Luzon Stevedoring Corp. vs. Court of Tax AppealsGR L-30232, 29 July 1988Second Division, Paras (J): 4 concurFacts: Luzon Stevedoring Corp. imported various engine parts and other equipment for tugboat repair andmaintenance in 1961 and 1962. It paid the assessed compensation tax under protest. Unable to secure a taxrefund from the Commissioner (for the amount of P33,442.13), it filed a petition for review with the Court ofTax Appeals (CTA). The CTA denied the petition, as well as the motion for reconsideration filed thereafter.Issue: Whether the corporation is exempt from the compensation tax.Held: As the power of taxation is a high prerogative of sovereignty, the relinquishment of such is neverpresumed and any reduction or dimunition thereof with respect to its mode or its rate, must be strictlyTaxation Law I, 2004 ( 1 )Digests (Berne Guerrero)construed, and the same must be couched in dear and unmistakable terms in order that it may be applied. Thecorporation’s tugboats do not fall under the categories of passenger or cargo vessels to avail of the exemptionfrom compensation tax in Section 190 of the Tax Code. It may be further noted that the amendment of Section190 of Republic Act 3176 was intended to provide incentives and inducements to bolster the shipping industryand not the business of stevedoring, in which the corporation is engaged in.Luzon Stevedoring Corp. is not exempt from compensating tax under Section 190, and is thus not entitled torefund.

Lutz vs. AranetaGR L-7859, 22 December 1955First Division, Reyes JBL (J): 8 concurFacts: AWalter Lutz, as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, sought torecover the sum of P14,6666.40 paid by the estate as taxes from the Commissioner under Section e ofCommonwealth Act 567 (the Sugar Adjustment Act), alleging that such tax is unconstitutional as it levied forthe aid and support of the sugar industry exclusively, which is in his opinion not a public purpose.Issue: Whether the tax is valid in supporting an industry.

Held: The tax is levied with a regulatory prupose, i.e. to provide means for the rehabilitation and stabilizationof the threatened sugar industry. The act is primarily an exercise of police power, and is not a pure exercise oftaxing power. As sugar production is one of the great industries of the Philippines; and that its promotion,protection and advancement redounds greatly to the general welfare, the legislature found that the generalwelfare demanded that the industry should be stabilized, and provided that the distribution of benefitstherefrom be readjusted among its component to enable it to resist the added strain of the increase in tax that ithad to sustain. Further, it cannot be said that the devotion of tax money to experimental stations to seekincrease of efficiency in sugar production, utilization of by-products, etc., as well as to the improvement ofliving and working conditions in sugar mills and plantations, without any part of such money being channeleddiectly to private persons, constitute expenditure of tax money for private purposes.The tax is valid.

Philex Mining Corporation v CIR GR No 125704, August 28, 1998

FACTS:BIR sent a letter to Philex asking it to settle its tax liabilities amounting to P124 million. Philex protested the demand for payment stating that it has pending claims for VAT input credit/refund amounting to P120 million. Therefore, these claims for tax credit/refund should be applied against the tax liabilities. In reply the BIR found no merit in Philex’s position. On appeal, the CTA reduced the tax liability of Philex.

ISSUES:

1. Whether legal compensation can properly take place between the VAT input credit/refund and the excise tax liabilities of Philex Mining Corp;

2. Whether the BIR has violated the NIRC which requires the refund of input taxes within 60 days

3. Whether the violation by BIR is sufficient to justify non-payment by Philex

RULING:

1. No, legal compensation cannot take place. The government and the taxpayer are not creditors and debtors of each other.

2. Yes, the BIR has violated the NIRC. It took five years for the BIR to grant its claim for VAT input credit. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund

3. No, despite the lethargic manner by which the BIR handled Philex’s tax claim, it is a settled rule that in the performance of government function, the State is not bound by the neglect of its agents and officers. It must be stressed that the same is not a valid reason for the non-payment of its tax liabilities.

Maceda vs. MacaraigGR 88291, 31 May 1991

En Banc, Gancayco (J): 6 concur, 2 took no part, 1 dissents

4. Facts: Commonwealth Act 120 created NAPOCOR as a public corporation to undertake the development of

5. hydraulic power and the production of power from other sources. RA 358 (1949) granted NAPOCOR tax and

6. duty exemption privileges. RA 6395 (1971) revised the charter of the NAPOCOR, tasking it to carry out the

7. policy of the national electrification, and provided in detail NAPOCOR’s tax exceptions. PD 380 (1974)

8. specified that NAPOCOR’s exemption includes all taxes, etc. imposed “directly or indirectly.” PD 938

9. integrated the exemptions in favor of GOCCs including their subsidiaries; however, empowering the President

10. or the Minister of Finance, upon recommendation of the Fiscal Incentives Review Board (FIRB) to restore,

11. partially or completely, the exemptions withdrawn or revised. The FIRB issued Resolution 10-85 (7 February

12. 1985) restoring the duty and tax exemptions privileges of NAPOCOR for period 11 June 1984- 30 June 1985.

13. Resolution 1-86 (1January 1986) restored such exemption indefinitely effective 1 July 1985. EO 93 (1987)

14. again withdrew the exemption. FIRB issued Resolution 17-87 (24 June 1987) restoring NAPOCOR’s

15. exemption, which was approved by the President on 5 October 1987.

16. Since 1976, oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and

17. delivered to NAPOCOR. Oil companies started to pay specific and ad valorem taxes on their sales of oil

18. products to NAPOCOR only in 1984. NAPOCOR claimed for a refund (P468.58 million). Only portion

19. thereof, corresponding to Caltex, was approved and released by way of a tax credit memo. The claim for

20. refund of taxes paid by PetroPhil, Shell and Caltex amounting to P410.58 million was denied. NAPOCOR

21. moved for reconsideration, starting that all deliveries of petroleum products to NAPOCOR are tax exempt,

22. regardless of the period of delivery.23. Issue: Whether NAPOCOR cease to

enjoy exemption from indirect tax when PD 938 stated the exemption in

24. general terms.25. Held: NAPOCOR is a non-profit

public corporation created for the general good and welfare, and wholly

26. owned by the government of the Republic of the Philippines. From the very beginning of the corporation’s

27. existence, NAPOCOR enjoyed preferential tax treatment “to enable the corporation to pay the indebtness and

28. obligation” and effective implementation of the policy enunciated in Section 1 of RA 6395. From the

29. preamble of PD 938, it is evident that the provisions of PD 938 were not intended to be strictly construed

30. against NAPOCOR. On the contrary, the law mandates that it should be interpreted liberally so as to enhance

31. the tax exempt status of NAPOCOR. It is recognized principle that the rule on strict interpretation does not

apply in the case of exemptions in favor of government political subdivision or instrumentality. In the case of32. property owned by the state or a city or

other public corporations, the express exception should not be

33. construed with the same degree of strictness that applies to exemptions contrary to the policy of the state,

34. since as to such property “exception is the rule and taxation the exception.”

SSS vs. Bacolod CityGR L-35726, 21 July 1982Second Division, Escolin (J): 5 concurFacts: The Social Security System (SSS) is a government agency created under RA 1161. In pursuance of itsoperations, SSS maintains a number of regional offices, one of which is a 5-storey building occupying 4

parcels of land in Bacolod City. Said building and lands were assessed for taxation. For failure to pay therealty taxes thereon, the city levid upon said properties. SSS sought reconsideration on the ground that SSS isa government-owned and -controlled corporation and is exempt from payment of real estate taxes.Issue: Whether SSS property in Bacolod City is tax-exempt.Held: The distinction whether the government-owned or controlled corporation exercises ministrant orproprietory function is of no relevance as the exemption does not relate to legal fees but on realty taxes. TheCharter of Bacolod City does not contain any qualification whatsoever in providing fro the exemption fromreal estate taxes of lands and building owned by the Government/ It is axiomatic that when public property isinvolved, exemption is the rule and taxation is the exception. PD 24, amending the Social Security Act of1954, has already removed all doubts as to the exemption of the SS from taxation (Section 16).

Villegas vs, Hiu Chiong Tsai Pao HoGR L-29646, 10 November 1978En Banc, Fernandez (J):4 concur, 3 concur in result, 1 took no partFacts: The Municipal Board of Manila enacted Ordinance 6537 requiring aliens (except those employed inthe diplomatic and consular missions of foreign countries, in technical assistance programs of the governmentand another country, and members of religious orders or congregations) to procure the requisite mayor’spermit so as to be employed or engage in trade in the City of Manila. The permit fee is P50, and the penaltyfor the violation of the ordinance is 3 to 6 months imprisonment or a fine of P100 to P200, or both.Issue: Whether the ordinance imposes a regulatory fee or a tax.Held: The ordinance’s purpose is clearly to raise money under the guise of regulation by exacting P50 fromaliens who have been cleared for employment. The amount is unreasonable and excessive because it fails toconsider difference in situation among aliens required to pay it, i.e. being casual, permanent, part-time, rankand-file or executive.

[ The Ordinance was declared invalid as it is arbitrary, oppressive and unreasonable, being applied only toaliens who are thus deprived of their rights to life, liberty and property and therefore violates the due processand equal protection clauses of the Constitution. Further, the ordinance does not lay down any criterion orstandard to guide the Mayor in the exercise of his discretion, thus conferring upon the mayor arbitrary andunrestricted powers. ]

Victorias Milling Co. vs. Municipality of VictoriasGR L-21183, 27 September 1968En Banc, Sanchez (J): 9 concurFacts: Ordinance 1 (1956) was approved by the municipal council of Victorias by way of an amendment to 2municipal ordinances separately imposing license taxes on operators of sugar centrals and sugar refineries.The changes were: (1) with respect to sugar centrals, by increasing the rates of license taxes; and (2) as tosugar refineries, by increasing the rates of license taxes as well as teh range of graduated schedule of annualoutput capacity. Victorias Milling questioned the validity of Ordinance 1 as it, among others, allegedly singledout Victorias Milling Co. since it is the only operator of a sugar central and a sugar refinery within thejurisdiction of the municipality.Taxation Law I, 2004 ( 20 )Digests (Berne Guerrero)Issue: Whether Ordinance 1 is discriminatory.Held: The ordinance does not single out Victorias as the only object of the ordinance but is made to apply toany sugar central or sugar refinery which may happen to operate in the municipality. The fact that VictoriasMilling is actually the sole operator of a sugar central and a sugar refinery does not make the ordinancediscriminatory. The ordinance is unlike that in Ormoc Sugar Company vs. Municipal Board of Ormoc City,which specifically spelled out Ormoc Sugar as the subject of the taxation, the name of the company hereinwas never mentioned in the ordinance.

PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC., et al. vs. THE SECRETARY OF DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT

GR. No. 143076. June 10, 2003

Facts: On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of other electric cooperatives organized and existing under PD 269 which are members of petitioner Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA). The other petitioners, electric cooperatives of Agusan del Norte (ANECO), Iloilo 1 (ILECO 1) and Isabela 1 (ISELCO 1) are non-stock, non-profit electric cooperatives organized and existing under PD 269, as amended, and registered with the National Electrification Administration (NEA).Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all National Government, local government, and municipal taxes and fee, including franchise, fling recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court or administrative proceedings in which it may be party.From 1971to 1978, in order to finance the electrification projects envisioned by PD 269, as amended, the Philippine Government, acting through the National Economic council (now National Economic Development Authority) and the NEA, entered into six loan agreements with the government of the United States of America, through the United States Agency for International Development (USAID) with electric cooperatives as beneficiaries. The loan agreements contain similarly worded provisions on the tax application of the loan and any property or commodity acquired through the proceeds of the loan.Petitioners allege that with the passage of the Local Government Code their tax exemptions have been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of the said code. Sec. 193 provides for the withdrawal of tax exemption privileges granted to all persons, whether natural or juridical, except cooperatives duly registered under RA 6938, while Sec. 234 exempts the same cooperatives from payment of real property tax.

Issue: (1) Does the Local Government Code (under Sec. 193 and 234) violate the equal protection clause since the provisions unduly discriminate against

petitioners who are duly registered cooperatives under PD 269, as amended, and no under RA 6938 or the Cooperatives Code of the Philippines?(2) Is there an impairment of the obligations of contract under the loan entered into between the Philippine and the US Governments? 

Held: (1) No. The guaranty of the equal protection clause is not violated by a law based on a reasonable classification. Classification, to be reasonable must (a) rest on substantial classifications; (b) germane to the purpose of the law; (c) not limited to the existing conditions only; and (d) apply equally to all members of the same class. We hold that there is reasonable classification under the Local Government Code to justify the different tax treatment between electric cooperatives covered by PD 269 and electric cooperatives under RA 6938.First, substantial distinctions exist between cooperatives under PD 269 and those under RA 6938. In the former, the government is the one that funds those so-called electric cooperatives, while in the latter, the members make equitable contribution as source of funds.a. Capital Contributions by Members – Nowhere in PD 269 doe sit require cooperatives to make equitable contributions to capital. Petitioners themselves admit that to qualify as a member of an electric cooperative under PD 269, only the payment of a P5.00 membership fee is required which is even refundable the moment the member is no longer interested in getting electric service from the cooperative or will transfer to another place outside the area covered by the cooperative. However, under the Cooperative Code, the articles of cooperation of a cooperative applying for registration must be accompanied with the bonds of the accountable officers and a sworn statement of the treasurer elected by the subscribers showing that at least 25% of the authorized share capital has been subscribed and at least 25% of the total subscription has been paid and in no case shall the paid-up share capital be less than P2,000.00. b. Extent of Government Control over Cooperatives – The extent of government control over electric cooperatives covered by PD 269 is largely a function of the role of the NEA as a primary source of funds

of these electric cooperatives. It is crystal clear that NEA incurred loans from various sources to finance the development and operations of these electric cooperatives. Consequently, amendments were primarily geared to expand the powers of NEA over the electric cooperatives o ensure that loans granted to them would be repaid to the government. In contrast, cooperatives under RA 6938 are envisioned to be self-sufficient and independent organizations with minimal government intervention or regulation.Second, the classification of tax-exempt entities in the Local Government Code is germane to the purpose of the law. The Constitutional mandate that “every local government unit shall enjoy local autonomy,” does not mean that the exercise of the power by the local governments is beyond the regulation of Congress. Sec. 193 of the LGC is indicative of the legislative intent to vet broad taxing powers upon the local government units and to limit exemptions from local taxation to entities specifically provided therein.Finally, Sec. 193 and 234 of the LGC permit reasonable classification as these exemptions are not limited to existing conditions and apply equally to all members of the same class.

(2) No. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the obligations of contracts does not prohibit every change in existing laws. To fall within the prohibition, the change must not only impair the obligation of the existing contract, but the impairment must be substantial. Moreover, to constitute impairment, the law must affect a change in the rights of the parties with reference to each other and not with respect to non-parties.The quoted provision under the loan agreement does not purport to grant any tax exemption in favor of any party to the contract, including the beneficiaries thereof. The provisions simply shift the tax burden, if any, on the transactions under the loan agreements to the borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local Government Code under Sec. 193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the borrower, the lender or

the beneficiary under the loan agreements as, in fact, no tax exemption is granted therein.

Nitafan vs. CommissionerGR L-78780, 23 July 1987ResolutionEn Banc, Melencio-Herrera (J): 12 concur, 1 on leaveFacts: The Chief Justice has previously issued a directive to the Fiscal Management and Budget Office tocontinue to deduct withholding taxes from the salaries of the Justices of the Supreme Court and othermembers of the judiciary. This was affirmed by the Supreme Court En Banc on 4 December 1987. RTCjudges seek to prohibit or enjoin the Commissioner of the Internal Revenue and the Financial Officer of theSupreme Court from making any deduction of withholding taxes from their salaries.Issue: Whether the salaries of judges are subject to tax.Held: The salaries of members of the Judiciary are subject to the general income tax applied to all taxpayers.Although such intent was somehoe and inadvertently not clearly set forth in the final text of the 1987Constitution, the deliberations of the 1986 Constitutional Commission negate the contention that the intent ofthe framers is to revert to the original concept of “non-diminution” of salaries of judicial officers. Hence, thedoctrine in Perfecto v. Meere and Endencia vs. David do not apply anymore. Justices and judges are not onlythe citizens whose income have been reduced in accepting service in government and yet subjecte to incometax. Such is true also of Cabinet members and all other employees.

CIR v. BPI

G.R. No. 178490 July 7, 2009

Chico-Nazario, J.

Doctrine:

1. The phrase “for that taxable period” merely

identifies the excess income tax, subject of the option,

by referring to the taxable period when it was acquired

by the taxpayer.

2. When circumstances show that a choice has been

made by the taxpayer to carry over the excess income

tax as credit, it should be respected; but when

indubitable circumstances clearly show that another

choice, a tax refund, is in order, it should be granted.

As to which option the taxpayer chose is generally a

matter of evidence.

“Technicalities and legalisms, however exalted,

should not be misused by the government to keep

money not belonging to it and thereby enrich itself at

the expense of its law-abiding citizens.”

Facts:

In filing its Corporate Income Tax Return for the

Calendar Year 2000, BPI carried over the excess tax

credits from the previous years of 1997, 1998 and

1999. However, BPI failed to indicate in its ITR its

choice of whether to carry over its excess tax credits

or to claim the refund of or issuance of a tax credit

certificate.

BPI filed with the Commissioner of Internal Revenue

(CIR) an administrative claim for refund. The CIR

failed to act on the claim for tax refund of BPI. Hence,

BPI filed a Petition for Review before the CTA, whom

denied the claim.

The CTA relied on the irrevocability rule laid down in

Section 76 of the National Internal Revenue Code

(NIRC) of 1997, which states that once the taxpayer

opts to carry over and apply its excess income tax to

succeeding taxable years, its option shall be

irrevocable for that taxable period and no application

for tax refund or issuance of a tax credit shall be

allowed for the same.

The Court of Appeals reversed the CTA decision

stating that there was no actual carrying over of the

excess tax credit, given that BPI suffered a net loss in

1999, and was not liable for any income tax for said

taxable period, against which the 1998 excess tax

credit could have been applied.

The Court of Appeals further stated that even if

Section 76 was to be construed strictly and literally,

the irrevocability rule would still not bar BPI from

seeking a tax refund of its 1998 excess tax credit

despite previously opting to carry over the same. The

phrase “for that taxable period” qualified the

irrevocability of the option of BIR to carry over its 1998

excess tax credit to only the 1999 taxable period;

such that, when the 1999 taxable period expired, the

irrevocability of the option of BPI to carry over its

excess tax credit from 1998 also expired.

Issue:

1. What is the period captured by the irrevocability

rule?

2. Whether or not the taxpayer’s failure to mark the

option chosen is fatal to whatever claim

Held:

1. The last sentence of Section 76 of the NIRC of

1997 reads: “Once the option to carry-over and apply

the excess quarterly income tax against income tax

due for the taxable quarters of the succeeding taxable

years has been made, such option shall be

considered irrevocable for that taxable period and

no application for tax refund or issuance of a tax

credit certificate shall be allowed therefor.” The

phrase “for that taxable period” merely identifies the

excess income tax, subject of the option, by referring

to the taxable period when it was acquired by the

taxpayer.

In the present case, the excess income tax credit,

which BPI opted to carry over, was acquired by the

said bank during the taxable year 1998. The option of

BPI to carry over its 1998 excess income tax credit is

irrevocable; it cannot later on opt to apply for a refund

of the very same 1998 excess income tax credit.

2. No. Failure to signify one’s intention in the FAR

does not mean outright barring of a valid request for a

refund, should one still choose this option later on.

The reason for requiring that a choice be made in the

FAR upon its filing is to ease tax administration

(Philam Asset Management, Inc. v. CIR G.R. No.

156637 and No. 162004, 14 December 2005). When

circumstances show that a choice has been made by

the taxpayer to carry over the excess income tax as

credit, it should be respected; but when indubitable

circumstances clearly show that another choice – a

tax refund – is in order, it should be granted.

Therefore, as to which option the taxpayer chose is

generally a matter of evidence.

“Technicalities and legalisms, however exalted,

should not be misused by the government to keep

money not belonging to it and thereby enrich itself at

the expense of its law-abiding citizens.”

Pepsi-Cola Bottling Co. vs. City of ButuanGR L-22814, 28 August 1968En Banc, Concepcion (J): 5 concurFacts: Ordinance 110 was enacted by the City of Butuan imposing a tax of P0.10 per case of 24 bottles ofsoftdrinks or carbonated drinks. The tax was imposed upon dealers engeged in selling softdrinks orcarbonated drinks. When Ordinance 110, the tax was imposed upon an agent or consignee of any person,association, partnership, company or corporation engaged in selling softdrinks or carbonated drinks, with“agent or consignee” being particularly defined on the inserted provision Section 3-A. In effect, merchantsengaged in the sale of softdrinks, etc. are not subject to the tax unless they are agents or consignees of anotherdealer who must be one engaged in business outside the City. Pepsi-Cola Bottling Co. filed suit to recoversums paid by it to the city pursuant to the Ordinance, which it claims to be null and void.Issue: Whether the Ordinance is discriminatory.Held: The Ordinance, as amended, is discriminatory since only sales by “agents or consignees” of outsidedealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants,regardless of the volume of their sales , and even if the same exceeded those made by said agents orconsignees of producers or merchants established outside the city, would be exempt from the tax. The

classification made in the exercise of the authority to tax, to be valid must be reasonable, which would besatisfied if the classification is based upon substantial distinctions which makes real differences; these aregermane to the purpose of legislation or ordinance; the classification applies not only to present conditions butalso to future conditions substantially identical to those of the present; and the classification applies equally toall those who belong to the same class. These conditions are not fully met by the ordinance in question.

Domingo vs. GarlitosGR L-18993, 29 June 1963En Banc, Labrador (J): 8 concur,1 concur in result, 1 took no partFacts: InDomingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final and executory theorder of the Court of First Instance of Leyte for the payment of estate and inheritance taxes, charges andpenalties amounting to P40,058.55 by the Estate of the late Walter Scott Price. The petition for execution filedby the fiscal, however, was denied by the lower court. The Court held that the execution is unjustified as theGovernment itself is indebted to the Estate for 262,200; and ordered the amount of inheritance taxes bededucted from the Government’s indebtedness to the Estate.Issue: Whether a tax and a debt may be compensated.Held: The court having jurisdiction of the Estate had found that the claim of the Estate against theGovernment has been recognized and an amount of P262,200 has already been appropriated by acorresponding law (RA 2700). Under the circumstances, both the claim of the Government for inheritancetaxes and the claim of the intestate for services rendered have already become overdue and demandable aswell as fully liquidated. Compensation, therefore, takes place by operation of law, in accordance with Article1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount.

 Mamba v. LaraGr. 165109

Facts: The private respondent a governor of Caga an e!ec"ted contracts for thecreation of bonds #ith interest to $nance the ne# to#n center. The petitioner a

congressman representing Caga an %"estioned the said contractsa&tho"gh he is not a part thereof. 'ss"e: ()* the petitioner ma %"estion the contract+s e!ec"ted b the  respondent.,e&d: -es since an ordinar ta!pa er is a&&o#ed to s"e provided that1 /"b&ic f"nds derived from ta!ation are to be "sed b a po&itica&instr"menta&it and in doing so a &a# is vio&ated or some irreg"&arit iscommitted The petitioner sha&& be direct& a2ected b the a&&eged act.3nd since the interest of the bonds sha&& be paid for b ta!ing the peop&e ofCaga an inc&"ding the petitioner the petitioner has &ega& standing to %"estion theacts of the respondent

Tiu v Ca G.R. No. 127410. January 20, 1999J. Panganiban

Facts:

On March 13, 1992, Congress, with the

approval of the President, passed into law RA

7227. This was for the conversion of former

military bases into industrial and commercial

uses. Subic was one of these areas. It was

made into a special economic zone.

In the zone, there were no exchange controls.

Such were liberalized. There was also tax

incentives and duty free importation policies

under this law.

On June 10, 1993, then President Fidel V.

Ramos issued Executive Order No. 97 (EO

97), clarifying the application of the tax and

duty incentives. It said that    

On Import Taxes and Duties. — Tax and duty-

free importations shall apply only to raw

materials, capital goods and equipment

brought in by business enterprises into the

SSEZ

On All Other Taxes. — In lieu of all local and

national taxes (except import taxes and

duties), all business enterprises in the SSEZ

shall be required to pay the tax specified in

Section 12(c) of R.A. No. 7227.

Nine days after, on June 19, 1993, the

President issued Executive Order No. 97-A

(EO 97-A), specifying the area within which

the tax-and-duty-free privilege was operative.

Section 1.1.     The Secured Area consisting

of the presently fenced-in former Subic Naval

Base shall be the only completely tax and

duty-free area in the SSEFPZ. Business

enterprises and individuals (Filipinos and

foreigners) residing within the Secured Area

are free to import raw materials, capital goods,

equipment, and consumer items tax and duty-

free.

Petitioners challenged the constitutionality of

EO 97-A for allegedly being violative of their

right to equal protection of the laws. This was

due to the limitation of tax incentives to Subic

and not to the entire area of Olongapo. The

case was referred to the Court of Appeals.

The appellate court concluded that such being

the case, petitioners could not claim that EO

97-A is unconstitutional, while at the same

time maintaining the validity of RA 7227.

The court a quo also explained that the

intention of Congress was to confine the

coverage of the SSEZ to the "secured area"

and not to include the "entire Olongapo City

and other areas mentioned in Section 12 of

the law.

Hence, this was a petition for review under

Rule 45 of the Rules of Court.

Issue:

Whether the provisions of Executive Order

No. 97-A confining the application of R.A.

7227 within the secured area and excluding

the residents of the zone outside of the

secured area is discriminatory or not owing to

a violation of the equal protection clause.

Held. No. Petition dismissed.

Ratio:

Citing Section 12 of RA 7227, petitioners

contend that the SSEZ encompasses (1) the

City of Olongapo, (2) the Municipality of Subic

in Zambales, and (3) the area formerly

occupied by the Subic Naval Base. However,

they claimed that the E.O. narrowed

the application to the naval base only.

OSG- The E.O. Was a valid classification.

Court- The fundamental right of equal

protection of the laws is not absolute, but is

subject to reasonable classification. If the

groupings are characterized by substantial

distinctions that make real differences,

one class may be treated and regulated

differently from another. The classification

must also be germane to the purpose of the

law and must apply to all those belonging to

the same class.

Inchong v Hernandez- Equal protection does

not demand absolute equality among

residents; it merely requires that all persons

shall be treated alike, under like

circumstances and conditions both as to

privileges conferred and liabilities enforced.

Classification, to be valid, must (1) rest on

substantial distinctions, (2) be germane to the

purpose of the law, (3) not be limited to

existing conditions only, and (4) apply equally

to all members of the same class.

RA 7227 aims primarily to accelerate the

conversion of military reservations into

productive uses. This was really limited to the

military bases as the law's intent provides.

Moreover, the law tasked the BCDA to

specifically develop the areas the bases

occupied.

Among such enticements are: (1) a separate

customs territory within the zone, (2) tax-and-

duty-free importations, (3) restructured income

tax rates on business enterprises within the

zone, (4) no foreign exchange control, (5)

liberalized regulations on banking and finance,

and (6) the grant of resident status to certain

investors and of working visas to certain

foreign executives and workers. The target of

the law was the big investor who can pour in

capital.

Even more important, at this time the business

activities outside the "secured area" are not

likely to have any impact in achieving the

purpose of the law, which is to turn the former

military base to productive use for the benefit

of the Philippine economy. Hence, there was

no reasonable basis to extend the tax

incentives in RA 7227.

It is well-settled that the equal-protection

guarantee does not require territorial

uniformity of laws.  As long as there are

actual and material differences between

territories, there is no violation of the

constitutional clause.

Besides, the businessmen outside the zone

can always channel their capital into it.

RA 7227, the objective is to establish a "self-

sustaining, industrial, commercial, financial

and investment center”. There will really be

differences between it and the outside zone of

Olongapo.

The classification of the law also applies

equally to the residents and businesses in the

zone. They are similarly treated to contribute

to the end gaol of the law. 

C h a m b e r   o f   R e a l  E s t a t e   a n d   B u i l d e r s ’  A s s o c i a t i o n s ,   I n c . ,   v .   T h e   Ho n .   E x e c u t i v e Secretary Alberto Romulo, et alG.R. No. 160756. March 9, 2010Facts:Pet i t i oner  Chamber  o f  Rea l  Es ta te   and  Bu i lders ’  Assoc ia t i ons ,   Inc .   (CREBA) ,   an  assoc ia t i on  of   rea l   e s ta tedevelopers and builders in the Philippines, questioned the validity of Section 27(E) of the Tax Code which imposes theminimum corporate income tax (MCIT) on corporations.Under the Tax Code, a corporation can become subject to theMCIT at the rate of 2% of gross income, beginning on the 4tht a x a b l e   y e a r   i m m e d i a t e l y  f o l l o w i n g   t h e   y e a r   i n   w h i c h   i tcommenced   i t s  bus iness  opera t ions ,  when   such  MCIT   i sgreater than the normal corporate income tax. If the regularincome tax is higher than the MCIT, the corporation does notpay the MCIT.CREBA argued, among others, that the use of gross income asMCIT base amounts to a confiscation of capital because grossincome, unlike net income, is not realized gain.CREBA also sought to invalidate the provisions of RR No. 2-9 8 ,   a s   a m e n d e d ,   o t h e r w i s e  k n o w n   a s   t h e   C o n s o l i d a t e d  Withholding Tax Regulations, which prescribe the rules andprocedures for the collection of CWT on sales of real propertiesc l a s s i f i e d   a s   o r d i n a r y  

a s s e t s ,   o n   t h e   g r o u n d s   t h a t   th e s e regulations:Use gross   se l l i ng  pr i ce   (GSP)  o r   f a i r  marke t va lue (FMV) as basis for determiningthe income tax on the sale of real estate classified as ordinary assets, instead of the entity’s net taxable income as providedfor under the Tax Code;M a n d a t e   t h e   c o l l e c t i o n   o f  i n c o m e   t a x   o n   a   p e r transaction basis, contrary to the Tax Code provision which imposes income tax on net income at the end of the taxable period;G o   a g a i n s t   t h e   d u e   p r o c e s s  c l a u s e   b e c a u s e   t h e government co l l ec t s   income   tax even  when the  ne t income has  no t ye t  been de termined ; ga in   i s  neverassured by mere receipt of the selling price; andContravene the equal protection clause because theCWT is being charged upon real estate enterprises, butnot on other business enterprises, more particularly,those in the manufacturing sector, which do businesssimilar to that of a real estate enterprise.Issues:(1) Is the imposition of MCIT constitutional? (2) Is theimposition of CWT on income from sales of real propertiesclassified as ordinary assets constitutional?Held: (1) Yes. The imposition of the MCIT is constitutional. An income tax is arbitrary and confiscatory if it taxes capital,  because   i t   i s   i ncome ,   and no t   cap i ta l ,  wh ich   i s sub jec t   t o income tax. However, MCIT is imposed on gross income whichis computed by deducting from gross sales the capital spent by a corporation in the sale of its goods, i.e., the cost of goods andother direct expenses from gross sales. Clearly, the capital isnot being taxed. Various safeguards were incorporated into the law imposingMCIT

F i rs t l y ,   recogn i z ing   the  b i r th  pangs  o f  bus inesses  and   thereality of the need to recoup initial major capital expenditures,the MCIT is imposed only on the 4th taxable year immediately following the year in which the corporation commenced itsoperations.Secondly, the law allows the carry-forward of any excess of theMCIT paid over the normal income tax which

shall be creditedaga ins t   the  norma l   income  tax fo r   the   three   immed ia te l y  succeeding years.Thirdly, since certain businesses may be incurring genuinerepeated losses, the law authorizes the Secretary of Finance tosuspend the imposition of MCIT if a corporation suffers lossesdue to prolonged labor dispute, force majeure and legitimate business reverses.(2) Yes. Despite the imposition of CWT on GSP or FMV, theincome tax base for sales of real property classified as ordinary assets remains as the entity’s net taxable income as provided inthe Tax  Code ,   i . e . ,   g ross   income   l ess  a l l owab le   cos t s   anddeductions. The seller shall file its income tax return and creditthe taxes withheld by the withholding agent-buyer against itstax due. If the tax due is greater than the tax withheld, then thetaxpayer shall pay the difference. If, on the other hand, the taxdue is less than the tax withheld, the taxpayer will be entitledto a refund or tax credit.The use of the GSP or FMV as basis to determine the CWT isfor purposes of practicality and convenience. The knowledge of the  w i thho ld ing  agent -buyer   i s  l im i ted   to   the  par t i cu lar transaction in which he is a party. Hence, his basis can only bethe GSP or FMV which figures are reasonably known to him.  A l s o ,   t h e   c o l l e c t i o n o f   i n c o m e   t a x   v i a t h e   C W T o n   a   p e r transaction basis, i.e., upon consummation of the sale, is notcontrary to the Tax Code which calls for the payment of the netincome at the end of the taxable period. The taxes withheld arein the nature of advance tax payments by a taxpayer in order tocancel its possible future tax obligation. They are installmentson the annual tax which may be due at the end of the taxable year. The withholding agent-buyer’s act of collecting the tax atthe time of the transaction, by withholding the tax due fromthe income payable, is the very essence of the withholding taxmethod of tax collection.On the alleged violation of the equal protection clause, thet a x i n g   p o w e r   h a s   t h e  a u t h o r i t y   t o   m a k e   r e a s o n a bl e classifications for purposes of taxation. Inequalities whichresu l t   f rom s ing l ing  ou t a  par t i cu lar   c l ass   fo r   t axa t ion ,  o rexempt ion ,   i n f r inge  no   cons t i tu t i ona l   l im i ta t i on .  The   rea lestate

industry is, by itself, a class and can be validly treateddifferently from other business enterprises.  W h a t   d i s t i n g u i s h e s  t h e   r e a l   e s t a t e   b u s i n e s s   f r o m  o t h e r manufacturing enterprises, for purposes of the imposition of the CWT, is not their production processes but the prices of their goods sold and the number of transactions involved. Theincome f rom the   sa le   o f a   rea l   p roper ty i s   b igger and i t s frequency of transaction limited, making it less cumbersomefor the parties to comply with the withholding tax scheme. Onthe other hand, each manufacturing enterprise may have tensof thousands of transactions with several thousand customersevery month involving both minimal and substantial amounts

 CIR v. Toda, Jr.

 GR No. 147188; 14

September 2004

F A C T S: On 2 March 1989, CIC

authorized Benigno P. Toda, Jr.,

President and owner of 99.991% of its

outstanding capital stock, to sell the

Cibeles Building. On 30 August 1989,

Toda purportedly sold the property for

P100 million to Rafael A. Altonaga,

who, in turn, sold the same property

on the same day to Royal Match Inc.

(RMI) for P200 million. Three and a

half years later Toda died. On 29

March 1994, the BIR sent an

assessment notice and demand letter

to the CIC for deficiency income tax

for the year 1989. On 27 January

1995, the Estate of Benigno P. Toda,

Jr., represented by special co-

administrators Lorna Kapunan and

Mario Luza Bautista, received a

Notice of Assessment from the CIR for

deficiency income tax for the year

1989. The Estate thereafter filed a

letter of protest. The Commissioner

dismissed the protest. On 15 February

1996, the Estate filed a petition for

review with the CTA. In its decision

the CTA held that the Commissioner

failed to prove that CIC committed

fraud to deprive the government of

the taxes due it. It ruled that even

assuming that a pre-conceived

scheme was adopted by CIC, the same

constituted mere tax avoidance, and

not tax evasion. Hence, the CTA

declared that the Estate is not liable

for deficiency of income tax. The

Commissioner filed a petition for

review with the Court of Appeals. The

Court of Appeals affirmed the decision

of the CTA, hence, this recourse.

I S S U E: Whether or not this is a

case of tax evasion or tax avoidance.

H E L D: Tax evasion connotes the

integration of three factors: (1) the

end to be achieved, i.e. the payment

of less than that known by the

taxpayer to be legally due, or the non-

payment of tax when it is shown that a

tax is due; (2) an accompanying state

of mind which is described as being

“evil,” in “bad faith,” “willfull,” or

“deliberate and not accidental”; and

(3) a course of action or failure of

action which is unlawful. All these

factors are present in the instant case.

The scheme resorted to by CIC in

making it appear that there were two

sales of the subject properties, i.e.

from CIC to Altonaga, and then from

Altonaga to RMI cannot be considered

a legitimate tax planning. Such

scheme is tainted with fraud.

Altonaga’s sole purpose of acquiring

and transferring title of the subject

properties on the same day was to

create a tax shelter. The sale to him

was merely a tax ploy, a sham, and

without business purpose and

economic substance. Doubtless, the

execution of the two sales was

calculated to mislead the BIR with the

end in view of reducing the

consequent income tax liability.

SMART COMMUNICATIONS, INC. vs. THE CITY OF DAVAO, represented Mayor DUTERTE, and the SANGGUNIANG PANLUNGSOD

NACHURA, J.:

On March 27, 1992, Smart obtained its legislative franchise under R.A. No. 7294. Sec. 9 of said law provides that “The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate buildings and personal property, exclusive of' this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied.)”

On January 1, 1992, the Local Government Code (R.A. No. 7160) took effect. Section 137, in relation to Section 151 of R.A. No. 7160, allowed the imposition of franchise tax by the local government units.

R.A. No. 7716 or the VAT Law was enacted which specifically expressed under Section 20,

repealing provisions of all special laws (that includes the legislative franchise R.A. No. 7294, a special law) relative to the rate of franchise taxes. It also repealed, amended, or modified all other laws, orders, issuances, rules and regulations, or parts thereof which are inconsistent with it. It is in effect, rendered ineffective the “in lieu of all taxes” clause in R.A. No. 7294.

Tax Code of the City of Davao, Section 1, Article 10 thereof, provides: “Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax on businesses enjoying a franchise, at a rate of seventy-five percent (75%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.

Smart filed a special civil action for declaratory relief for the ascertainment of its rights and obligations under the Tax Code of the City of Davao and contends that its telecenter in Davao City is exempt from payment of franchise tax to the City, on the following grounds:

the issuance of its franchise under Republic Act (R.A.) No. 7294, subsequent to R.A. No. 7160 shows the clear legislative intent to exempt it from the provisions of R.A. 7160

that the “in lieu of all taxes” clause in Section 9 of its franchise exempts it from all taxes, both local and national, except the national franchise tax (now VAT), income tax, and real property tax

Section 137 of R.A. No. 7160 can only apply to exemptions already existing at the time of its effectivity and not to future exemptions;

not covered bec. The franchise was granted after the effectivity of the LGC

the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as the “ in lieu of all taxes” clause found in Section 9

of R.A. No. 7294; and only taxes it may be made

to bear under its franchise are the national franchise tax (now VAT), income tax, and real property tax

exempt from the local franchise tax because the “in lieu of taxes” clause in its franchise does not distinguish between national and local taxes.

the imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contracts.

franchise is in the nature of a contract between the government and Smart.

Respondent invoked its power granted by the Constitution to local government units to create their own sources of revenue.

RTC denied the petition on the ground that petitioner failed to prove that it is exempt from tax applying strictissimi juris against the taxpayer and liberally in favor of the taxing authority. On the issue of violation of the non-impairment clause of the Constitution, it cited Mactan Cebu International Airport Authority v. Marcos and declared that the city’s power to tax is based not merely on a valid delegation of legislative power but on the direct authority granted to it by the fundamental law. That while such power may be subject to restrictions or conditions imposed by Congress, any such legislated limitation must be consistent with the basic policy of local autonomy.

ISSUES:

Exemption from Franchise Tax under Section 9, RA 7294 which contains “in lieu of taxes” clause “In lieu of taxes” clause applies to national taxes or local taxes or both? Violation to the Constitutional prohibition against “impairment of contracts”

HELD: Petition is denied.

On “In lieu of all taxes“ Clause in RA 7294:

R.A. No. 7294 is not definite in granting exemption to Smart from local taxation. Section 9 of R.A. No. 7294 imposes on Smart a franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under the franchise and the said percentage shall be in lieu of all taxes on the franchise or earnings thereof. R.A. No 7294 does not expressly provide what kind of taxes Smart is exempted from. It is not clear whether the “in lieu of all taxes” provision in the franchise of Smart would include exemption from local or national taxation. What is clear is that Smart shall pay franchise tax equivalent to three percent (3%) of all gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and the national government is not unequivocal.

In this case, the doubt must be resolved in favor of the City of Davao. The “in lieu of all taxes” clause applies only to national internal revenue taxes and not to local taxes. It is clear that the “in lieu of all taxes” clause apply only to taxes under the NIRC and not to local taxes. It is not even applied to income tax, as shown in the provision itself, to wit:

proviso in the first paragraph of Section 9, Smart's franchise states that the grantee shall "continue to be liable for income taxes payable under Title II of the National Internal Revenue Code."

second paragraph of Section 9, speaks of tax returns filed and taxes paid to the "Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code."

same paragraph, declares that the tax returns "shall be subject to audit by the Bureau of Internal Revenue."

If Congress intended the "in lieu of all taxes" clause in Smart's franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes.

It should be noted that the “in lieu of all taxes” clause in R.A. No. 7294 has become functus officio with the abolition of the franchise tax on telecommunications companies. Currently, Smart along with other telecommunications companies pays the uniform 10% value-added tax. The VAT on sale of services of telephone franchise grantees is equivalent to 10% of gross receipts derived from the sale or exchange of services, as provided in R.A. No. 7716, as amended by the Expanded Value Added Tax Law (R.A. No. 8241).

On the burden of grant to Tax exemptions:

Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of the taxing authority. They can only be given force when the grant is clear and categorical. If the intention of the legislature is open to doubt, then the intention of the legislature must be resolved in favor of the State.

On impairment of contracts:

There is no violation of Article III, Section 10 of the 1987 Philippine Constitution. The franchise of Smart does not expressly provide for exemption from local taxes. Absent the express provision on such exemption under the franchise, we are constrained to rule against it. Due to this ambiguity in the law, the doubt must be resolved against the grant of tax exemption.

Contract Clause has never been thought as a limitation on the exercise of the State’s power

of taxation save only where a tax exemption has been granted for a valid consideration.

PBCom. vs. CIR(GR 112024. Jan. 28, 1999)

Posted by taxcasesdigest on Tuesday, July 7, 2009

Labels: 2-year, administrative issuance, reglementary period, tax credit, tax refund

FACTS:

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00 by applying PBCom's tax credit memos for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered net loss of P25,317,228.00, thereby showing no income tax liability in its Annual Income Tax Returns for the year-ended December 31, 1985. For the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue."

The CTA decided in favor of the BIR on the ground that the Petition was filed out of time as the same was filed beyond the two-year reglementary period. A motion for Reconsideration was denied and the appeal to Court of Appeals was likewise denied. Thus, this appeal to Supreme Court.

Issues:

a) Whether or not Revenue Regulations No. 7-85 which alters the reglementary period from two (2) years to ten (10) years is valid.

b) Whether or not the petition for tax refund had already prescribed.

Ruling:

RR 7-85 altering the 2-year prescriptive period imposed by law to 10-year prescriptive period is invalid.

Administrative issuances are merely interpretations and not expansions of the provisions of law, thus, in case of inconsistency, the law prevails over them. Administrative agencies have no legislative power.

“When the Acting Commissioner of Internal Revenue issued RMC 7-85,

changing the prescriptive period of two years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret

the law; rather it legislated guidelines contrary to the statute passed by Congress.”

“It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply and implement.”

“Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.”

By implication of the above, claim for refund had already prescribed.

Since the petition had been filed beyond the prescriptive period, the same has already prescribed. The fact that the final adjusted return show an excess tax credit does not automatically entitle taxpayer claim for refund without any express intent.

WHEREFORE, the petition is hereby DENIED. The decision of the Court of

Appeals appealed from is AFFIRMED, with COSTS against the petitioner.

COMMISSION OF INTERNAL REVENUE vs. HANTEX TRADING CO., INCG.R. No. 136975. March 31, 2005

Facts:

Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57. Thus, Hantex receive a subpoena to present its books of account which it failed to do. The bureau cannot find any original copies of the products Hantex imported since the originals were eaten by termites. Thus, the Bureau relied on the certified copies of the respondent’s Profit and Loss Statement for 1987 and 1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer, as well as excerpts from the entries certified by Tomas and Danganan. The case was submitted to the CTA which ruled that Hantex have tax deficiency and is ordered to pay, per investigation of the Bureau. The CA ruled that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators.

Issue:

Whether or not the final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latter’s 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law.

Held:

Section 16 of the NIRC of 1977, as amended, provides that the Commissioner of Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b), which provides that “Failure to submit required returns, statements, reports and other documents. – When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.” This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayer’s failure to file one, or to amend a return already filed in the BIR. The “best evidence” envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The

petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer.