Tax 1 Case Digests

CIR v Solidbank Corporation (G.R. No. 148191)

Facts:
Solidbank filed its Quarterly Percentage Tax Returns
reflecting gross receipts amounting to P1,474,693.44. It
alleged that the total included P350,807,875.15 representing
gross receipts from passive income which was already
subjected to 20%final withholding tax (FWT).

The Court of Tax Appeals (CTA) held in Asian Ban Corp. v
Commissioner, that the 20% FWT should not form part of its
taxable gross receipts for purposes of computing the tax.

Solidbank, relying on the strength of this decision, filed with
the BIR a letter-request for the refund or tax credit. It also
filed a petition for review with the CTA where the it ordered
the refund.

The CA ruling, however, stated that the 20% FWT did not
form part of the taxable gross receipts because the FWT
was not actually received by the bank but was directly
remitted to the government.

The Commissioner claims that although the FWT was not
actually received by Solidbank, the fact that the amount
redounded to the bank’s benefit makes it part of the taxable
gross receipts in computing the Gross Receipts Tax.
Solidbank says the CA ruling is correct.

Issue:
Whether or not the FWT forms part of the gross receipts tax.

Held:
Yes. In a withholding tax system, the payee is the taxpayer,
the person on whom the tax is imposed. The payor, a
separate entity, acts as no more than an agent of the
government for the collection of tax in order to ensure its
payment. This amount that is used to settle the tax liability is
sourced from the proceeds constitutive of the tax base.

These proceeds are either actual or constructive. Both
parties agree that there is no actual receipt by the bank.
What needs to be determined is if there is constructive
receipt. Since the payee is the real taxpayer, the rule on
constructive receipt can be rationalized.

The Court applied provisions of the Civil Code on actual and
constructive possession. Article 531 of the Civil Code clearly
provides that the acquisition of the right of possession is
through the proper acts and legal formalities
established. The withholding process is one such
act. There may not be actual receipt of the income withheld;
however, as provided for in Article 532, possession by any
person without any power shall be considered as acquired
when ratified by the person in whose name the act of
possession is executed.

In our withholding tax system, possession is acquired by the
payor as the withholding agent of the government, because
the taxpayer ratifies the very act of possession for the
government. There is thus constructive receipt.

The processes of bookkeeping and accounting for interest
on deposits and yield on deposit substitutes that are
subjected to FWT are tantamount to delivery, receipt or
remittance. Besides, Solidbank admits that its income is
subjected to a tax burden immediately upon “receipt”,
although it claims that it derives no pecuniary benefit or
advantage through the withholding process.

There being constructive receipt, part of which is withheld,
that income is included as part of the tax base on which the
gross receipts tax is imposed.


CIR vs. MARUBENI
11
FEB
GR No. 137377| J. Puno

Facts:
CIR assails the CA decision which affirmed CTA, ordering
CIR to desist from collecting the 1985 deficiency income,
branch profit remittance and contractor‟s taxes from
Marubeni Corp after finding the latter to have properly
availed of the tax amnesty under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in general
import and export trading, financing and construction, is
duly registered in the Philippines with Manila branch office.
CIR examined the Manila branch‟s books of accounts for
fiscal year ending March 1985, and found that respondent
had undeclared income from contracts with NDC and
Philphos for construction of a wharf/port complex and
ammonia storage complex respectively.
On August 27, 1986, Marubeni received a letter from CIR
assessing it for several deficiency taxes. CIR claims that the
income respondent derived were income from Philippine
sources, hence subject to internal revenue taxes. On Sept
1986, respondent filed 2 petitions for review with CTA: the
first, questioned the deficiency income, branch profit
remittance and contractor‟s tax assessments and second
questioned the deficiency commercial broker‟s assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for unpaid
income taxes for 1981-85, and that taxpayers who wished to
avail this should on or before Oct 31, 1986. Marubeni filed its
tax amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41‟s scope to include
estate and donor‟s taxes under Title 3 and business tax under
Chap 2, Title 5 of NIRC, extended the period of availment to
Dec 15, 1986 and stated those who already availed amnesty
under EO 41 should file an amended return to avail of the
new benefits. Marubeni filed a supplemental tax amnesty
return on Dec 15, 1986.
CTA found that Marubeni properly availed of the tax
amnesty and deemed cancelled the deficiency taxes. CA
affirmed on appeal.

Issue:
W/N Marubeni is exempted from paying tax

Held:
Yes.
1. On date of effectivity
CIR claims Marubeni is disqualified from the tax amnesty
because it falls under the exception in Sec 4b of EO 41:
“Sec. 4. Exceptions.—The following taxpayers may not avail
themselves of the amnesty herein granted: xxx b) Those
with income tax cases already filed in Court as of the
effectivity hereof;”
Petitioner argues that at the time respondent filed for
income tax amnesty on Oct 30, 1986, a case had already been
filed and was pending before the CTA and Marubeni
therefore fell under the exception. However, the point of
reference is the date of effectivity of EO 41 and that the filing
of income tax cases must have been made before and as of its
effectivity.
EO 41 took effect on Aug 22, 1986. The case questioning the
1985 deficiency was filed with CTA on Sept 26, 1986. When
EO 41 became effective, the case had not yet been filed.
Marubeni does not fall in the exception and is thus, not
disqualified from availing of the amnesty under EO 41 for
taxes on income and branch profit remittance.
The difficulty herein is with respect to the contractor‟s tax
assessment (business tax) and respondent‟s availment of the
amnesty under EO 64, which expanded EO 41‟s coverage.
When EO 64 took effect on Nov 17, 1986, it did not provide
for exceptions to the coverage of the amnesty for business,
estate and donor‟s taxes. Instead, Section 8 said EO provided
that:
“Section 8. The provisions of Executive Orders Nos. 41 and
54 which are not contrary to or inconsistent with this
amendatory Executive Order shall remain in full force and
effect.”
Due to the EO 64 amendment, Sec 4b cannot be construed to
refer to EO 41 and its date of effectivity. The general rule is
that an amendatory act operates prospectively. It may not be
given a retroactive effect unless it is so provided expressly or
by necessary implication and no vested right or obligations
of contract are thereby impaired.
2. On situs of taxation
Marubeni contends that assuming it did not validly avail of
the amnesty, it is still not liable for the deficiency tax because
the income from the projects came from the “Offshore
Portion” as opposed to “Onshore Portion”. It claims all
materials and equipment in the contract under the
“Offshore Portion” were manufactured and
completed in Japan, not in the Philippines, and are
therefore not subject to Philippine taxes.
(BG: Marubeni won in the public bidding for projects with
government corporations NDC and Philphos. In the
contracts, the prices were broken down into a Japanese Yen
Portion (I and II) and Philippine Pesos Portion and financed
either by OECF or by supplier‟s credit. The Japanese Yen
Portion I corresponds to the Foreign Offshore Portion, while
Japanese Yen Portion II and the Philippine Pesos Portion
correspond to the Philippine Onshore Portion. Marubeni has
already paid the Onshore Portion, a fact that CIR does not
deny.)
CIR argues that since the two agreements are turn-key, they
call for the supply of both materials and services to the client,
they are contracts for a piece of work and are indivisible. The
situs of the two projects is in the Philippines, and the
materials provided and services rendered were all done and
completed within the territorial jurisdiction of the
Philippines. Accordingly, respondent‟s entire receipts from
the contracts, including its receipts from the Offshore
Portion, constitute income from Philippine sources. The total
gross receipts covering both labor and materials should be
subjected to contractor‟s tax (a tax on the exercise of a
privilege of selling services or labor rather than a sale on
products).
Marubeni, however, was able to sufficiently prove in trial
that not all its work was performed in the Philippines
because some of them were completed in Japan (and in fact
subcontracted) in accordance with the provisions of the
contracts. All services for the design, fabrication, engineering
and manufacture of the materials and equipment under
Japanese Yen Portion I were made and completed in Japan.
These services were rendered outside Philippines’
taxing jurisdiction and are therefore not subject to
contractor’s tax. Petition denied.

CHAMBER OF REAL ESTATE AND BUILDERS’
ASSOCIATION, INC. VS. EXECUTIVE SECRETARY-
MINIMUM CORPORATE INCOME TAX

FACTS:
CREBA assails the imposition of the minimum corporate income
tax (MCIT) as being violative of the due process clause as it levies
income tax even if there is no realized gain. They also question the
creditable withholding tax (CWT) on sales of real properties
classified as ordinary assets stating that (1) they ignore the
different treatment of ordinary assets and capital assets; (2) the use
of gross selling price or fair market value as basis for the CWT and
the collection of tax on a per transaction basis (and not on the net
income at the end of the year) are inconsistent with the tax on
ordinary real properties; (3) the government collects income tax
even when the net income has not yet been determined; and (4) the
CWT is being levied upon real estate enterprises but not on other
enterprises, more particularly those in the manufacturing sector.

ISSUE:
Are the impositions of the MCIT on domestic corporations and
CWT on income from sales of real properties classified as
ordinary assets unconstitutional?

HELD:
NO. MCIT does not tax capital but only taxes income as shown by
the fact that the MCIT is arrived at by deducting the capital spent
by a corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sales. Besides, there are sufficient
safeguards that exist for the MCIT: (1) it is only imposed on the
4th year of operations; (2) the law allows the carry forward of any
excess MCIT paid over the normal income tax; and (3) the
Secretary of Finance can suspend the imposition of MCIT in
justifiable instances.
The regulations on CWT did not shift the tax base of a real estate
business’ income tax from net income to GSP or FMV of the
property sold since the taxes withheld are in the nature of advance
tax payments and they are thus just installments on the annual tax
which may be due at the end of the taxable year. As such the tax
base for the sale of real property classified as ordinary assets
remains to be the net taxable income and the use of the GSP or
FMV is because these are the only factors reasonably known to the
buyer in connection with the performance of the duties as a
withholding agent. Neither is there violation of equal protection
even if the CWT is levied only on the real industry as the real
estate industry is, by itself, a class on its own and can be validly
treated different from other businesses.

CIR VS PROCTER AND GAMBLE PHILIPPINE
MANUFACTURING CORPORATION (204 SCRA 377)
Details
Category: Income Taxation

NON-RESIDENT FOREIGN CORPORATION-
DIVIDENDS
Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax
rate will be applied to dividend remittances to non-resident
corporate stockholders of a Philippine corporation. This rate
goes down to 15% ONLY IF the country of domicile of the
foreign stockholder corporation “shall allow” such foreign
corporation a tax credit for “taxes deemed paid in the
Philippines,” applicable against the tax payable to the
domiciliary country by the foreign stockholder corporation.
However, such tax credit for “taxes deemed paid in the
Philippines” MUST, as a minimum, reach an amount
equivalent to 20 percentage points

FACTS:
Procter and Gamble Philippines declared dividends payable
to its parent company and sole stockholder, P&G USA. Such
dividends amounted to Php 24.1M. P&G Phil paid a 35%
dividend withholding tax to the BIR which amounted to Php
8.3M It subsequently filed a claim with the Commissioner of
Internal Revenue for a refund or tax credit, claiming that
pursuant to Section 24(b)(1) of the National Internal
Revenue Code, as amended by Presidential Decree No. 369,
the applicable rate of withholding tax on the dividends
remitted was only 15%.

MAIN ISSUE:
Whether or not P&G Philippines is entitled to the refund or
tax credit.

HELD:
YES. P&G Philippines is entitled.Sec 24 (b) (1) of the NIRC
states that an ordinary 35% tax rate will be applied to
dividend remittances to non-resident corporate stockholders
of a Philippine corporation. This rate goes down to 15%
ONLY IF he country of domicile of the foreign stockholder
corporation “shall allow” such foreign corporation a tax
credit for “taxes deemed paid in the Philippines,” applicable
against the tax payable to the domiciliary country by the
foreign stockholder corporation. However, such tax credit for
“taxes deemed paid in the Philippines” MUST, as a
minimum, reach an amount equivalent to 20 percentage
points which represents the difference between the regular
35% dividend tax rate and the reduced 15% tax rate. Thus,
the test is if USA “shall allow” P&G USA a tax credit for
”taxes deemed paid in the Philippines” applicable against the
US taxes of P&G USA, and such tax credit must reach at least
20 percentage points. Requirements were met.

NOTES: Breakdown:
a) Deemed paid requirement: US Internal Revenue Code, Sec
902: a domestic corporation (owning 10% of remitting
foreign corporation) shall be deemed to have paid a
proportionate extent of taxes paid by such foreign
corporation upon its remittance of dividends to domestic
corporation.
b) 20 percentage points requirement: (computation is as
follows) P 100.00 -- corporate income earned by P&G
Phils x 35% -- Philippine income tax rate P 35.00 -- paid
by P&G Phil as corporate income tax
P 100.00 - 35.00 65. 00 -- available for remittance
P 65. 00 x 35% -- Regular Philippine dividend tax
rate P 22.75 -- regular dividend tax
P 65.0o x 15% -- Reduced dividend tax rate P 9.75 --
reduced dividend tax
P 65.00 -- dividends remittable - 9.75 -- dividend tax
withheld at reduced rate P 55.25 -- dividends actually
remitted to P&G USA
Dividends actually remitted by P&G Phil = P 55.25 -----
----------------------------- ------------- x P35 =
P29.75 Amount of accumulated P 65.00 profits earned
P35 is the income tax paid. P29.75 is the tax credit
allowed by Sec 902 of US Tax Code for Phil corporate income
tax „deemed paid‟ by the parent company. Since P29.75 is
much higher than P13, Sec 902 US Tax Code complies with
the requirements of sec 24 NIRC. (I did not understand why
these were divided and multiplied. Point is, requirements
were met)

Reason behind the law:
Since the US Congress desires to avoid or reduce double
taxation of the same income stream, it allows a tax credit of
both (i) the Philippine dividend tax actually withheld, and
(ii) the tax credit for the Philippine corporate income tax
actually paid by P&G Philippines but “deemed paid” by P&G
USA.
Moreover, under the Philippines-United States Convention
“With Respect to Taxes on Income,” the Philippines, by
treaty commitment, reduced the regular rate of dividend tax
to a maximum of 20% of he gross amount of dividends paid
to US parent corporations, and established a treaty
obligation on the part of the United States that it “shall
allow” to a US parent corporation receiving dividends from
its Philippine subsidiary “a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the
Philippine [subsidiary].
Note: The NIRC does not require that the US tax law
deem the parent corporation to have paid the 20 percentage
points of dividend tax waived by the Philippines. It only
requires that the US “shall allow” P&G-USA a “deemed paid”
tax credit in an amount equivalent to the 20 percentage
points waived by the Philippines. Section 24(b)(1) does not
create a tax exemption nor does it provide a tax credit; it is a
provision which specifies when a particular (reduced) tax
rate is legally applicable.
Section 24(b)(1) of the NIRC seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the
tax cost of earning profits here and thereby increasing the
net dividends remittable to the investor. The foreign
investor, however, would not benefit from the reduction of
the Philippine dividend tax rate unless its home country
gives it some relief from double taxation by allowing the
investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly
Section 24(b)(1) of the NIRC requires the home or
domiciliary country to give the investor corporation a
“deemed paid” tax credit at least equal in amount to the 20
percentage points of dividend tax foregone by the
Philippines, in the assumption that a positive incentive effect
would thereby be felt by the investor.

CYANAMID PHILIPPINES, INC. VS. CA, CTA AND CIR-
SURTAX
Details
Category: Income Taxation

In order to determine whether profits are accumulated for
the reasonable needs of the business to avoid the surtax
upon the shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of the
accumulation, not intentions subsequently, which are mere
afterthoughts.

Facts:
Petitioner is a corporation organized under Philippine laws
and is a wholly owned subsidiary of American Cyanamid Co.
based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of
imported finished goods and an imported/indentor. In 1985
the CIR assessed on petitioner a deficiency income tax of
P119,817) for the year 1981. Cyanamid protested the
assessments particularly the 25% surtax for undue
accumulation of earnings. It claimed that said profits were
retained to increase petitioner‟s working capital and it would
be used for reasonable business needs of the company. The
CIR refused to allow the cancellation of the assessments,
petitioner appealed to the CTA. It claimed that there was not
legal basis for the assessment because 1) it accumulated its
earnings and profits for reasonable business requirements to
meet working capital needs and retirement of indebtedness
2) it is a wholly owned subsidiary of American Cyanamid
Company, a foreign corporation, and its shares are listed and
traded in the NY Stock Exchange. The CTA denied the
petition stating that the law permits corporations to set aside
a portion of its retained earnings for specified purposes
under Sec. 43 of the Corporation Code but that petitioner‟s
purpose did not fall within such purposes. It found that there
was no need to set aside such retained earnings as working
capital as it had considerable liquid funds. Those
corporations exempted from the accumulated earnings tax
are found under Sec. 25 of the NIRC, and that the petitioner
is not among those exempted. The CA affirmed the CTA‟s
decision.

Issue: Whether or not the accumulation of income
was justified.

Held:
In order to determine whether profits are accumulated for
the reasonable needs of the business to avoid the surtax
upon the shareholders, it must be shown that the controlling
intention of the taxpayer is manifested at the time of the
accumulation, not intentions subsequently, which are mere
afterthoughts. The accumulated profits must be used within
reasonable time after the close of the taxable year. In the
instant case, petitioner did not establish by clear and
convincing evidence that such accumulated was for the
immediate needs of the business.
To determine the reasonable needs of the business, the
United States Courts have invented the “Immediacy Test”
which construed the words “reasonable needs of the
business” to mean the immediate needs of the business, and
it is held that if the corporation did not prove an immediate
need for the accumulation of earnings and profits such was
not for reasonable needs of the business and the penalty tax
would apply. (Law of Federal Income Taxation Vol 7) The
working capital needs of a business depend on the nature of
the business, its credit policies, the amount of inventories,
the rate of turnover, the amount of accounts receivable, the
collection rate, the availability of credit and other similar
factors. The Tax Court opted to determine the working
capital sufficiency by using the ration between the current
assets to current liabilities. Unless, rebutted, the
presumption is that the assessment is correct. With the
petitioner‟s failure to prove the CIR incorrect, clearly and
conclusively, the Tax Court‟s ruling is upheld.

CIR V. CA AND YMCA (TAX)


YMCA is a non-stock, non-profit institution, which
conducts various programs and activities that are
beneficial to the public, especially the young people,
pursuant to its religious, educational, and charitable
objectives.

In 1980, YMCA earned, among others, an income
from leasing out a portion of its premises to small
shop owners, like restaurants and canteen operators,
and income form parking collected from non-
members.

In 1985, CIR issued an assessment to YMCA, for
deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees
and deficiency withholding tax on wages. YMCA
formally protested the assessment , which CIR
denied.

Issue: Is the income derived from rentals of real
property owned by YMCA - established as welfare,
educational, and charitable non-profit corporation -
subject to income tax under the NIRC and the
Constitution?

Petitioner argued that while the income received by
the organizations enumerated in the NIRC is, as a
rule, exempt from payment of tax, in respect to
income received by them as such, the exemption
does not apply to income derived from any of
its properties, real or personal, or from any of
their activities conducted for profit, regardless
of the disposition made of such income.

Petitioner adds that rented income derived by a tax-
exempt organization from the lease of its properties,
real or personal, is not therefore exempt from
income taxation, even if such income is exclusively
used for the accomplishment of its objectives.

The settled rule in this jurisdiction is that laws
granting exemption from tax are construed
strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an
exemption is equivalent to an appropriation. Hence,
a claim for exemption from tax payments must be
clearly shown and based on language in the law too
plain to be mistaken.

Doctrine: - Rental income derived by a tax-exempt
organization from the lease of its properties, real or personal,
is not exempt from income taxation, even if such income is
exclusively used for the accomplishment of its objectives.
- A claim of statutory exemption from taxation should be
manifest and unmistakable from the language of the law on
which it is based. Thus, it must expressly be granted in a
statute stated in a language too clear to be mistaken. Verba
legis non est recedendum — where the law does not
distinguish, neither should we.
- The bare allegation alone that one is a non-stock, non-
profit educational institution is insufficient to justify its
exemption from the payment of income tax. It must prove
with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution;
and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational
purposes.
- The Court cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be
overspilling its role and invading the realm of legislation. The
Court, given its limited constitutional authority, cannot rule on
the wisdom or propriety of legislation. That prerogative
belongs to the political departments of government.

COMMISIONER OF INTERNAL REVENUE VS. S.C.
JOHNSON AND SON, INC.,
July 11, 2009, 11:16 pm
Filed under: PUBLIC INTL'L LAW, Treaty
Facts:
S.C. JOHNSON AND SON, INC., a domestic
corporation organized and operating under the Philippine
laws, entered into a license agreement with SC Johnson and
Son, United States of America (USA), a non-resident foreign
corporation based in the U.S.A. pursuant to which the
[respondent] was granted the right to use the trademark,
patents and technology owned by the latter including the
right to manufacture, package and distribute the products
covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson
and Son, U. S. A.
The said License Agreement was duly registered with
the Technology Transfer Board of the Bureau of Patents,
Trade Marks and Technology Transfer under Certificate of
Registration No. 8064.For the use of the trademark or
technology, [respondent] was obliged to pay SC Johnson
and Son, USA royalties based on a percentage of net sales
and subjected the same to 25% withholding tax on royalty
payments which [respondent] paid for the period covering
July 1992 to May 1993 in the total amount of P1,603,443.00
On October 29, 1993, [respondent] filed with the
International Tax Affairs Division (ITAD) of the BIR a claim
for refund of overpaid withholding tax on royalties arguing
that, “the antecedent facts attending [respondent's] case fall
squarely within the same circumstances under which said
MacGeorge and Gillete rulings were issued. Since the
agreement was approved by the Technology Transfer Board,
the preferential tax rate of 10% should apply to the
[respondent]. We therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is only subject to
10% withholding tax pursuant to the most-favored nation
clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b)
(iii)] in relation to the RP-West Germany Tax Treaty [Article
12 (2) (b)]” (Petition for Review [filed with the Court of
Appeals]
The RP-US Tax Treaty states that:
1) Royalties derived by a resident of one of the Contracting
States from sources within the other Contracting State may
be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall
not exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the royalties;
(ii) 15 percent of the gross amount of the royalties, where the
royalties are paid by a corporation registered with the
Philippine Board of Investments and engaged in preferred
areas of activities; and
(iii) the lowest rate of Philippine tax that may be imposed on
royalties of the same kind paid under similar circumstances
to a resident of a third State.
The RP-Germany Tax Treaty provides:
(2) However, such royalties may also be taxed in the
Contracting State in which they arise, and according to the
law of that State, but the tax so charged shall not exceed:
b) 10 percent of the gross amount of royalties arising from
the use of, or the right to use, any patent, trademark, design
or model, plan, secret formula or process, or from the use of
or the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial,
commercial or scientific experience.
For as long as the transfer of technology, under
Philippine law, is subject to approval, the limitation of the tax
rate mentioned under b) shall, in the case of royalties arising
in the Republic of the Philippines, only apply if the contract
giving rise to such royalties has been approved by the
Philippine competent authorities.
The Commissioner did not act on said claim for
refund. Private respondent S.C. Johnson & Son, Inc. (S.C.
Johnson) then filed a petition for review before the Court of
Tax Appeals (CTA).The Court of Tax Appeals rendered its
decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing
overpaid withholding tax on royalty payments, beginning
July, 1992 to May, 1993.
2

The Commissioner of Internal Revenue thus filed a
petition for review with the Court of Appeals which rendered
the decision finding no merit in the petition and affirming in
toto the CTA ruling.
Thus, this petition.
Issue:
Whether the Court of Appeals erred in ruling that SC
Johnson and Son, USA is entitled to the “Most Favored
Nation” Tax rate of 10% on Royalties as provide in the RP-
US Tax Treaty in relation to the RP-West Germany Tax
Treaty?

Ruling:.
Under Article 24 of the RP-West Germany Tax Treaty,
the Philippine tax paid on income from sources within the
Philippines is allowed as a credit against German income
and corporation tax on the same income. In the case of
royalties for which the tax is reduced to 10 or 15 percent
according to paragraph 2 of Article 12 of the RP-West
Germany Tax Treaty, the credit shall be 20% of the gross
amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising
from the use of, or the right to use, any patent, trade mark,
design or model, plan, secret formula or process, is taxed at
10% of the gross amount of said royalty under certain
conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is
allowed in favor of the German resident. That means the rate
of 10% is granted to the German taxpayer if he is similarly
granted a credit against the income and corporation tax of
West Germany. The clear intent of the “matching credit” is to
soften the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar “matching
credit” as that provided under the RP-West Germany Tax
Treaty. Hence, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Therefore,
the “most favored nation” clause in the RP-West Germany
Tax Treaty cannot be availed of in interpreting the provisions
of the RP-US Tax Treaty.
5

The rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-
Germany Tax Treaty should apply only if the taxes imposed
upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances.
This would mean that private respondent must prove that the
RP-US Tax Treaty grants similar tax reliefs to residents of
the United States in respect of the taxes imposable upon
royalties earned from sources within the Philippines as those
allowed to their German counterparts under the RP-
Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties
do not contain similar provisions on tax crediting. Article 24
of the RP-Germany Tax Treaty expressly allows crediting
against German income and corporation tax of 20% of the
gross amount of royalties paid under the law of the
Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to
relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid.
Since the RP-US Tax Treaty does not give a matching
tax credit of 20 percent for the taxes paid to the Philippines
on royalties as allowed under the RP-West Germany Tax
Treaty, private respondent cannot be deemed entitled to the
10 percent rate granted under the latter treaty for the reason
that there is no payment of taxes on royalties under similar
circumstances.


PLDT vs. CIR
GR 157264 January 31, 2008
Carpio Morales;J.:
FACTS:
PLDT terminated and compensated affected
employees in compliance with labor law requirements. It
deducted from separation pay withholding taxes and
remitted the same to BIR. In 1997, it filed a claim for tax
refund and CTA contended that petitioner failed to show
proof of payment of separation pay and remittance of the
alleged with held taxes. CA dismissed the same and PLDT^
assailed the decision arguing against the need for proof that
the employees received their separation pay and proffers
actually received by terminated employees.
ISSUE:
Whether or not the withholding taxes remitted to the
BIR should be refunded for having been erroneously
withheld and paid to the latter.
RULING:
Tax refunds, like tax exemptions, are considered
strictly against the taxpayer and liberally in favor of the
taxing authority, and the taxpayer bears the burden of
establishing the factual basis of his claim for a refund.
A taxpayer must do two things to be able to
successfully make a claim for tax refund: a) declare the
income payments it received as part of its gross income and
b) establish the fact of withholding.
At all events, the alleged newly discovered
evidence that PLDT seeks to offer does not suffice to
established its claim for refund as it would still have to
comply with Revenue Regulation 6-85 by proving that the
redundant employees on whose behalf it filed the claim for
refund, declared the separation pay received as part of their
gross income. The same Revenue Regulation required that
the facts of withholding is established by a copy of the
statement duly issued by the payor to the payee showing the
amount paid and the amount of tax withhold therefrom.



Atlas Consolidated vs. CIR
ATLAS CONSOLIDATED MINING DEVT CORP vs. CIR
524 SCRA 73, 103
GR Nos. 141104 & 148763, June 8, 2007

"The taxpayer must justify his claim for tax exemption or refund
by the clearest grant of organic or statute law and should not be
permitted to stand on vague implications."

"Export processing zones (EPZA) are effectively considered as
foreign territory for tax purposes."

FACTS: Petitioner corporation, a VAT-registered taxpayer
engaged in mining, production, and sale of various mineral
products, filed claims with the BIR for refund/credit of input VAT
on its purchases of capital goods and on its zero-rated sales in the
taxable quarters of the years 1990 and 1992. BIR did not
immediately act on the matter prompting the petitioner to file a
petition for review before the CTA. The latter denied the claims on
the grounds that for zero-rating to apply, 70% of the company's
sales must consists of exports, that the same were not filed within
the 2-year prescriptive period (the claim for 1992 quarterly returns
were judicially filed only on April 20, 1994), and that petitioner
failed to submit substantial evidence to support its claim for
refund/credit.
The petitioner, on the other hand, contends that CTA failed to
consider the following: sales to PASAR and PHILPOS within the
EPZA as zero-rated export sales; the 2-year prescriptive period
should be counted from the date of filing of the last adjustment
return which was April 15, 1993, and not on every end of the
applicable quarters; and that the certification of the independent
CPA attesting to the correctness of the contents of the summary of
suppliers’ invoices or receipts examined, evaluated and audited by
said CPA should substantiate its claims.

ISSUE: Did the petitioner corporation sufficiently establish the
factual bases for its applications for refund/credit of input VAT?

HELD: No. Although the Court agreed with the petitioner
corporation that the two-year prescriptive period for the filing of
claims for refund/credit of input VAT must be counted from the
date of filing of the quarterly VAT return, and that sales to PASAR
and PHILPOS inside the EPZA are taxed as exports because these
export processing zones are to be managed as a separate customs
territory from the rest of the Philippines, and thus, for tax purposes,
are effectively considered as foreign territory, it still denies the
claims of petitioner corporation for refund of its input VAT on its
purchases of capital goods and effectively zero-rated sales during
the period claimed for not being established and substantiated by
appropriate and sufficient evidence.
Tax refunds are in the nature of tax exemptions. It is regarded as
in derogation of the sovereign authority, and should be construed
in strictissimi juris against the person or entity claiming the
exemption. The taxpayer who claims for exemption must justify
his claim by the clearest grant of organic or statute law and should
not be permitted to stand on vague implications.


Aguinaldo Industries Co. vs. CIR
Post under case digests, Taxation at Sunday, February 19,
2012 Posted by Schizophrenic Mind
Facts: Aguinaldo Industries is engaged in the manufacture
of fishing nets (a tax exempt industry), which is handled by
its Fish Nets Division. It is also engaged in the manufacture
of furniture which is operated by its Furniture Division. Each
division is provided with separate books of accounts. The
income from the Fish Nets Division, miscellaneous income of
the Fish Nets Division, and and the income from the
Furniture Division are computed individually.

Petitioner acquired a parcel of land in Muntinlupa Rizal as
site for its fishing net factory. The transaction was entered in
the books of the Fish Nets Division. The company then
found another parcel of land in Marikina Heights, which was
more suitable. They then sold the Muntinlupa property and
the profit derived from the sale was entered in the books of
the Fish Nets Division as miscellaneous income to separate
it from its tax exempt income.

For 1957, petitioner filed 2 separate ITRs (one for Fish Nets
and one for Furniture). After investigation, BIR examiners
found that the Fish Nets Div deducted from its gross income
PhP 61k as additional remuneration paid to the company’s
officers. Such amount was taken from the sale of the land
and was reported as part of the selling expenses. The
examiners recommended that such deduction be disallowed.
Petitioner then asserted in its letter that it should be allowed
because it was paid as bonus to its officers pursuant to
Sec.3 of its by-laws: “From the net profits shall be deducted
for allowance of the Pres. - 3%, VP - 1%, members of the
Board - 10%.”

CTA imposed a 5% surcharge and 1% monthly interest for
the deficiency assessment. Petitioner then stressed that the
profit derived from the sale of the land is not taxable
because the Fish Nets Div enjoys tax exemption under RA
901.

Issues:
(1) Whether the bonus given to the officers of the petitioner
upon the sale of its Muntinlupa land is an ordinary and
necessary business expense deductible for income tax
purposes; and
(2) Whether petitioner is liable for surcharge and interest for
late payment.

Held:
(1) YES. These extraordinary and unusual amounts paid by
petitioner to these directors in the guise and form of
compensation for their supposed services as such, without
any relation to the measure of their actual services, cannot
be regarded as ordinary and necessary expenses within the
meaning of the law. This posture is in line with the doctrine in
the law of taxation that the taxpayer must show that its
claimed deductions clearly come within the language of the
law since allowances, like exemptions, are matters of
legislative grace.

Moreover, petitioner cannot now claim that the profit from the
sale is tax exempt. At the administrative level, the petitioner
implicitly admitted that the profit it derived from the sale of its
Muntinlupa land, a capital asset, was a taxable gain — which
was precisely the reason why for tax purposes the petitioner
deducted therefrom the questioned bonus to its corporate
officers as a supposed item of expense incurred for the sale
of the said land, apart from the P51,723.72 commission paid
by the petitioner to the real estate agent who indeed effected
the sale. The BIR therefore had no occasion to pass upon
the issue.

To allow a litigant to assume a different posture when he
comes before the court and challenge 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. The requirement of prior
exhaustion of administrative remedies gives administrative
authorities the prior opportunity to decide controversies
within its competence, and in much the same way that, on
the judicial level, issues not raised in the lower court cannot
be raised for the first time on appeal. Up to the time the
questioned decision of the respondent Court was rendered,
the petitioner had always implicitly admitted that the disputed
capital gain was taxable, although subject to the deduction of
the bonus paid to its corporate officers. It was only after the
said decision had been rendered and on a motion for
reconsideration thereof, that the issue of tax exemption was
raised by the petitioner for the first time. It was thus not one
of the issues raised by petitioner in his petition and
supporting memorandum in the CTA.

(2) YES. Interest and surcharges on deficiency taxes are
imposable upon failure of the taxpayer to pay the tax on the
date fixed in the law for the payment thereof, which was,
under the unamended Section 51 of the Tax Code, the 15th
day of the 5th month following the close of the fiscal year in
the case of taxpayers whose tax returns were made on the
basis of fiscal years. A deficiency tax indicates non-payment
of the correct tax, and such deficiency exists not only from
the assessment thereof but from the very time the taxpayer
failed to pay the correct amount of tax when it should have
been paid and the imposition thereof is mandatory even in
the absence of fraud or willful failure to pay the tax is full.

CIR vs. Isabela Cultural Corporation
Post under case digests, Taxation at Friday, March 02, 2012
Posted by Schizophrenic Mind
Facts: Isabela Cultural Corporation (ICC), a domestic
corporation received an assessment notice for deficiency
income tax and expanded withholding tax from BIR. It arose
from the disallowance of ICC’s claimed expense for
professional and security services paid by ICC; as well as
the alleged understatement of interest income on the three
promissory notes due from Realty Investment Inc. The
deficiency expanded withholding tax was allegedly due to
the failure of ICC to withhold 1% e-withholding tax on its
claimed deduction for security services.

ICC sought a reconsideration of the assessments. Having
received a final notice of assessment, it brought the case to
CTA, which held that it is unappealable, since the final notice
is not a decision. CTA’s ruling was reversed by CA, which
was sustained by SC, and case was remanded to CTA. CTA
rendered a decision in favor of ICC. It ruled that the
deductions for professional and security services were
properly claimed, it said that even if services were rendered
in 1984 or 1985, the amount is not yet determined at that
time. Hence it is a proper deduction in 1986. It likewise found
that it is the BIR which overstate the interest income, when it
applied compounding absent any stipulation.

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

Issue: Whether or not the expenses for professional and
security services are deductible.

Held: No. One of the requisites for the deductibility of
ordinary and necessary expenses is that it must have been
paid or incurred during the taxable year. This requisite is
dependent on the method of accounting of the taxpayer. In
the case at bar, ICC is using the accrual method of
accounting. Hence, under this method, an expense is
recognized when it is incurred. Under a Revenue Audit
Memorandum, when the method of accounting is accrual,
expenses not being claimed as deductions by a taxpayer in
the current year when they are incurred cannot be claimed in
the succeeding year.

The accrual of income and expense is permitted when the
all-events test has been met. This test requires: 1) fixing of a
right to income or liability to pay; and 2) the availability of the
reasonable accurate determination of such income or
liability. The test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer
has at its disposal the information necessary to compute the
amount with reasonable accuracy.

From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees
charged by the firm. They cannot give as an excuse the
delayed billing, since it could have inquired into the amount
of their obligation and reasonably determine the amount.




Esso Standard Eastern Inc. vs. CIR (G.R. Nos. L-28508-9,
July 7, 1989)
Post under case digests, Taxation at Saturday, March 10,
2012 Posted by Schizophrenic Mind
Facts: In CTA Case No. 1251, Esso Standard Eastern Inc.
(Esso) deducted from its gross income for 1959, as part of
its ordinary and necessary business expenses, the amount it
had spent for drilling and exploration of its petroleum
concessions. This claim was disallowed by the
Commissioner of Internal Revenue (CIR) on the ground that
the expenses should be capitalized and might be written off
as a loss only when a "dry hole" should result. Esso then
filed an amended return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes of
several of its oil wells. Also claimed as ordinary and
necessary expenses in the same return was the amount of
P340,822.04, representing margin fees it had paid to the
Central Bank on its profit remittances to its New York head
office.

On August 5, 1964, the CIR granted a tax credit of
P221,033.00 only, disallowing the claimed deduction for the
margin fees paid on the ground that the margin fees paid to
the Central Bank could not be considered taxes or allowed
as deductible business expenses.

Esso appealed to the Court of Tax Appeals (CTA) for the
refund of the margin fees it had earlier paid contending that
the margin fees were deductible from gross income either as
a tax or as an ordinary and necessary business expense.
However, Esso’s appeal was denied.

Issues:
(1) Whether or not the margin fees are taxes.

(2) Whether or not the margin fees are necessary and
ordinary business expenses.

Held:
(1) No. A tax is levied to provide revenue for government
operations, while the proceeds of the margin fee are applied
to strengthen our country's international reserves. The
margin fee was imposed by the State in the exercise of its
police power and not the power of taxation.

(2) No. Ordinarily, an expense will be considered 'necessary'
where the expenditure is appropriate and helpful in the
development of the taxpayer's business. It is 'ordinary' when
it connotes a payment which is normal in relation to the
business of the taxpayer and the surrounding circumstances.
Since the margin fees in question were incurred for the
remittance of funds to Esso's Head Office in New York,
which is a separate and distinct income taxpayer from the
branch in the Philippines, for its disposal abroad, it can never
be said therefore that the margin fees were appropriate and
helpful in the development of Esso's business in the
Philippines exclusively or were incurred for purposes proper
to the conduct of the affairs of Esso's branch in the
Philippines exclusively or for the purpose of realizing a profit
or of minimizing a loss in the Philippines exclusively. If at all,
the margin fees were incurred for purposes proper to the
conduct of the corporate affairs of Esso in New York, but
certainly not in the Philippines.


For an item to be deductible as a business expense, the expense
must be ordinary and necessary; it must be paid or incurred within
the taxable year; and it must be paid or incurred in carrying on a
trade or business. In addition, the taxpayer must substantially
prove by evidence or records the deductions claimed under law,
otherwise, the same will be disallowed.

For an item to be deductible as a business expense, the expense
must be ordinary and necessary; it must be paid or incurred within
the taxable year; and it must be paid or incurred in carrying on a
trade or business. In addition, the taxpayer must substantially
prove by evidence or records the deductions claimed under law,
otherwise, the same will be disallowed. There has been no attempt
to define “ordinary and necessary” with precision. However, as
guiding principle in the proper adjudication of conflicting claims,
an expenses is considered necessary where the expenditure is
appropriate and helpful in the development of the taxpayer’s
business. It is ordinary when it connotes a payment which is
normal in relation to the business of the taxpayer and the
surrounding circumstances. Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer’s business;
the expenditure, to be an allowable deduction as a business
expense, must be determined from the nature of the expenditure
itself, and on the extent and permanency of the work accomplished
by the expenditure. Herein, ESSO has not shown that the
remittance to the head office of part of its profits was made in
furtherance of its own trade or business. The petitioner merely
presumed that all corporate expenses are necessary and appropriate
in the absence of a showing that they are illegal or ultra vires;
which is erroneous. Claims for deductions are a matter of
legislative grace and do not turn on mere equitable considerations.

CIR vs Lednicky


Principle/s:
- Alien resident’s deduction of Income Taxation from Gross
Income paid in their home country
- Double Taxation


Commissioner of Internal Revenue vs W.E. Lednicky
and Maria Lednicky
GR Nos. L-18262 and L-21434, 1964


FACTS:
Spouses are both American citizens residing in the
Philippines and have derived all their income from Philippine
sources for taxable years in question.

On March, 1957, filed their ITR for 1956, reporting gross
income of P1,017,287.65 and a net income of P 733,809.44.
On March 1959, file an amended claimed deduction of P
205,939.24 paid in 1956 to the United States government
as federal income tax of 1956.


ISSUE:
Whether a citizen of the United States residing in the
Philippines, who derives wholly from sources within the
Philippines, may deduct his gross income from the income
taxes he has paid to the United States government for the
said taxable year?


HELD:
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 for the taxable
year. The right to deduct foreign income taxes paid given
only where alternative right to tax credit exists.

Section 30 of the NIRC, Gross Income “Par. C (3): Credits
against tax per 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
shall be credited with: Paragraph (B), Alien resident of the
Philippines; and, Paragraph C (4), Limitation on credit.”

An alien resident not entitled to tax credit for foreign income
taxes paid when his income is derived wholly from sources
within the Philippines.

Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity. In the present case, although the
taxpayer would have to pay two taxes on the same income
but the Philippine government only receives the proceeds of
one tax, there is no obnoxious double taxation.

COMMON ISSUE: WON a citizen of the US residing in Phils who
derives income wholly from sources within the Phils may
deduct from his gross income the income taxes he has paid to
US gov’t for the taxable year?
HELD/RATIO:
 SC: CIR correct that the construction and wording of Sec.
30c(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
o (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 any extent the benefits of paragraph
(3) of this subsection (relating to credit for foreign
countries)
 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 any extent benefits
of paragraph 3, the statute assumes that the taxpayer in
question 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 on non-
deductible items in Sec. 30c 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
 No danger of double credit/taxation.
o Double taxation becomes obnoxious only where the
taxpayer is taxed twice for the benefit of the same
governmental entity
o The Philippine government only receives the
proceeds of one tax
o Justice and equity demand that the tax on the
income should accrue to the benefit of the
Philippines
o Any relief from the alleged double taxation should
come from the US since the former’s right to burden
the taxpayer is solely predicated in is citizenship,
without contributing to the production of wealth
that is being taxed
o 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.



CIR V GENERAL FOODS
14
FEB
GR No. 143672| April 24, 2003 | J. Corona
Test of Reasonableness

Facts:
Respondent corporation General Foods (Phils), which is
engaged in the manufacture of “Tang”, “Calumet” and “Kool-
Aid”, filed its income tax return for the fiscal year ending
February 1985 and claimed as deduction, among other
business expenses, P9,461,246 for media advertising for
“Tang”.
The Commissioner disallowed 50% of the deduction claimed
and assessed deficiency income taxes of P2,635,141.42
against General Foods, prompting the latter to file an MR
which was denied.
General Foods later on filed a petition for review at CA,
which reversed and set aside an earlier decision by CTA
dismissing the company‟s appeal.

Issue:
W/N the subject media advertising expense for “Tang” was
ordinary and necessary expense fully deductible under the
NIRC

Held:
No. Tax exemptions must be construed in stricissimi juris
against the taxpayer and liberally in favor of the taxing
authority, and he who claims an exemption must be able to
justify his claim by the clearest grant of organic or statute
law. Deductions for income taxes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed,
then deductions must also be strictly construed.
To be deductible from gross income, the subject advertising
expense must comply with the following requisites: (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.
While the subject advertising expense was paid or incurred
within the corresponding taxable year and was incurred in
carrying on a trade or business, hence necessary, the parties‟
views conflict as to whether or not it was ordinary. To be
deductible, an advertising expense should not only be
necessary but also ordinary.
The Commissioner maintains that the subject advertising
expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence: first, “reasonableness”
of the amount incurred and second, the amount incurred
must not be a capital outlay to create “goodwill” for the
product and/or private respondent‟s business. Otherwise,
the expense must be considered a capital expenditure to be
spread out over a reasonable time.
There is yet to be a clear-cut criteria or fixed test for
determining the reasonableness of an advertising expense.
There being no hard and fast rule on the matter, the right to
a deduction depends on a number of factors such as but not
limited to: the type and size of business in which the
taxpayer is engaged; the volume and amount of its net
earnings; the nature of the expenditure itself; the intention
of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.
The Court finds the subject expense for the advertisement of
a single product to be inordinately large. Therefore, even if it
is necessary, it cannot be considered an ordinary expense
deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to
stimulate the current sale of merchandise or use of services
and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves
expenditures incurred, in whole or in part, to create or
maintain some form of goodwill for the taxpayer‟s trade or
business or for the industry or profession of which the
taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of
the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If,
however, the expenditures are for advertising of the second
kind, then normally they should be spread out over a
reasonable period of time.
The company‟s media advertising expense for the promotion
of a single product is doubtlessly unreasonable considering it
comprises almost one-half of the company‟s entire claim for
marketing expenses for that year under review. Petition
granted, judgment reversed and set aside.

Philex Mining Corporation vs. CIR [G.R. No. 148187
(April 16, 2008)]
Post under case digests, Civil Law at Tuesday, February 21,
2012 Posted by Schizophrenic Mind
Facts: Petitioner Philex entered into an agreement with
Baguio Gold Mining Corporation for the former to manage
the latter’s mining claim know as the Sto. Mine. The parties’
agreement was denominated as “Power of Attorney”. The
mine suffered continuing losses over the years, which
resulted in petitioners’ withdrawal as manager of the mine.
The parties executed a “Compromise Dation in Payment”,
wherein the debt of Baguio amounted to Php.
112,136,000.00. Petitioner deducted said amount from its
gross income in its annual tax income return as “loss on the
settlement of receivables from Baguio Gold against reserves
and allowances”. BIR disallowed the amount as deduction
for bad debt. Petitioner claims that it entered a contract of
agency evidenced by the “power of attorney” executed by
them and the advances made by petitioners is in the nature
of a loan and thus can be deducted from its gross income.
Court of Tax Appeals (CTA) rejected the claim and held that
it is a partnership rather than an agency. CA affirmed CTA

Issue: Whether or not it is an agency.

Held: No. The lower courts correctly held that the “Power of
Attorney” (PA) is the instrument material that is material in
determining the true nature of the business relationship
between petitioner and Baguio. An examination of the said
PA reveals that a partnership or joint venture was indeed
intended by the parties. While a corporation like the
petitioner cannot generally enter into a contract of
partnership unless authorized by law or its charter, it has
been held that it may enter into a joint venture, which is akin
to a particular partnership. The PA indicates that the parties
had intended to create a PAT and establish a common fund
for the purpose. They also had a joint interest in the profits of
the business as shown by the 50-50 sharing of income of the
mine.

Moreover, in an agency coupled with interest, it is the
agency that cannot be revoked or withdrawn by the principal
due to an interest of a third party that depends upon it or the
mutual interest of both principal and agent. In this case the
non-revocation or non-withdrawal under the PA applies to
the advances made by the petitioner who is the agent and
not the principal under the contract. Thus, it cannot be
inferred from the stipulation that it is an agency.


THURSDAY, APRIL 23, 2009
BASILAN ESTATES V. CIR AND CTA (TAX)


The first question for resolution is whether
depreciation shall be determined on the
acquisition cost or on the reappraised value of
the assets.

DEPRECIATION is the gradual diminution in the
useful value of tangible property resulting from wear
and tear and normal obsolescense. The term is also
applied to amortization of the value of intangible
assets, the use of which in the trade or business is
definitely limited in duration. Depreciation
commences with the acquisition of the property and
its owner is not bound to see his property gradually
waste, without making provision out of earnings for
its replacement. Accordingly, the law permits the
taxpayer to recover gradually his capital investment
in wasting assets free from income tax.

Precisely, Section 30 (f)(1) states:

In general - a reasonable allowance for deterioration
of property arising out of its use or employment in
the business or trade, or out of its not being used:
Provided, that when the allowance authorized under
this subsection shall equal the capital invested by the
taxpayer... no further allowance shall be made...

...allows deduction from gross income for
depreciation but limits the recovery to the capital
invested in the asset being depreciated.

The income tax law does not authorize the
depreciation of an asset beyond its acquisition cost.
Hence, a deduction over and above such cost cannot
be claimed and allowed. The reason is that
deductions from gross income are privileges, not
matters of right. They are not created by implication
but upon clear expression in the law.

Moreover, the recovery, free of income tax, of an
amount more than the invested capital in an asset
will transgress the underlying purpose of a
depreciation allowance. for then what the taxpayer
would recover will be, not only the acquisition cost
but also some profit. Recovery in due time thru
depreciation on investment made is the philosophy
behind depreciation allowance; the idea of profit on
the investment made has never been the underlying
reason for the allowance of a deduction for
depreciation.

Accordingly, the claim for depreciation has no
justification in the law. The determination therefore,
of the Commissioner disallowing said amount,
affirmed by the CTA is sustained.

The second question for resolution is whether
the miscellaneous expenses and officer's
travelling expenses are allowable expenses as
the same could not be supported by
appropriate papers.

On this ground, the petitioner may be sustained for
under Section 337 of the Tax Code, receipts and
papers supporting such expenses need be kept by
the taxpayer for a period of 5 years from the last
entry. At the time of the investigation, said 5 years
have lapsed. Taxpayer's stand on this issue is
therefore sustained.

The third question is on the unreasonably
accumulated profits.

Section 25 of the Tax Code which imposes a surtax
on profits unreasonably accumulated provides:

Sec. 25. Additional tax on corporations improperly
accumulating profits or surplus - (a) Imposition of
tax. - If any corporation, except banks, insurance
companies, or personal holding companies, domestic
or foreign, is formed or availed of for the purpose of
preventing imposition of tax upon its shareholders or
members or the shareholders or members of another
corporation, through the medium of permitting its
gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed
against such corporation, for each taxable year, a tax
equal to 25% of the undistributed portion of its
accumulated profits or surplus which shall be in
addition to the tax imposed by Section 24, and shall
be computed, collected, and paid in the same
manner and subject to the same provisions of law,
including penalties, as that tax.

Petitioner failed to provide sufficient explanation. In
order to determine whether profits were accumulated
for the reasonable needs of the business or to avoid
the surtax upon shareholders, the controlling
intention of the taxpayer is that which is manifested
at the time of the accumulation, not subsequently
declared intentions which are merely the products of
afterthought. As correctly held by the CTA, while
certain expenses of the corporation were credited
against large amounts, the unspent balance was
retained by the stockholders without refunding them
to petitioner at the end of each year. These advances
were in fact indirect loans to the stockholders
indicating the unreasonable accumulation or surplus
beyond the needs of the business.

SILVERIO v. REPUBLIC
July 14, 2012 § Leave a Comment
Silverio v. Republic
October 22, 2007 (GR. No. 174689)

PARTIES:
petitioner: Rommel Jacinto Dantes Silverio
respondent: Republic of the Philippines
FACTS:
On November 26, 2002, Silverio field a petition for the
change of his first name “Rommel Jacinto” to “Mely” and his
sex from male to female in his birth certificate in the RTC of
Manila, Branch 8, for reason of his sex reassignment. He
alleged that he is a male transsexual, he is anatomically
male but thinks and acts like a female. The Regional Trial
Court ruled in favor of him, explaining that it is consonance
with the principle of justice and equality.
The Republic, through the OSG, filed a petition for certiorari
in the Court of Appeals alleging that there is no law allowing
change of name by reason of sex alteration. Petitioner filed a
reconsideration but was denied. Hence, this petition.
ISSUE:
WON change in name and sex in birth certificate are allowed
by reason of sex reassignment.
HELD:
No. A change of name is a privilege and not a right. It may
be allowed in cases where the name is ridiculous, tainted
with dishonor, or difficult to pronounce or write; a nickname
is habitually used; or if the change will avoid confusion. The
petitioner’s basis of the change of his name is that he
intends his first name compatible with the sex he thought he
transformed himself into thru surgery. The Court says that
his true name does not prejudice him at all, and no law
allows the change of entry in the birth certificate as to sex on
the ground of sex reassignment. The Court denied the
petition.

Philam Asset Management, Inc. vs CTA
G.R.156637 and 162004; December 14, 2005

Facts: Petitioner acts as investment manager of PFI &PBFI. It
provides management &technical services and thus respectively
paid for it’s services. PFI & PBFI withhold the amount of
equivalent to 5% creditable tax regulation. On April 3, 1998, filed
ITR with a net loss thus incurred withholding tax. Petitioner filed
for refund from BIR but was unanswered . CTA denied the petition
for review. CA held that to request for either a refund or credit of
income tax paid, a corporation must signify it’s intention by
marking the corresponding box on it’s annual corporate
adjustment return.

Issue: Whether or not petitioner is entitled to a refund of it’s
creditible taxes.

Ruling: Any tax income that is paid in excess of it’s amount due to
the government may be refunded, provided that a taxpayer
properly applies for the refund. One can not get a tax refund and
a tax credit at the same time for the same excess to income taxes
paid. Failure to signify one’s intention in Final Assessment Return
(FAR) does not mean outright barring of a valid request for a
refund

Requiring that the ITR on the FAR of the succeeding year be
presented to the BIR in requesting a tax refund has no basis in law
and jurisprudence. The Tax Code likewise allows the refund of
taxes to taxpayer that claims it in writing within 2 years after
payment of the taxes. Technicalities and legalism should not be
misused by the government to keep money not belonging to it,
and thereby enriched itself at the expense of it’s law-abiding
citizens.


DELPHER TRADES CORPORATION vs. IAC G.R. No. L-
69259 January 26, 1988
Facts:
Delfin Pacheco and sister Pelagia were the owners of a parcel of
land in Polo (now Valenzuela). On April 3, 1974, they leased to
Construction Components International Inc. the property and
providing for a right of first refusal should it decide to buy the said
property.
Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes
Philippines, Inc. with the signed conformity and consent of Delfin
and Pelagia. In 1976, a deed of exchange was executed between
lessors Delfin and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the Pachecos conveyed to the latter the
leased property together with another parcel of land also located in
Malinta Estate, Valenzuela for 2,500 shares of stock of defendant
corporation with a total value of P1.5M.
On the ground that it was not given the first option to buy the
leased property pursuant to the proviso in the lease agreement,
respondent Hydro Pipes Philippines, Inc., filed an amended
complaint for reconveyance of the lot. Trivia lang: Delpher
Trades Corp is owned by the Pacheco Family, managed by the
sons and daughters of Delfin and Pelagia. Their primary defense is
that there is no transfer of ownership because the Pachecos
remained in control of the original co-owners. The transfer of
ownership, if anything, was merely in form but not in substance.
Issue:
WON the Deed of Exchange of the properties executed by the
Pachecos and the Delpher Trades Corporation on the other was
meant to be a contract of sale which, in effect, prejudiced the
Hydro Phil’s right of first refusal over the leased property included
in the “deed of exchange”? NO
Held:
By their ownership of the 2,500 no par shares of stock, the
Pachecos have control of the corporation. Their equity capital is
55% as against 45% of the other stockholders, who also belong to
the same family group. In effect, the Delpher Trades Corporation is
a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership
from unincorporated to incorporated form by organizing Delpher
Trades Corporation to take control of their properties and at the
same time save on inheritance taxes.
The “Deed of Exchange” of property between the Pachecos and
Delpher Trades Corporation cannot be considered a contract of
sale. There was no transfer of actual ownership interests by the
Pachecos to a third party. The Pacheco family merely changed
their ownership from one form to another. The ownership
remained in the same hands. Hence, the private respondent has no
basis for its claim of a light of first refusal under the lease contract.
CAVEAT: The case has not fully explained the difference between
sale and barter. So here is a foreign decision.