Madrigal vs. RaffertyPost under case digests, Taxation at Tuesday, January 31, 2012 Posted by Schizophrenic Mind

Facts: Vicente Madrigal and Susana Paterno were legally married prior to January 1,

1914, contracted under the provisions of law concerning conjugal partnerships. In

1915, Madrigal filed a sworn declaration with the CIR showing that his total net income

for the year 1914 was P296,302.73. Subsequently Madrigal submitted the claim that the

said P296,302.73 did not represent his income for the year 1914, but was in fact the

income of the conjugal partnershipexisting between himself and his wife Susana

Paterno, and that in computing and assessing the additional income tax provided by the

Act of Congress of October 3, 1913, the income declared by VicenteMadrigal should be

divided into two equal parts, one-half to be considered the income of

Vicente Madrigal and the other half of Susana Paterno.

After payment under protest, and after the protest of Madrigal had been decided

adversely by the CIR, action was begun by Madrigaland his wife Paterno in the CFI of

Manila against Collector of Internal Revenue and the Deputy Collector of Internal

Revenue. CFI decided against Madrigal and Paterno.

Appellees contend that the taxes imposed by the Income Tax Law are as the name

implies taxes upon income tax and not upon capital and property; that the fact

that Madrigal was a married man, and his marriage contracted under the provisions

governing the conjugalpartnership, has no bearing on income considered as income,

and that the distinction must be drawn between the ordinary form of

commercial partnership and the conjugal partnership of spouses resulting from the

relation of marriage.

Issue: Whether or not the additional income tax should be divided into two equal parts

because of the conjugal partnership

Held: Income as contrasted with capital or property is to be the test. The

essential difference between capital and income is that capital is a fund; income is a

flow. A fund of property existing at an instant of time is called capital. A flow of services

rendered by that capital by the payment of money from it or any other benefit rendered

by a fund of capital in relation to such fund through a period of time is called an income.

Capital is wealth, while income is the service of wealth.

Susana Paterno, wife of Vicente Madrigal, has an inchoate right in the property of her

husband Vicente Madrigal during the life of theconjugal partnership. She has an interest

in the ultimate property rights and in the ultimate ownership of property acquired as

income after such income has become capital. Susana Paterno has no absolute right to

one-half the income of the conjugal partnership. Not being seized of a separate estate,

Susana Paterno cannot make a separate return in order to receive the benefit of the

exemption which would arise by reason of the additional tax. As she has no estate and

income, actually and legally vested in her and entirely distinct from her husband's

property, the income cannot properly be considered the separate income of the wife for

the purposes of the additional tax. Moreover, the Income Tax Law does not look on the

spouses as individual partners in an ordinary partnership. The husband and wife are

only entitled to the exemption of P8,000 specifically granted by the law. The

higher schedules of the additional tax directed at the incomes of the wealthy may not be

partially defeated by reliance on provisions in our Civil Code dealing with

the conjugal partnership and having no application to theIncome Tax Law. The aims

and purposes of the Income Tax Law must be given effect.The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth.

FACTS:

• Vicente Madrigal and Susana Paterno were legally married prior to Januray 1, 1914. The marriage was contracted under the provisions of law concerning conjugal partnership• On 1915, Madrigal filed a declaration of his net income for year 1914, the sum of P296,302.73• Vicente Madrigal was contending that the said declared income does not represent his income for the year 1914 as it was the income of his conjugal partnership with Paterno. He said that in computing for his additional income tax, the amount declared should be divided by 2.

• The revenue officer was not satisfied with Madrigal’s explanation and ultimately, the United States Commissioner of Internal Revenue decided against the claim of Madrigal.• Madrigal paid under protest, and the couple decided to recover the sum of P3,786.08 alleged to have been wrongfully and illegally assessed and collected by the CIR.

ISSUE: Whether or not the income reported by Madrigal on 1915 should be divided into 2 in computing for the additional income tax.

HELD:

• No! The point of view of the CIR is that the Income Tax Law, as the name implies, taxes upon income and not upon capital and property.• The essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant of time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth.• As Paterno has no estate and income, actually and legally vested in her and entirely distinct from her husband’s property, the income cannot properly be considered the separate income of the wife for the purposes of the additional tax.• To recapitulate, Vicente wants to half his declared income in computing for his tax since he is arguing that he has a conjugal partnership with his wife. However, the court ruled that the one that should be taxed is the income which is the flow of the capital, thus it should not be divided into 2.

Conwi, et.al. vs. CTA and CIRPost under case digests, Taxation at Thursday, January 26, 2012 Posted by Schizophrenic Mind

Facts: Petitioners are employees of Procter and Gamble (Philippine Manufacturing

Corporation, subsidiary of Procter & Gamble, a foreign corporation).During the years

1970 and 1971, petitioners were assigned to other subsidiaries of Procter & Gamble

outside the Philippines, for which petitioners were paid US dollars as compensation. 

Petitioners filed their ITRs for 1970 and 1971, computing tax due by applying the dollar-

to-peso conversion based on the floating rate under BIR Ruling No. 70-027. In 1973,

petitioners filed amened ITRs for 1970 and 1971, this time using the par value of the

peso as basis. This resulted in the alleged overpayments, refund and/or tax credit, for

which claims for refund were filed. 

CTA held that the proper conversion rate for the purpose of reporting and paying the

Philippine income tax on the dollar earnings of petitioners are the rates prescribed

under Revenue Memorandum Circulars Nos. 7-71 and 41-71. The refund claims were

denied. 

Issues: 

(1) Whether or not petitioners' dollar earnings are receipts derivedfrom foreign

exchange transactions; NO. 

(2) Whether or not the proper rate of conversion of petitioners' dollar earnings for tax

purposes in the prevailing free market rate of exchange and not the par value of the

peso; YES. 

Held: For the proper resolution of income tax cases, income may be defined as an

amount of money coming to a person or corporation within a specified time, whether as

payment for services, interest or profit from investment. Unless otherwise specified, it

means cash or its equivalent. Income can also be though of as flow of the fruits of one's

labor. 

Petitioners are correct as to their claim that their dollar earnings are not

receipts derived from foreign exchange transactions. For aforeign exchange transaction

is simply that — a transaction inforeign exchange, foreign exchange being "the

conversion of an amount of money or currency of one country into an equivalent amount

of money or currency of another." When petitioners were assigned to the foreign

subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency

and were ALSO spending in said currency. There was no conversion, therefore, from

one currency to another. 

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries

of Procter & Gamble. It was a definite amount of money which came to them within a

specified period of time of two years as payment for their services. 

And in the implementation for the proper enforcement of the National Internal Revenue

Code, Section 338 thereof empowers the Secretary of Finance to "promulgate all

needful rules and regulations" to effectively enforce its provisions pursuant to this

authority, Revenue Memorandum Circular Nos. 7-71 and 41-71 were issued to

prescribed a uniform rate of exchange from USdollars to Philippine pesos for

INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively.

Said revenue circulars were a valid exercise of the authority given to the Secretary of

Finance by the Legislature which enacted the Internal Revenue Code. And these are

presumed to be a valid interpretation of said code until revoked by the Secretary of

Finance himself. 

Petitioners are citizens of the Philippines, and their income, within or without, and in

these cases wholly without, are subject to income tax. Sec. 21, NIRC, as amended,

does not brook any exemption. 

DENIED FOR LACK OF MERIT.Conwi v. Court of Tax Appeals | NoconG.R. Nos. 48532 & 48533, August 31, 1992 | 213 SCRA 83Keywords: Procter & Gamble, Filipino citizens temporarily working abroad earning in dollars, taxable income

NOTEThis digest was adjusted to meet our needs for the June 29 class.

RATIO DECIDENDIIncome of Filipino citizens temporarily residing in a foreign country, even if totally derived from outside the Philippines, is subject to tax by virtue of Sec. 21, NIRC, viz: “A tax is hereby imposed upon the taxable net income received x x x from all sources by every individual, whether a citizen of the Philippines residing therein or abroad x x x” (italics mine)

FACTS Hernando Conwi et al. (Conwi et al.) are employees of Procter & Gamble Philippine

Manufacturing Corporation, a local subsidiary of U.S.-basedProcter & Gamble.

Conwi et al. were temporarily assigned to subsidiaries of Procter & Gamble outside of the Philippines, where they were paid in U.S. dollars.

It is claimed that they earned and spent their money exclusively abroad, and that they did not remit money back into the Philippines during the time they were outside of the country earning in dollars.

In the years 1970 and 1971, Conwi et al., since they were earning in U.S. currency, in

order to pay their income tax liabilities in Philippine peso, used the prevailing free market rate of conversion prescribed under a Bureau of Internal Revenue ruling and two Revenue Memorandum Circulars. However, in 1973, Conwi et al. filed with the Commissioner of Internal Revenue (CIR) amended income tax returns for the said years, this time using the par value of the peso as conversion rate. The adjustment caused a disparity between what was initially paid and what they were now claiming to be their actual tax liabilities. Consequently, they asked for a refund of the “overpayment.”

Even before the CIR could rule on the matter, Conwi et al. filed a petition for review before the Court of Tax Appeals (CTA), which eventually denied their claim for tax refund and/or tax credit.

Aggrieved, Conwi et al., via a petition for review, elevated the matter to the Supreme Court.

ISSUES & ARGUMENTSW/N the ruling and circulars above apply to Conwi et al.

(Note: Conti et al. argue that since there were no remittances and acceptances of their salaries and wages in U.S. dollars into the Philippines, they are exempt from the coverage of such ruling and circulars.)

HELD & RATIONALEYES, the said ruling and circulars apply to Conwi et al.

“Income” may be defined as “an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. x x x ‘Income’ can also be thought of as a flow of the fruits of one’s labor.” (See pages 87-88 of the case)

The dollar earnings of Conwi et al. are fruits of their labor in the foreign subsidiaries of Procter & Gamble. They were given a definite amount of money which came to them within a specified period of time as payment for their services.

Sec. 21, NIRC, states: “A tax is hereby imposed upon the taxable net income received x x x from all sources by every individual, whether a citizen of the Philippines residing therein or abroad x x x”

As such, their income is taxable even if there were no inward remittances during the time they were earning in dollars abroad.

The ruling and the circulars are a valid exercise of power on the part of the Secretary of Finance by virtue of Sec. 338, NIRC, which empowers him “to promulgate all needful rules and regulations” to effectively enforce its provisions.

Besides, they have already paid their taxes using the prescribed rate of conversion. There is no need for the CIR to give them a tax refund and/or credit.

FALLOPetition of Conwi et al. DENIED. The denial of their claim for tax refund and/or credit by the CTA is AFFIRMED.Sison vs Ancheta (1984)

February 15, 2013 markerwins Tax Law

Facts: Batas Pambansa 135 was enacted. Sison, as taxpayer, alleged that its provision (Section

1) unduly discriminated against him by the imposition of higher rates upon his income as a

professional, that it amounts to class legislation, and that it transgresses against the equal

protection and due process clauses of the Constitution as well as the rule requiring uniformity

in taxation.

Issue: Whether BP 135 violates the due process and equal protection clauses, and the rule on

uniformity in taxation.

Held: There is a need for proof of such persuasive character as would lead to a conclusion that

there was a violation of the due process and equal protection clauses. Absent such showing,

the presumption of validity must prevail. Equality and uniformity in taxation means that all

taxable articles or kinds of property of the same class shall be taxed at the same rate. The

taxing power has the authority to make reasonable and natural classifications for purposes of

taxation. Where the differentitation conforms to the practical dictates of justice and equity,

similar to the standards of equal protection, it is not discriminatory within the meaning of the

clause and is therefore uniform. Taxpayers may be classified  into different categories, such as

recipients of compensation income as against professionals. Recipients of compensation

income are not entitled to make deductions for income tax purposes as there is no practically

no overhead expense, while professionals and businessmen have no uniform costs or expenses

necessaryh to produce their income. There is ample justification to adopt the gross system of

income taxation to compensation income, while continuing the system of net income taxation

as regards professional and business income

Sison vs Ancheta

GR No. L-59431, 25 July 1984

Facts: Section 1 of BP Blg 135 amended the Tax Code and petitioner Antero M. Sison, as taxpayer, alleges that "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-vis those which are imposed upon fixed income or salaried individual taxpayers. He characterizes said provision as arbitrary amounting to class legislation, oppressive and capricious in character. It therefore violates both the equal protection and due process clauses of the Constitution as well asof the rule requiring uniformity in taxation.

Issue: Whether or not the assailed provision violates the equal protection and due process clauses of the Constitution while also violating the rule that taxes must be uniform and equitable.

Held: The petition is without merit.On due process - it is undoubted that it may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property from abuse of power. Petitioner alleges arbitrariness but his mere allegation does not suffice and there must be a factual foundation of such unconsitutional taint.On equal protection - it suffices that the laws operate equally and uniformly on all persons under similar circumstances, both in the privileges conferred and the liabilities imposed.On the matter that the rule of taxation shall be uniform and equitable - this requirement is met when the tax operates with the same force and effect in every place where the subject may be found." Also, :the rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly unattainable." When the problem of classification became of issue, the Court said: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation..." As provided by this Court, where "the differentation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform." COMMISSIONER OF

INTERNAL REVENUE VS. TOURS SPECIALISTS, INC.- Gross Receipts Subject to Tax; Contractor's Tax

Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit.

FACTS: -- petition to review on certiorari the decision of the CTA

• From 1974 to 1976, Tours Specialists, Inc. had derived income from its activities as a travel agency by servicing the needs of foreign tourists and travelers and Filipino "Balikbayans" during their stay in this country. Some of the services extended to the tourists consist of booking said tourists and travelers in local hotels for their lodging and board needs; transporting these foreign tourists from the airport to their respective hotels, and from the latter to the airport upon their departure from the Philippines, transporting them from their hotels to various embarkation points for local tours, visits and excursions; securing permits for them to visit places of interest; and arranging their cultural entertainment, shopping and recreational activities.

• In order to ably supply these services to the foreign tourists, TOURS and its correspondent counterpart tourist agencies abroad have agreed to offer a package fee for the tourists. . Although the fee to be paid by said tourists is quoted by the petitioner, the payments of the hotel room accommodations, food and other personal expenses of said tourists, as a rule, are paid directly either by tourists themselves, or by their foreign travel agencies to the local hotels and restaurants or shops, as the case may be. • Some tour agencies abroad request the local tour agencies that the hotel room charges be paid through them. By this arrangement, the foreign tour agency entrusts to Tours, the fund for hotel room accommodation, which in turn is paid by petitioner tour agency to the local hotel when billed. The billing hotel sends the bill to Tours. The local hotel identifies the individual tourist, or the particular groups of tourists by code name or group designation and also the duration of their stay for purposes of payment. Upon receipt of the bill, Tours then pays the local hotel with the funds entrusted to it by the foreign tour correspondent agency.

• Commissioner of Internal Revenue assessed petitioner for deficiency 3% contractor's tax as independent contractor by including the entrusted hotel room charges in its gross receipts from services for the years 1974 to 1976.

• In addition to the deficiency contractor's tax of P122,946.93, petitioner was assessed to pay a compromise penalty of P500.00.

• During one of the hearings in this case, a witness, Serafina Sazon, Certified Public Accountant and in charge of the Accounting Department of Tours, had testified, that the amounts entrusted to it by the foreign tourist agencies intended for payment of hotel room charges, were paid entirely

to the hotel concerned, without any portion thereof being diverted to its own funds. And that the reason why tourists pay their room charge, or through their foreign tourists agencies, is the fact that the room charge is exempt from hotel room tax under P.D. 31

ISSUE/S:

• WON amounts received by a local tourist and travel agency included in a package fee from tourists or foreign tour agencies, intended or earmarked for hotel accommodations form part of gross receipts subject to 3% contractor's tax.

HELD:

• NO. Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code.

• The room charges entrusted by the foreign travel agencies to the private respondent do not form part of its gross receipts within the definition of the Tax Code. The said receipts never belonged to the private respondent. The private respondent never benefited from their payment to the local hotels. As stated earlier, this arrangement was only to accommodate the foreign travel agencies.

• Another objection raised by the petitioner is to the respondent court's application of Presidential Decree 31 which exempts foreign tourists from payment of hotel room tax. Section 1 thereof provides: Sec. 1. — Foreign tourists and travelers shall be exempt from payment of any and all hotel room tax for the entire period of their stay in the country.

• If the hotel room charges entrusted to Tours will be subjected to 3% contractor's tax as what CIR would want to do in this case, that would in effect do indirectly what P.D. 31 would not like hotel room charges of foreign tourists to be subjected to hotel room tax. Although, CIR may claim that the 3% contractor's tax is imposed upon a different incidence i.e. the gross receipts of the tourist agency which he asserts includes the hotel room charges entrusted to it, the effect would be to impose a tax, and though different,  it nonetheless imposes a tax actually on room charges. One way or the other, it would not have the effect of promoting tourism in the Philippines as that would increase the costs or expenses by the addition of a hotel room tax in the overall expenses of said tourists.

 

CIR vs. Isabela Cultural Corporation

Post under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind

Facts: Isabela Cultural Corporation (ICC), a domestic corporationreceived an

assessment notice for deficiency income tax and expanded withholding tax from BIR. It

arose from the disallowance of ICC’s claimed expense for professional and

security services paid by ICC; as well as the alleged understatement of interest income

onthe three promissory notes due from Realty Investment Inc. The deficiency

expanded withholding tax was allegedly due to the failure of ICC to withhold 1% e-

withholding tax on its claimed deduction for security services. 

ICC sought a reconsideration of the assessments. Having received a final notice of

assessment, it brought the case to CTA, which held that it is unappealable, since the

final notice is not a decision. CTA’s ruling was reversed by CA, which was sustained by

SC, and case was remanded to CTA. CTA rendered a decision in favor of ICC. It ruled

that the deductions for professional and security services were properly claimed, it said

that even if services were rendered in 1984 or 1985, the amount is not yet determined

at that time. Hence it is a proper deduction in 1986. It likewise found that it is the BIR

which overstate the interest income, when it applied compounding absent any

stipulation. 

Petitioner appealed to CA, which affirmed CTA, hence the petition. 

Issue: Whether or not the expenses for professional and securityservices are

deductible. 

Held: No. One of the requisites for the deductibility of ordinary and necessary expenses

is that it must have been paid or incurred during the taxable year. This requisite is

dependent on the method of accounting of the taxpayer. In the case at bar, ICC is using

the accrual method of accounting. Hence, under this method, an expense is recognized

when it is incurred. Under a Revenue Audit Memorandum, when the method of

accounting is accrual, expenses not being claimed as deductions by a taxpayer in the

current year when they are incurred cannot be claimed in the succeeding year. 

The accrual of income and expense is permitted when the all-events test has been met.

This test requires: 1) fixing of a right to income or liability to pay; and 2) the availability

of the reasonable accurate determination of such income or liability. The test does not

demand that the amount of income or liability be known absolutely, only that a taxpayer

has at its disposal the information necessary to computethe amount with reasonable

accuracy. 

From the nature of the claimed deductions and the span of time during which the firm

was retained, ICC can be expected to have reasonably known the retainer fees charged

by the firm. They cannot give as an excuse the delayed billing, since it could have

inquired into the amount of their obligation and reasonably determine the amount. Marubeni vs. CIRPost under case digests, Taxation at Friday, March 02, 2012 Posted by Schizophrenic Mind

Facts: Petitioner Marubeni s a foreign corporation duly organized under the existing

laws of Japan and duly licensed to engage in business under Philippine laws. 

Marubeni of Japan has equity investments in Atlantic Gulf & Pacific Co. of Manila. 

AG&P declared and directly remitted the cash dividends to Marubeni’s head office in

Tokyo net of the final dividend tax and withholding profit remittance tax. 

Thereafter, Marubeni, through SGV, sought a ruling from the BIR on whether or not the

dividends it received from AG&P are effectively connected with its business in the

Philippines as to be considered branch profits subject to profit remittance tax. 

The Acting Commissioner ruled that the dividends received by Marubeni are not income

from the business activity in which it is engaged. Thus, the dividend if remitted abroad

are not considered branch profits subject to profit remittance tax. 

Pursuant to such ruling, petitioner filed a claim for refund for the profit tax remittance

erroneously paid on the dividends remitted by AG& P. 

Respondent Commissioner denied the claim. It ruled that since Marubeni is a non

resident corporation not engaged in trade or business in the Philippines it shall be

subject to tax on income earned from Philippine sources at the rate of 35% of its gross

income. 

On the other hand, Marubeni contends that, following the principal-agent relationship

theory, Marubeni Japan is a resident foreign corporation subject only to final tax on

dividends received from a domestic corporation. 

Issue: Whether or not Marubeni Japan is a resident foreign corporation. 

Held: No. The general rule is a foreign corporation is the same juridical entity as

its branch office in the Philippines . The rule is based on the premise that the business

of the foreign corporation is conducted through its branch office, following the principal-

agent relationship theory. It is understood that the branch becomes its agent. 

However, when the foreign corporation transacts business in the Philippines

independently of its branch, the principal-agent relationship is set aside. The transaction

becomes one of the foreign corporation, not of the branch. Consequently, the taxpayer

is the foreign corporation, not the branch or the resident foreign corporation. 

Thus, the alleged overpaid taxes were incurred for the remittance ofdividend income to

the head office in Japan which is considered as a separate and distinct income taxpayer

from the branch in the Philippines.CIR vs. BAIER-NICKEL

11FEBGR No. 153793 | August 29, 2006 | J. Ynares-Santiago Facts:CIR appeals the CA decision, which granted the tax refund of respondent and reversed that of the CTA. Juliane Baier-Nickel, a non-resident German, is the president of Jubanitex, a domestic corporation engaged in the manufacturing, marketing and selling of embroidered textile products. Through Jubanitex’s general manager, Marina Guzman, the company

appointed respondent as commission agent with 10% sales commission on all sales actually concluded and collected through her efforts.

In 1995, respondent received P1, 707, 772. 64 as sales commission from w/c Jubanitex deducted the 10% withholding tax of P170, 777.26 and remitted to BIR. Respondent filed her income tax return but then claimed a refund from BIR for the P170K, alleging this was mistakenly withheld by Jubanitex and that her sales commission income was compensation for services rendered in Germany not Philippines and thus not taxable here.

She filed a petition for review with CTA for alleged non-action by BIR. CTA denied her claim but decision was reversed by CA on appeal, holding that the commission was received as sales agent not as President and that the “source” of income arose from marketing activities in Germany.

 

Issue: W/N respondent is entitled to refund

Held:No. Pursuant to Sec 25 of NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to the Philippine income taxation on their income received from all sources in the Philippines. In determining the meaning of “source”, the Court resorted to origin of Act 2833 (the first Philippine income tax law), the US Revenue Law of 1916, as amended in 1917.US SC has said that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. If the income is from labor, the place where the labor is done should be decisive; if it is done in this country, the income should be from “sources within the United States.” If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from “sources within the United States.” If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive. “Source” is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.

The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the

Philippines, it is sufficient that the income is derived from activity within the Philippines.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the taxpayer. To those therefore, who claim a refund rest the burden of proving that the transaction subjected to tax is actually exempt from taxation.In the instant case, respondent failed to give substantial evidence to prove that she performed the incoming producing service in Germany, which would have entitled her to a tax exemption for income from sources outside the Philippines. Petition granted.CIR v. Juliane Baier-Nickel / Taxation

The Juliane Baier-Nickel, a non-resident German citizen, was appointed and engaged as

commission agent of a domestic corporation.  It was agreed that respondent will receive

10% sales commission on all sales actually concluded and collected through her

efforts.  Juliane contends that her sales commission income is not taxable in the Philippines

because the same was a compensation for her services rendered in Germany and therefore

considered as income from sources outside the Philippines.  DECIDE.

SUGGESTED ANSWER: The important factor which determines the source of income of

personal services is not the residence of the payor, or the place where the contract for service is

entered into, or the place of payment, but the place where the services were actually

rendered.

 The rule is that “source of income” relates to the property, activity or

service that produced the income.  With respect to rendition of labor or

personal service, as in the instant case, it is the place where the labor or

service was performed that determines the source of the income.  There is

no merit in the interpretation which equates source of income in labor or

personal service with the residence of the payor or the place of payment of

the income.

The decisive factual consideration here is not the capacity in which Juliane Baier-Nickel

received the income, but the sufficiency of evidence to prove that the services she rendered were

performed in Germany to entitle her to tax exemption since she is a non-resident German citizen.

          Juliane did not prove by substantial evidence, or that relevant evidence that a reasonable

mind might accept as adequate to support the conclusion that it was in Germany where she

performed the income producing service.  She thus failed to discharge the burden of proving that

her income was from sources outside the Philippines and exempt from the application of our

income tax law.   (CIR v. Baier-Nickel, G.R. No. 153793, August 29, 2006,

Ynares-Santiago, J., 1st Div.)

National Development Company v CIR (1987)

National Development Company v CIR GR No L-53961, June 30, 1987

FACTS:The National Development Company (NDC) entered into contracts in Tokyo with several Japanese shipbuilding companies for the construction of 12 ocean-going vessels. Initial payments were made in cash and through irrevocable letters of credit. When the vessels were completed and delivered to the NDC in Tokyo, the latter remitted to the shipbuilders the amount of US$ 4,066,580.70 as interest on the balance of the purchase price. No tax was withheld. The Commissioner then held the NDC liable on such tax in the total sum of P5,115,234.74. Negotiations followed but failed. NDC went to CTA. BIR was sustained by CTA. BIR was sustained by CTA. Hence, this petition for certiorari.

ISSUE:Is NDC liable for the tax?

RULING:Yes.Although NDC is not the one taxed since it was the Japanese shipbuilders who were liable on the interest remitted to them under Section 37 of the Tax Code, still, the imposition is valid. The imposition of the deficiency taxes on NDC is a penalty for its failure to withhold the same from the Japanese shipbuilders. Such liability is imposed by Section 53c of the Tax Code. NDC was remiss in the discharge of its obligation as the withholding agent of the government and so should be liable for the omission.

COMMISSIONER OF INTERNAL REVENUE VS. SMART COMMUNICATION, INC.- Tax Refund

FACTS:

Smart entered into an Agreement with Prism, a nonresident foreign corporation domiciled in Malaysia, whereby Prism will provide programming and consultancy services to Smart. Thinking that the payments to Prism were royalties, Smart withheld 25% under the RP-Malaysia Tax Treaty. Smart then filed a refund with the BIR alleging

that the payments were not subject to Philippine withholding taxes given that they constituted business profits paid to an entity without a permanent establishment in the Philippines.

ISSUE:

Does Smart have the right to file the claim for refund?

HELD:

YES. The Court reiterated the ruling in Procter & Gamble stating that a person “liable for tax” has sufficient legal interest to bring a suit for refund of taxes he believes were illegally collected from him. Since the withholding agent is an agent of the beneficial owner of the payments (i.e., nonresident), the authority as agent is held to include the filing of a claim for refund. The Silkair case was held inapplicable as it involved excise taxes and not withholding taxes.

Smart was granted a refund given that only a portion of its payments represented royalties since it is only that portion over which Prism maintained intellectual property rights and the rest involved full transfer of proprietary rights to Smart and were thus treated as business profits of Prism.