose of computing its taxable gross
receipts
• the 20% final tax on the passive income was already deducted and withheld
by various withholding agents. Hence, the actual or the exact amount
received, as its passive income in the year 1994, was less the 20% final tax
already withheld by various withholding agents.
• to include it again would tantamount to double taxation
G.R. No. 140857
• Asianbank is a domestic corporation also engaged in banking business. It
remitted to the BIR 5% GRT on its total gross receipts.
• It filed a claim for refund for the overpaid GRT based on the Asian bank
case.
• CTA: allowed refund in the reduced amount of P1,345,743.01
• CA: Reversed CTA.
• It is true that Revenue Regulation No. 12-80 provides that the gross receipts
tax on banks and other financial institutions should be based on all items of
income actually received. Actual receipt here is used in opposition to mere
accrual. But receipt may be actual or constructive. The 20% final tax
withheld from interest income of banks and other similar institutions is not
income that they have not received; it is simply withheld from them and paid
to the government, for their benefit.
PETITIONER’S ARGUMENT:
Commissioner’s Arguments:
• first, there is no law which excludes the 20% FWT from the taxable gross
receipts for the purpose of computing the 5% GRT;
• second, the imposition of the 20% FWT on the bank's passive income and
the 5% GRT on its taxable gross receipts, which include the bank's passive
income, does not constitute double taxation;
• third, the ruling by this Court in Manila Jockey Club, cited in the ASIAN
BANK case, is not applicable; and
• fourth, in the computation of the 5% GRT, the passive income need not be
actually received in order to form part of the taxable gross receipts.
RESPONDENT’S ARGUMENT:
• first, Section 4(e) of Revenue Regulations No. 12-80 dated November 7,
1980 provides that the rates of taxes on the gross receipts of financial
institutions shall be based only on all items of income actually received;
• second, Court's ruling in Manila Jockey Club is applicable
ISSUES+HELD:
1. WON the 20% FWT on a bank's interest income forms part of the taxable
gross receipts for the purpose of computing the 5% GRT? - NO
• Numerous cases are unanimous in defining "gross receipts" as "the entire
receipts without any deduction.”
• CIR v. Bank of Philippine Islands: The Tax Code does not provide a
definition of the term "gross receipts". Accordingly, the term is properly
understood in its plain and ordinary meaning and must be taken to comprise
of the entire receipts without any deduction
• CIR v. Bank of Commerce: The word "gross" must be used in its plain and
ordinary meaning. It is defined as "whole, entire, total, without deduction."
Gross is the antithesis of net.
• China Banking Corporation v. Court of Appeals: Under the ordinary basic
methods of handling accounts, the term gross receipts, in the absence of
any statutory definition of the term, must be taken to include the whole total
gross receipts without any deductions
o the legislative intent to apply the term in its plain and ordinary
meaning may be surmised from a historical perspective of the levy
on gross receipts. From the time the GRT on banks was first
imposed in 1946 under Republic Act No. 39 the legislature has not
established a definition of the term "gross receipts."
o Under Revenue Regulations No. 12-80 and No. 17-84, as well as
several numbered rulings, the BIR has consistently ruled that the
term "gross receipts" does not admit of any deduction. This
interpretation has remained unchanged throughout the various re-
enactments of the present Section 121 of the Tax Code.
• Commissioner of Internal Revenue v. Solidbank Corporation: When we
speak of the "gross earnings" of a person or corporation, we mean the entire
earnings or receipts of such person or corporation from the business or
operation to which we refer. Webster's Dictionary→ gross ="whole or entire."
2. WON there is double taxation - NO
The 20% FWT and 5% GRT does not constitute double taxation.
• Double taxation means taxing for the same tax period the same thing or
activity twice, when it should be taxed but once, for the same purpose and
with the same kind of character of tax. This is not the situation in the case at
bar. The GRT is a percentage tax under Title V of the Tax Code ([Section
 121], Other Percentage Taxes), while the FWT is an income tax under Title II
of the Code (Tax on Income). The two concepts are different from each
other.
• Solidbank Case: a percentage tax is a national tax measured by a certain
percentage of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by any
person engaged in the sale of services. It is not subject to withholding. An
income tax, on the other hand, is a national tax imposed on the net or the
gross income realized in a taxable year. It is subject to withholding. Tax
Code imposes two different kinds of taxes.
DISPOSITIVE:
• G.R. No. 139786: GRANT the petition of the Commissioner of Internal
Revenue and REVERSE the Decision of the CA
• G.R. No. 140857: DENY petition of Asianbank and affirm in toto the decision
of the CA
PASSIVE INVESTMENT
CIR VS. MANNING
COMMISSIONER OF INTERNAL REVENUE vs. MANNING
L-28398 | Aug 6, 1975 | Petition for Review | Castro
Petitioner: Commissioner of Internal Revenue
Respondents: John Manning, W.D. McDonald, E.E. Simmons & CTA
Quick Summary:
Facts: Reese, the majority stockholder of Mantrasco, executed a trust agreement
between him, Mantrasco, Ross, Selph, carrascoso & Janda law firm and the minority
stockholders, Manning, McDonald and Simmons. Said agreement was entered into
because of Reese’s desire that Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco
Guam and Port Motors, to continue under the management of Manning, McDonald and
Simmons upon his [Reese] death. When Reese died, Mantrasco paid Reese’s estate
the value of his shares. When said purchase price has been fully paid, the 24,700
shares, which were declared as dividends, were proportionately distributed to Manning,
McDonald and Simmons. Because of this, the BIR issued assessments on Manning,
McDonald and Simmons for deficiency income tax for 1958. Manning et al, opposed
this assessment but the BIR still found them liable. Manning et al. appealed to the CTA,
which absolved them from any liability.
Held: The manifest intention of the parties to the trust agreement was, in sum and
substance, to treat the 24,700 shares of Reese as absolutely outstanding shares of
Reese's estate until they were fully paid. Such being the true nature of the 24,700
shares, their declaration as treasury stock dividend in 1958 was a complete nullity and
plainly violative of public policy. A stock dividend, being one payable in capital stock,
cannot be declared out of outstanding corporate stock, but only from retained earnings.
A stock dividend always involves a transfer of surplus (or profit) to capital stock. A stock
dividend is a conversion of surplus or undivided profits into capital stock, which is
distributed to stockholders in lieu of a cash dividend.
Facts:
 1952 - Mantrasco had an authorized capital stock of P2.5M divided into 25,000
common shares. 24,700 of these shares are owned by Julius Reese while the
rest, at 100 each, are owned by Manning, McDonald & Simmons.
 February 29, 1958 - a trust agreement was executed between Reese,
Mantrasco, Ross, Selph, carrascoso & Janda law firm, Manning, McDonald
and Simmons. Said agreement was entered into because of Reese’s desire
that Mantrasco and Mantrasoc’s 2 subsidiaries, Mantrasco Guam and Port
Motors, to continue under the management of Manning, McDonald and
Simmons upon his [Reese] death.
 October 19, 1954 - Reese died. However, the projected transfer of his shares
in the name of Mantrasco could not be immediately effected for lack of
sufficient funds to cover the initial payment on the shares.
 February 2, 1955 - after Mantrasco made a partial payment of Reese's shares,
the certificate for the 24,700 shares in Reese's name was cancelled and a
new certificate was issued in the name of Mantrasco. Also, new certificate was
endorsed to the law firm of Ross, Selph, Carrascoso and Janda, as trustees
for and in behalf of Mantrasco.
 December 22, 1958 - a resolution was passed during a special meeting of
Mantrasco stockholders.
 November 25, 1963 - entire purchase price of Reese's interest in Mantrasco
was finally paid in full by Mantrasco.
 May 4, 1964 - trust agreement was terminated and the trustees delivered to
Mantrasco all the shares which they were holding in trust.
 September 14, 1962 - BIR ordered an examination of Mantrasco’s books. This
examination disclosed that:
1. as of December 31, 1958 the 24,700 shares declared as dividends had
been proportionately distributed to Manning, McDonald & Simmons,
representing a total book value or acquisition cost of P7,973,660
2. Manning, McDonald & Simmons failed to declare the said stock dividends
as part of their taxable income for the year 1958
 Thus, BIR examiners concluded that the distribution of Reese's shares as
stock dividends was in effect a distribution of the "asset or property of
the corporation as may be gleaned from the payment of cash for the
redemption of said stock and distributing the same as stock dividend."
 April 14, 1965 - Commissioner of Internal Revenue issued notices of
assessment for deficiency income taxes to Manning, McDonald & Simmons
for the year 1958.
 Manning, McDonald & Simmons opposed said assessments. BIR still held
them liable for these assessments.
 Manning, McDonald & Simmons appealed to the CTA.
 CTA: absolved Manning, McDonald & Simmons from any liability on the
ground that their respective 1/3 interest in Mantrasco remained the same
before and after the declaration of stock dividends and only the number
of shares held by each of them changed.
Issues:
1. WON the shares are treasury shares [NO]
2. WON Manning, McDonald & Simmons should pay for deficiency income taxes
[YES]
Ratio:
1. Treasury shares are stocks issued and fully paid for and re-acquired by
the corporation either by purchase, donation, forfeiture or other means.
 Treasury shares are therefore issued shares, but being in the treasury they
do not have the status of outstanding shares. Consequently, although a
treasury share, not having been retired by the corporation re-acquiring
it, may be re-issued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends,
because dividends cannot be declared by the corporation to itself, nor in the
meetings of the corporation as voting stock, for otherwise equal
distribution of voting powers among stockholders will be effectively lost and
the directors will be able to perpetuate their control of the corporation, though
it still represents a paid-for interest in the property of the corporation.
 In this case, such essential features of a treasury share are lacking
in the former shares of Reese.
 The manifest intention of the parties to the trust agreement was, in
sum and substance, to treat the 24,700 shares of Reese as absolutely
outstanding shares of Reese's estate until they were fully paid. Such
being the true nature of the 24,700 shares, their declaration as treasury
stock dividend in 1958 was a complete nullity and plainly violative
of public policy. A stock dividend, being one payable in capital
stock, cannot be declared out of outstanding corporate stock, but
only from retained earnings.
Nature of a stock dividend
 A stock dividend always involves a transfer of surplus (or profit) to capital
stock.
 A stock dividend is a conversion of surplus or undivided profits into capital
stock, which is distributed to stockholders in lieu of a cash dividend.
2. The ultimate purpose which the parties to the trust agreement aimed to
realize is to make Manning, McDonalds & Simmons the sole owners of
Reese’s interest in Mantrasco by utilizing the periodic earnings of
Mantrasco and its subsidiaries to directly subsidize their purchase of
said interests and by making it appear that they have not received any
income from those firms when, in fact, by the formal declaration of non-
existent stock dividends in the treasury they secured to themselves the means
to turn around as full owners of Reese’s shares.
 Manning, McDonald & Simmons, using the trust instrument as a
convenient technical device, bestowed unto themselves the full worth and
value of Reese's corporate holdings with the use of the very earnings of
the companies.
 Such package device, obviously not designed to carry out the usual stock
dividend purpose of corporate expansion reinvestment but exclusively for
expanding the capital base of Manning, McDonald & Simmons in
Mantrasco, cannot be allowed to deflect their responsibilities toward our
income tax laws.
 All these amounts are subject to income tax as being a flow of cash
benefits to Manning, McDonald & Simmons.
Commissioner’s assessment is erroneous
 Commissioner should not have assessed the income tax on the total
acquisition cost of the alleged treasury stock dividends in 1 lump sum.
 The record shows that the earnings of Mantrasco over a period of years
were used to gradually wipe out the holdings of Reese.
 Consequently, those earnings should be taxed for each of the
corresponding years when payments were made to Reese’s estate on
account of his 24,700 shares.
Dispositive: CTA judgment set aside. Case remanded to the CTA for further
proceedings for the recomputation of the income tax liabilities of Manning, McDonald &
Simmons.
CASH DIVIDEND
BACHRACH VS. SEIFERT AND ELIANOFF
Facts:
The deceased E. M. Bachrach, who left no forced heir except his widow Mary
McDonald Bachrach, in his last will and testament made various legacies in cash and
willed the remainder of his estate. The estate of E. M. Bachrach, as owner of 108,000
shares of stock of the Atok-Big Wedge Mining Co., Inc., received from the latter
54,000 shares representing 50 per cent stock dividend on the said 108,000 shares.
On June 10, 1948, Mary McDonald Bachrach, as usufructuary or life tenant of the
estate, petitioned the lower court to authorize the Peoples Bank and Trust Company,
as administrator of the estate of E. M. Bachrach, to transfer to her the said 54,000
shares of stock dividend by indorsing and delivering to her the corresponding
certificate of stock, claiming that said dividend, although paid out in the form of stock,
is fruit or income and therefore belonged to her as usufructuary or life tenant. Sophie
Siefert and Elisa Elianoff, legal heirs of the deceased, opposed said petition on the
ground that the stock dividend in question was not income but formed part of the
capital and therefore belonged not to the usufructuary but to the remainderman. While
appellants admit that a cash dividend is an income, they contend that a stock dividend
is not, but merely represents an addition to the invested capital.
Issue:
Whether or not a dividend is an income and whether it should go to the usufructuary.
Held:
The usufructuary shall be entitled to receive all the natural, industrial, and civil fruits of
the property in usufruct. The 108,000 shares of stock are part of the property in
usufruct. The 54,000 shares of stock dividend are civil fruits of the original investment.
They represent profits, and the delivery of the certificate of stock covering said
dividend is equivalent to the payment of said profits. Said shares may be sold
independently of the original shares, just as the offspring of a domestic animal may be
sold independently of its mother. If the dividend be in fact a profit, although declared
in stock, it should be held to be income. A dividend, whether in the form of cash or
stock, is income and, consequently, should go to the usufructuary, taking into
consideration that a stock dividend as well as a cash dividend can be declared only
out of profits of the corporation, for if it were declared out of the capital it would be a
serious violation of the law.
Under the Massachusetts rule, a stock dividend is considered part of the capital and
belongs to the remainderman; while under the Pennsylvania rule, all earnings of a
corporation, when declared as dividends in whatever form, made during the lifetime of
the usufructuary, belong to the latter. The Pennsylvania rule is more in accord with
our statutory laws than the Massachusetts rule.
WISE & CO VS. MEER
Facts: On June 1, 1937, Manila Wine Merchants, Ltd., a Hongkong company, was
liquidated and its capital stock was distributed to its stockholders, one of which is the
petitioner. As part of its liquidation, the corporation was sold to Manila Wine
Merchants., Inc. for Php400,000. The said earnings, declared as dividends, were
distributed to its stockholders. The Hongkong company then paid the income tax for
the entire earnings. As a result of the sale of its business and assets, a surplus was
realized by the Hongkong company after deducting the dividends. This surplus was
also distributed to its stockholders. The Hongkong company also paid the income tax
for the said surplus. The petitioners then filed their respective income tax returns. The
respondent Commissioner, then, made a deficiency assessment charging the
individual stockholders for taxes on the shares distributed to them despite the fact that
income tax was already paid by the Hongkong company. The petitioners paid the
assessed amount in protest. The lower courts ruled in favor of the Commissioner of
Internal Revenue, hence, this action.
Issue(s):
1. Whether the amount received by the petitioners were ordinary dividends or
liquidating dividends.
2. Whether such dividends were taxable or not.
3. Whether or not the profits realized by the non-resident alien individual appellants
constitute “income from the Philippines” considering that the sale took place outside
the Philippines.
Held:
1. The dividends are liquidating dividends or payments for surrendered or
relinquished stock in a corporation in complete liquidation. It was stipulated in the
deed of sale that the sale and transfer of the corporation shall take effect on June 1,
1937 while distribution took place on June 8. They could not consistently deem all the
business and assets of the corporation sold as of June 1, 1937, and still say that said
corporation, as a going concern, distributed ordinary dividends to them thereafter.
2. Yes. Petitioners received the said distributions in exchange for the surrender and
relinquishment by them of their stock in the liquidated corporation. That money in the
hands of the corporation formed a part of its income and was properly taxable to it
under the Income Tax Law. When the corporation was dissolved in the process of
complete liquidation and its shareholders surrendered their stock to it and it paid the
sums in question to them in exchange, a transaction took place. The shareholder who
received the consideration for the stock earned received that money as income of his
own, which again was properly taxable to him under the Income Tax Law.
3. The contention of the petitioners that the earnings cannot be considered as income
from the Philippines because the sale was made outside the Philippines and is not
subject to Philippine tax law is untenable. At the time of the sale, the Hongkong
company was engage in its business in the Philippines. Its successor was a domestic
corporation and doing business also in the Philippines. It must be taken into
consideration that the Hongkong company was incorporated for the purpose of
carrying business in the Philippine Islands. Hence, its earnings, profits and assets,
including those from whose proceeds the distribution was made, had been earned
and acquired in the Philippines. It is clear that the distributions in questions were
income “from Philippine sources”, hence, taxable under Philippine law.
CIR VS. CA 301 SCRA 152
301 SCRA 152 – Business Organization – Corporation Law – Trust Fund Doctrine
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC) had a total
shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495
shares which were of original issue when the corporation was founded and 134,659
shares as stock dividend declarations. So in 1964 when Soriano died, half of the
shares he held went to his wife as her conjugal share (wife’s “legitime”) and the other
half (92,577 shares, which is further broken down to 25,247.5 original issue shares
and 82,752.5 stock dividend shares) went to the estate. For sometime after his death,
his estate still continued to receive stock dividends from ASC until it grew to at least
108,000 shares.
In 1968, ASC through its Board issued a resolution for the redemption of shares from
Soriano’s estate purportedly for the planned “Filipinization” of ASC. Eventually,
108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was
conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an
assessment against ASC for deficiency withholding tax-at-source. The CIR explained
that when the redemption was made, the estate profited (because ASC would have to
pay the estate to redeem), and so ASC would have withheld tax payments from the
Soriano Estate yet it remitted no such withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate because it
redeemed the said shares for purposes of “Filipinization” of ASC and also to reduce
its remittance abroad.
ISSUE: Whether or not ASC’s arguments are tenable.
HELD: No. The reason behind the redemption is not material. The proceeds from a
redemption is taxable and ASC is duty bound to withhold the tax at source. The
Soriano Estate definitely profited from the redemption and such profit is taxable, and
again, ASC had the duty to withhold the tax. There was a total of 108,000 shares
redeemed from the estate. 25,247.5 of that was original issue from the capital of ASC.
The rest (82,752.5) of the shares are deemed to have been from stock dividend
shares. Sale of stock dividends is taxable. It is also to be noted that in the absence
of evidence to the contrary, the Tax Code presumes that every distribution of
corporate property, in whole or in part, is made out of corporate profits such as
stock dividends.
It cannot be argued that all the 108,000 shares were distributed from the capital of
ASC and that the latter is merely redeeming them as such. The capital cannot be
distributed in the form of redemption of stock dividends without violating the
trust fund doctrine — wherein the capital stock, property and other assets of
the corporation are regarded as equity in trust for the payment of the corporate
creditors. Once capital, it is always capital. That doctrine was intended for the
protection of corporate creditors
AFISCO INSURANCE CORP VS. CA
Facts: AFISCO and 40 other non-life insurance companies entered into a Quota
Share Reinsurance Treaties with Munich, a non-resident
foreigninsurance corporation, to cover for All Risk Insurance Policies over machinery
erection, breakdown and boiler explosion. The treaties required petitioners to form a
pool, to which AFISCO and the others complied. On April 14, 1976, the pool of
machinery insurers submitted a financial statement and filed an “Information Return of
Organization Exempt from Income Tax” for the year ending 1975, on the basis of
which, it was assessed by the commissioner of Internal Revenue deficiency corporate
taxes. A protest was filed but denied by the CIR.
Petitioners contend that they cannot be taxed as a corporation, because (a) the
reinsurance policies were written by them individually and separately, (b) their liability
was limited to the extent of their allocated share in the original risks insured and not
solidary, (c) there was no common fund, (d) the executive board of the pool did not
exercise control and management of its funds, unlike the board of a corporation, (e)
the pool or clearing house was not and could not possibly have engaged in the
business of reinsurance from which it could have derived income for itself. They
further contend that remittances to Munich are not dividends and to subject it to tax
would be tantamount to an illegal double taxation, as it would result to taxing the
same premium income twice in the hands of the same taxpayer. Finally, petitioners
argue that the government’s right to assess and collect the subject Information Return
was filed by the pool on April 14, 1976. On the basis of this return, the BIR telephoned
petitioners on November 11, 1981 to give them notice of its letter of assessment
dated March 27, 1981. Thus, the petitioners contend that the five-year prescriptive
period then provided in the NIRC had already lapsed, and that the internal revenue
commissioner was already barred by prescription from making an assessment.
Issue: WON the pool is taxable as a corporation
Held: A pool is considered a corporation for taxation purposes. Citing the case of
Evangelista v. CIR, the court held that Sec. 24 of the NIRC covered these
unregistered partnerships and even associations or joint accounts, which had no legal
personalities apart from individual members. Further, the pool is a partnership as
evidence by a common fund, the existence of executive board and the fact that while
the pool is not in itself, a reinsurer and does not issue any insurance policy, its work
isindispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their
premiums.
As to the claim of double taxation, the pool is a taxable entity distinct from the
individual corporate entities of the ceding companies. The tax on its income is
obviously different from the tax on the dividends received by the said companies.
Clearly, there is no double taxation.
As to the argument on prescription, the prescriptive period was totaled under the
Section 333 of the NIRC, because the taxpayer cannot be located at the address
given in the information return filed and for which reason there was delay in sending
the assessment. Further, the law clearly states that the prescriptive period will be
suspended only if the taxpayer informs the CIR of any change in the address.
CIR VS. GOODYEAR PHILS INC.
Facts: Respondent is a domestic corporation duly organized and existing under the
laws of the Philippines, and registered with the Bureau of Internal Revenue (BIR) as a
large taxpayer with Taxpayer Identification Number 000-409-561-000.6 On August 19,
2003, the authorized capital stock of respondent was increased from
P400,000,000.00 divided into 4,000,000 shares with a par value of P100.00 each, to
P1,731,863,000.00 divided into 4,000,000 common shares and 13,318,630 preferred
shares with a par value of P100.00 each. Consequently, all the preferred shares were
solely and exclusively subscribed by Goodyear Tire and Rubber Company (GTRC),
which was a foreign company organized and existing under the laws of the State of
Ohio, United States of America (US) and is unregistered in the Philippines.
On May 30, 2008, the Board of Directors of respondent authorized the redemption of
GTRC's 3,729,216 preferred shares on October 15, 2008 at the redemption price of
P470,653,914.00, broken down as follows: P372,921,600.00 representing the
aggregate par value and P97,732,314.00, representing accrued and unpaid
dividends.
On October 15, 2008, respondent filed an application for relief from double taxation
before the International Tax Affairs Division of the BIR to confirm that the redemption
was not subject to Philippine income tax, pursuant to the Republic of the Philippines
(RP) - US Tax Treaty.9 This notwithstanding, respondent still took the conservative
approach, and thus, withheld and remitted the sum of P14,659,847.10 to the BIR on
November 3, 2008, representing fifteen percent (15%) FWT, computed based on the
difference of the redemption price and aggregate par value of the shares.
On October 21, 2010, respondent filed an administrative claim for refund or issuance
of TCC, representing 15% FWT in the sum of P14,659,847.10 before the BIR.
Thereafter, or on November 3, 2010, it filed a judicial claim, by way of petition for
review, before the CTA, docketed as C.T.A. Case No. 8188.
ISSUE: whether or not the CTA En Banc correctly ruled that the gain derived by
GTRC was not subject to 15% FWT on dividends
HELD:
For another, petitioner asserts that the net capital gain derived by GTRC from the
redemption of its 3,729,216 preferred shares should be subject to 15% FWT on
dividends; She claims that while the payment of the original subscription price could
not be taxed as it represented a return of capital, the additional amount, however, or
the component of the redemption price representing the amount of P97,732,314.00
should not be treated as a mere premium and part of the subscription price, but as
accumulated dividend in arrears, and, hence, subject to 15% FWT. [39]
Again, the assertions are wrong.
The imposition of 15% FWT on intercorporate dividends received by a non-resident
foreign corporation is found in Section 28 (B) (5) (b) of the Tax Code which reads:
SEC. 28. Rates of Income Tax on Foreign Corporations. –
xxxx
(B) Tax on Nonresident Foreign Corporation. –
xxxx
(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. –
(b) Intercorporate Dividends. – A final withholding tax at the rate of fifteen percent
(15%) is hereby imposed on the amount of cash and/or property dividends received
from a domestic corporation, which shall be collected and paid as provided in Section
57 (A) of this Code, subject to the condition that the country in which the nonresident
foreign corporation is domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to twenty percent (20%), which represents the difference between the
regular income tax of thirty-five percent (35%) and the fifteen percent (15%) tax on
dividends as provided in this subparagraph: Provided, That effective January 1, 2009,
the credit against the tax due shall be equivalent to fifteen percent (15%), which
represents the difference between the regular income tax of thirty percent (30%) and
the fifteen percent (15%) tax on dividends;
xxxx (Emphasis and underscoring supplied)
It must be noted, however, that GTRC is a non-resident foreign corporation,
specifically a resident of the US. Thus, pursuant to the cardinal principle that treaties
have the force and effect of law in this jurisdiction,[40] the RP-US Tax Treaty
complementarily governs the tax implications of respondent's transactions with
GTRC.
Under Article 11 (5)[41] of the RP-US Tax Treaty, the term "dividends" should be
understood according to the taxation law of the State in which the corporation making
the distribution is a resident, which, in this case, pertains to respondent, a resident of
the Philippines. Accordingly, attention should be drawn to the statutory definition of
what constitutes "dividends," pursuant to Section 73 (A)[42] of the Tax Code which
provides that "[t]he term 'dividends' x x x means any distribution made by a
corporation to its shareholders out of its earnings or profits and payable to its
shareholders, whether in money or in other property."
In light of the foregoing, the Court therefore holds that the redemption price
representing the amount of P97,732,314.00 received by GTRC could not be treated
as accumulated dividends in arrears that could be subjected to 15% FWT. Verily,
respondent's AFS covering the years 2003 to 2009 show that it did not have
unrestricted retained earnings, and in fact, operated from a position of deficit. [43]Thus,
absent the availability of unrestricted retained earnings, the board of directors of
respondent had no power to issue dividends.[44] Consistent with Section 73 (A) of the
Tax Code, this rule on dividend declaration – i.e., that it is dependent upon the
availability of unrestricted retained earnings – was further edified in Section 43 of The
Corporation Code of the Philippines[45] which reads:
Section 43. Power to Declare Dividends. – The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings which
shall be payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided,That any cash dividends due on delinquent
stock shall first be applied to the unpaid balance on the subscription plus costs and
expenses, while stock dividends shall be withheld from the delinquent stockholder
until his unpaid subscription is fully paid: Provided, further, That no stock dividend
shall be issued without the approval of stockholders representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called
for the purpose.
x x x x (Emphasis and underscoring supplied)
It is also worth mentioning that one of the primary features of an ordinary dividend is
that the distribution should be in the nature of a recurring return on stock [46] which,
however, does not obtain in this case. As aptly pointed out by the CTA En Banc, the
amount of P97,732,314.00 received by GTRC did not represent a periodic distribution
of dividend, but rather a payment by respondent for the redemption [47] of GTRC's
3,729,216 preferred shares. In Wise & Co., Inc. v. Meer:[48]
The amounts thus distributed among the plaintiffs were not in the nature of a recurring
return on stock — in fact, they surrendered and relinquished their stock in return for
said distributions, thus ceasing to be stockholders of the Hongkong Company, which
in turn ceased to exist in its own right as a going concern during its more or less brief
administration of the business as trustee for the Manila Company, and finally
disappeared even as such trustee.
"The distinction between a distribution in liquidation and an ordinary dividend
is factual; the result in each case depending on the particular circumstances of the
case and the intent of the parties. If the distribution is in the nature of a recurring
return on stock it is an ordinary dividend. However, if the corporation is really winding
up its business or recapitalizing and narrowing its activities, the distribution may
properly be treated as in complete or partial liquidation and as payment by the
corporation to the stockholder for his stock. The corporation is, in the latter instances,
wiping out all parts of the stockholders' interest in the company * * * ." (Montgomery,
Federal Income Tax Handbook [1938-1939], 258 x x x)[49] (Emphases and
underscoring supplied)
All told, the amount of P97,732,314.00 received by GTRC from respondent for the
redemption of its 3,729,216 preferred shares were not accumulated dividends in
arrears. Contrary to petitioner's claims, it is therefore not subject to 15% FWT on
dividends in accordance with Section 28 (B) (5) (b) of the Tax Code.
DEBT INSTRUMENTS THAT ARE NOT DEPOSIT SUBSTITUTES
BANCO DE ORO VS. REPUBLIC
This case involves P35 billion worth of 10-year zero-coupon treasury bonds issued by
the Bureau of Treasury (BTr) denominated as the Poverty Eradication and Alleviation
Certificates or the PEACe Bonds. These PEACe Bonds would initially be purchased
by a special purpose vehicle on behalf of Caucus of Development NGO Networks
(CODE-NGO), repackaged and sold at a premium to investors. The net proceeds
from the sale will be used to endow a permanent fund to finance meritorious activities
and projects of accredited non-government organizations (NGOs) throughout the
country. In relation to this, CODE-NGO wrote a letter to the Bureau of Internal
Revenue (BIR) to inquire as to whether the PEACe Bonds will be subject to
withholding tax of 20%. The BIR issued several rulings beginning with BIR Ruling
No.020-2001 (issued on May 31, 2001) and was subsequently reiterated its points in
BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120.
The rulings basically say that in determining whether financial assets such as a debt
instrument are deposit substitute, the “20 or more individual or corporate lenders rule”
should apply. Likewise, the “at any one time” stated in the rules should be construed
as “at the time of the original issuance.”
With this BTr made a public offering of the PEACe Bonds to the Government
Securities Eligible Dealers (GSED) wherby RCBC won as the highest bidder for
approximately 10.17 billion, resulting in a discount of approximately 24.83 billion.
RCBC Capital Capital entered into an underwriting agreement with CODE-NGO,
whereby RCBC Capital was appointed as the Issue Manager and Lead Underwriter
for the offering of the PEACe Bonds.
In October 7, 2011, BIR issued BIR RULING NO. 370-2011 in response to the query
of the Secretary of Finance as to the proper tax treatment of the discounts and
interest derived from Government Bonds. It cited three other rulings issued in 2004
and 2005. The above ruling states that the all treasury bonds (including PEACe
Bonds), regardless of the number of purchasers/lenders at the time of
origination/issuance are considered deposit substitutes. In the case of zero-coupon
bonds, the discount (i.e. difference between face value and purchase
price/discounted value of the bond) is treated as interest income of the
purchaser/holder.
Ruling:
The PEACe Bonds, according to the SC, requires further information for proper
determination of whether these bonds are within the purview of deposit substitutes.
The Court noted that it may seem that the lender is only CODE-NGO through RCBC.
However, the underwriting agreement reveals that the entire 35billion worth of zero-
coupon bonds were sourced directly from the undisclosed number of investors. These
are the same investors to whom RCBC Capital distributed the PEACe Bonds all at
the time of the origination or issuance. Hence, until there is information as to whether
the PEACe Bonds are found within the coverage of deposit substitutes, the proper
procedure for the BIR is to collect the unpaid final withholding tax directly from RCBC
Capital/ CODE-NGO, or any lender if such be the case.
The court also noted that according to the NIRC, Section 24, interest income received
by individuals from long term deposits or investments with a holding period of not less
than five years is exempt from final tax.
The decision provided the definition of deposit substitute 1997 National
Internal Revenue Code which placed the 20-lender rule. In particular, Section 22 (Y)
states that a debt instrument shall mean “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) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower’s own account” The
determination as to whether a deposit substitute will be imposed with 20% final
withholding tax rests on the number of lenders.
When there are 20 or more lenders/investors in a transaction for a specific
bond issue, the seller is required to withhold the 20% final income tax on the imputed
interest income from the bonds. The SC cited Sections 24(B) (1), 27(D)(1), and
28(A)(7) of the 1997 NIRC. These provisions state the imposition of a final tax rate of
20% upon the amount of interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes. On the other hand, for instruments
not considered as deposit substitutes, these will be subjected to regular income tax.
The prevailing provision is Section 32(A). Hence, should the deposit substitute
involves less than 20 lenders in a transaction, the income is considered as “income
derived from whatever source”.
The “gain” referred to in Section 32 (A) pertains to that realized from the trading of
bonds at maturity rate or the gain realized by the last holder of the bonds when
redeemed at maturity. In the case of discounted instruments, like the zero-coupon
bonds, the trading gain shall be the excess of the selling price over the book value or
accreted value of the instruments.
As for the BIR Rulings issued in 2001, the SC finds that the interpretation of
the phrase “at any one time”, is “to mean at the point of origination alone is unduly
restrictive” On the other hand, the 2011 BIR Ruling which relied on the 2004 and 2005
BIR Rulings is void for creating a distinction between government bonds and those
issued by private corporations, when there is none in the law. Further, it completely
disregarding the 20-lender rule under the NIRC since it says, “all treasury bonds
regardless of the number of purchasers/lenders at the time of origination/issuance are
considered deposit substitutes”
BANCO DE ORO VS. REPUBLIC (RESOLUTION)
SITUS OF TAXATION
CIR VS. ANGLO CALIFORNIA NATIONAL BANK
Respondent Calamba Sugar Estate Inc., herein represented by its trustee, the Anglo
California National Bank, is a foreign corporation organized and existing under the
laws of the State of California, U. S. A., duly licensed (on May 18, 1946) to do
business in the Philippines. It has consistently filed its income tax returns here
through its resident attorney-in-fact. On May 14, 1956, the petitioner Collector of
Internal Revenue notified the corporation of an assessment for alleged deficiency
income taxes for the years 1953, 1954 and 1955 in the respective amounts of
P138,855.00, P131,759.00 and P393, 459.00, supposedly based upon capital gains
derived from the respondent's sale to the Pasumil Planters, Inc. of P250,000 shares
of the capital stock of the Pampanga Sugar Mills (a domestic corporation) and of a
promissory note, dated January 1, 1950, executed by the Pampanga Sugar Mills in
the sum of $500,000.00. In an appeal by the respondent from the ruling of the
Collector, the Court of Tax Appeals reversed said ruling and absolved the respondent
from liability.
This is an appeal by the Collector from that decision.
The parties stipulated that (a) the negotiations leading to the execution and
conclusion of the agreement of sale, dated January 16, 1953, between the
respondent corporation and the Pasumil Planters, Inc., took place in San Francisco,
California; (b) the payments on account of the sale were made by the Pasumil
Planters, Inc. at the same foreign city; and (c) the sale was made under and in
accordance with the laws of that State. From the evidence presented, it also appears
that on December 16, 1955, the Securities and Exchange Commission cancelled
respondent's license to transact business in the Philippines, and on December 30,
1955, the corporation was dissolved in accordance with the California law.
The sole issue is whether the capital gains obtained from the sale constituted income
from sources within or without the Philippines. It was the opinion of the Tax Court that
they were income derived from abroad, and not subject to income tax.
It is hardly disputable that although shares of stock of a corporation represent equities
that may consist of real as well as personal properties therein, they are considered
under applicable law and jurisprudence as intangible personal properties (see Art.
417 [2], Civil Code of the Philippines; Sec. 35, Act No. 1459). Section 24 of the
National Internal Revenue Codes levies income taxes on foreign corporations only on
income derived from sources within the Philippines; and with respect to capital gains
on the sale of personal properties, section 37 (e) of the same Tax Code deems the
place of sale as also that place or source of the capital gain:
"* * * Gains, profit, and income derived from the purchase of personal property within
and its sale without the Philippines or from the purchase of personal property without
and its sale within the Philippines, shall be treated as derived entirely from sources
within the country in which sold." (Italics supplied)
Construing the same provision of law (which is section 119 (e) of the 1934 Act, U.S.
I.R.C.), United States courts are in accord in disallowing the imposition of income
taxes by its government on capital gains where the sale takes place outside its
territorial jurisdiction. It is likewise the prevailing view that in ascertaining the place of
sale, the determination of when and where title to the goods passes from the seller to
the buyer is decisive (East Coast Oil Co. vs. Comm., 31 B.T.A. 588, aff'd 85 F. [2d]
322, cer. den-299 U.S. 608, 81 L. Ed. 449, 57 S.Ct. 234; also Disconto-
Gaesellcraft vs. U.S. Steel Corporation, 267 U.S. 22; Compañia General de Tabacos
de Filipinas vs. Collector, 279 U.S. 306, 73 L.Ed. 704, 49 S.Ct. 304).
In this case, it is admitted that the negotiation, perfection and consummation of the
contract of sale were all done in California, U.S.A. It follows that title to the shares of
stock passed from the vendor to the vendee at said place, from which time the
incidents of ownership were vested on the buyer.
The Collector argues that the situs of shares of stock of a corporation is considered to
be at the domicile of the latter, as held in some cases cited by him; but in the instant
problem, we are not concerned with the imposition of taxes upon the shares
themselves, but on a sale effected abroad that resulted in capital gains, for which
there is a specific provision of law (Sec. 37 [e] N.I.R.C.). As stated by the Tax Court,
there is a distinction between the situs of personal properties and the situs of the
income derived from the sale or exchange of such properties.
As to the contention that section 35 of the Corporation Law, (Act No. 1459) requires
the transfer to be noted and entered upon the books of the corporation, such
requirement does not invalidate the transfer between the parties nor is it essential to
vest title upon the vendee. The capital gains, now sought to be taxed, arose from the
severance of gain, from the investment occasioned by the transfer of title abroad and
not on account of any registration that might be effected later.
Wherefore, the judgment under review is hereby affirmed. No costs.
PHILIPPINE GUARANTY CO INC VS. CIR
TOPIC: Cession of the premiums taxable as income from sources within the
Philippines.
FACTS: The Philippine Guaranty Co., Inc., a domestic insurance company, entered
into reinsurance contracts, on various dates, with foreign insurance companies not
doing business in the Philippines. Petitioner thereby agreed to cede to the foreign
reinsurers a portion of the premiums on insurance it has originally underwritten in the
Philippines, in consideration for the assumption by the latter of liability on an
equivalent portion of the risks insured.
Said reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in
Manila and by the foreign reinsurers outside the Philippines.
Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross
income when it file its income tax returns. It did not withhold or pay tax on them.
Consequently, the CIR assessed against PETITIONER .withholding tax on the ceded
reinsurance premiums.
Petitioner protested the assessment on the ground that reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines are not
subject to withholding tax.
CTA: IN FAVOR OF RESPONDENT
ISSUE: Whether reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to tax
HELD: Yes. The reinsurance premiums are subject to tax.
The reinsurance contracts show that the transactions or activities that
constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against loses
arising from the original insurances in the Philippines were performed in the
Philippines.
Section 24 of the Tax Code subjects foreign corporations to tax on their
income from sources within the Philippine .“Sources” means the activity, property, or
service giving rise to the income. The original insurance undertakings took place in
the Philippines. It is not required that the foreign corporation be engaged in business
in the Philippines. What is controlling is no the place of business, but the place of
activity that created the income. Thus, the income is subject to income tax.
NOTE: The foreign insurers' place of business should not be confused with their
place of activity. Business should not be continuity and progression of
transactions while activity may consist of only a single transaction. An activity may
occur outside the place of business.
ALEXANDER HOWDEN & CO. VS CIR
FACTS:
1. In 1950 the Commonwealth Insurance Co., a domestic corporation, entered
into reinsurance contracts with 32 British insurance companies not engaged
in trade or business in the Philippines, whereby the former agreed to cede to
them a portion of the premiums on insurances on fire, marine and other risks
it has underwritten in the Philippines.
2. The reinsurance contracts were prepared and signed by the foreign
reinsurers in England and sent to Manila where Commonwealth Insurance
Co. signed them.
3. Alexander Howden & Co., Ltd., also a British corporation, represented the
British insurance companies.
4. Pursuant to the contracts, Commonwealth Insurance Co remitted
P798,297.47 to Alexander Howden & Co., Ltd., as reinsurance premiums.
5. In behalf of Alexander Howden & Co., Ltd., Commonwealth Insurance Co.
filed an income tax return declaring the sum of P798,297.47, with accrued
interest in the amount of P4,985.77, as Alexander Howden & Co., Ltd.'s
 gross income for calendar year 1951. It also paid the BIR P66,112.00
income tax.
6. On May 12, 1954, Alexander Howden & Co., Ltd. filed with the BIR a claim
for refund of the P66,112.00, later reduced to P65,115.00, because it
agreed to the payment of P977.00 as income tax on the P4,985.77
accrued interest.
7. A ruling of the CIR was invoked, stating that it exempted from withholding tax
reinsurance premiums received from domestic insurance companies by
foreign insurance companies not authorized to do business in the
Philippines.
8. Subsequently, petitioner. instituted an action in the CFI of Manila for the
recovery of the amount claimed. Tax Court denied the claim.
ISSUE#1: Are portions of premiums earned from insurances locally underwritten by a
domestic corporation, ceded to and received by non-resident foreign reinsurance
companies, thru a non-resident foreign insurance broker, pursuant to reinsurance
contracts signed by the reinsurers abroad but signed by the domestic corporation in
the Philippines, subject to income tax or not?
HELD: YES. Section 24 of the National Internal Revenue Code subjects to tax a non-
resident foreign corporation's income from sources within the Philippines.
RATIO:
• Appellants contends that the reinsurance premiums came from sources
outside the Philippines, for these reasons: (1) The contracts of reinsurance,
out of which the reinsurance premiums were earned, were prepared and
signed abroad (2) The reinsurers, not being engaged in business in the
Philippines, received the reinsurance premiums as income from their
business conducted in England and, as such, taxable in England; and, (3)
Section 37 of the Tax Code, enumerating what are income from sources
within the Philippines, does not include reinsurance premiums.
• 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, 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.
o In the first place, the reinsured, the liabilities insured and the
risks originally underwritten by Commonwealth Insurance Co.,
upon which the reinsurance premiums and indemnity were
based, were all situated in the Philippines.
o Secondly, contrary to appellants' view, the reinsurance contracts
were perfected in the Philippines, for Commonwealth
Insurance Co. signed them last in Manila.
o Thirdly, the parties to the reinsurance contracts in question
evidently intended Philippine law to govern. Article 11 thereof
provided for arbitration in Manila, and the contracts provided for the
use of Philippine currency as the medium of exchange and for the
payment of Philippine taxes.
• Section 24 of the Tax Code does not require a foreign corporation to be
engaged in business in the Philippines in order for its income from sources
within the Philippines to be taxable. It subjects foreign corporations not doing
business in the Philippines to tax for income from sources within the
Philippines. If by source of income is meant the business of the taxpayer,
foreign corporations not engaged in business in the Philippines would be
exempt from taxation on their income from sources within the Philippines.
• "Income" refers to the flow of wealth. Such flow, proceeded from the
Philippines. Such income enjoyed the protection of the Philippine
Government. As wealth flowing from within the taxing jurisdiction of the
Philippines and in consideration for protection accorded it by the Philippines,
said income should properly share the burden of maintaining the
government.
• Appellants further contend that reinsurance premiums not being among
those mentioned in Section 37 of the Tax Code as income from sources
within the Philippines, the same should not be treated as such. Section 37,
however, is not an all-inclusive enumeration. It states that "the following
items of gross income shall be treated as gross income from sources within
the Philippines." It does not state or imply that an income not listed therein is
necessarily from sources outside the Philippines.
• As to appellants' contention that reinsurance premiums constitute "gross
receipts" instead of "gross income", not subject to income tax, suffice it to
say that, "gross receipts" of amounts that do not constitute return of capital,
such as reinsurance premiums, are part of the gross income of a taxpayer.
At any rate, the tax actually collected in this case was computed not on the
basis of gross premium receipts but on the net premium income, that is, after
deducting general expenses, payment of policies and taxes.
ISSUE#2: whether or not reinsurance premiums are subject to withholding tax under
Section 54 in relation to Section 53 of the Tax Code.
HELD: Yes
RATIO:
Subsection (b) of Section 53 subjects to withholding tax the following: interest,
dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical gains,
profits, and income of any non-resident alien individual not engaged in trade or
business within the Philippines and not having any office or place of business therein.
Section 54, by reference, applies this provision to foreign corporations not engaged in
trade or business in the Philippines.
• Appellants maintain that reinsurance premiums are not "premiums" at all and
that they are not within the scope of "other fixed or determinable annual or
periodical gains, profits, and income"; that, therefore, they are not items of
income subject to withholding tax.
• SC disagrees with the contention. Since Section 53 subjects to withholding
tax various specified income, among them, "premiums", the generic
 connotation of each and every word or phrase composing the enumeration in tax liability was greatly reduced from P511,247 to P186,992 resulting in an
Subsection (b) thereof is income. Perforce, the word "premiums", which is overpayment of P324,255.
neither qualified nor defined by the law itself, should mean income and
should include all premiums constituting income, whether they be insurance On April 2, 1974, without awaiting the action of the Commissioner of Internal Revenue
or reinsurance premiums. on its claim, Smith Kline filed a petition for review with the Court of Tax Appeals.
• Assuming that reinsurance premiums are not within the word "premiums" in
Section 53, still they may be classified as determinable and periodical In its decision of March 21, 1980, the Tax Court ordered the Commissioner to refund
income under the same provision of law. Section 199 of the Income Tax the overpayment or grant a tax credit to Smith Kline. The Commissioner appealed to
Regulations defines fixed, determinable, annual and periodical income: this Court.
• Income is fixed when it is to be paid in amounts definitely pre-determined.
On the other hand, it is determinable whenever there is a basis of calculation The governing law is found in section 37 of the old National Internal Revenue Code,
by which the amount to be paid may be ascertained.The income need not be Commonwealth Act No. 466, which is reproduced in Presidential Decree No. 1158,
paid annually if it is paid periodically. That the length of time during which the the National Internal Revenue Code of 1977 and which reads:
payments are to be made may be increased or diminished in accordance
with someone's will or with the happening of an event does not make the
payments any the less determinable or periodical. ...
• Reinsurance premiums, therefore, are determinable and periodical income: "SEC. 37. Income from sources within the Philippines.
determinable, because they can be calculated accurately on the basis of the
reinsurance contracts; periodical, inasmuch as they were earned and
remitted from time to time. xxx xxx xxx
• Appellants' claim for refund, as stated, invoked a ruling of the CIR cited
rulings attempting to show that the prevailing administrative interpretation of
Sections 53 and 54 of the Tax Code exempted from withholding tax
reinsurance premiums ceded to non-resident foreign insurance companies. It "(b) Net income from sources in the Philippines. From the items of gross income
is asserted that since Sections 53 and 54 were "substantially re-enacted" by specified in subsection (a) of this section there shall be deducted the expenses,
Republic Acts 1065 , 1291, 1505, and 2343, when the said administrative losses, and other deductions properly apportioned or allocated thereto and a ratable
rulings prevailed, the rulings should be given the force of law under the part of any expenses, losses, or other deductions which can definitely be allocated to
principle of legislative approval by re-enactment. some item or class of gross income. The remainder, if any, shall be included in full as
net income from sources within the Philippines.
CIR VS. CA 1984
xxx xxx x x x."
This case is about the refund of a 1971 income tax amounting to P324,255. Smith
Revenue Regulations No. 2 of the Department of Finance contains the following
Kline and French Overseas Company, a multinational firm domiciled in Philadelphia,
provisions on the deductions to be made to determine the net income from Philippine
Pennsylvania, is licensed to do business in the Philippines. It is engaged in the
sources:
importation, manufacture and sale of pharmaceuticals, drugs and chemicals.

In its 1971 original income tax return, Smith Kline declared a net taxable income of
P1,489,277 (Exh. A) and paid P511,247 as tax due. Among the deductions claimed
from gross income was P501,040 ($77,060) as its share of the head office overhead
expenses. However, in its amended return filed on March 1, 1973, there was an
overpayment of P324,255 "arising from underdeduction of home office overhead"
(Exh. E). It made a formal claim for the refund of the alleged overpayment.
It appears that sometime in October, 1972, Smith Kline received from its international
independent auditors, Peat, Marwick, Mitchell and Company, an authenticated
certification to the effect that the Philippine share in the unallocated overhead
expenses of the main office for the year ended December 31, 1971 was actually
$219,547 (P1,427,484). It further stated in the certification that the allocation was
made on the basis of the percentage of gross income in the Philippines to gross
income of the corporation as a whole. By reason of the new adjustment, Smith Kline's
"SEC. 160. Apportionment of deductions. - From the items specified in section 37(a)
as being derived specifically from sources within the Philippines there shall be
deducted the expenses, losses, and other deductions properly apportioned or
allocated thereto and a ratable part of any other expenses, losses or deductions
which cannot definitely be allocated to some item or class of gross income. The
remainder shall be included in full as net income from sources within the Philippines.
The ratable part is based upon the ratio of gross income from sources within the
Philippines to the total gross income.
"Example: A non-resident alien individual whose taxable year is the calendar year,
derived gross income from all sources for 1939 of P180,000, including therein:

Interest on bonds of a domestic
P 9,000
corporation
Dividends on stock of a domestic
4,000
Corporation
Royalty for the use of patents within
12,000
the Philippines
Gain from sale of real property
11,000
located within the Philippines
Total P36,000
that is, one-fifth of the total gross income was from sources within the Philippines. The
remainder of the gross income was from sources without the Philippines, determined
under section 37(c).
"The expenses of the taxpayer for the year amounted to P78,000. Of these expenses
the amount of P8,000 is properly allocated to income from sources within the
Philippines and the amount of P40,000 is properly allocated to income from sources
without the Philippines.
"The remainder of the expense, P30,000, cannot be definitely allocated to any class
of income. A ratable part thereof, based upon the' relation of gross income from
sources within the Philippines to the total gross income, shall be deducted in
computing net income from sources within the Philippines. Thus, there are deducted
from the P36,000 of gross income from sources within the Philippines expenses
amounting to P14,000 [representing P8,000 properly apportioned to the income from
sources within the Philippines and P6,000, a ratable part (one-fifth) of the expenses
which could not be allocated to any item or class of gross income]. The remainder
P22,000, is the net income from sources within the Philippines."
From the foregoing provisions, it is manifest that where an expense is clearly related
to the production of Philippine-derived income or to Philippine operations (e.g.
salaries of Philippine personnel, rental of office building in the Philippines), that
expense can be deducted from the gross income acquired in the Philippines without
resorting to apportionment.
The overhead expenses incurred by the parent company in connection with finance,
administration, and research and development, all of which directly benefit its
branches all over the world, including the Philippines, fall under a different category
however. These are items which cannot be definitely allocated or identified with the
operations of the Philippine branch. For 1971, the parent company of Smith Kline
spent $1,077,739. Under section 37(b) of the Revenue Code and section 160 of the
regulations, Smith Kline can claim as its deductible share a ratable part of such
expenses based upon the ratio of the local branch's gross income to the total gross
income, worldwide, of the multinational corporation.
In his petition for review, the Commissioner does not dispute the right of Smith Kline
to avail itself of section 37(b) of the Tax Code and section 160 of the regulations. But
the Commissioner maintains that such right is not absolute and that as there exists a
contract (in this case a service agreement) which Smith Kline has entered into with its
home office, prescribing the amount that a branch can deduct as its share of the main
office's overhead expenses, that contract is binding.
The Commissioner contends that since the share of the Philippine branch has been
fixed at $77,060, Smith Kline itself cannot claim more than the said amount. To allow
Smith Kline to deduct more than what was expressly provided in the agreement would
be to ignore its existence. It is a cardinal rule that a contract is the law between the
contracting parties and the stipulations therein must be respected unless these are
proved to be contrary to law, morals, good customs and public policy. There being
allegedly no showing to the contrary, the provisions thereof must be followed.
The Commissioner also argues that the Tax Court erred in relying on the certification
of Peat, Marwick, Mitchell and Company that Smith Kline is entitled to deduct
P1,427,484 ($219,547) as its allotted share and that Smith Kline has not presented
any evidence to show that the home office expenses chargeable to Philippine
operations exceeded $77,060.
On the other hand, Smith Kline submits that the contract between itself and its home
office cannot amend tax, laws and regulations. The matter of allocated expenses
which are deductible under the law cannot be the subject of an agreement between
private parties nor can the Commissioner acquiesce in such an agreement.
Smith Kline had to amend its return because it is of common knowledge that audited
financial statements are generally completed three or four months after the close of
the accounting period. There being no financial statements yet when the certification
of January 11, 1972 was made, the treasurer could not have correctly computed
Smith Kline's share in the home office overhead expenses in accordance with the
gross income formula prescribed in section 160 of the Revenue Regulations. What
the treasurer certified was a mere estimate.
Smith Kline likewise submits that it has presented ample evidence to support its claim
for refund. To this end, it has presented before the Tax Court the authenticated
statement of Peat, Marwick, Mitchell and Company to show that since the gross
income of the Philippine branch was P7,143,155 ($1,098,617) for 1971 as per audit
report prepared by Sycip, Gorres, Velayo and Company, and the gross income of the
corporation as a whole was $6,891,052, Smith Kline's share at 15.94% of the home
office overhead expenses was P1,427,484 ($219,547) (Exh. G to G-2, BIR Records,
4-5).
Clearly, the weight of evidence bolsters its position that the amount of P1,427,484 Issue: Whether or not respondent is liable to pay the income, branch profit
represents the correct ratable share, the same having been computed pursuant to remittance, and contractor’s taxes assessed by petitioner.
section 37(b) and section 160.
Held:
In a manifestation dated July 19, 1983, Smith Kline declared that with respect to its
share of the head office overhead expenses in its income tax returns for the A contractor’s tax is imposed in the National Internal Revenue Code (NIRC) as
years 1973to 1981, it deducted its ratable share of the total Overhead expenses of its follows:
head office for those years as computed by the independent auditors hired by the “Sec. 205. Contractors, proprietors or operators of dockyards, and others.—A
parent company in Philadelphia, Pennsylvania, U. S. A. as soon as said computations contractor’s tax of four percent of the gross receipts is hereby imposed on proprietors
were made available to it. 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:
We hold that Smith Kline's amended 1971 return is in conformity with the law and
regulations. The Tax Court correctly held that the refund or credit of the resulting
(a) General engineering, general building and specialty contractors, as defined in
overpayment is in order.
Republic Act No. 4566;
WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs.
(q) Other independent contractors. The term “independent contractors” includes
SO ORDERED. persons (juridical or natural) not enumerated above (but not including individuals
subject to the occupation tax under the Local Tax Code) whose activity consists
CIR VS. MARUBENI CORP 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
Respondent Marubeni Corporation is a foreign corporation organized and existing
headquarters established in the Philippines by multinational corporations, including
under the laws of Japan. It is engaged in general import and export trading, financing
their alien executives, and which headquarters do not earn or derive income from the
and the construction business. It is duly registered to engage in such business in the
Philippines and which act as supervisory, communications and coordinating centers
Philippines and maintains a branch office in Manila.
for their affiliates, subsidiaries or branches in the Asia-Pacific Region.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a
Under the afore-quoted provision, an independent contractor is a person whose
letter of authority to examine the books of accounts of the Manila branch office of
activity consists essentially of the sale of all kinds of services for a fee, regardless of
respondent corporation for the fiscal year ending March 1985. In the course of the
whether or not the performance of the service calls for the exercise or use of the
examination, petitioner found respondent to have undeclared income from two (2)
physical or mental faculties of such contractors or their employees. The word
contracts in the Philippines, both of which were completed in 1984. One of the
“contractor” refers to a person who, in the pursuit of independent business,
contracts was with the National Development Company (NDC) in connection with the
undertakes to do a specific job or piece of work for other persons, using his own
construction and installation of a wharf/port complex at the Leyte Industrial
means and methods without submitting himself to control as to the petty details.
Development Estate in the municipality of Isabel, province of Leyte. The other
contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the
A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is
construction of an ammonia storage complex also at the Leyte Industrial Development
generally in the nature of an excise tax on the exercise of a privilege of selling
Estate.
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
On March 1, 1986, petitioner’s revenue examiners recommended an assessment for
authority only when the acts, privileges or business are done or performed within the
deficiency income, branch profit remittance, contractor’s and commercial broker’s
jurisdiction of said authority. Like property taxes, it cannot be imposed on an
taxes. Respondent questioned this assessment in a letter dated June 5, 1986.
occupation or privilege outside the taxing district.
Petitioner found that the NDC and Philphos contracts were made on a “turn-key”
In the case at bar, it is undisputed that respondent was an independent contractor
basis and that the gross income from the two projects amounted to P967,269,811.14.
under the terms of the two subject contracts.
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
Clearly, the service of “design and engineering, supply and delivery, construction,
constituted income from Philippine sources, hence, subject to internal revenue taxes.
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.
CIR VS. AMERICAN AIRLINES
Facts:
Petitioner Commissioner of Internal Revenue comes to this Court seeking the reversal
of the decision of the Court of Tax Appeals (CTA, for short), promulgated on April 16,
1984 in CTA Case No. 3046. Respondent American Airlines, Inc. was absolved in
said... decision of liability for the tax imposed under Section 24(b)(2) of the National
Internal Revenue Code, as amended by Presidential Decree No. 69 promulgated on
November 24, 1972.
respondent airline company was duly organized under the laws of the United States
of America. It is an off-line international carrier without any flight originating from the
Philippines. However, by virtue of BOI Certificate of Authority No. 267 and a license
issued by the Securities and Exchange Commission dated August 2, 1973, a liaison
office was established by it in... this country for passenger and flight information and
reservation and to render ticketing services.
petitioner assessed respondent company for deficiency income tax, interest and
compromise penalty for the year 1974
Private respondent protested the assessment
Petitioner, in his letter dated September 14, 1979, denied the request informing the
respondent that such letter was the final decision on the... protest.
private respondent filed a petition for review with respondent court on November 23,
1979 contending that it was not doing business in the Philippines and that selling
tickets is not an activity subject to the assessed tax on gross Philippine... billings.
. effective March 1988 and was issued VAT Registration Certificate No. 088445
respondent court reversed the appealed decision of petitioner,... do not make such
international... air carrier engaged in business in the Philippines
Issues:
whether or not respondent American Airlines, Inc., which is an off-line international
carrier without flight operations in this country but rendering ticketing services herein,
is liable to... pay the 2-1/2% tax on its gross Philippine billings pursuant to Section
24(b)(2), as amended, of the tax code.
Ruling:
for the source of income to be considered as coming from the Philippines, it is
sufficient that the income is derived from activities within this country.
respondent American Airlines, Inc., being a resident foreign corporation engaged in
business in the Philippines and deriving income from Philippine sources, the
assessment of the aforestated deficiency tax against it... was correct and valid.
Principles:
Presidential Decree No. 1355, promulgated on April 21, 1978, stating that:
"x x x 'Gross Philippine Billings' include gross revenue realized from uplifts anywhere
in the world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess... baggage or mail, provided
the cargo or mail originates from the Philippines. The gross revenue realized from the
said cargo or mail (shall) include the gross freight charge up to final
destination. Gross revenue from chartered flights... originating from the Philippines
shall likewise form part of 'Gross Philippine Billings' regardless of the place of sale or
payment of the passage documents. For purposes of determining the taxability of
revenues from chartered flights, the term 'originating... from the Philippines' shall
include flight of passengers who stay in the Philippines for more than forty-eight (48)
hours prior to embarkation."
"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 travelling
public in general embraces within its terms all the... elements to constitute a valid
contract, binding upon the parties entering into the relationship.
CIR VS. AMERICAN EXPRESS INTERNATIONAL INC
Facts:
Amex Philippines registered itself with the Bureau of Internal Revenue (BIR),
Revenue District Office no. 47 (East Makati) as a value-added tax (VAT) taxpayer
bearing VAT Registration No. 32A-3-004868. For the period January 1, 1997 to
December 31, 1997, the respondent filed with the BIR its quarterly VAT returns. On
March 23, 1999, however, the respondent amended and declared the returns. On
April 13, 1999, the respondent filed with the BIR a letter-request for the refund of its
1997 excess input taxes in the amount of P3,751,067.04, which amount was arrived
at after deducting from its total input VAT paid of P3,363,060.43 its applied output
VAT liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66
and P6,799.43, respectively.
Respondent cites as basis therefor, Section 110 (B) of the 1997 Tax Code. There
being no immediate action on the part of the petitioner, respondent’s petition was filed
on April 15, 1999. Further arguments were being raised by respondent in support of
its Petition for Review. In addition, respondent relied on VAT Ruling No. 080-089,
dated April 3, 1989 which states that a VAT registered entity with a service paid in
acceptable foreign currency which is remitted inwardly to the Philippines and
accounted for in accordance with the rules and regulations of the Central Bank of the
Philippines, automatically the service income is zero-rated effective January 1, 1998.
[Section 102(a)(2) of the Tax Code as amended]. For this, there is no need to file an
application for zero-rate.
On May 6, 1999, the petitioner filed his answer and claimed by way of Special and
Affirmative Defenses that:
• The claim refund is subject to investigation by the BIR;
• Taxes paid and collected are presumed to have been made in accordance
with laws and regulations, hence, not refundable;
• Moreover, respondent must prove that it has complied with the governing
rules with reference to tax recovery or refund, which are found in Sections
204(c) and 229 of the Tax Code, as amended.
Issues:
Whether or not the petitioner is ordered to refund to respondent the amount of
P3,352.406.59 representing the latter’s excess input VAT paid for the year 1997.
Held:
Yes. Held by the Court of Appeals that the respondent’s services fell under the first
type enumerated in Section 4.102-2(b)(2) of RR 7-95, as amended by RR 5-96.
Moreover, “services were not of the same class or of the same nature as project
studies, information, or engineering and architectural designs” for non-resident foreign
clients; rather, they were “services other than the processing, manufacturing or
repacking of goods for persons doing business outside the Philippines.” The
consideration in both types of service, however, was paid for in an acceptable foreign
currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas.
Furthermore, the Court of Appeals reasoned that reliance on VAT Ruling No. 040-98
was unwarranted. By requiring that respondent’s services be construed abroad in
order to be zero-rated, petitioner went beyond the sphere of interpretation and into
that of legislation. Even granting that it is valid, the ruling cannot be given retroactive
effect, for it will be harsh and oppressive to respondent, which has already relied upon
VAT Ruling No. 080-89 for zero-rating.
CIR VS. PLACER DOME TECHNICAL SERVICES
FACTS
CIR v. American Express International, Inc: Under the National Internal Revenue
Code of 1986, as amended, services performed by VAT-registered persons in the
Philippines (other than the processing, manufacturing or repacking of goods for
persons doing business outside the Philippines), when paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP
are zero-rated.
Clean-up Ops: Placer Dome, Inc. (PDI) » Placer Dome Technical Services Limited
(PDTSL), a non-resident foreign corporation » Placer Dome Technical Services
(Philippines), Inc. (respondent), a domestic corporation and registered Value-
Added Tax (VAT) entity
The San Antonio Mines in Marinduque owned by Marcopper Mining Corporation
(Marcopper), mine tailings from the Taipan Pit started to escape through the Makulapnit
Tunnel and Boac Rivers, causing the cessation of mining and milling operations, and
causing potential environmental damage to the rivers and the immediate area. To
contain the damage and prevent the further spread of the tailing leak, Placer Dome,
Inc. (PDI), the owner of 39.9% of Marcopper, undertook to perform the clean-up and
rehabilitation of the Makalupnit and Boac Rivers, through a subsidiary. To accomplish
this, PDI engaged Placer Dome Technical Services Limited (PDTSL), a non-resident
foreign corporation with office in Canada, to carry out the project. In turn, PDTSL
engaged the services of Placer Dome Technical Services (Philippines), Inc.
(respondent), a domestic corporation and registered Value-Added Tax (VAT) entity, to
implement the project in the Philippines.
The Implementation Agreement stipulated that PDTSL was to pay respondent an
amount of money, in U.S. funds, equal to all Costs incurred for Implementation Services
performed under the Agreement, as well as a fee agreed to 1% of such Costs.
Respondent’s claim for Input VAT Refund
Respondent amended its quarterly VAT returns. In the amended returns, respondent
declared a total input VAT payment of P43M for the said quarters, and P42.8M as its
total excess input VAT for the same period. Then respondent filed an administrative
claim for the refund of its reported total input VAT payments in relation to the project it
had contracted from PDTSL, In support of this claim for refund, respondent argued that
the revenues it derived from services rendered to PDTSL, pursuant to the Agreement,
qualified as zero-rated sales under Section 102(b)(2) of the then Tax Code, since it was
paid in foreign currency inwardly remitted to the Philippines. When the Commissioner
of Internal Revenue (CIR) did not act on this claim, respondent duly filed a Petition for
Review with the Court of Tax Appeals (CTA), praying for the refund of its total reported
excess input VAT. In its Answer to the Petition, the CIR merely invoked the presumption
that taxes are collected in accordance with law, and that claims for refund of taxes are
construed strictly against claimants, as the same was in the nature of an exemption
from taxation.
CTA sided with Placer Dome
The CTA supported respondent’s legal position that its sale of services to PDTSL
constituted a zero-rated transaction under the Tax Code, as these services were paid
for in acceptable foreign currency which had been inwardly remitted to the Philippines
in accordance with the rules and regulations of the BSP. In the end, the CTA found that
only the resulting input VAT of P17.2M could be refunded the respondent
CIR filed MR invoking Section 4.102-2(b)(2) of Revenue Regulation No. 5-961, and
especially VAT Ruling No. 040-982, CTA remains unpersuaded. Case was
elevated to the CA which affirmed the CTA rulings; hence, present petition.
ISSUE(S)
o W/N the services rendered by respondent are zero-rated. – YES, Respondent
and CTA are correct.
o W/N the destination principle invoked by petitioner relying on VAT Ruling No. 040-
98 applies – NO. The law clearly provides for exceptions.
RULING
It is Section 102(b)(2)3 which finds special relevance to this case. American Express
explained the nature of VAT imposed on services.4
1
Section 4.102(b)(2)- Services other than processing, manufacturing or repacking for other
persons doing business outside the Philippines for goods which are subsequently exported, as well
as services by a resident to a non-resident foreign client such as project studies, information
services, engineering and architectural designs and other similar services, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the BSP.
2
The sales of services subject to zero percent (0%) VAT under Section 108(B)(2), of the Tax Code
of 1997, are limited to such sales which are destined for consumption outside of the Philippines in
that such services are tacked-in as part of the cost of goods exported. The zero-rating also extends
to project studies, information services, engineering and architectural designs and other similar
services sold by a resident of the Philippines to a non-resident foreign client because these services
are likewise destined to be consumed abroad. The phrase project studies, information services,
engineering and architectural designs and other similar services does not include services rendered
by travel agents to foreign tourists in the Philippines following the doctrine of ejusdem generis,
since such services by travel agents are not of the same class or of the same nature as those
enumerated under the aforesaid section.
3
Section 102. Value-Added Tax on Sale of Services and Use or Lease of Properties.
Yet even as services may be subject to VAT, our tax laws extend the benefit of zero-
rating the VAT due on certain services. The aforementioned Section 102(b) of the 1986
NIRC activates such zero-rating on two categories of transactions. As mentioned at the
outset, Section 102(b)(2) of the Tax Code is very clear. Therefore, no statutory
construction or interpretation is needed. Neither can conditions or limitations be
introduced where none is provided for. Rewriting the law is a forbidden ground that only
Congress may tread upon.
In the present case, it is because of such enumeration that petitioner now argues that
respondents services likewise do not fall under the second category mentioned in
Section 4.102-2(b)(2) [as amended by Revenue Regulation No. 5-96], because they
are not similar to project studies, information services, engineering and architectural
designs which are destined to be consumed abroad by non-resident foreign clients.
However, the Court in American Express clearly rebuffed a similar contention.
➢ In this provision, the use of the term "as well as" is not restrictive. As a prepositional
phrase with an adverbial relation to some other word, it simply means "in addition
to, besides, also or too."
➢ Neither the law nor any of the implementing revenue regulations aforequoted
categorically defines or limits the services that may be sold or exchanged for a fee,
remuneration or consideration.
Petitioner presently invokes the destination principle, citing that respondent’s services,
while rendered to a non-resident foreign corporation, are not destined to be consumed
abroad. Hence, the onus of taxation of the revenue arising therefrom, for VAT purposes,
is also within the Philippines. Yet the Court in American Express debunked this
argument when it rebutted the theoretical underpinnings of VAT Ruling No. 040-98,
particularly its reliance on the destination principle in taxation:
(b) Transactions Subject to Zero Percent (0%) Rate. ─ The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding subparagraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the [BSP].
4
The VAT is a tax on consumption "expressed as a percentage of the value added to goods or
services" purchased by the producer or taxpayer. As an indirect tax on services, its main object is
the transaction itself or, more concretely, the performance of all kinds of services conducted in the
course of trade or business in the Philippines. These services must be regularly conducted in this
country; undertaken in "pursuit of a commercial or an economic activity;" for a valuable
consideration; and not exempt under the Tax Code, other special laws, or any international
agreement.
➢ As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax.
➢ Confusion in zero rating arises because petitioner equates the performance of a
particular type of service with the consumption of its output abroad.
➢ The consumption contemplated by law, contrary to petitioner's administrative
interpretation, does not imply that the service be done abroad in order to be zero-
rated.
➢ Consumption is "the use of a thing in a way that thereby exhausts it." Applied to
services, the term means the performance or "successful completion of a
contractual duty, usually resulting in the performer's release from any past or future
liability x x x" Its services, having been performed in the Philippines, are therefore
also consumed in the Philippines.
➢ Unlike goods, services cannot be physically used in or bound for a specific place
when their destination is determined. Instead, there can only be a "predetermined
end of a course" when determining the service "location or position x x x for legal
purposes."
➢ However, the law clearly provides for an exception to the destination principle; that
is, for a zero percent VAT rate for services that are performed in the Philippines,
"paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the [BSP]." Thus, for the supply of service to be zero-rated
as an exception, the law merely requires that first, the service be performed in the
Philippines; second, the service fall under any of the categories in Section 102(b)
of the Tax Code; and, third, it be paid in acceptable foreign currency accounted for
in accordance with BSP rules and regulations.
➢ Again, contrary to petitioner's stand, for the cost of respondent's service to be zero-
rated, it need not be tacked in as part of the cost of goods exported. The law neither
imposes such requirement nor associates services with exported goods. It simply
states that the services performed by VAT-registered persons in the Philippines
services other than the processing, manufacturing or repacking of goods for
persons doing business outside this country if paid in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP, are
zero-rated. The service rendered by respondent is clearly different from the product
that arises from the rendition of such service. The activity that creates the income
must not be confused with the main business in the course of which that income is
realized.

DISPOSITIVE PORTION
Petition is DENIED.