Republic of the PhilippinesSUPREME COURTManila

EN BANC

G.R. No. 109289 October 3, 1994

RUFINO R. TAN,petitioner,vs.RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as COMMISSIONER OF INTERNAL REVENUE,respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG, MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA, JR.,petitioners,vs.RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in his capacity as COMMISSIONER OF INTERNAL REVENUE,respondents.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG,J.:These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and, inG.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic ActNo. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.

Article VI, Section 28(1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that public respondents have exceeded their rule-making authority in applying SNIT to general professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's directive, have filed their respective memoranda.

G.R. No. 109289Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme for the Self-Employedand Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21 and 29 of the National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue Code, as now amended, provide:

Sec. 21. Tax on citizens or residents.

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in the Practice of Profession. A tax is hereby imposed upon the taxable net income as determined in Section 27 received during each taxable year from all sources, other than income covered by paragraphs (b), (c), (d) and (e) of this section by every individual whethera citizen of the Philippines or an alien residing in the Philippines who is self-employed or practices his profession herein, determined in accordance with the following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%of excess over P350,000

Sec. 29. Deductions from gross income. In computing taxable income subject to tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this section:Provided,however, That in computing taxable income subject to tax under Section 21 (f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the rehabilitation of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited financial institutions which must be proven to have been incurred in connection with the conduct of a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a maximum of forty per cent (40%) of their gross receipts shall be allowed as deductions to answer for business or professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the amendatory law should be considered as having now adopted agrossincome, instead of as having still retained thenetincome, taxation scheme. The allowance for deductible items, it is true, may have significantly been reduced by the questioned law in comparison with that which has prevailed prior to the amendment; limiting, however, allowable deductions from gross income is neither discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that various deductions, which are by no means inconsequential, continue to be well provided under the new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling legislation intended to unite the members of the legislature who favor any one of unrelated subjects in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly apprise the people, through such publications of its proceedings as are usually made, of the subjects of legislation.1The above objectives of the fundamental law appear to us to have been sufficiently met. Anything else would be to require a virtual compendium of the law which could not have been the intendment of the constitutional mandate.Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law would now attempt to tax single proprietorships and professionals differently from the manner it imposes the tax on corporations and partnerships. The contention clearly forgets, however, that such a system of income taxation has long been the prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as: (1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both present and future conditions, and (4) the classification applies equally well to all those belonging to the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3;Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to increasingly shift the income tax system towards the schedular approach2in the income taxation of individual taxpayers and to maintain, by and large, the present global treatment3on taxable corporations. We certainly do not view this classification to be arbitrary and inappropriate.Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be an imbalance between the tax liabilities of those covered by the amendatory law and those who are not. With the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) andsitus(place) of taxation. This court cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the power to tax cannot override constitutional proscriptions. This stage, however, has not been demonstrated to have been reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for being violative of due process must perforce fail. The due process clause may correctly be invoked only when there is a clear contravention of inherent or constitutional limitations in the exercise of the tax power. No such transgression is so evident to us.

G.R. No. 109446The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership The general professional partnership (GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred by partners in their individual capacities in the practice of their profession which are not reimbursed or paid by the partnership but are not considered as direct cost, are not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's privilege speech by way of commenting on the questioned implementing regulation of public respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct impression of this bill. Do we speak here of individuals who are earning, I mean, who earn through business enterprises and therefore, should file an income tax return?

MR. PEREZ. That is correct, Mr. Speaker. This does not apply to corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from Batangas say that this bill is intended to increase collections as far as individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate version of the SNITS, it is categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or to partnerships; it is only with respect to individuals and professionals. (Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respective professions and partners in general professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. (a) Persons exercising a common profession in general partnership shall be liable for income tax only in their individual capacity, and the share in the net profits of the general professional partnership to which any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and the tax paid in accordance with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each partner

(1) Shall take into account separately his distributive share of the partnership's income, gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless he declares his distributive share of the gross income undiminished by his share of the deductions.

There is, then and now, no distinction in income tax liability between a person who practices his profession alone or individually and one who does it through partnership (whether registered or not) with others in the exercise of a common profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view can easily become myopic, however, when the law is understood, as it should be, as only forming part of, and subject to, the whole income tax concept and precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in levying the tax, adopts the most comprehensive taxsitusof nationality and residence of the taxpayer (that renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-resident aliens and foreign corporations to income tax on their income from Philippine sources). In the process, the Code classifies taxpayers into four main groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable Trusts (irrevocable both as tocorpusand as toincome).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships."Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as "taxable partnerships") which, for purposes of the above categorization,are by law assimilated to be within the context of, and so legally contemplated as, corporations. Except for few variances, such as in the application of the "constructive receipt rule" in the derivation of income, the income tax approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496, aforequoted, to cover corporations and partnerships which are independently subject to the payment of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even considered as independent taxable entities for income tax purposes. A generalprofessionalpartnership is such an example.4Here, the partners themselves, not the partnership (although it is still obligated to file an income tax return [mainly for administration and data]), are liable for the payment of income tax in theirindividualcapacity computed on their respective and distributive shares of profits. In the determination of the tax liability, a partner does so as anindividual, and there is no choice on the matter. In fine, under the Tax Code on income taxation, the general professional partnership is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate distribution of such income to, respectively, each of the individual partners.Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing rule as now so modified by Republic ActNo. 7496 on basically the extent of allowable deductions applicable toallindividual income taxpayers on their non-compensation income. There is no evident intention of the law, either before or after the amendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice their respective professions individually and of those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno, Kapunan and Mendoza, JJ., concur.Padilla and Bidin, JJ., are on leave.

PhilippineLaw.infoJurisprudence1964JulyPhilippineLaw.infoJurisprudenceSCRAVol. 11G.R. Nos. L-18169, L-18262 & L-21434, Commissioner of Internal Revenue v. Lednicky and Lednicky, 11 SCRA 603

Republic of the PhilippinesSUPREME COURTManila

EN BANC

July 31, 1964

G.R. Nos. L-18169, L-18262 & L-21434COMMISSIONER OF INTERNAL REVENUES,petitioner,vs.V.E. LEDNICKY and MARIA VALERO LEDNICKY,respondents.

Office of the Solicitor General for petitioner.Ozaeta, Gibbs and Ozaeta for respondents.REYES, J.B.L.,J.:The above-captioned cases were elevated to this Court under separate petitions by the Commissioner for review of the corresponding decisions of the Court of Tax Appeals. Since these cases involve the same parties and issues akin to each case presented, they are herein decided jointly.

The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, respectively, both American citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in question.

In compliance with local law, the aforesaid respondents, on 27 March 1957, filed their income tax return for 1956, reporting therein a gross income of P1,017,287. 65 and a net income of P733,809.44 on which the amount of P317,395.4 was assessed after deducting P4,805.59 as withholding tax. Pursuant to the petitioner's assessment notice, the respondents paid the total amount of P326,247.41, inclusive of the withheld taxes, on 15 April 1957.

On 17 March 1959, the respondents Lednickys filed an amended income tax return for 1956. The amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the United States government as federal income tax for 1956. Simultaneously with the filing of the amended return, the respondents requested the refund of P112,437.90.

When the petitioner Commissioner of Internal Revenue failed to answer the claim for refund, the respondents filed their petition with the Tax Court on 11 April 1959 as CTA Case No. 646, which is now G. R. No. L-18286 in the Supreme Court.

G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount of P150,269.00, as alleged overpaid income tax for 1955, the facts of which are as follows:

On 28 February 1956, the same respondents-spouses filed their domestic income tax return for 1955, reporting a gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April 1956, they filed an amended income tax return, the amendment upon the original being a lesser net income of P1,012,554.51, and, on the basis of this amended return, they paid P570,252.00, inclusive of withholding taxes. After audit, the petitioner determined a deficiency of P16,116.00, which amount, the respondents paid on 5 December 1956.

Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in Manila their federal income tax return for the years 1947, 1951, 1952, 1953, and 1954 on income from Philippine sources on a cash basis. Payment of these federal income taxes, including penalties and delinquency interest in the amount of P264,588.82, were made in 1955 to the U.S. Director of Internal Revenue, Baltimore, Maryland, through the National City Bank of New York, Manila Branch. Exchange and bank charges in remitting payment totaled P4,143.91.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts.

On 11 August 1958, the said respondents amended their Philippine income tax return for 1955 to include the following deductions:

U.S. Federal income taxesP471,867.32

Interest accrued up to May 15, 195540,333.92

Exchange and bank charges4,143.91

T o t a l

P516,345.15

and therewith filed a claim for refund of the sum of P166,384.00, which was later reduced to P150,269.00.

The respondents Lednicky brought suit in the Tax Court, which was docketed therein as CTA Case No. 570.

In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to respondents Lednickys' income tax return for 1957, filed on 28 February 1958, and for which respondents paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80, representing taxes paid to the U.S. Government on income derived wholly from Philippine sources. On the strength thereof, respondents seek refund of P90 520.75 as overpayment. The Tax Court again decided for respondents.

The common issue in all three cases, and one that is of first impression in this jurisdiction, is whether a citizen of the United States residing in the Philippines, who derives income wholly from sources within the Republic of the Philippines, may deduct from his gross income the income taxes he has paid to the United States government for the taxable year on the strength of section 30 (C-1) of the Philippine Internal Revenue Code, reading as follows:

SEC. 30.Deduction from gross income. In computing net income there shall be allowed as deductions

(a) ...

(b) ...

(c) Taxes:

(1)In general. Taxes paid or accrued within the taxable year, except

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes imposed by the authority of any foreign country;but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. (Emphasis supplied)

The Tax Court held that they may be deducted because of the undenied fact that the respondent spouses did not "signify" in their income tax return a desire to avail themselves of the benefits of paragraph 3 (B) of the subsection, which reads:

Par. (c) (3)Credits against tax for taxes of foreign countries. If the taxpayer signifies in his return his desire to have the benefits of this paragraph, the tax imposed by this Title shall be credited with

(A) ...;

(B)Alien resident of the Philippines. In the case of an alien resident of the Philippines, the amount of any such taxes paid or accrued during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country;

It is well to note that the tax credit so authorized is limited under paragraph 4 (A and B) of the same subsection, in the following terms:

Par. (c) (4)Limitation on credit. The amount of the credit taken under this section shall be subject to each of the following limitations:

(A) The amount of the credit in respect to the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources within such country taxable under this Title bears to his entire net income for the same taxable year; and

(B) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer's net income from sources without the Philippines taxable under this Title bears to his entire net income for the same taxable year.

We agree with appellant Commissioner that the Construction and wording of Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the taxpayer's gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is precluded from deducting the foreign income taxes from his gross income. For it is obvious that in prescribing that such deduction shall be allowed in the case ofa taxpayer who does not signifyin his return his desire to have to any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign countries), the statute assumes that the taxpayer in question alsomay signifyhis desire to claim a tax credit and waive the deduction; otherwise, the foreign taxes would always be deductible, and their mention in the list of non-deductible items in Section 30(c) might as well have been omitted, or at least expressly limited to taxes on income from sources outside the Philippine Islands.

Had the law intended that foreign income taxes could be deducted from gross income in any event,regardless of the taxpayer's right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayer's waiving the deduction; in which Case the right to reduction under subsection (c-1-B) would have been made absolute or unconditional (by omitting foreign taxes from the enumeration of non-deductions), while the right to a tax credit under subsection (c-3) would have been expressly conditioned upon the taxpayer's not claiming any deduction under subsection (c-1). In other words, if the law had been intended to operate as contended by the respondent taxpayers and by the Court of Tax Appeals section 30 (subsection (c-1) instead of providing as at present:

SEC. 30.Deduction from gross income. In computing net income there shall be allowed as deductions

(a) .

(b) ...

(c) Taxes:

(1)In general. Taxes paid or accrued within the taxable year, except

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of paragraph (3) of this subsection (relating to credit for taxes of foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

would have merely provided:

SEC. 30.Decision from grow income. In computing net income there shall be allowed as deductions:

(a) ...

(b) ...

(c) Taxes paid or accrued within the taxable year, EXCEPT

(A) The income tax provided for in this Title;

(B) Omitted or else worded as follows:

Income, war profits and excess profits taxes imposed by authority of any foreign country onincome earned within the Philippinesif the taxpayer does not claim the benefits under paragraph 3 of this subsection;

(C) Estate, inheritance or gift taxes;

(D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed.

while subsection (c-3) would have been made conditional in the following or equivalent terms:

(3)Credits against tax for taxes of foreign countries. If the taxpayerhas not deducted such taxes from his gross income butsignifies in his return his desire to have the benefits of this paragraph, the tax imposed by Title shall be credited with ... (etc.)

Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from claiming twice the benefits of his payment of foreign taxes, by deduction from gross income (subs. c-1) and by tax credit (subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim benefit under either of these headings at his option, so that he must be entitled to a tax credit (respondent taxpayers admittedly are not so entitled because all their income is derived from Philippine sources), or the option to deduct from gross income disappears altogether.

Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the income taxes they are required to pay to the government of the United States in their return for Philippine income tax, they would be subjected to double taxation. What respondents fail to observe is that double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of thesame governmental entity(cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89 Phil. 357). In the present case, while the taxpayers would have to pay two taxes on the same income, the Philippine government only receives the proceeds of one tax. As between the Philippines, where the income was earned and where the taxpayer is domiciled, and the United States, where that income wasnotearned and where the taxpayer did not reside, it is indisputable that justice and equity demand that the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double taxation should come from the United States, and not from the Philippines, since the former's right to burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the wealth that is being taxed.

Aside from not conforming to the fundamental doctrine of income taxation that the right of a government to tax income emanates from its partnership in the production of income, by providing the protection, resources, incentive, and proper climate for such production, the interpretation given by the respondents to the revenue law provision in question operates, in its application, to place a resident alien with only domestic sources of income in an equal, if not in a better, position than one who has both domestic and foreign sources of income, a situation which is manifestly unfair and short of logic.

Finally, to allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to conferring on the latter the power to reduce the tax income of the Philippine government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed upon an alien resident is increased by his own government, his deduction from Philippine taxes would correspondingly increase, and the proceeds for the Philippines diminished, thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible with the status of the Philippines as an independent and sovereign state.

IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals are reversed, and, the disallowance of the refunds claimed by the respondents Lednicky is affirmed, with costs against said respondents-appellees.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes, Regala and Makalintal, JJ., concur.Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 172231 February 12, 2007COMMISSIONER OF INTERNAL REVENUE,Petitioner,vs.ISABELA CULTURAL CORPORATION,Respondent.

D E C I S I O N

YNARES-SANTIAGO,J.:Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices for deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986.

The deficiency income tax ofP333,196.86, arose from:

(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3for the year ending December 31, 1985;4(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.5(c) Expense for security services of El Tigre Security & Investigation Agency for the months of April and May 1986.6(2) The alleged understatement of ICCs interest income on the three promissory notes due from Realty Investment, Inc.

The deficiency expanded withholding tax ofP4,897.79(inclusive of interest and surcharge) was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services.7On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it received a final notice before seizure demanding payment of the amounts stated in the said notices. Hence, it brought the case to the CTA which held that the petition is premature because the final notice of assessment cannot be considered as a final decision appealable to the tax court. This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore be questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210.8The case was thus remanded to the CTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued against ICC. It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount thereof could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was the BIR which made an overstatement of said income when it compounded the interest income receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for security services as shown by the various payment orders and confirmation receipts it presented as evidence. The dispositive portion of the CTAs Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET ASIDE.

SO ORDERED.9Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision,10holding that although the professional services (legal and auditing services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC received the billing statements for said services. It further ruled that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. As to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment, petitioner invoked the presumption that the assessment notices issued by the BIR are valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for professional and security services from ICCs gross income; and (2) held that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers.11The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and deductions.12In the instant case, the accounting method used by ICC is the accrual method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so cannot deduct the same for the next year.13The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to indeterminacy merely of time of payment.14For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such a manner that the taxpayer must recognize income or expense? 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 all-events test requires the right to income or liability be fixed, and the amount of such income or liability be determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within the taxable year.The amount of liability does not have to be determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy" implies something less than an exact or completely accurate amount.[15]The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to have known, at the closing of its books for the taxable year.[16]Accrual method of accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or deduction.17Corollarily, it is a governing principle in taxation that tax exemptions must be construed instrictissimi jurisagainst the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed.18In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax problems for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960s.19From 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 as well as the compensation for its legal services. The failure to determine the exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden. As to when the firms performance of its services in connection with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquire about the amount of its liability, or whether it does or does not possess the information necessary to compute the amount of said liability withreasonableaccuracy, are questions of fact which ICC never established. It simply relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC in 198620and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and that only simple interest computation and not a compounded one should have been applied by the BIR. There is indeed no stipulation between the latter and ICC on the application of compounded interest.21Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax from its claimed deductions for security services and remitted the same to the BIR is supported by payment order and confirmation receipts.22Hence, the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for security services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for professional services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for professional and security services, is declared valid only insofar as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.

CONSUELO YNARES-SANTIAGOAssociate Justice

WE CONCUR:

Republic of the PhilippinesSUPREME COURTManila

SECOND DIVISION

G.R. No. L-66838 April 15, 1988

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX APPEALS,respondents.

PARAS,J.:This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal Revenue, seeking the reversal of the decision of the Court of Tax Appeals dated January 31, 1984 in CTA Case No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. Bureau of Internal Revenue," which declared petitioner therein, Procter and Gamble Philippine Manufacturing Corporation to be entitled to the sought refund or tax credit in the amount of P4,832,989.00 representing the alleged overpaid withholding tax at source and ordering payment thereof.

The antecedent facts that precipitated the instant petition are as follows:

Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter referred to as PMC-Phil.), a corporation duly organized and existing under and by virtue of the Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of Procter and Gamble, U.S.A. herein referred to as PMC-USA), a non-resident foreign corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is the sole shareholder or stockholder of PMC Phil., as PMC-U.S.A. owns wholly or by 100% the voting stock of PMC Phil. and is entitled to receive income from PMC-Phil. in the form of dividends, if not rents or royalties. In addition, PMC-Phil has a legal personality separate and distinct from PMC-U.S.A. (Rollo, pp. 122-123).

For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to P25%-35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code, the pertinent portion of which reads:

SEC. 24. Rates of tax on corporation. a) Tax on domestic corporations. A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or geting under the laws of the Philippines, and partnerships, no matter how created or organized, but not including general professional partnerships, in accordance with the following:

Twenty-five per cent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and

Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred thousand pesos.

After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code which reads in full:

SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal Revenue Code, as amended, is hereby further amended to read as follows:

(b) Tax on foreign corporations. 41) Non-resident corporation. A foreign corporation not engaged in trade or business in the Philippines, including a foreign life insurance company not engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the gross income received during its taxable year from all sources within the Philippines, as interest (except interest on foreign loans which shall be subject to 15% tax), dividends, rents, royalties, salaries, wages, premiums, annuities, compensations, remunerations for technical services or otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits, and income, and capital gains: Provided, however, That premiums shall not include re-insurance premium Provided, further, That cinematograpy film owners, lessors, or distributors, shall pay a tax of 15% on their gross income from sources within the Philippines: Provided, still further That on dividends received from a domestic corporation hable to tax under this Chapter, the tax shall be 15% of the dividends received, which shall be collected and paid as provided in Section 53(d) of this Code, subject to the condition that the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which represents the difference between the regular tax (35%) on corporations and the tax (15%) on dividends as provided in this section: Provided, finally That regional or area headquarters established in the Philippines by multinational corporations and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region shall not be subject to tax.

For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975, PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or P6,457,485.00.

In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as aforequoted, as the withholding agent of the Philippine government, with respect to the dividend taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of Internal Revenue, for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid withholding tax in the amount of P4,832,989.00," computed as follows:

Dividend IncomeTax withheld15% tax underAlleged of

PMC-U.S.A.at source attax sparingover

35%provisopayment

P17,707,460P6,196,611P2,656,119P3,541,492

6,457,4852,260,119968,6221,291,497

P24,164,946P8,457,731P3,624,941P4,832,989

There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the intervention of the CTA when on July 13, 1977 it filed with herein respondent court a petition for review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation vs. The Commissioner of Internal Revenue," praying that it be declared entitled to the refund or tax credit claimed and ordering respondent therein to refund to it the amount of P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund. (Rollo, p. 41)

On the other hand therein respondent, Commissioner of qqqInterlaal Revenue, in his answer, prayed for the dismissal of said Petition and for the denial of the claim for refund. (Rollo, p. 48)

On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the herein petitioner, the dispositive portion of the same reading as follows:

Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing the overpaid withholding tax at source and the payment therefor by the respondent hereby ordered. No costs.

SO ORDERED.

Hence this petition.

The Second Division of the Court without giving due course to said petition resolved to require the respondents to comment (Rollo, p. 74). Said comment was filed on November 8, 1984 (Rollo, pp. 83-90). Thereupon this Court by resolution dated December 17, 1984 resolved to give due course to the petition and to consider respondents' comulent on the petition as Answer. (Rollo, p. 93)

Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief on May 13, 1985 (Rollo, p. 107), while private respondent PMC Phil filed its brief on August 22, 1985.

Petitioner raised the following assignments of errors:

I

THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT AND IN LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT)IS ENTITLED TO THE SOUGHT REFUND OR TAX CREDIT OF P4,832,989.00, REPRESENTING ALLEGEDLY THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON REMITTANCE OF DIVIDEND INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE, USA (PMC-USA FOR SHORT).

II

THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT AND IN LAW, THAT PMC-USA, A NON-RESIDENT FOREIGN CORPORATION UNDER SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION DOMICILED IN THE UNITED STATES, IS ENTITLED UNDER THE U.S. TAX CODE AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF THE 35 PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE CONSIDERED OR DEEMED PAID BY THE PHILIPPINE GOVERNMENT.

The sole issue in this case is whether or not private respondent is entitled to the preferential 15% tax rate on dividends declared and remitted to its parent corporation.

From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and they are (1) Whether or not PMC-Phil. is the proper party to claim the refund and (2) Whether or not the U. S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends?

The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter or payor of the dividend income, and a mere withholding agent for and in behalf of the Philippine Government, which should be legally entitled to receive the refund if any. (Rollo, p. 129)

It will be observed at the outset that petitioner raised this issue for the first time in the Supreme Court. He did not raise it at the administrative level, nor at the Court of Tax Appeals. As clearly ruled by Us "To allow a litigant to assume a different posture when he comes before the court and challenges the position he had accepted at the administrative level," would be to sanction a procedure whereby the Court-which is supposed to review administrative determinations would not review, but determine and decide for the first time, a question not raised at the administrative forum." Thus it is well settled that under the same underlying principle of prior exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court cannot generally be raised for the first time on appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR, 114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107 SCRA 726 [1981]),

Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in matters involving taxation. The errors of certain administrative officers should never be allowed to jeopardize the government's financial position.

The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding agent of the government and therefore cannot claim reimbursement of the alleged over paid taxes, is completely meritorious. The real party in interest being the mother corporation in the United States, it follows that American entity is the real party in interest, and should have been the claimant in this case.

Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A. a non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion (of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the government. The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as amended by Public Law 87-834, the law governing tax credits granted to U.S. corporations on dividends received from foreign corporations, which to the extent applicable reads:

SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.

(a)Treatment of Taxes Paid by Foreign Corporation- For purposes of this subject, a domestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall-

(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends (determined without regard to Section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid); and

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits [as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less-developed country corporation, be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends bears to the amount of such accumulated profits.

xxx xxx xxx

(c) Applicable Rules

(1)Accumulated profits defined- For purpose of this section, the term 'accumulated profits' means with respect to any foreign corporation.

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country.... ; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in excess of the income, was profits, and excess profits taxes imposed on or with respect to such profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of what year or years such dividends were paid, treating dividends paid in the first 20 days of any year as having been paid from the accumulated profits of the preceding year or years (unless to his satisfaction shows otherwise), and in other respects treating dividends as having been paid from the most recently accumulated gains, profits, or earnings. .. (Rollo, pp. 55-56)

To Our mind there is nothing in the aforecited provision that would justify tax return of the disputed 15% to the private respondent. Furthermore, as ably argued by the petitioner, the private respondent failed to meet certain conditions necessary in order that the dividends received by the non-resident parent company in the United States may be subject to the preferential 15% tax instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income tax return of its mother company for 1975 when the dividends were received; and (3) to submit any duly authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is REVERSED and SET ASIDE.

SO ORDERED.

HIRD DIVISIONCOMMISSIONER OF INTERNAL G.R. No. 159647REVENUE,Petitioner, Present:Panganiban,J.,Chairman,Sandoval-Gutierrez,- versus - Corona,Carpio Morales, andGarcia,JJCENTRAL LUZON DRUG Promulgated:CORPORATION,Respondent. April 15, 2005x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- xDECISIONPANGANIBAN,J.:T

he 20 percent discount required by the law to be given to senior citizens is atax credit, not merely atax deductionfrom the gross income or gross sale of the establishment concerned. Atax creditis used by a private establishment only after the tax has been computed; atax deduction, before the tax is computed. RA 7432 unconditionally grants atax creditto all covered entities. Thus, the provisions of the revenue regulation that withdraw or modify such grant are void. Basic is the rule that administrative regulations cannot amend or revoke the law.The CaseBefore us is a Petition for Review[1]under Rule 45 of the Rules of Court, seeking to set aside the August 29, 2002 Decision[2]and the August 11, 2003 Resolution[3]of the Court of Appeals (CA) in CA-GR SP No. 67439. The assailed Decision reads as follows:WHEREFORE, premises considered, the Resolution appealed from isAFFIRMEDin toto.No costs.[4]The assailed Resolution denied petitioners Motion for Reconsideration.The FactsThe CA narrated the antecedent facts as follows:Respondent is a domestic corporation primarily engaged in retailing of medicines and other pharmaceutical products. In 1996, it operated six (6) drugstores under the business name and style Mercury Drug.From January to December 1996, respondent granted twenty (20%) percent sales discount to qualified senior citizens on their purchases of medicines pursuant to Republic Act No. [R.A.] 7432 and its Implementing Rules and Regulations. For the said period, the amount allegedly representing the 20% sales discount granted by respondent to qualified senior citizens totaledP904,769.00.On April 15, 1997, respondent filed its Annual Income Tax Return for taxable year 1996 declaring therein that it incurred net losses from its operations.On January 16, 1998, respondent filed with petitioner a claim for tax refund/credit in the amount ofP904,769.00 allegedly arising from the 20% sales discount granted by respondent to qualified senior citizens in compliance with [R.A.] 7432. Unable to obtain affirmative response from petitioner, respondent elevated its claim to the Court of Tax Appeals [(CTA or Tax Court)]viaa Petition for Review.On February 12, 2001, the Tax Court rendered aDecision[5]dismissing respondents Petition for lack of merit. In said decision, the [CTA] justified its ruling with the following ratiocination:x x x, if no tax has been paid to the government, erroneously or illegally, or if no amount is due and collectible from the taxpayer, tax refund or tax credit is unavailing. Moreover, whether the recovery of the tax is made by means of a claim for refund or tax credit, before recovery is allowed[,] it must be first established that there was an actual collection and receipt by the government of the tax sought to be recovered. x x x.x x x x x x x x xPrescinding from the above, it could logically be deduced that tax credit is premised on the existence of tax liability on the part of taxpayer. In other words, if there is no tax liability, tax credit is not available.Respondent lodged a Motion for Reconsideration. The [CTA], in its assailed resolution,[6]granted respondents motion for reconsideration and ordered herein petitioner to issue a Tax Credit Certificate in favor of respondent citing the decision of the then Special Fourth Division of [the CA] in CA G.R. SP No. 60057 entitledCentral [Luzon] Drug Corporation vs. Commissioner of Internal Revenuepromulgated on May 31, 2001, to wit:However, Sec. 229 clearly does not apply in the instant case because the tax sought to be refunded or credited by petitioner was not erroneously paid or illegally collected. We take exception to the CTAs sweeping but unfounded statement that both tax refund and tax credit are modes of recovering taxes which are either erroneously or illegally paid to the government. Tax refunds or credits do not exclusively pertain to illegally collected or erroneously paid taxes as they may be other circumstances where a refund is warranted. The tax refund provided under Section 229 deals exclusively with illegally collected or erroneously paid taxes but there are other possible situations, such as the refund of excess estimated corporate quarterly income tax paid, or that of excess input tax paid by a VAT-registered person, or that of excise tax paid on goods locally produced or manufactured but actually exported. The standards and mechanics for the grant of a refund or credit under these situations are different from that under Sec. 229. Sec. 4[.a)] of R.A. 7432, is yet another instance of a tax credit and it does not in any way refer to illegally collected or erroneously paid taxes, x x x.[7]Ruling of the Court of Appeals

The CA affirmedin totothe Resolution of the Court of Tax Appeals (CTA) ordering petitioner to issue a tax credit certificate in favor of respondent in the reduced amount ofP903,038.39. It reasoned that Republic Act No. (RA) 7432 required neither a tax liability nor a payment of taxes by private establishments prior to the availment of a tax credit. Moreover, such credit is not tantamount to an unintended benefit from the law, but rather a just compensation for the taking of private property for public use.Hence this Petition.[8]The IssuesPetitioner raises the following issues for our consideration:Whether the Court of Appeals erred in holding that respondent may claim the 20% sales discount as a tax credit instead of as a deduction from gross income or gross sales.Whether the Court of Appeals erred in holding that respondent is entitled to a refund.[9]These two issues may be summed up in only one: whether respondent, despite incurring a net loss, may still claim the 20 percent sales discount as a tax credit.The Courts RulingThe Petition is not meritorious.Sole Issue:Claim of 20 Percent Sales DiscountasTax CreditDespiteNet LossSection 4a) of RA 7432[10]grants to senior citizens the privilege of obtaining a 20 percent discount on their purchase of medicine from any private establishment in the country.[11]The latter may then claim the cost of the discount as atax credit.[12]But can such credit be claimed, even though an establishment operates at a loss?We answer in the affirmative.Tax CreditversusTax DeductionAlthough the term is not specifically defined in our Tax Code,[13]tax creditgenerally refers to an amount that is subtracted directly from ones total tax liability.[14]It is an allowance against the tax itself[15]or a deduction from what is owed[16]by a taxpayer to the government. Examples oftax creditsare withheld taxes, payments of estimated tax, and investment tax credits.[17]Tax creditshould be understood in relation to other tax concepts. One of these istax deduction-- defined as a subtraction from income for tax purposes,[18]or an amount that is allowed by law to reduce income prior to [the] application of the tax rate to compute the amount of tax which is due.[19]An example of atax deductionis any of the allowable deductions enumerated in Section 34[20]of the Tax Code.Atax creditdiffers from atax deduction. On the one hand, atax creditreduces the tax due, including -- whenever applicable -- theincome taxthat is determined after applying the corresponding tax rates totaxable income.[21]Atax deduction, on the other, reduces the income that is subject to tax[22]in order to arrive attaxable income.[23]To think of the former as the latter is to avoid, if not entirely confuse, the issue. Atax creditis used onlyafterthe tax has been computed; atax deduction,before.Tax Liability RequiredforTax CreditSince atax creditis used to reduce directly the tax that is due, there ought to be a tax liabilitybeforethetax creditcan be applied. Without that liability, anytax creditapplication will be useless. There will be no reason for deducting the latter when there is, to begin with, no existing obligation to the government. However, as will be presented shortly, theexistenceof a tax credit or itsgrantby law is not the same as theavailmentoruseof such credit. While the grant is mandatory, the availment or use is not.If anet lossis reported by, and no other taxes are currently due from, a business establishment, there will obviously be no tax liability against which anytax creditcan be applied.[24]For the establishment to choose the immediate availment of atax creditwill be premature and impracticable. Nevertheless, the irrefutable fact remains that, under RA 7432, Congress has granted without conditions atax creditbenefit to all covered establishments.Although thistax creditbenefit is available, it need not be used by losing ventures, since there is no tax liability that calls for its application. Neither can it be reduced to nil by the quick yet callow stroke of an administrative pen, simply because no reduction of taxes can instantly be effected. By its nature, thetax creditmay still be deducted from afuture, not apresent, tax liability, without which it does not have any use. In the meantime, it need not move. But it breathes.Prior Tax Payments NotRequired forTax CreditWhile a tax liability is essential to theavailment or useof anytax credit, prior tax payments are not. On the contrary, for theexistence or grantsolely of such credit, neither a tax liability nor a prior tax payment is needed. The Tax Code is in fact replete with provisions granting or allowingtax credits, even though no taxes have been previously paid.For example, in computing theestate tax due, Section 86(E) allows atax credit-- subject to certain limitations -- for estate taxes paid to a foreign country. Also found in Section 101(C) is a similar provision for donors taxes -- again when paid to a foreign country -- in computing for thedonors tax due. Thetax creditsin both instances allude to the prior payment of taxes, even if not made to our government.Under Section 110, a VAT (Value-Added Tax)- registered person engaging in transactions -- whether or not subject to the VAT -- is also allowed atax creditthat includes a ratable portion of any input tax not directly attributable to either activity. This input tax mayeitherbe the VAT on the purchase or importation of goods or services that is merely due from -- not necessarily paid by -- such VAT-registered person in the course of trade or business;orthe transitional input tax determined in accordance with Section 111(A). The latter type may in fact be an amount equivalent to only eight percent of the value of a VAT-registered persons beginning inventory of goods, materials and supplies, when such amount -- as computed -- is higher than the actual VAT paid on the said items.[25]Clearly from this provision, thetax creditrefers to an input tax that is either due only or given a value by mere comparison with the VAT actually paid -- then later prorated. No tax is actually paid prior to the availment of such credit.In Section 111(B), a one and a half percent inputtax creditthat is merely presumptive is allowed. For the purchase of primary agricultural products used as inputs -- either in the processing of sardines, mackerel and milk, or in the manufacture of refined sugar and cooking oil -- and for the contract price of public work contracts entered into with the government, again, no prior tax payments are needed for the use of thetax credit.More important, a VAT-registered person whose sales are zero-rated or effectively zero-rated may, under Section 112(A), apply for the issuance of atax creditcertificate for the amount of creditable input taxes merely due -- again not necessarily paid to -- the government and attributable to such sales, to the extent that the input taxes have not been applied against output taxes.[26]Where a taxpayer

is engaged in zero-rated or effectively zero-rated sales and also in taxable or exempt sales, the amount of creditable input taxes due that are not directly and entirely attributable to any one of these transactions shall be proportionately allocated on the basis of the volume of sales. Indeed, in availing of suchtax creditfor VAT purposes, this provision -- as well as the one earlier mentioned -- shows that the prior payment of taxes is not a requisite.It may be argued that Section 28(B)(5)(b) of the Tax Code is another illustration of atax creditallowed, even though no prior tax payments are not required. Specifically, in this provision, the imposition of a final withholding tax rate on cash and/or property dividends received by a nonresident foreign corporation from a domestic corporation is subjected to the condition that a foreigntax creditwill be given by the domiciliary country in an amount equivalent to taxes that are merely deemed paid.[27]Although true, this provision actually refers to thetax creditas aconditiononly for the imposition of a lower tax rate, not as adeductionfrom the corresponding tax liability. Besides, it is not our government but the domiciliary country that credits against the income tax payable to the latter by the foreign corporation, the tax to be foregone or spared.[28]In contrast, Section 34(C)(3), in relation to Section 34(C)(7)(b), categorically allows as credits, against the income tax imposable under Title II, the amount of income taxes merely incurred -- not necessarily paid -- by a domestic corporation during a taxable year in any foreign country. Moreover, Section 34(C)(5) provides that for such taxes incurred but not paid, atax creditmay be allowed, subject to the condition precedent that the taxpayer shall simply give a bond with sureties satisfactory to and approved by petitioner, in such sum as may be required; and further conditioned upon payment by the taxpayer of any tax found due, upon petitioners redetermination of it.In addition to the above-cited provisions in the Tax Code, there are also tax treaties and special laws that grant or allowtax credits, even though no prior tax payments have been made.Under the treaties in which thetax creditmethod is used as a relief to avoid double taxation,income that is taxed in thestate of sourceis also taxable in thestate of residence, but the tax paid in the former is merely allowed as a credit against the tax levied in the latter.[29]Apparently, payment is made to thestate of source, not thestate of residence. No tax, therefore, has beenpreviouslypaid to the latter.Under special laws that particularly affect businesses, there can also betax creditincentives. To illustrate,the incentives provided for in Article 48 of Presidential Decree No. (PD) 1789, as amended by Batas Pambansa Blg. (BP) 391, includetax creditsequivalent to either five percent of the net value earned, or five or ten percent of the net local content of exports.[30]In order to avail of such credits under the said law and still achieve its objectives, no prior tax payments are necessary.From all the foregoing instances, it is evident that prior tax payments are not indispensable to the availment of atax credit. Thus, the CA correctly held that the availment under RA 7432 did not require prior tax payments by private establishments concerned.[31]However, we do not agree with its finding[32]that the carry-over oftax creditsunder the said special law to succeeding taxable periods, and even their application against internal revenue taxes, did not necessitate the existence of a tax liability.The examples above show that a tax liability is certainly important in theavailment or use, not theexistence or grant, of atax credit. Regarding this matter, a private establishment reporting anet lossin its financial statements is no different from another that presents anet income. Both are entitled to thetax creditprovided for under RA 7432, since the law itself accords that unconditional benefit. However, for the losing establishment to immediately apply such credit, where no tax is due, will be an improvident usance.Sections 2.i and 4 of RevenueRegulations No. 2-94 ErroneousRA 7432 specifically allows private establishments to claim astax creditthe amount of discounts they grant.[33]In turn, the Implementing Rules and Regulations, issued pursuant thereto, provide the procedures for its availment.[34]To deny such credit, despite the plain mandate of the law and the regulations carrying out that mandate, is indefensible.First, the definition given by petitioner is erroneous. It refers totax creditas the amount representing the 20 percent discount that shall be deducted by the said establishments from theirgross incomefor income tax purposes and from theirgross salesfor value-added tax or other percentage tax purposes.[35]In ordinary business language, thetax creditrepresents the amount of such discount. However, the manner by which the discount shall be credited against taxes has not been clarified by the revenue regulations.By ordinary acceptation, a discount is an abatement or reduction made from the gross amount or value of anything.[36]To be more precise, it is in business parlance a deduction or lowering of an amount of money;[37]or a reduction from the full amount or value of something, especially a price.[38]In business there are many kinds of discount, the most common of which is that affecting theincome statement[39]or financial report upon which theincome taxis based.Business DiscountsDeducted fromGross SalesAcash discount, for example, is one granted by business establishments tocredit customersfor their prompt payment.[40]It is a reduction in price offered to the purchaser if payment is made within a shorter period of time than the maximum time specified.[41]Also referred to as asales discounton the part of the seller and apurchase discounton the part of the buyer, it may be expressed in such

terms as 5/10, n/30.[42]Aquantity discount, however, is a reduction in price allowed for purchases made in large quantities, justified by savings in packaging, shipping, and handling.[43]It is also called avolumeorbulk discount.[44]A percentage reduction from the list price x x x allowed by manufacturers to wholesalers and by wholesalers to retailers[45]is known as atrade discount. No entry for it need be made in the manual or computerizedbooks of accounts, since the purchase or sale is already valued at the net price actually charged the buyer.[46]The purpose for the discount is to encourage trading or increase sales, and the prices at which the purchased goods may be resold are also suggested.[47]Even achain discount-- a series of discounts from one list price -- is recorded at net.[48]Finally, akin to atrade discountis afunctional discount. It is a suppliers price discount given to a purchaser based on the [latters] role in the [formers] distribution system.[49]This role usually involves warehousing or advertising.Based on this discussion, we find that the nature of asales discountis peculiar. Applying generally accepted accounting principles (GAAP) in the country, this type of discount is reflected in theincome statement[50]as a line item deducted -- along with returns, allowances, rebates and other similar expenses -- fromgross salesto arrive atnet sales.[51]This type of presentation is resorted to, because theaccounts receivableandsalesfigures that arise fromsales discounts, -- as well as fromquantity, volumeorbulk discounts-- are recorded in the manual and computerizedbooks of accountsand reflected in the financial statements at the gross amounts of the invoices.[52]This manner of recording credit sales -- known as thegross method-- is most widely used, because it is simple, more convenient to apply than thenet method, and produces no material errors over time.[53]However, under thenet methodused in recordingtrade,chainorfunctional discounts, only the net amounts of the invoices -- after the discounts have been deducted -- are recorded in thebooks of accounts[54]and reflected in the financial statements. A separate line item cannot be shown,[55]because the transactions themselves involving bothaccounts receivableandsaleshave already been entered into, net of the said discounts.The termsales discountsis not expressly defined in the Tax Code, but one provision adverts to amounts whose sum -- along withsales returns,allowancesandcost of goods sold[56]-- is deducted fromgross salesto come up with thegross income,profitormargin[57]derived from business.[58]In another provision therein,sales discountsthat are granted and indicated in the invoices at the time of sale -- and that do not depend upon the happening of any future event -- may be excluded from thegross saleswithin the same quarter they were given.[59]While determinative only of the VAT, the latter provision also appears as a suitable reference point for income tax purposes already embraced in the former. After all, these two provisions affirm thatsales discountsare amounts that are always deductible fromgross sales.Reason for the Senior Citizen Discount:The Law, Not Prompt PaymentA distinguishing feature of the implementing rules of RA 7432 is the private establishments outright deduction of the discount from the invoice price of the medicine sold to the senior citizen.[60]It is, therefore, expected that for each retail sale made under this law, the discount period lasts no more than a day, because such discount is given -- and the net amount thereof collected -- immediately upon perfection of the sale.[61]Although prompt payment is made for an arms-length transaction by the senior citizen, the real and compelling reason for the private establishment giving the discount is that the law itself makes it mandatory.What RA 7432 grants the senior citizen is a mere discount privilege, not asales discountor any of the above discounts in particular. Prompt payment is not the reason for (although a necessary consequence of) such grant. To be sure, the privilege enjoyed by the senior citizen must be equivalent to thetax creditbenefit enjoyed by the private establishment granting the discount. Yet, under the revenue regulations promulgated by our tax authorities, this benefit has been erroneously likened and confined to asales discount.To a senior citizen, the monetary effect of the privilege may be the same as that resulting from asales discount. However, to a private establishment, the effect is different from a simple reduction in price that results from such discount. In other words, thetax creditbenefit is not the same as asales discount. To repeat from our earlier discourse, this benefit cannot and should not be treated as atax deduction.To stress, the effect of asales discounton theincome statementandincome tax returnof an establishment covered by RA 7432 is different from that resulting from theavailmentoruseof itstax creditbenefit. While the former is a deductionbefore, the latter is a deductionafter, theincome taxis computed. As mentioned earlier, a discount is not necessarily asales discount, and atax creditfor a simple discount privilege should not be automatically treated like asales discount.Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish.Sections 2.i and 4 of Revenue Regulations No. (RR) 2-94 definetax creditas the 20 percent discount deductible fromgross incomeforincome taxpurposes, or fromgross salesfor VAT or other percentage tax purposes. In effect, thetax creditbenefit under RA 7432 is related to asales discount. This contrived definition is improper, considering that the latter has to be deducted fromgross salesin order to compute thegross incomein theincome statementand cannot be deducted again, even for purposes of computing theincome tax.When the law says that the cost of the discount may be claimed as atax credit, it means that the amount -- when claimed -- shall be treated as a reduction from any tax liability, plain and simple. The option to avail of thetax creditbenefit depends upon the existence of a tax liability, but to limit the benefit to asales discount-- which is not even identical to the discount privilege that is granted by law -- does not define it at all and serves no useful purpose. The definition must, therefore, be stricken down.Laws Not Amendedby RegulationsSecond, the law cannot be amended by a mere regulation. In fact, aregulation that operates to create a rule out of harmony with

the statute is a mere nullity;[62]it cannot prevail.It is a cardinal rule that courtswill and should respect the contemporaneous construction placed upon a statute by the executive officers whose duty it is to enforce it x x x.[63]In the scheme of judicial tax administration, the need for certainty and predictability in the implementation of tax laws is crucial.[64]Our tax authorities fill in the details that Congress may not have the opportunity or competence to provide.[65]The regulations these authorities i