Tax digests last part of General Principles

8/10/2019 Tax digests last part of General Principles

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TAX DP | Atty. Martin | Pages 8 to 11 of the syllabus

1

KINDS OF TAXES:

1. As to tax rates: CIR v Mobil (FRANCISCO)

Doctrine:

Kinds of excise taxes imposed in respect of the manufacture or production of petroleum

products:1. Specific Tax

imposed and based on weight or volume capacity or any other physical unit of

measurement

specific tax on petroleum products is computed on a per liter basis (Specific

taxes on petroleum products are simply computed on the basis of a given

number of pesos or centavos per liter or other relevant unit of physical

measurement)

2. Ad Valorem Tax

imposed on the manufacture of petroleum products based on selling price or

other specified value of the article is computed on the wholesale posted price, net of specific and domestic ad

valoremtaxes on the oil products as approved by the Board of Energy.

Domestically refined and manufactured mineral oils and motor fuel become subject to

excise taxes as soon as they come into existence as such, but in the case of locally

manufactured petroleum products, the manufacturer is given a fifteen-day grace period.

Petroleum products become subject to excise taxes the moment they come to existence.

Facts:

Mobil is a corporation engaged in marketing aviation turbo (jet) fuel, diesel and bunkerfuel oil to international carriers.

It obtains its supply of these petroleum products from Caltex Phiils., drawing

product from the Caltexs refinery in Batangas or from Caltexs entitlement to

processed product from the Bataan refinery of the Bataan Refining Corporation.

07 Feb 1987, by its Resolution 87-02, the Board of Energy (BOE) (now the Energy

Regulatory Board [ERB]) increased by an average amount of 30.2 centavos per liter

the cost recovery of oil companies on the various petroleum products refined and

marketed by them locally. The effectivity of this Resolution was, by its terms, made

retroactive to 01 January 1987. 20 Feb 1987, BIR addressed a demand letter informing Mobil that it still has due

of P981K as additional ad valorem taxes for the month of January 1987.

12 March 1987, Mobil paid the demanded amount

16 March 1987, by its Resolution 87-03, BOE once again increased the cost of recovery

oil to 54.7 cents/liter of product sold. The effectivity was retroactivelyset at 01 March

1981.


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24 April 1987, BIR again sent a demand letter to Mobil demanding additional

payment of P1.3M ad valorem taxes plus 25% surcharge for failure to pay within

15 days from the respective dates of the 2 resolutions (07-02-87 and 16-03-87).

15 May 1987, Mobil paid the amount of 1.3M BUT protested for the

imposition of the 25% surcharge as arbitrary and unfair. Mobil added that the adjustment in the tax base resulting from the

adjustment of the posted price under the BOE Resolutions dated

Feb. 7, 1987 and March 16, 1987 were post facto or retroactive to

January 1, 1987. At the time the excise tax or ad valorem tax on

the products were due (which was 15 days after removal of the

products), the additional tax base was not yet in existence,

hence we could not pay the appropriate tax due per said BOE

Resolution.

CIR: rejected the protest of Mobil. Commissioner stated

that the dates of the two (2) BOE Resolutions were byinference the date of removal of the products from the

place of production mentioned in Section 110 [1977 Tax

Code, as amended].

Mobil went to CTA assailing the 25% surcharge by the BIR.

CTA: Sustained the position taken by CIR

Mobil went to CA

CA: Reversed CTAs judgment. CA rejectedthe position of the BIR that the date

of payment of the adjusted or additional ad valorem taxes should be fifteen (15)

days from the dates of the BOE Resolutions, such dates being deemed to be the

dates of removal of the covered product from the petroleum refinery. A surcharge is an amount imposed by law as an addition to the main tax

in case of delinquency.

Section 282 of the 1987 Tax Code, a penalty equivalent to 25% of the

amount due shall be imposed in case of failure to pay the tax within the

time prescribed for its payment,among others. In other words, they are

imposed in case of delay in the payment of the tax due.

In the case at bar, Mobil is not guilty of delay in the payment of the

adjusted excise tax for the reason that there was no period specified in

the Resolutions for the payment of the said taxes. One cannot incur in

delay when there is no period fixed for payment.

Issue:

W/n Mobil is liable for the 25% surcharge for late payment of additional ad valorem taxes

which became due by reason of the operation of the 2 BOE resolutions.

Held:

Yes.


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There are two kinds of excise taxes imposed in respect of the manufacture or production

of the particular kinds of petroleum products covered by BOE resolution, i.e. specific tax

and ad valorem tax. (See differences above)

The time prescribed for payment of both kinds of excise taxes imposed upon petroleum

products was specified in Section 110 of the 1977 Tax Code, as amended, in thefollowing manner:

Sec. 110. Payment of excise taxes on domestic products.(a) Persons liable; time for paymentUnless

otherwise especially allowed, excise taxes on domestic products shall be paid by the manufacturer or producer

before removal from the place of productions; Provided, however, That excise tax on locally manufactured

petroleum productslevied under Section 128 of this Title shall bepaid within fifteen (15) days from the date of

removal thereof from the place of production. Should domestic products be removed from the place of

production without the payment of the tax, the owner or person having possession thereof shall be liable for the

tax due thereon. Section 110 should be read with Section 128 of the same Code:

Sec. 128. Manufactured Oils and Other Fuels.There shall be collected on refined and manufactured mineral

oils and motor fuels, the following excise taxeswhich shall attach to the articles hereunder enumerated as soon

as they are in existence as such:x x x

Reading Section 128 and Section 110 together, it will be seen that domestically refinedand manufactured mineral oils and motor fuels become subject to excise taxes as soon

as they come into existence.

In respect of most other kinds of articles also subject to excise taxes,the excise

taxes are payable by the manufacturer or producer even before removal from the

place of production.

In the case of locally manufactured petroleum products, however, the

manufacturer is given what is in effect a fifteen (15)-day grace period: those

excise taxes must be paid within fifteen (15) days from the date of removal of the

petroleum product from the place of production.

In the case...

Contentions of Mobil - It is literally true that the adjusted tax base, or the wholesale

posted price as increased by or as a result of the operation of the two (2) BOE

Resolutions, did notexist fifteen (15) days afterphysical removalof the product from the

refinery provided such product had been physically removed more than fifteen (15) days

beforethe actual dates of promulgation of the two (2) BOE Resolutions.

The basic contention of Mobil may hence be seen to be that the liability to pay ad

valorem taxes accrued fifteen (15) days after physical removal of product from

the oil refinery. At the time such physical removal had been effected, the

adjusted tax base, i.e., the wholesale posted price as increased by the effects of

the two (2) BOE Resolutions, did not exist and was not determinable.There

was, therefore, in Mobils contention, no prescribed time for payment of theadditional ad valoremtaxes which became due by reason of the increases in cost

recovery in respect of product withdrawn from the refinery during the period of

the retroactive application of the two (2) BOE Resolutions.

If there was no prescribed time for payment, it followed, as a matter of strict logic

that no liability for delay in payment of such additional ad valorem taxes could

arise.

Mobils contentions were rejected by the SC


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BIR considered the product as having been constructively removed from the refinery

only on the dates of promulgation of the two (2) BOE Resolutions and counted the

statutory fifteen (15) day-grace period from such dates.

This position appears reasonable and moderate and as close to the intent of

Sections 110 and 128, 1977 Tax Code. SC noted that whether the fifteen (15) day grace period for payment be computed from

the dates of promulgation of the two (2) BOE Resolutions, or from the date of actual

receipt of a copy of those two (2) BOE Resolutions,

Mobil paid the additional ad valorem taxes due after expiration of such fifteen

(15) day period. Mobil was, in other words, late in any case in effecting payment

of the additional ad valorem taxes. Mobil paid the additional ad valorem taxes

arising as a result of BOE Resolution No. 87-02 on 12 March 1987, or thirty-one

(31) days after receipt of a copy of that BOE Resolution. Mobil paid the additional

ad valorem taxes arising as a result of BOE Resolution No. 87-03 on 15 May

1987, or fifty-nine (59) days after receipt of a copy of BOE Resolution No. 87-03.SC: Petition is granted. Affirmed CTAs decision.

2. As to purpose: PAL v Edu (GATCHALIAN)

DOCTRINE: If the purpose is primarily revenue, or if revenue is, at least, one of the real and

substantial purposes, then the exaction is properly called a tax.

FACTS:

The Philippine Airlines is existing under the laws of the Philippines and engaged in the air

transportation business under a legislative franchise, Act No. 42739. Under its franchise, PAL isexempt from the payment of taxes.

Section 13.In consideration of the franchise and rights hereby granted, the grantee shall pay to

the National Government during the life of this franchise a tax of two per cent of the gross

revenue or gross earning derived by the grantee from its operations under this franchise. Such

tax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature or

description, levied, established or collected by any municipal, provincial or national automobiles,

Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal

Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the ten

days from the receipt of the assessment. The grantee shall pay the tax on its real property in

conformity with existing law.

PAL has, since 1956, not been paying motor vehicle registration fees. Sometime in 1971,

however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax

exempt entities, among them PAL to pay motor vehicle registration fees.


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Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles

unless the amounts imposed under Republic Act 4136 were paid. The appellant thus paid,

under protest, the amount of P19,529.75.

PAL through counsel, wrote a letter to Commissioner Edudemanding a refund of the amountspaid, invoking the ruling in Calalang v. Lorenzo where it was held that motor vehicle

registration fees are in reality taxes from the payment of which PAL is exempt by virtue of its

legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v.

Phi l ippine Rabbit Bus Lines, Inc., to the effect that motor vehicle registration fees are

regulatory exceptional and NOT revenue measures and, therefore, do not come within the

exemption granted to PAL.

Hence PAL filed a complaint. Defense filed a motion to dismiss citing against RP v Phil Rabbit.CFI ruled in their favor. CA affirmed.

*NOTE: Below is a brief discussion of each of the case (decision) the parties raised

Philippine Rabbit Case:

Section 8 of the Revised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading

speaks of "registration fees." The term is repeated four times in the body thereof. Equally

so, mention is made of the "fee for registration."

The conclusion is difficult to resist therefore that the Motor Vehicle Act requires

the payment not of a tax but of a registration fee under the police power.

Calalang v. Lorenzo Case:

For not the name but the object of the charge determines whether it is a tax or a fee.

Generally speaking, taxes are for revenue, whereas fees are exactions for purposes of

regulation and inspection and are for that reason limited in amount to what is necessary

to cover the cost of the services rendered in that connection.

Hence, a charge fixed by statute for the service to be person,-When by an officer,

where the charge has no relation to the value of the services performed and where

the amount collected eventually finds its way into the treasury of the branch of the

government whose officer or officers collected the chauffeur, isNOT a fee but a

tax. As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as

taxes, for it provides that "no other taxes or fees than those prescribed in this Act

shall be imposed," thus implying that the charges therein imposedthough called

feesare of the category of taxes. The provision is contained in section 70, of

subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads:Sec. 70(b) No other taxes or fees than those prescribed in this Act shall be imposed for

the registration or operation or on the ownership of any motor vehicle, or for the exercise


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6of the profession of chauffeur, by any municipal corporation, the provisions of any city

charter to the contrary notwithstanding: Provided, however, That any provincial board,

city or municipal council or board, or other competent authority may exact and collect

such reasonable and equitable toll fees for the use of such bridges and ferries, within

their respective jurisdiction, as may be authorized and approved by the Secretary ofPublic Works and Communications, and also for the use of such public roads, as may be

authorized by the President of the Philippines upon the recommendation of the Secretary

of Public Works and Communications, but in none of these cases, shall any toll fee." be

charged or collected until and unless the approved schedule of tolls shall have been

posted levied, in a conspicuous place at such toll station.

MAIN ISSUE: WON the motor vehicle registration fee is considered as tax? YES

HELD:

Section 73 of Commonwealth Act 123 states:

Section 73. Disposal of mo neys col lected.Twenty per centum of the money collected underthe provisions of this Act shall accrue to the road and bridge funds of the different provinces and

chartered cities in proportion to the centum shall during the next previous year and the remaining

eighty per centum shall be deposited in the Philippine Treasury to create a special fund for the

construction and maintenance of national and provincial roads and bridges. as well as the streets

and bridges in the chartered cities to be alloted by the Secretary of Public Works and

Communications for projects recommended by the Director of Public Works in the different

provinces and chartered cities. ....

Sec. 61 of the Land Transportation and Traffic Code provides:Sec. 61. Dispos al of Mortgage. Col lectedMonies collected under the provisions of this Act

shall be deposited in a special trust account in the National Treasury to constitute the Highway

Special Fund, which shall be apportioned and expended in accordance with the provisions of the"

Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain and

equip the Land Transportation Commission but not to exceed twenty per cent of the total

collection during one year, shall be set aside for the purpose.

It appears clear from the above provisions that the legislative intent and purpose behind

the law requiring owners of vehicles to pay for their registration is mainly to raise funds

for the construction and maintenance of highways and to a much lesser degree, pay for

the operating expenses of the administering agency.

Fees may be properly regarded as taxes even though they also serve as an instrument of

regulation,As stated by a former presiding judge of the CTA and writer on various aspects of

taxpayers

It is possible for an exaction to be both tax and regulation. License fees are often looked to as a

source of revenue as well as a means of regulation. This is true, for example, of automobile license fees.

Isabela such case, the fees may properly be regarded as taxes even though they also serve as an

instrument of regulation. If the purpose is primarily revenue, or if revenue is at least one of the real


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7and substantial purposes, then the exaction is properly called a tax . These exactions are

sometimes called regulatory taxes.

Indeed, taxation may be made the implement of the state's police power. If the purpose is

primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then theexaction is properly called a tax. Such is the case of motor vehicle registration fees. The

conclusions become inescapable in view of Section 70(b) of Rep. Act 587 quoted in the

Calalangcase.Same provision appears as Sec 59(b) in the Land Transportation Code.

Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is a

tax, Section 59 (b) speaks of "taxes." or fees ... for the registration or operation or on the

ownership of any motor vehicle, or for the exercise of the profession of chauffeur ..."

making the intent to impose a tax more apparent.

In view of the foregoing, we rule that motor vehicle registration fees as at present

exacted pursuant to the Land Transportation and Traffic Code are actually taxes intended

for additional revenues of government even if one fifth or less of the amount collected is

set aside for the operating expenses of the agency administering the program.

SIDE ISSUE: May the respondent administrative agency be required to refund the amounts

stated in the complaint of PAL? NO

The claim for refund is made for payments given in 1971. It is not clear from the records as to

what payments were made in succeeding years. We have ruled that Section 24 of Rep. Act

No. 5448 dated June 27, 1968, repealed all earlier tax exemptions of corporate taxpayers found

in legislative franchises similar to that invoked by PAL in this case.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly

imposed because the tax exemption in the franchise of PAL was repealed during the period.

However, an amended franchise was given to PAL in 1979.

PAL's current franchise is clear and specific. It has removed the ambiguity found in the earlier

law. PAL is now exempt from the payment of any tax, fee, or other charge on the registration

and licensing of motor vehicles. Such payments are already included in the basic tax or

franchise tax provided in Subsections (a) and (b) of Section 13, P.D. 1590, and may no longer

be exacted.

3. As to graduation: British American Tobacco v Camacho (HAUTEA)

Facts:

- The Bureau of Internal Revenue (BIR) issued Revenue Regulation 1-97. The said

regulation classifies cigarette brands into 2 categories, Active brands and New Brands.


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The New Brands, or those registered after January 1, 1997 shall be initially assessed at

their suggested retail price until such time that the appropriate survey to determine their

current net retail price is conducted.

-

Jan. 1, 1997: RA 8284 amendments; Sec. 145 of the NIRC provides for four tiers of taxrates (low, medium, high, premium) based on the net retail price per pack of cigarettes

which is based on a survey done in October 1, 1996 for the duly registered and active

brands as of that time. Meanwhile, those brands not covered will be classified based on

their current net retail price.

-Rev. Reg. No. 1-97: Classified existing brands (brands registered on or before Jan. 1,

1997/RA 8424) from new brands which were registered thereafter providing that their

(new brands) tax category will be based on their suggested retail price (SRP) until a

survey by the Bureau has been conducted to determine its actual retail price after three

months of its introduction to the market.

- June 2001: Petitioner introduced their Lucky Strike brand of cigarettes which had anSRP of P9.90/pack therefore belonging to the high tax rate of P8.96/pack.

- Rev. Reg. No. 9-2003: Empowered the BIR to make survey every two years on the

current retail price of the products for the reclassification of their tax rates or for new tax

category.

- Rev. Mem. No. 6-2003: Issued guidelines for the net retail price of new brands of

cigarettes and alcohol products.

- Rev. Reg. 22-3003: Issued to implement the revised tax classification of the new

brands (after Jan. 1, 1997) based on the survey (RR No. 1-97), which revealed that

Lucky Strike has a current net retail price of P22 thus should be categorized in the

premium rate of P13.44/pack.

- On Sept. 4, 2003, the RTC denied the TRO, saying that it has no power to restrain tax

collection. Then it also denied the Motion to Dismiss on March 2004 but issued the Writ

of Preliminary Injunction for the Revenue Regulations and Memorandums. On a motion

for reconsideration, both the parties agreed that it was their (the law and rules/orders)

constitutionality that is being ultimately questioned.

- On May 2004, RTC uplifted the writ and upheld their constitutionality, thus this petition

for review in the Supreme Court.

- Jan. 2005: RA 9334 amendments provided for the legislative freeze on brands of

cigarettes introduced between Jan. 2, 1997- Dec. 31, 2003, saying that their current taxrate/category will be that which the BIR has assigned to them together with those old

brands (prior to said date) contained in Annex D of the petition shall remain in their

categories until revised by Congress. Thus, it resulted for petitioner having higher tax for

their products, prompting them to amend their petition to assail the validity of RA 9334

and praying for a lower tax category, citing other brands such as Philip Morris and

Marlboro being unduly benefited because their category are still based on the Oct. 1996


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tax base (and all those listed in Annex D) and thus having lower taxes than them

despite the disparity in their prices. Said companies filed their respective motion for

intervention which the Court granted.

Petitioner argues that the classification freeze provision is a form of regressive and

inequitable tax system which is proscribed under Article VI, Section 28(1) of the

Constitution.

Issues & Held:

1. Whether the assailed law is Regressive in nature? YES

Whether the Regressive nature of the assailed law violates Article VI Section

28(1) of the Constitution? NO

It may be conceded that the assailed law imposes an excise tax on cigarettes which is a form ofindirect tax, and thus, regressive in character. While there was an attempt to make the

imposition of the excise tax more equitable by creating a four-tiered taxation system where

higher priced cigarettes are taxed at a higher rate, still, every consumer, whether rich or poor, of

a cigarette brand within a specific tax bracket pays the same tax rate. To this extent, the tax

does not take into account the persons ability to pay. Nevertheless, this does not mean that the

assailed law may be declared unconstitutional for being regressive in character because the

Constitution does not prohibit the imposition of indirect taxes but merely provides that Congress

shall evolve a progressive system of taxation. As we explained in Tolentino v. Secretary of

Finance

Regressivity is not a negative standard for courts to enforce. What Congress is

required by the Constitution to do is to "evolve a progressive system of taxation."

This is a directive to Congress, just like the directive to it to give priority to the

enactment of laws for the enhancement of human dignity and the reduction of

social, economic and political inequalities [Art. XIII, Section 1] or for the

promotion of the right to "quality education" [Art. XIV, Section 1]. These

provisions are put in the Constitution as moral incentives to legislation, not as

judicially enforceable rights.

NIRC of 1997 as amended

1. Income Tax Systems: Tan v Del Rosario (LIM)DOCTRINES/ DEFINITIONS:Schedular Approach:A system employed where the income tax treatment varies and made to depend on the kind or category

of taxable income of the taxpayer.


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Global Treatment:A system where the tax treatment views indifferently the tax base and generally treats in common all

categories of taxable income of the taxpayer.

- Uniformity in taxation means those that are similarly situated are to be treated alike. There is

uniformity as long as:

o (1) the standards that are used therefor are substantial and not arbitrary,

o (2) the categorization is germane to achieve the legislative purpose,

o (3) the law applies, all things being equal, to both present and future conditions, and

o (4) the classification applies equally well to all those belonging to the same class

- 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 individualsderiving income from any source whatsoever are treated in almost invariably the same manner and under

a common set of rules.FACTS:Consolidated petitions assailing the constitutionality of RA No. 7496 or Simplified Net Income Taxation

Scheme (SNIT). (Each petition has a different issue, both concern income tax systems)

ISSUES:1. W/N RA 7496 is unconstitutional (G.R. No. 109289) [No]2. W/N in RA 7496, respondents have exceeded their rule making authority in applying it to general

professional partnerships (G.R. No. 109446) [No]

HOLDING AND RATIO:ISSUE #1 (G.R. No. 109289): NO. The RA did not violate any constitutional provision.Petitioner: The said law violates the ff. provisions of the 3 Constitutional provisions:

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

shall be expressed in the title thereof.- The title of the bill "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of their Profession" is a misnomer

HELD:- The full text title of the bill is An Act Adopting the Simplified Net Income Taxation Scheme For The

Self-Employed and Professionals Engaged In The Practice of Their Profession, Amending Sections 21and 29 of the National Internal Revenue Code, as Amended - Amended Sec. 21 of the National Internal Revenue Code speaks of imposing tax on taxable net

income received from all sources of self-employed/ practicing professionals while Sec. 29 speaks of the

allowed deductions from gross income of the said group of people. However, deductible items on income

are now more limited as compared to the law before the said amendment.- Petitioner contends that the law now impose taxes on gross as opposed to net income.


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11- Court held that limiting the deductible items is still within the purview of the concept of net income. It

is still income less the expenses and then the remaining amount determines the tax to be paid. The

amendment just limited the items that fall under the expenses.- The objectives of the law on bill titles are: (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) toavoid 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.The above objectives of

the fundamental law appear to us to have been sufficiently met.

2.) Petitioner contends that the law would now attempt to tax single proprietorships and professionals

differently from the manner it imposes the tax on corporations and partnerships violating the ff.

constitutional provisions: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.

HELD:- Uniformity in taxation means those that are similarly situated are to be treated alike. There is

uniformity as long as:

o (1) the standards that are used therefor are substantial and not arbitrary,

o (2) the categorization is germane to achieve the legislative purpose,

o (3) the law applies, all things being equal, to both present and future conditions, and

o (4) the classification applies equally well to all those belonging to the same class - 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 approach in the income taxation of

individual taxpayers and to maintain, by and large, the present global treatment on taxable corporations.

We certainly do not view this classification to be arbitrary and inappropriate.- The court does not view the classification in this instance as arbitrary or inappropriate. Moreover, the

legislature has the discretion to determine the nature (kind), object (purpose), extent (rate), coverage

(subjects) and situs (place) of taxation. The Court only intervenes when there is a violation of the

constitution, which in this case there is none.

ISSUE # 2 (G.R. No. 109446): NO. Respondents did not exceed authority.

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.

This is anchored on the administrative interpretation of public respondents that would apply SNIT topartners in general professional partnerships.

Petitioners cited the deliberations in the house of representatives regarding the implementation of the

said rule in which it was shown that framers did not intend for the bill to be applicable to business

corporations or partnerships.

HELD:


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12- A business partnership itself is not a taxpayer, the income tax is imposed on the partners themselves

in their individual capacity which is computed on their distributive shares of partnership profits.- 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 taxand 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.- RA 7496 should be takes as an amendatory legislation which is still under the National Internal

Revenue Code. Under such code income taxpayers cover all persons with taxable income. It classifies

taxpayers into: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4) Irrevocable

Trusts (irrevocable both as to corpus and as to income).o Partnerships are, 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.o SNIT is not intended to cover corporations and partnerships which are independently subject to the

payment of income tax.o SNIT speaks of general professional partnership which focuses on the partners themselves as

individuals and not on the partnership.

2. Criteria in imposing Phil Income Tax

a. Residence Principle: CIR v De Lara (MEJILLANO)

These are two separate appeals, one by the Collector of Internal Revenue and the other by

Domingo de Lara as Ancilliary Administrator of the estate of Hugo H. Miller, from the decision ofthe Court of Tax Appeals of June 25, 1955, with the following dispositive part:

WHEREFORE, respondent's assessment for estate and inheritance taxes upon the

estate of the decedent Hugo H. Miller is hereby modified in accordance with the

computation attached as Annex "A" of this decision. Petitioner is hereby ordered to pay

the amount of P2,047.22 representing estate taxes due, together with the interests and

other increments. In case of failure to pay the amount of P2,047.22 within thirty (30)

days from the time this decision has become final, the 5 per cent surcharge and the

corresponding interest due thereon shall be paid as a part of the tax.

Facts:

Hugo H. Miller, an American citizen, was born in Santa Cruz, California, U.S.A., in 1883.

In 1905, he came to the Philippines.

From 1906 to 1917, he was connected with the public school system, first as a teacher

and later as a division superintendent of schools, later retiring under the Osmeiia

Retirement Act.


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After his retirement, Miller accepted an executive position in the local branch of Ginn &

Co., book publishers with principal offices in New York and Boston, U.S.A., up to the

outbreak of the Pacific War.

From 1922 up to December 7, 1941, he was stationed in the Philippines as Oriental

representative of Ginn & Co. In or about the year 1922, Miller lived at the Manila Hotel.

His wife remained at their home in California, but she used to come to the Philippines for

brief visits with Miller, staying three or four months.

Miller also used to visit his wife in California. He never lived in any residential house in

the Philippines.

After the death of his wife in 1931, he transferred from the Manila Hotel to the Army and

Navy Club, where he was staying at the outbreak of the Pacific War.

On January 17, 1941, Miller executed his last will and testament in Santa Cruz,

California, in which he declared that he was "of Santa Cruz, California".

On December 7, 1941, because of the Pacific War, the office of Ginn & Co. was closed,and Miller joined the Board of Censors of the United States Navy.

During the war, he was taken prisoner by the Japanese forces in Leyte, and in January,

1944, he was transferred to Catbalogan, Samar, where he was reported to have been

executed by said forces on March 11, 1944, and since then, nothing has been heard

from him.

At the time of his death in 1944, Miller owned the following properties:

Real Property situated in Ben-Lomond, Santa Cruz, California valued at P 5,000.00

Real property situated in Burlingame, San Mateo, California valued at 16,200.00

Tangible Personal property, worth 2,140.00

Cash in the banks in the United States 21,178.20

Accounts Receivable from various persons in the United States including

notes36,062.74

Stocks in U.S. Corporations and U.S. Savings Bonds, valued at 123,637.16

Shares of stock in Philippine Corporations, valued at 51,906.45

Testate proceedings were instituted before the Court of California in Santa Cruz County,

in the course of which Miller's will of January 17, 1941 was admitted to probate on May

10, 1946.


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Court of California: issued an order and decree of settlement of final account and final

distribution, wherein it found that Miller was a "resident of the County of Santa Cruz,

State of California" at the time of his death in 1944.

Thereafter ancillary proceedings were filed by the executors of the will before the Court

of First Instance of Manila. CFI of Manila: admitted to probate the will of Miller probated in the California court, and

found that Miller was a resident of Santa Cruz, California, at the time of his death.

On July 29, 1949, the Bank of America, National Trust and Savings Association of San

Francisco California, co-executor named in Miller's will, filed an estate and inheritance

tax return with the Collector, covering only the shares of stock issued by Philippines

corporations, reporting a liability of P269.43 for taxes and P230.27 for inheritance taxes.

After due investigation, the Collector assessed estate and inheritance taxes, which was

received by the said executor on April 3, 1950.

The estate of Miller protested the assessment of the liability for estate and inheritance

taxes, including penalties and other increments at P77,300.92, as of January 16, 1954.This assessment was appealed by De Lara as Ancillary Administrator before the Board

of Tax Appeals, which appeal was later heard and decided by the Court of Tax Appeals.

In determining the "gross estate" of a decedent, under Section 122 in relation to section

88 of our Tax Code, it is first necessary to decide whether the decedent was a resident

or a non-resident of the Philippines at the time of his death.

The Collector maintains that:

Under the tax laws, residence and domicile have different meanings; that tax

laws on estate and inheritance taxes only mention resident and non-resident, and

no reference whatsoever is made to domicile except in Section 93 (d) of the Tax

Code.

That Miller during his long stay in the Philippines had required a "residence" inthis country, and was a resident thereof at the time of his death, and

consequently, his intangible personal properties situated here as well as in the

United States were subject to said taxes.

However, the Ancillary Administrator equally maintains:

That for estate and inheritance tax purposes, the term "residence" is

synonymous with the term domicile.

Issue(s):

1. WON the term "residence" is synonymous with the term domicile in tax laws.

2. WON Miller, at the time of his death, had his residence/domicile in the Philippines.Held:

1. YES

We agree with the Court of Tax Appeals that at the time that The National Internal

Revenue Code was promulgated in 1939, the prevailing construction given by the courts


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to the "residence" was synonymous with domicile and that the two were used

interchangeably.

Cases were cited in support of this view, particularly that of Velilla vs. Posadas, 62 Phil.

624, wherein this Tribunal used the terms "residence" and "domicile" interchangeably

and without distinction, the case involving the application of the term residenceemployed in the inheritance tax law at the time (section 1536- 1548 of the Revised

Administrative Code), and that consequently, it will be presumed that in using the term

residence or resident in the meaning as construed and interpreted by the Court.

Moreover, there is reason to believe that the Legislature adopted the American (Federal

and State) estate and inheritance tax system.

In the United States, for estate tax purposes, a resident is considered one who at the

time of his death had his domicile in the United States, and in American jurisprudence,

for purposes of estate and taxation, "residence" is interpreted as synonymous with

domicile, and that

The incidence of estate and succession has historically been determined by domicileand situs and not by the fact of actual residence. (Bowring vs. Bowers, (1928) 24 F 2d

918, at 921, 6 AFTR 7498, cert. den (1928) 272 U.S.608).

2. NO

We also agree with the Court of Tax Appeals that at the time of his death, Miller had his

residence or domicile in Santa Cruz, California.

During his country, Miller never acquired a house for residential purposes for he stayed

at the Manila Hotel and later on at the Army and Navy Club.

The bulk of his savings and properties were in the United States.

In November, 1940, Miller took out a property insurance policy and indicated therein his

address as Santa Cruz, California, this aside from the fact that Miller, as already stated,executed his will in Santa Cruz, California, wherein he stated that he was "of Santa Cruz,

California".

From the foregoing, it is clear that as a non-resident of the Philippines, the only

properties of his estate subject to estate and inheritance taxes are those shares of stock

issued by Philippines corporations, valued at P51,906.45.

It is true, as stated by the Tax Court, that while it may be the general rule that personal

property, like shares of stock in the Philippines, is taxable at the domicile of the owner

(Miller) under the doctrine of mobilia secuuntur persona, nevertheless, when he during

his life time, extended his activities with respect to his intangibles, so as to avail himself

of the protection and benefits of the laws of the Philippines, in such a way as to bring hisperson or property within the reach of the Philippines, the reason for a single place of

taxation no longer obtains- protection, benefit, and power over the subject matter are no

longer confined to California, but also to the Philippines (Wells Fargo Bank & Union

Trust Co. vs. Collector (1940), 70 Phil. 325).

In the instant case, the actual situs of the shares of stock is in the Philippines, the

corporation being domiciled herein: and besides, the right to vote the certificates at

stockholders' meetings, the right to collect dividends, and the right to dispose of the


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shares including the transmission and acquisition thereof by succession, all enjoy the

protection of the Philippines, so that the right to collect the estate and inheritance taxes

cannot be questioned (Wells Fargo Bank & Union Trust Co. vs. Collector supra).

It is recognized that the state may, consistently with due process, impose a tax upon

transfer by death of shares of stock in a domestic corporation owned by a decedentwhose domicile was outside of the state (Burnett vs. Brooks, 288 U.S. 378; State

Commission vs. Aldrich, (1942) 316 U.S. 174, 86 L. Ed. 1358, 62 ALR 1008)." (Brief for

the Petitioner, p. 79-80).

The Ancillary Administrator for purposes of exemption invokes the proviso in Section 122

of the Tax Code, which provides as follows:

. . ."And Provided, however, That no tax shall be collected under this Title in respect of

intangible personal property (a) if the decedent at the time of his death was a resident of

a foreign country which at the time of his death did not impose a transfer tax or death tax

of any character in respect of intangible personal property of citizens of the Philippines

not residing in that country, or (b) if the laws of the foreign country of which the decedentwas resident at the tune of his death allow a similar exemption from transfer taxes or

death taxes of every character in respect of intangible personal property owned by

citizen, of the Philippine not residing in that foreign country.

The Ancillary Administrator bases his claim of exemption on (a) the exemption of non-

residents from the California inheritance taxes with respect to intangibles, and (b) the

exemption by way of reduction of P4,000 from the estates of non-residents, under the

United States Federal Estate Tax Law.

Section 6 of the California Inheritance Tax Act of 1935, now reenacted as Section

13851, California Revenue and Taxation Code, reads as follows:

SEC. 6. The following exemption from the tax are hereby allowed:

xxx xxx xxx.

(7) The tax imposed by this act in respect of intangible personal property shall not be

payable if decedent is a resident of a State or Territory of the United States or a foreign

state or country which at the time of his death imposed a legacy, succession of death tax

in respect of intangible personal property within the State or Territory or foreign state or

country of residents of the States or Territory or foreign state or country of residence of

the decedent at the time of his death contained a reciprocal provision under which non-

residents were exempted from legacy or succession taxes or death taxes of everycharacter in respect of intangible personal property providing the State or Territory or

foreign state or country of residence of such non-residents allowed a similar exemption

to residents of the State, Territory or foreign state or country of residence of such

decedent.

Considering the State of California as a foreign country in relation to section 122 of Our

Tax Code we believe and hold, as did the Tax Court, that the Ancillary Administrator is


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entitled to exemption from the tax on the intangible personal property found in the

Philippines.

Incidentally, this exemption granted to non-residents under the provision of Section 122

of our Tax Code, was to reduce the burden of multiple taxation, which otherwise would

subject a decedent's intangible personal property to the inheritance tax, both in his placeof residence and domicile and the place where those properties are found.

As regards the exemption or reduction of P4,000 based on the reduction under the

Federal Tax Law in the amount of $2,000, we agree with the Tax Court that the amount

of $2,000 allowed under the Federal Estate Tax Law is in the nature of deduction and

not of an exemption. Besides, as the Tax Court observes--.

. . . this exemption is allowed on all gross estate of non-residents of the United States,

who are not citizens thereof, irrespective of whether there is a corresponding or similar

exemption from transfer or death taxes of non-residents of the Philippines, who are

citizens of the United States; and thirdly, because this exemption is allowed on all gross

estates of non-residents irrespective of whether it involves tangible or intangible, real orpersonal property; so that for these reasons petitioner cannot claim a reciprocity. . .

Furthermore, in the Philippines, there is already a reduction on gross estate tax in the

amount of P3,000 under section 85 of the Tax Code, before it was amended, which in

part provides as follows:

SEC. 85. Rates of estate tax.There shall be levied, assessed, collected, and paid

upon the transfer of the net estate of every decedent, whether a resident or non-resident

of the Philippines, a tax equal to the sum of the following percentages of the value of the

net estate determined as provided in sections 88 and 89:

One per centrum of the amount by which the net estate exceeds three thousand pesosand does not exceed ten thousand pesos;. . .

It will be noticed from the dispositive part of the appealed decision of the Tax Court that

the Ancillary Administrator was ordered to pay the amount of P2,047.22, representing

estate taxes due, together with interest and other increments. Said Ancillary

Administrator invokes the provisions of Republic Act No. 1253, which was passed for the

benefit of veterans, guerrillas or victims of Japanese atrocities who died during the

Japanese occupation.

The provisions of this Act could not be invoked during the hearing before the Tax Court

for the reason that said Republic Act was approved only on June 10, 1955. We are satisfied that inasmuch as Miller, not only suffered deprivation of the war, but

was killed by the Japanese military forces, his estate is entitled to the benefits of this Act.

Consequently, the interests and other increments provided in the appealed judgment

should not be paid by his estate.

With the above modification, the appealed decision of the Court of Tax Appeals is

hereby affirmed.


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b. Source Principle: NDC v CIR (MORA)

DOCTRINE:

Taxation; Income from the sources within the Philippines; Residence of obligor who

pays the interest rather than the physical location of the securities bonds or notes or

the place of payment is the determining factor of the source of interest income.

FACTS:

The national Development Company entered into contracts in Tokyo with several

Japanese shipbuilding companies for the construction of twelve ocean-going

vessels. The purchase price was to come from the proceeds of bonds issued by the

Central Bank.

Initial payments were made in cash and through irrevocable letters of credit.

Fourteen promissory notes were signed for the balance by the NDC and, as requiredby the shipbuilders, guaranteed by the Republic of the Philippines.

The remaining payments and the interests thereon were remitted in due time by the

NDC to Tokyo. The vessels were eventually completed and delivered to the NDC in

Tokyo.

The NDC remitted to the shipbuilders in Tokyo the total amount of US$4,066,580.70

as interest on the balance of the purchase price. No tax was withheld. The

Commissioner then held the NDC liable on such tax in the total sum of

P5,115,234.74.

The BIR thereupon served on the NDC a warrant of distraint and levy to enforce

collection of the claimed amount.

CTA sustained the BIR.

ISSUE:

Whether NDC should be the tax on the interest paid to the Japanese shipbuilding

companies? ---YES

HELD:The Japanese shipbuilders were liable to tax on the interest remitted to them under

Section 37 of the Tax Code, thus:

SEC. 37. Income from sources within the Philippines. (a) Gross income from

sources within the Philippines. The following items of gross income shall be

treated as gross income from sources within the Philippines:


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(1) Interest. Interest derived from sources within the Philippines, and interest on

bonds, notes, or other interest-bearing obligations of residents, corporate or

otherwise;

xxx xxx xxx

The petitioner argues that the Japanese shipbuilders were not subject to tax under

the above provision because all the related activities the signing of the contract,

the construction of the vessels, the payment of the stipulated price, and their delivery

to the NDC were done in Tokyo. The law, however, does not speak of activity but

of "source," which in this case is the NDC. This is a domestic and resident

corporation with principal offices in Manila.

As the Tax Court put it:

It is quite apparent, under the terms of the law, that the Government's right

to levy and collect income tax on interest received by foreign corporationsnot engaged in trade or business within the Philippines is not planted upon

the condition that 'the activity or labor and the sale from which the

(interest) income flowed had its situs' in the Philippines. The law specifies:

'Interest derived from sources within the Philippines, and interest on bonds,

notes, or other interest-bearing obligations of residents, corporate or

otherwise.' Nothing there speaks of the 'act or activity' of non-resident

corporations in the Philippines, or place where the contract is signed. The

residence of the obligor who pays the interest rather than the physical

location of the securities, bonds or notes or the place of payment, is the

determining factor of the source of interest income.

Accordingly, if the obligor is a resident of the Philippines the interest

payment paid by him can have no other source than within the Philippines.

The interest is paid not by the bond, note or other interest-bearing

obligations, but by the obligor.

Here in the case at bar, petitioner National Development Company, a

corporation duly organized and existing under the laws of the Republic of the

Philippines, with address and principal office at Calle Pureza, Sta. Mesa,

Manila, Philippines unconditionally promised to pay the Japanese

shipbuilders, as obligor in fourteen (14) promissory notes for each vessel,the balance of the contract price of the twelve (12) ocean-going vessels

purchased and acquired by it from the Japanese corporations, including the

interest on the principal sum at the rate of five per cent (5%) per annum. And

pursuant to the terms and conditions of these promissory notes, which are

duly signed by its Vice Chairman and General Manager, petitioner remitted

to the Japanese shipbuilders in Japan during the years 1960, 1961, and

1962 the sum of $830,613.17, $1,654,936.52 and $1,541.031.00,


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respectively, as interest on the unpaid balance of the purchase price of the

aforesaid vessels.

The law is clear. Our plain duty is to apply it as written. The residence of the

obligor which paid the interest under consideration, petitioner herein, is CallePureza, Sta. Mesa, Manila, Philippines; and as a corporation duly organized

and existing under the laws of the Philippines, it is a domestic corporation,

resident of the Philippines. (Sec. 84(c), National Internal Revenue Code.)

The interest paid by petitioner, which is admittedly a resident of the

Philippines, is on the promissory notes issued by it. Clearly, therefore, the

interest remitted to the Japanese shipbuilders in Japan in 1960, 1961 and

1962 on the unpaid balance of the purchase price of the vessels acquired by

petitioner is interest derived from sources within the Philippines subject to

income tax under the then Section 24(b)(1) of the National Internal Revenue

Code.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due

on the interests earned by the Japanese shipbuilders. It was the income of these

companies and not the Republic of the Philippines that was subject to the tax the

NDC did not withhold.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penaltyfor

its failure to withhold the same from the Japanese shipbuilders. Such liability is

imposed by Section 53(c) of the Tax Code, thus:

Section 53(c). Return and Payment. Every person required to deduct andwithhold any tax under this section shall make return thereof, in duplicate, on or

before the fifteenth day of April of each year, and, on or before the time fixed by law

for the payment of the tax, shall pay the amount withheld to the officer of the

Government of the Philippines authorized to receive it. Every such person is made

personally liable for such tax, and is indemnified against the claims and demands of

any person for the amount of any payments made in accordance with the provisions

of this section. (As amended by Section 9, R.A. No. 2343.)

InPhilippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court

of Tax Appeals,the Court quoted with approval the following regulation of the BIR onthe responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by

withholding the tax due, and promptly causing a query to be addressed to

the Commissioner of Internal Revenue for the determination whether or not

the income paid to an individual is not subject to withholding. In case the

Commissioner of Internal Revenue decides that the income paid to an

individual is not subject to withholding, the withholding agent may thereupon


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remit the amount of a tax withheld. (2nd par., Sec. 200, Income Tax

Regulations).

"Strict observance of said steps is required of a withholding agent before he could be

released from liability," so said Justice Jose P. Bengson, who wrote the decision."Generally, the law frowns upon exemption from taxation; hence, an exempting

provision should be construed strictissimi juris."

The petitioner was remiss in the discharge of its obligation as the withholding agent

of the government and so should be held liable for its omission.

3. Types of Philippine Income Tax: CREBA v Romulo (PABALAN)

4. Kinds of Taxpayers

a. Resident Aliens: CIR v Lednicky (SUPAPO)

DOCTRINES:

1. An alien resident who derives income wholly from sources within the Philippines may

not deduct from gross income the income taxes he paid to his home country.

2. An alien residents right to deduct from gross income the income taxes he paid to a

foreign government is given only as an alternative of his right to claim tax credit for

such foreign income taxes, so that unless he has a right to claim such tax credit if he

chooses, he is precluded from said deduction.

3. An alien resident is not entitled to tax credit for foreign income taxes paid when his

income is derived wholly from sources within the Philippines.

FACTS:

1. Spouses Lednicky, both American Citizens residing in the Philippines, derived all

their income from Philippine sources for the taxable years 1955-1957

2. In compliance with local law, they filed their ITR for taxable years and paid the

amount due.

3. Thereafter, the spouses filed an amended ITR for the taxable years in question

claiming a deduction for the amount theyve paid to the US government as federal

income tax.

4. Simultaneously, they requested for a refund.5. 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.

6. The CTA ruled in favor of the spouses.

Legal basis of Lednicky spouses:


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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.

ISSUE: whether an American citizen 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.

HELD: NO!A resident alien is not entitled to tax credit for the foreign income taxes paid

when his income is derived wholly from sources within the Philippines.

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 availthemselves 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


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23(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.

Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that the right todeduct 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 of a taxpayer who does not signify in 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 also may

signify his 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 theCourt of Tax Appeals section 30 (subsection (c-1) instead of providing as at present

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 on

income earned within the Philippinesif the taxpayer does not claim the benefits under paragraph3 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 taxpayer has not deducted such

taxes from his gross income but signifies in his return his desire to have the benefits of this

paragraph, the tax imposed by Title shall be credited with ... (etc.).


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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 hisoption, 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 the same governmental entity. In the

present case, while the taxpayers would have to pay two taxes on the same income, thePhilippine 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 was not earned 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 ofincome, 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. Every time the rate of taxation imposed upon an alien resident is increased byhis 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.

b. Non-resident aliens: CIR v Nickel (VELASCO)


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FACTS

JULIANE NICKEL is a non-resident German Citizen. She is also the President of

JUBANITEX, Inc., a domestic corporation engaged in "manufacturing, marketing on

wholesale only, buying or otherwise acquiring, holding, importing and exporting, sellingand disposing embroidered textile products."

The corporation appointed and engaged the services of Nickel as commission agent. It

was agreed that respondent will receive 10% sales commission on all sales actually

concluded and collected through her efforts.

NICKEL received the amount of P1,707,772.64, representing her sales commission

income from which JUBANITEX withheld the corresponding 10% withholding tax

amounting to P170,777.26, and remitted the same to the Bureau of Internal Revenue

(BIR). On October 17, 1997, respondent filed her 1995 income tax return reporting a

taxable income of P1,707,772.64 and a tax due of P170,777.26

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 allegedto have been mistakenly withheld and remitted by JUBANITEX to the BIR.

Respondent contended that her sales commission income is not taxable in the

Philippines because the same was a compensation for her services rendered in

Germany and therefore considered as income from sources outside the

Philippines.

The Commissioner of Internal Revenue maintains that the income earned by respondent

is taxable in the Philippines because the source thereof is JUBANITEX, a domestic

corporation located in the City of Makati.

It thus implied that source of income means the physical source where the

income came from.

It further argued that since respondent is the President of JUBANITEX, anyremuneration she received from said corporation should be construed as

payment of her overall managerial services to the company and should not be

interpreted as a compensation for a distinct and separate service as a sales

commission agent.

NICKEL, on the other hand, claims that the income she received was payment for her

marketing services.

She contended that income of nonresident aliens like her is subject to tax only if

the source of the income is within the Philippines. Source, according to

respondent is the situsof the activity which produced the income. And since the

source of her income were her marketing activities in Germany, the income shederived from said activities is not subject to Philippine income taxation.

Issue & Held:

1. Whether NICKEL is entitled to a refund?

NO. She is not entitled. The settled rule is that tax refunds are in the nature of tax exemptions

and are to be construed strictissimi juris against the taxpayer.To those therefore, who claim a


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refund rest the burden of proving that the transaction subjected to tax is actually exempt from

taxation.

In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that

the activity or the service which would entitle her to 10% commission income, are "sales actuallyconcluded and collected through [her] efforts." What she presented as evidence to prove that

she performed income producing activities abroad, were copies of documents she allegedly

faxed to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be

used in the finished products as well as samples of sales orders purportedly relayed to her by

clients.

However, these documents do not show whether the instruct ions or o rders faxed

ripened into con cluded or c ol lected sales in Germany. At the very least, these

pieces of evidence show that while respondent was in Germany, she sent

instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to

consummated sales and whether these sales were truly concluded in Germany,respondent presented no such evidence. Neither did she establish reasonable

connection between the orders/instructions faxed and the reported monthly sales

purported to have transpired in Germany.

In sum, we find that the faxed documents presented by respondent did not constitute substantial

evidence, or that relevant evidence that a reasonable mind might accept as adequate to support

the conclusionthat it was in Germany where she performed the income producing service which

gave rise to the reported monthly sales in the months of March and May to September of 1995.

She thus fai led to discharge the burden of proving th at her incom e was from sour ces

outsid e the Phil ippines and exempt from the applicat ion of our income tax law.Hence, the

claim for tax refund should be denied.

Important:

Pertinent portion of the National Internal Revenue Code (NIRC), states:

SEC. 25. Tax on Nonresident Alien Individual.

(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.

(1) In General.A nonresident alien individual engaged in trade or business in the Philippines

shall be subject to an income tax in the same manner as an individual citizen and a resident

alien individual, on taxable income received from all sources within the Philippines. A

nonresident alien individual who shall come to the Philippines and stay therein for an aggregateperiod of more than one hundred eighty (180) days during any calendar year shall be deemed a

nonresident alien doing business in the Philippines, Section 22(G) of this Code

notwithstanding.

x x x x

(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines.

There shall be levied, collected and paid for each taxable year upon the entire income received


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from all sources within the Philippines by every nonresident alien individual not engaged in trade

or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income.

x x x

Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engagedin trade or business, are subject to Philippine income taxation on their income received from all

sources within the Philippines. Thus, the keyword in determining the taxability of non-resident

aliens is the incomes "source."

The US Supreme Court has said, in a definition much quoted but often debated, that income

may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale

of capital assets. While the three elements of this attempt at definition need not be accepted as

all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from

"sources within the United States" and suggest an investigation into the nature and location of

the activities or property which produce the income.

If the income is from labor the place where the labor is done should be decisive; if it is done in

this country, the income should be from "sources within the US." If the income is from capital,

the place where the capital is employed should be decisive; if it is employed in this country, the

income should be from "sources within the US." If the income is from the sale of capital assets,

the place where the sale is made should be likewise decisive.

With respect to rendition of labor or personal service, as in th e instant case, it is the place

wh ere the labor or service was performed that determines the source of the incom e.

There is therefore no merit in petitioners interpretation which equates source of income in labor

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

c. Not engaged in trade of industry: Phil Guaranty v CIR (VILLAFUERTE)

Doctrines:

Reinsurance premiums ceded to foreign reinsurers subject to withholding tax.

Reinsurance premiums ceded to foreign reinsurers considered income from Philippine

sources.

Section 24 of the Tax Code does not require a foreign corporation to engage in businessin the Philippines in subjecting its income to tax. It suffices that the activity creating the

income is performed or done in the Philippines. What is controlling, therefore, is not the

place of business but the place of activity that created an income.

Section 37 of the Tax Code is not an all-inclusive enumeration, for it merely directs that

the kinds of income mentioned therein should be treated as income from sources within

the Philippines but it does not require that other kinds of income should not be

considered likewise.


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FACTS:

The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered

into reinsurance contracts with foreign insurance companies not doing business in the

country, thereby ceding to foreign reinsurers a portion of the premiums on insurance it

has originally underwritten in the Philippines, in consideration for the assumption by thelatter of liability on an equivalent portion of the risks insured.

Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty Co., Inc. ceded to

the foreign reinsurers the premiums worth P842,466.71 in 1953 and P721,471.85 in

1954.

Said premiums were excluded by Philippine Guaranty Co., Inc. from its gross income

when it filed its income tax returns for 1953 and 1954. Furthermore, it did not withhold or

pay tax on them. Consequently, the Commissioner of Internal Revenue (CIR) assessed

against Philippine Guaranty Co., Inc. withholding tax on the ceded reinsurance

premiums

Philippine Guaranty Co., Inc., protested the assessment on the ground that reinsurancepremiums ceded to foreign reinsurers not doing business in the Philippines are not

subject to withholding tax. Its protest was denied and it appealed to the Court of Tax

Appeals.

Petitioner maintain that the reinsurance premiums in question did not constitute income

from sources within the Philippines because the foreign reinsurers did not engage in

business in the Philippines, nor did they have office here.

ISSUE: Whether or not reinsurance premiums ceded to foreign reinsurers not doing business in

the Philippines are subject to withholding tax.

HELD: Yes.

Section 24 of the Tax Code subjects foreign corporations to tax on their income fromsources within the Philippines. The word "sources" has been interpreted as the activity,

property or service giving rise to the income. The reinsurance premiums were income

created from the undertaking of the foreign reinsurance companies to reinsure Philippine

Guaranty Co., Inc., against liability for loss under original insurances. Such undertaking,

as explained above, took place in the Philippines. These insurance premiums, therefore,

came from sources within the Philippines and, hence, are subject to corporate income

tax.

The foreign insurers' place of business should not be confused with their place of

activity. Business should not be continuity and progression of transactions while activity

may consist of only a single transaction. An activity may occur outside the place ofbusiness.

Section 24 of the Tax Code does not require a foreign corporation to engage in business

in the Philippines in subjecting its income to tax. It suffices that the activity creating the

income is performed or done in the Philippines. What is controlling, therefore, is not the

place of business but the place of activity that created an income.

Petitioner further contends that the reinsurance premiums are not income from sources

within the Philippines because they are not specifically mentioned in Section 37 of the


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Tax Code. Section 37 is not an all-inclusive enumeration, for it merely directs that the

kinds of income mentioned therein should be treated as income from sources within the

Philippines but it does not require that other kinds of income should not be considered

likewise.

Finally, petitioner contends that the withholding tax should be computed from the amountactually remitted to the foreign reinsurers instead of from the total amount ceded. And

since it did not remit any amount to its foreign insurers in 1953 and 1954, no withholding

tax was due.

The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at source. In the case of foreign

corporations subject to taxation under this Title not engaged in trade or business

within the Philippines and not having any office or place of business therein,

there shall be deducted and withheld at the source in the same manner and upon

the same items as is provided in Section fifty-three a tax equal to twenty-four per

centum thereof, and such tax shall be returned and paid in the same manner andsubject to the same conditions as provided in that section.

The applicable portion of Section 53 provides:

(b) Nonresident aliens. All persons, corporations and general copartnerships

(compaias colectivas), in what ever capacity acting, including lessees or

mortgagors of real or personal property, trustees acting in any trust capacity,

executors, administrators, receivers, conservators, fiduciaries, employers, and all

officers and employees of the Government of the Philippines having the control,

receipt, custody, disposal, or payment of interest, dividends, rents, salaries,

wages, premiums, annuities, compensation, remunerations, emoluments, or

other fixed or determinable annual or periodical gains, profits, and income of any

nonresident alien individual, not engaged in trade or business within thePhilippines and not having any office or place of business therein, shall (except in

the case provided for in subsection [a] of this section) deduct and withhold from

such annual or periodical gains, profits, and income a tax equal to twelve per

centum thereof: Provided That no deductions or withholding shall be required in

the case of dividends paid by a foreign corporation unless (1) such corporation is

engaged in trade or business within the Philippines or has an office or place of

business therein, and (2) more than eighty-five per centum of the gross income

of such corporation for the three-year period ending with the close of its taxable

year preceding the declaration of such dividends (or for such part of such period

as the corporation has been in existence)was derived from sources within thePhilippines as determined under the provisions of section thirty-seven: Provided,

further, That the Collector of Internal Revenue may authorize such tax to be

deducted and withheld from the interest upon any securities the owners of which

are not known to the withholding agent.

5. Special Class of Individual Employees


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a. Non resident foreign corporation: Howden v Collector (BUENAVENTURA)

FACTS: In 1950 the Commonwealth Insurance Co., a domestic corporation, entered into

reinsurance contracts with 32 British insurance companies not engaged in trade or business i

Documents

Tax digests last part of General Principles