Court of Tax Appeal CasesSeptember 1-15, 2010

Tax Remedies; Substantiation of Administrative Claim for Refund; Proceedings before Division trial de novo Defenses and objections not pleaded; Judicial claim for Refund or tax credit an original action, not an appeal; Issues before Pre-trial Conference; Division as trial court. Contrary to petitioner CIR’s claim, respondent filed all the required documents to substantiate its administrative claim for refund for the following reasons: (a) Proceedings before the CTA Division was trial de novo, it was incumbent upon the petitioner to adduce evidence to prove its defense. (b) Pursuant to Section 1, Rule 9 of the Rules of Court, defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived. (c) A judicial claim for refund or tax credit is by no mean an original action but rather an appeal by way of petition for review of a previous, unsuccessful administrative claim. It is a matter of law that when a party adopts a particular theory and the case is tried and decided upon that theory in the court below, he will not be permitted to change his theory on appeal. (d) The determination of issues during the pre-trial conference (in the Division) bars the consideration of other question, whether during trial or appeal. (e) The Court in Division, acting as a trial Court is best equipped to make the assessment on the issues raised by the parties during the trial, therefore, its factual finding are generally not disturbed on appeal unless a court a quo is perceived to have overlooked, misunderstood or misinterpreted certain facts which if properly considered would affect the result of the case and warrant a reversal of the decision involved. Commissioner of Internal Revenue vs. Mirant (Navotas II) Corporation; C.T.A. E.B. No. 537 (C .T.A. Case No. 7469); September 1, 2010.

Income Tax; Rule Irrevocability of carry-over option of excess income and tax payments and creditable withholding taxes; Exceptions; Clearance of Tax Liability as requirement for termination of business operations and ultimately for tax refund. Under Section 76 of the NIRC of 1997, once the carry-over option is taken, actually or constructively, it becomes irrevocable and no application for tax refund or issuance of tax refund or issuance of tax credit certificate will be allowed. Exception: Where, however, the corporation permanently ceases operations before full utilization of the tax credits it opted to carry over, it may then be allowed to claim the refund of the remaining tax credits. In such a case, the remaining tax credits can no longer be carried over and the irrevocability rule ceases to apply. There is no possible way by which the excess payment can be utilized since petitioner will no longer incur future income tax liability. Based on the NIRC, there is need for petitioner to be cleared of any tax liability before it can be allowed to legally terminate business operations. Absent a tax clearance certificate and certificate of dissolution, the Court cannot ascertain if the petitioner indeed has paid all of its tax liabilities as to entitle it to the tax refund. Section 76, Section 52 (c) and Section 235 (e) of the 1997 NIRC. IMPSA Construction Corporation vs. Commissioner of Internal Revenue; C.T.A. Case no. 6921 & 7172; September 3, 2010.

Documentary Stamp Tax; Special Savings Account subject to DST; Increase of Capitalization subject to DST. Special Savings Account or SSA’s are in fact certificate of deposits drawing interest subject to documentary tax as provided for in Section 180 of the NIRC. A “Special/super Savings Deposit Account” has all the distinct features of certificate of deposit, to wit: (a) Minimum deposit Requirement (b) Stated maturity period (c) Interest rate is higher than the ordinary savings account (d) Not payable on sight or demand, but upon maturity or in case of pre-termination, prior notice is required; and (e) Early withdrawal penalty in the form of partial loss or total loss of interest in the case of pretermination. Since the law does not intend the petitioner from payment of DST even in its original issue of shares of stock, it necessarily follows that it is not exempted from DST in the payment of increase in capitalization.

Section 180 of the 1977 NIRC; Revenue Memorandum Circular No. 16-2003. Philippine Veterans Bank vs. Commissioner of Internal Revenue; C.T.A. E.B. Case No. 613 (C.T.A. No. 6950); September 3, 2010.

Corporate Income Tax; Royalties; Tax Treaties; Most Favored Nation Clause.Meaning of “Similar circumstances” . Given the purpose underlying tax treaties and the rationale for the most favored nation, the preferential tax provided for in the RP-Czech Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Czech Treaty are paid under similar circumstances. This means that the petitioner must prove that petitioner must prove that the RP-US Tax Treaty grants similar reliefs to residents of the United States with respect to taxex imposable upon royalties earned from sources from within the Philippines, as those allowed to their Czechs counterparts under the RP-Chezh Tax Treaty. Article 23, RP-US Treaty. Article 22, RP-Czech Treaty. Cargill Philippines, Inc. vs. Commisioner of Internal Revenue; C.T.A. Case no. 7656; September 6, 2010.

Value-Added Tax; Prescription Period for Judicial Claim for Tax refund or credit. The two year prescriptive period for administrative and judicial claims for VAT refund is mandatory as expressly provided under Section 112 (A) in relation to Section 112 (D) and Section 229 of the 1997 NIRC. The two (2) year prescriptive period applies both to administrative and judicial claims for refund. Hence, if the two (2) year prescriptive period is about to expire, there is no need to wait for the denial of the claim by the Commissioner of Internal Revenue or its inaction after the expiration of the 120-day period before the taxpayer can go to the Court of Tax Appeals. This is based on the following reasons: 1.) The applicable provisions of the law to the instant case found in Section 112 (A) and (D) of NIRC of 1997 are clear and categorical. 2.) Recent Jurisprudence will show that the two (2) year prescriptive period applies both to administrative and judicial claims for refund or credit of unutilized VAT. 3.) The Supreme Court decided in several refund cases that before the lapse of the two (2) year prescriptive period the tax-payer applicant may already file a judicial claim without awaiting the decision of the Commissioner 4.) Revenue Memorandum Circular No. 49-03 recognizes that administrative and judicial claims for VAT refund or tax credit can proceed simultaneously. Section 112 (A) (D), Section 229 of the 1997 NIRC; Revenue Memorandum Circular No. 49-03. Philex Mining Corporation vs. Commisioner of Internal Revenue; C.T.A. EB No. 532 (Case No. 7657); September 7, 2010.

Income Tax; Rentals paid to affiliates as deductible business expense; Disallowance of deduction due to non-witholding of taxes on income. In Section 29 (a) (1) (A) of the 1977 Tax Code which provides that rentals...for the purpose of the trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity (underscoring supplied), the provision cleary refers to equity in the property itself. It can not go far as to include equity ownership in a corporation that owen the property for let. Since the corporate property is owned by the corporation as a juridical person, the stockholders have no claim on it as owners, but have merely expectancy or inchoate right to the same; The duty to withold arises at the time an income subject to witholding tax is payable or paid while the duty to remit must be performed in accordance with Section 5 of the RR No. 6-85. The failure to comply is fatal to the taxpayer’s cause as it will result in the disallowance of deduction. Section 29 (j) of the 1997 Tax Code provides that if a taxpayer is remiss in his duty, the allowable deduction from the gross income must necessarily be disallowed by reason of non-witholding and non-payment of the witholding tax. Section 29 (a) (1) (A) of the 1977 Tax Code; Section 29 (j) of the 1997 Tax Code; Section 5, RR No. 6-85. Mitsubishi Motors Phils, Corp. vs. Commisioner of Internal Revenue; C.T. A. Case no. 6385; September 7, 2010.

Corporate Income Tax; Minimum Corporate Income Tax; Philippine Airlines whether or not exempted from MCIT. As consideration for the franchise, PAL is liable to pay: 1.) Whichever is lower of: (a) Basic Corporate Income Tax based on the grantee’s annual net taxable income computed in accordance with the provisions of the NIRC; (b) Franchise tax of two (2%) of the gross revenues derived by the grantee from all sources. 2.) The above tax paid under either of the above alternatives shall be in lieu of all other taxes imposed by all government entities in the country; 3.) Real Property Tax. The meaning of basic corporate income tax referred in the franchise relates to the general rate of 35% (now 30% effective January 1, 2009)- said definition effectively excludes liability from MCIT of 2% of the gross income. In addition, the basic corporate income tax referred in the franchise shall be based on annual net income whereas MCIT shall be based on gross income. Section 13 (a) of PD 1590; Section 27 (e ) of the 1997 NIRC. Commissioner of Internal Revenue vs. Philippine Airlines, Inc.; C.T.A. Case no. 7669; September 13, 2010.

Local Tax; Claim for Refund or Tax Credit; Exhaustion of Administrative Remedies; Review of unassigned errors on appeal. Considering that Section 196 of R.A. no. 7160 starts with the negative word “No”, the requirement that a written claim for refund must be first filed with the local treasurer before a judicial claim for refund may be maintained is deemed to be mandatory. Such mandatory character is further emphasized by the use of the term “shall” in the langauage of the statute, implying that the said requirement is imperative; The requirement of exhaustion of administrative remedy, the written refund with the local treasurer is not only part and parcel of the elements of a refund claim but also a jurisdictional requisite which must be complied with first before the courts may acquire jurisdiction over such claims for refund of local taxes; Appellate courts, such as the CTA, is clothed with ample authority to review rulings even if they are not assinged as errors in appeal in enumerated circumstances, such as when consideration of the matters not assigned is necessary at arriving at a just decision and complete resolution of the case. Section 196, R.A. no. 7160. China Banking Corporation vs. TheTreasurer of the City of Manila; C.T. A. EB No. 525 (C.T. A. AC no. 50); September 13, 2010.

Value-Added Tax; Tax Refund; Prescriptive Period; As regards claims for refund or issuance of tax credit certificate of excess input VAT, the applicable provision is Section 112 of 1997 NIRC. In the case of Commisioner of Internal Revenue vs. Mirant Pagbilao Corporation, the Supreme Court categoracally ruled that taxpayers cannot avail of the provisions of either Section 204 (c) or Section 229 of the 1997 NIRC, as amended, as regards the refund of any unutilized creditable input VAT. Both provisions apply only to instances off eroneous payment of illegal collection of internal revenue taxes. While Section 112 (A) of the 1997 NIRC, as amended, provides that any VAT-registered person, whose sales are zero-rated may, within two (2) years after the close of taxable quarter when the sales were made, apply for the issuance of tax credit certificate or refund of creditable input tax due or paid attributable to such sales, the provision specifically applies only to administive claims for refund. On the other hand Section 112 (D), as amended, is the procedure applicable to claims for input tax file with the court. Section 112, Section 204 (c) Section 229 of the 1997 NIRC. Mindanao II Geothermal Partnership vs. Commisioner of Internal Revenue; C.T.A. Case Nos. 7595, 7638, 7692; September 14, 2010.

Corporate Income Tax; Irrevocability Rule; Refund of excess creditable taxes: Requisites. Under Section 76 of the NIRC of 1997, as amended, the corporate taxpayer’s excess tax credits or overpaid income tax in a given taxable year may either be refunded (either in the form of cash or tax credit certificate) or carried over and applied to the succeeding taxable years. However, once the option to carry-over has been made, the same becomes irrevocable for the period; In Order for the petitioner to be entitled to a refund of creditable withholding tax at source, it must satisfy the following requisites: 1.) That the claim for refund was filed within 2-year prescriptive period as provided under Section 204 (c ) in relation to Section 229 of the 1997 NIRC 2.) That the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom; and 3.) That the income upon which the taxes were withheld were included in the return of the recipient. Section 76 of the 1997 NIRC; Section 204 (c ) in relation to Section 229 of the 1997 NIRC; Section 2.58 of Revenue Regulation No. 2-98; PRHC property Managers, Inc. vs. Commissioner of Internal Revenue; C.T.A. Case no. 7615;. September 14, 2010.

Local Tax; Notice of Garnishment deemed denial of protest. Claim for refund not sine qua non to right to appeal; Franchise ta; Bureau of Local Government Finance Opinions. Jurisprudence dictates that a final letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. Hence, the issuance of notice of Garnishment is deemed a denial of respondent’s protest; The Supreme court ruled in Vda. De San Agustin vs. CIR that to require the taxpayer to claim for refund of the taxes paid as a condition precedent to his right to appeal, would in effect require him to go through a useless and needless ceremony that would only delay the disposition of the case, for the Commissioner would certainly disallow the claim for refund in the same way, as he disallowed the protest again the assessment; Taxpayer is not liable to pay franchise tax to the province on gross receipts realized within the city (that is within the territory of the province); BLGF’s interpretation of local tax laws in not authoritative and persuasive. It has not express powers to interpret the tax code and other national laws, unlike the Commisioner of Internal Revenue. Section 195, 196, 137 and 151 of the Local government Code. Province of Cagayan and Provincial Treasurer del Rosario vs. PLDT, Inc.; CTA AC no. 63 (RTC Civil Case No. 07-077); September 15, 2010.

Real Property Tax;Procedure in questioning the constitutionality and legality of local tax ordinance. Clearly, the lawrequires that the dissatisfied taxpayer who questions the validity or legality of a tax ordinance must file his appeal to the Secretary of Justice, within thirty (30) days from effectivitythreof. Thus, petitioner, after finding that his assessment is unjust, confiscatory or excessive must have brought the case before the Secretary of Justice for questions of legality or constitutionality of the ordinance. The said thirty day period is construed as mandatory to prevent delays and to enhance the orderly and speedy discharge of judicial functions. Failure of the dissatisfied taxpayer to appeal within the said period to the Secretary is deemed fatal. Thus, the objection to the ordinance setting the new Schedule of Fair Market Values being confiscatory should be raised before the Secretary of Justice. Section 187 and Section 219 of the Local Government Code. National Power Corporation vs. Provincial Assessor of Lanaodel Sur.; C.T.A. EB No. 549; September 15, 2010.

Income Tax; Expanded Witholding tax; Compromise Penalty; Presumption of Regularity of Tax Assessments; Tax Liability of Partners in a General Professional Partnership. A compromise Agreement by its very nature is mutual, meaning with knowledge and consent of both parties. The compromise penalty, being an imposition cannot be compulsorily imposed on the one who did not agree to its iimposition. Thus without the knowledge and conformity of petitioner the compromise penalty is illegal and unauthorized; Well settled is the rule that the tax assessments are presumed to be correct unless the contrary is shown, and the burden of proof rests upon the taxpayer to overcome this presumption.

While the determination of a deficiency tax by the government is only prima facie correct, the duty to prove is otherwise on the taxpayer;Income payments made to a GPP, as a juridcal person, are exempt from income tax. Its partners are the ones liable in their individual capacities for the payment of income tax. Secttion 26 of the 1997 NIRC. Covanta Energy Philippine Holdings, Inc. vs. Commisioner of Internal Revenue. C.T.A. Case no. 7103; September 15, 2010.