153692327 tax-cases
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IV
Republic of the PhilippinesSUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-39086 June 15, 1988
ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs.HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO MILLARE,respondents.
PARAS, J.:
This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:
IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial Treasurer of said province against the lot and building of the Abra Valley Junior College, Inc., represented by Director Pedro Borgonia located at Bangued, Abra, is valid;
That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the amount of P5,140.31 and back taxes and penalties from the promulgation of this decision;
That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated to apply for the payment of the back taxes and for the redemption of the property in question, if the amount is less than P6,000.00, the remainder must be returned to the Director of Pedro Borgonia, who represents the plaintiff herein;
That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be returned to said Municipal Treasurer of Bangued, Abra;
And finally the case is hereby ordered dismissed with costs against the plaintiff.
SO ORDERED. (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original Certificate of Title No. Q-83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale was held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss the complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.
On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its questioned decision. Said Stipulations reads:
STIPULATION OF FACTS
COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the following agreed stipulation of facts:
1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone who is actually holding the position of Provincial Treasurer of the Province of Abra;
2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon located in Bangued, Abra under Original Certificate of Title No. 0-83;
3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school under Original Certificate of Title No. 0-83 for the satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to the complaint as Exhibit A;
4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public auction for the satisfaction of the unpaid real property taxes thereon and the same was sold to defendant Paterno Millare who offered the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant Municipal Treasurer.
5. That all other matters not particularly and specially covered by this stipulation of facts will be the subject of evidence by the parties.
WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation of facts on the point agreed upon by the parties.
Bangued, Abra, April 12, 1973.
Sgd. Agripino Brillantes Typ AGRIPINO BRILLANTES Attorney for Plaintiff
Sgd. Loreto Roldan Typ LORETO ROLDAN Provincial Fiscal Counsel for Defendants Provincial Treasurer of Abra and the Municipal Treasurer of Bangued, Abra
Sgd. Demetrio V. Pre Typ. DEMETRIO V. PRE Attorney for Defendant Paterno Millare (Rollo, pp. 17-18)
Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school is recognized by the government and is offering Primary, High School and College Courses, and has a school population of more than one thousand students all in all; (b) that it is located right in the heart of the town of Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance building; (c) that the elementary pupils are housed in a two-storey building across the street; (d) that the high school and college students are housed in the main building; (e) that the Director with his family is in the second floor of the main building; and (f) that the annual gross income of the school reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is whether or not the lot and building in question are used exclusively for educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the school building and school lot used for educational purposes of the Abra Valley College, Inc., are exempted from the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner school for residential purposes. He thus ruled for the government and rendered the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the instant petition for review on certiorari with prayer for preliminary injunction before this Court, which petition was filed on August 17, 1974 (Rollo, p.2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes."
Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in question which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is being used and rented by a commercial establishment, the Northern Marketing Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable or educational purposes ...
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409, otherwise known as the Assessment Law, provides:
The following are exempted from real property tax under the Assessment Law:
xxx xxx xxx
(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious, charitable, scientific or educational purposes.
xxx xxx xxx
In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling guide, norm and standard to determine tax exemption, and not the mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its members, still these do not constitute business in the ordinary acceptance of the word, but an institution used exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991 [1965], thus —
Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).
The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use of the school building or lot for commercial purposes is neither contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential purposes of the Director and his family, may find justification under the concept of incidental use, which is complimentary to the main or primary purpose—educational, the lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of education.
It will be noted however that the aforementioned lease appears to have been raised for the first time in this Court. That the matter was not taken up in the to court is really apparent in the decision of respondent Judge. No mention thereof was made in the stipulation of facts, not even in the description of the school building by the trial judge, both embodied in the decision nor as one of the issues to resolve in order to determine whether or not said properly may be exempted from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is noteworthy that such fact was not disputed even after it was raised in this Court.
Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal. Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not squarely raised below, still in the interest of substantial justice, this Court is not prevented from considering a pivotal factual matter. "The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it finds that their consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director and his family for residential purposes, but because the first floor thereof is being used for commercial purposes. However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED subject to the modification that half of the assessed tax be returned to the petitioner.
SO ORDERED.
VII
[G.R. No. 171742 : June 15, 2011]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. MIRANT (PHILIPPINES) OPERATIONS, CORPORATION, RESPONDENT.
[G.R. No. 176165]
MIRANT (PHILIPPINES) OPERATIONS CORPORATION (FORMERLY: SOUTHERN ENERGY ASIA-PACIFIC OPERATIONS (PHILS.), INC.), PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
D E C I S I O N
MENDOZA, J.:
These are two consolidated petitions for review on certiorari under Rule 45 of the Rules of Court.
In G.R. No. 171742, petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the January 17, 2006 Decision [1] and March 9, 2006 Resolution [2] of the Court of Tax Appeals (CTA) En Banc in CTA E.B. Case No. 123.
In G.R. No. 176165, petitioner Mirant (Philippines) Operations, Corporation (Mirant) seeks the reversal of the October 26, 2006 Decision [3] and January 5, 2007 Resolution [4] of the CTA En Banc in CTA E.B. Case No. 125.
THE FACTS
Petitioner is empowered to perform the lawful duties of his office including, among others, the duty to act on and approve claims for refund or tax credit as provided by law.
Respondent Mirant is a corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal office at Bo. Ibabang Pulo, Pagbilao Grande Island, Pagbilao, Quezon. [5]
Mirant also operated under the names Southern Energy Asia-Pacific Operations (Phils.), Inc., CEPA Operations (Philippines) Corporation; CEPA Tileman Project Management Corporation; and Hopewell Tileman Project Management Corporation. [6]
Mirant, duly licensed to do business in the Philippines, is primarily engaged in the design, construction, assembly, commissioning, operation, maintenance, rehabilitation and management of gas turbine and other power generating plants and related facilities using coal, distillate, and other fuel provided by and under contract with the Government of the Republic of the Philippines or any subdivision, instrumentality or agency thereof, or any government-owned or controlled corporations or other entities engaged in the development, supply or distribution of energy. [7]
Mirant entered into Operating and Management Agreements with Mirant Pagbilao Corporation (formerly Southern Energy Quezon, Inc.) and Mirant Sual Corporation (formerly Southern Energy Pangasinan, Inc.) to provide these companies with maintenance and management services in connection with the operation, construction and commissioning of coal-fired power stations situated in Pagbilao, Quezon, and Sual, Pangasinan respectively. [8]
On October 15, 1999, Mirant filed with the Bureau of Internal Revenue (BIR) its income tax return for the fiscal year ending June 30, 1999, declaring a net loss of P235,291,064.00 and unutilized tax credits of ?32,263,388.00:
Gross Income P (64,438,434.00) Less: Deductions 170,852,630.00 Net Loss P(235,291,064.00)
Income Tax Due P--- Less: Prior Year's Excess Credits 4,714,516.00 Creditable Tax Withheld First Three Quarters 21,702,771.00 Fourth Quarter 5,846,101.00 Tax Overpayment P32,263,388.00 [9]
On April 17, 2000, Mirant filed with the BIR an amended income tax return (ITR) for the fiscal year ending June 30, 1999 , reporting an increased net loss amount of ?379,324,340.00 but reporting the same unutilized tax credits of ?32,263,388.00, which it opted to carry over as a tax credit to the succeeding taxable year, thus:
Gross Income P(113,113,036.00) Less: Deductions 248,211,204.00 Net Loss P(379,324,240.00)
Income Tax Due P --- Less: Prior Year's Excess Credits 4,714,516.00 Creditable Tax Withheld First Three Quarters 21,702,771.00 Fourth Quarter 5,846,101.00 Tax Overpayment P32,263,388.00 [10]
To synchronize its accounting period with those of its affiliates, Mirant allegedly secured the approval of the BIR to change its accounting period from fiscal year (FY) to calendar year (CY) effective December 31, 1999. Thus, on April 17, 2000, Mirant filed its income tax return for the interim period July 1, 1999 to December 31, 1999, declaring a net loss in the amount of ?381,874,076.00 and unutilized tax credits of ?48,626,793.00:
Gross Income P(320,895,462.00) Less: Deductions 60,978,614.00
Net Loss P(381,874,076.00)
Income Tax Due P --- Less: Prior Year's Excess Credits 32,263,388.00 Creditable Tax Withheld First Three Quarters 16,363,405.00 Fourth Quarter --- Tax Overpayment P48,626,793.00 [11]
Mirant indicated the excess amount of ?48,626,793.00 as "To be carried over as tax credit next year/quarter." [12]
On April 10, 2001, it filed with the BIR its income tax return for the calendar year ending December 31, 2000, reflecting a net loss of ?56,901,850.00 and unutilized tax credits of ?87,345,116.00, computed as follows:
Gross Income P(4,080,541.00) Less: Deductions 52,821,309.00 Net Loss P(56,901,850.00)
Income Tax Due P --- Less: Prior Year's Excess Credits 48,626,793.00 Creditable Tax Withheld First Three Quarters 25,336,971.00 Fourth Quarter 13,381,352.00 Tax Overpayment P87,345,116.00 [13]
On September 20, 2001, Mirant wrote the BIR a letter claiming a refund of ?87,345,116.00 representing overpaid income tax for the FY ending June 30, 1999, the interim period covering July 1, 1999 to December 31, 1999, and CY ending December 31, 2000. [14]
As the two-year prescriptive period for the filing of a judicial claim under Section 229 of the National Internal Revenue Code (NIRC) of 1997 was about to lapse without action on the part of the BIR, Mirant elevated its case to the CTA by way of Petition for Review on October 12, 2001. The case was docketed as CTA Case No. 6340. [15]
The CTA First Division rendered judgment partially granting Mirant's claim for refund in the reduced amount of P38,620,427.00, representing its duly substantiated unutilized creditable withholding taxes for taxable year 2000 out of the total claim of ?38,718,323.00 therefor. [16] It appears that the total claim was reduced by P97,896.00 for the following reasons: the amount of P92,996.00 was deducted because the CTA First Division found that it was not covered by the withholding tax certificate issued by Southern Energy Quezon, Inc. for the period October 1, 2000 to December 31, 2000. Moreover the additional amount of P4,900.00 was also deducted because based on the reconciliation schedule for the creditable taxes of P745,290.00 withheld by Southern Energy Quezon, Inc. for the period October 1, 2000 to December 31, 2000 on Mirant's Philippine peso billings under Invoice No. 0015, the corresponding creditable taxes claimed by Mirant in its 2000 income tax return amounted to P750,190.00 which was higher by ?4,900.00 than that reflected in the certificate. [17]
Additionally, Mirant's claim for the refund of its unutilized tax credits for the taxable year 1999 in the total amount of P48,626,793.00, was denied as it exercised the carry-over option with regard to the said unutilized tax credits, which is irrevocable pursuant to the provisions of Section 76 of the 1997 NIRC. [18]
The dispositive portion of the assailed May 18, 2005 Decision [19] of the CTA First Division reads:
IN VIEW OF ALL THE FOREGOING, the instant Petition for Review is hereby GRANTED but in a reduced amount of P38,620,427.00. Accordingly, respondent is ORDERED TO REFUND, or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the amount of P38,620,427.00 representing unutilized creditable withholding taxes for taxable year 2000.
Both parties filed their respective motions for partial reconsideration of the above decision, but these were both denied for lack of merit in a Resolution [20] dated September 22, 2005.
Both parties sought redress before the CTA En Banc in two separate petitions for review docketed as CTA EB Case No. 123 and CTA EB Case No. 125, respectively.
According to the CTA, although arising from the same case, CTA Case No. 6340, these two cases were not consolidated because CTA EB Case No. 125 was initially dismissed due to procedural infirmities.
In a Resolution dated April 28, 2006, however, acting on Mirant's motion for reconsideration, the CTA En Banc recalled its earlier resolution and reinstated the case. [21] Eventually, the CTA En Banc in separate decisions, denied due course and dismissed the two cases. The CIR and Mirant filed their respective motions for reconsideration but both were denied. Thus, the CIR and Mirant filed their respective petitions for review with this Court, docketed as G.R. No. 171742 and G.R. No. 176165, respectively.
ISSUES
In G.R. No. 171742, the CIR raises the following issue:
WHETHER OR NOT THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN HOLDING RESPONDENT ENTITLED TO A REFUND OR TAX CREDIT IN THE AMOUNT OF P38,620,427.00.
In G.R. No. 176165, Mirant raises the following issue:
WHETHER OR NOT PETITIONER IS ENTITLED TO A CLAIM FOR ADDITIONAL REFUND OR ISSUANCE OF A TAX CREDIT CERTIFICATE IN THE AMOUNT OF P48,626,793.00 REPRESENTING EXCESS CREDITABLE WITHHOLDING TAXES FOR THE FISCAL YEAR ENDED JUNE 30, 1999 AND THE INTERIM PERIOD FROM JULY 1, 1999 TO DECEMBER 31, 1999.
In essence, the issue is whether Mirant is entitled to a tax refund or to the issuance of a tax credit certificate and, if it is, then what is the amount to which it is entitled.
RULING OF THE COURT
The Court finds the assailed decisions and resolutions of the CTA En Banc in CTA E.B. Case Nos. 123 and 125 to be consistent with law and jurisprudence.
Once exercised, the optionto carry over is irrevocable.
Section 76 of the National Internal Revenue Code (Presidential Decree No. 1158, as amended) provides:
SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or(B) Carry-over the excess credit; or(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. (Underscoring and emphasis supplied.)
The last sentence of Section 76 is clear in its mandate. Once a corporation exercises the option to carry-over and apply the excess quarterly income tax against the tax due for the taxable quarters of the succeeding taxable years, such option is irrevocable for that taxable period. Having chosen to carry-over the excess quarterly income tax, the corporation cannot thereafter choose to apply for a cash refund or for the issuance of a tax credit certificate for the amount representing such overpayment.
In the recent case of Commissioner of Internal Revenue v. PL Management International Philippines, Inc., [22] the Court discussed the irrevocability rule of Section 76 in this wise:
The predecessor provision of Section 76 of the NIRC of 1997 is Section 79 of the NIRC of 1985, which provides:
Section 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either:(a) Pay the excess tax still due; or(b) Be refunded the excess amount paid, as the case may be.In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year.
As can be seen, Congress added a sentence to Section 76 of the NIRC of 1997 in order to lay down the irrevocability rule, to wit:
xxx Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor
.In Philam Asset Management, Inc. v. Commissioner of Internal Revenue, [23] the Court expounds on the two alternative options of a corporate taxpayer whose total quarterly income tax payments exceed its tax liability, and on how the choice of one option precludes the other, viz:
The first option is relatively simple.Any tax on income that is paid in excess of the amount due the government may be refunded, provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as shown on the FAR of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature. The choice of one precludes the other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, [24] the Court ruled that a corporation must signify its intention - whether to request a tax refund or claim a tax credit - by marking the corresponding option box provided in the FAR.While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. xxx
In Commissioner of Internal Revenue v. Bankof the Philippine Islands, [25] the Court, citing the aforequoted pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of 1997 is clear and unequivocal in providing that the carry-over option, once actually or constructively chosen by a corporate taxpayer, becomes irrevocable . The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an option; and once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to carry over has been made, "no application for tax refund or issuance of a tax credit certificate shall be allowed therefor."
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor." The phrase "for that taxable period" merely identifies the excess income tax, subject of the option, by referring to the taxable period when it was acquired by the taxpayer. In the present case, the excess income tax credit, which BPI opted to carry over, was acquired by the said bank during the taxable year 1998. The option of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on opt to apply for a refund of the very same 1998 excess income tax credit.
The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive period for the irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit. This construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and complication as regards said taxpayer's excess tax credit. The interpretation of the Court of Appeals only delays the flip-flopping to the end of each succeeding taxable period.
The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for refund of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the part of the government. The Court addressed the very same argument in Philam, where it elucidated that there would be no unjust enrichment in the event of denial of the claim for refund under such circumstances, because there would be no forfeiture of any amount in favor of the government. The amount being claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable years, as provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for refund of excess income tax, which prescribes after two years from the filing of the FAR, there is no prescriptive period for the carrying over of the same. Therefore, the excess income tax credit of BPI, which it acquired in 1998 and opted to carry over, may be repeatedly carried over to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited to a tax liability of BPI.
Inasmuch as the respondent already opted to carry over its unutilized creditable withholding tax of P1,200,000.00 to taxable year 1998, the carry-over could no longer be converted into a claim for tax refund because of the irrevocability rule provided in Section 76 of the NIRC of 1997. Thereby, the respondent became barred from claiming the refund. [Underscoring supplied] [26]
In this case, in its amended ITR for the year ended July 30, 1999 [27] and for the interim period ended December 31, 1999, [28] Mirant clearly ticked the box signifying that the overpayment was "To be carried over as tax credit next year/quarter." Item 31 of the Annual Income Tax Return Form (BIR Form No. 1702) also clearly indicated "If overpayment, mark one box only. (once the choice is made, the same is irrevocable)."
Applying the irrevocability rule in Section 76, Mirant having opted to carry over its tax overpayment for the fiscal year ending July 30, 1999 and for the interim period ending December 31, 1999, it is now barred from applying for the refund of the said amount or for the issuance of a tax credit certificate therefor, and for the unutilized tax credits carried over from the fiscal year ended June 30, 1998.
Mirant is entitled to the refund of its unutilized creditable withholding taxes for the taxable year 2000.
It is apt to restate here the time-honored doctrine that the findings and conclusions of the CTA are accorded the highest respect and will not be lightly set aside. The CTA, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an
expertise on the subject unless there has been an abusive or improvident exercise of authority. [29] Citing Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue, [30] this Court in Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal Revenue,[31] explicitly pronounced -
Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect. [32]
In this case, having studied the applicable law and jurisprudence, the Court agrees with the conclusion of the CTA that Mirant complied with all the requirements for the refund of its unutilized creditable withholding taxes for taxable year 2000.
In Commissioner of Internal Revenue v. Far East Bank & Trust Company (now Bank of the Philippine Islands), [33] the Court enumerated the requisites for claiming a tax credit or a refund of creditable withholding tax:
1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax;
2) It must be shown on the return that the income received was declared as part of the gross income; and
3) The fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld. [34]
First, Mirant clearly complied with the two-year period. This requirement is based on Section 229 of the NIRC of 1997 which provides:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. [Underscoring supplied]
Mirant filed its income tax return for the taxable year ending December 31, 2000 on April 10, 2001. Thus, from such date of filing, petitioner had until April 10, 2003 within which to file its claim for refund or for the issuance of a tax credit certificate in its favor. [35]
Mirant filed its administrative claim with the BIR on September 20, 2001. It thereafter filed its Petition for Review with the CTA on October 12, 2001, [36] or clearly within the prescribed two-year period.
Second, Mirant was also able to establish that the income, upon which the creditable withholding taxes were paid, was declared as part of its gross income in its ITR. As the CTA En Banc concluded:
As regards petitioner CIR's contention that respondent Mirant was not able to establish that the income upon which the creditable withholding taxes were paid was included in respondent's Income Tax Returns, a perusal of the records reveals otherwise. The reported creditable taxes withheld of ?38,718,323.00 were withheld from the services fees of ?871,127,253.00 received by respondent from its affiliates, the Southern Energy Quezon, Inc. and the Southern Energy Pangasinan, Inc., pursuant to the Operating and Maintenance Service Agreements entered into by respondent Mirant with said entities (Exhibits "HH", "K", and "K-1"). The gross income figure of ?871,127,253.00 is the very same amount declared by respondent in its income tax return for taxable year 2000 (Exhibits "O-11" & "O-12"). [37]
The CIR disagrees but merely alleges without any clear argument or basis that Mirant failed to prove that the income from which its creditable taxes were withheld were duly declared as part of its income in its annual ITR.
Thus, there being no cogent reason presented to reverse the findings and conclusions of the CTA, the Court affirms its finding that the income received was declared as part of the gross income, as shown in Mirant's tax return.
Finally, Mirant was also able to establish the fact of withholding of the creditable withholding tax.
The CIR is of the opinion that Mirant's non-presentation of the various payors or withholding agents to verify the Certificates of Creditable Tax Withheld at Source (CWT's), the registered books of accounts and the audited financial statements for the various periods covered to corroborate its other allegations, and its failure to offer other evidence to prove and corroborate the propriety of its claim for refund and failure to establish the fact of remittance of the alleged withheld taxes by various payors to the BIR, are all fatal to its claim. [38]
Citing the CTA First Division, Mirant argues that since the CWT's were duly signed and prepared under pain of perjury, the figures appearing therein are presumed to be true and correct. [39] The CWT's were presented and duly identified by its witness, Magdalena Marquez, and further verified by the duly commissioned independent CPA, Ruben R. Rubio, on separate hearing dates, before the CTA First Division. [40] Moreover, these certificates were found by the duly commissioned independent CPA to be faithful reproductions of the originals, as stated in his supplementary report dated March 24, 2003. [41]
The Court agrees with the conclusion of the CTA En Banc:
Contrary to petitioner CIR's contention, the fact of withholding was likewise established through respondent's presentation of the Certificates of Creditable Tax Withheld At Source, duly issued to it by Southern Energy Pangasinan, Inc. and Southern Energy Quezon, Inc., for the year 2000 (Exhibits "Y", "Z", "AA" to "FF"). These certificates were found by the duly commissioned independent CPA to be faithful reproductions of the original copies, as per his Supplementary Report dated March 24, 2003 (Exhibit "RR").
As to petitioner CIR's contention that the Report of the independent CPA dated February 21, 2003 shows several discrepancies, We sustain the findings of the First Division. On direct examination, Mr. Ruben Rubio, the duly commissioned independent CPA, testified and explained that the discrepancy was merely brought about by: (1) the difference in foreign exchange (forex) rates at the time the certificates were recorded by respondent Mirant and the forex rates used at the time the certificates were issued by its customers; and (2) the timing difference between the point when respondent Mirant recognized or accrued its income and the time when the corresponding creditable tax was withheld by its customers. x x x
x x x
As extensively discussed by the First Division:
"The creditable withholding taxes of P40,600,971.79 reflected in the certificates were higher by P1,882,648.79 when compared with the creditable withholding taxes of P38,718,323.00 reported by petitioner in its income tax return for taxable year 2000 (Exhibit O-7). As stated by SGV & Co. in its report dated February 21, 2003 (Exhibit NN), tax credits were claimed by petitioner in its income tax return for taxable year 2000 prior to its receipt of the certificates from the withholding agents. At the time it recognized and accrued its income, petitioner also reported the related creditable withholding taxes, which was prior to the receipt of the certificates from the withholding agents. Hence, the discrepancy of P1,882,648.79 in creditable withholding taxes was mainly brought about by the difference between the foreign exchange (forex) rates used at the time when petitioner recorded its income and the related tax credits and the forex rates used by the withholding agents at the time when income payments were made to petitioner in reporting its tax credits, the same do not have a bearing on petitioner's total claim because the resulting increase in the amounts of creditable withholding taxes reflected in the certificates were not declared by the petitioner in its income tax return for the said year. However, for the creditable taxes withheld by Southern Energy Quezon, Inc. for the period October 1, 2000 to December 31, 2000 totalling P7,670,746.00 (which formed part of the creditable withholding taxes of P8,834,280.11 shown in the certificate marked as Exhibit EE), the same were based on forex rates which were lower than those used by petitioner in recognizing the tax credits of P7,763,742.00 for the same transactions. In other words, petitioner's claimed unutilized tax credits of P92,996.00 (P7,763,742.00 less P7,670,746.00) were not covered by the withholding tax certificate issued by Southern Energy, Quezon Inc. for the period October 1, 2000 to December 31, 2000 and should therefore be deducted from the total claim of P38,718,323.00 Below is the breakdown of the amount of P92,996.00:
Creditable Withholding Taxes Overclaimed Tax Credits
Exhibits Period Covered Withholding Agent Per Certificate (a)
Per ITR (b)
(b) - (a)
EE, QQ 10/01/00 - 12/31/00 Southern Energy Quezon, Inc. P4,298,892.00 P4,350,327.00 P51,435.00
3,371,854.00 3,413,415.00 41,561.00
P7,670,746.00 P7,763,742.00 P92,996.00
The reconciliation schedule also shows that for the creditable taxes of P745,290.00 withheld by Southern Energy Quezon Inc. for the period October 1, 2000 to December 31, 2000 on petitioner's Philippine peso billings under Invoice No. 0015, the corresponding creditable taxes claimed by petitioner in its 2000 income tax return amounted to P750,190.00 which were higher by P4,900.00 than those reflected in the certificate. Accordingly, the amount of P4,900.00 shall be deducted from petitioner's total claim.
In fine, this Court finds that of the total unutilized credits of P38,718, 323.00 declared by petitioner in its 2000 income tax return, only the amount of P38,620,427.00 (P38,718,323.00 less P92,996.00) was duly substantiated by withholding tax certificates."Therefore, as the CTA ruled, Mirant complied with all the legal requirements and it is entitled, as it opted, to a refund of its excess creditable withholding tax for the taxable year 2000 in the amount of ?38,620,427.00.
The Court finds no abusive or improvident exercise of authority on the part of the CTA. Since there is no showing of gross error or abuse on the part of the CTA, and its findings are supported by substantial evidence, there is no cogent reason to disturb its findings and conclusions.
WHEREFORE, the petitions in G.R. No. 171742 and G.R. No. 176165 are DENIED.
SO ORDERED.
Carpio, (Chairperson), Leonardo-De Castro,* Peralta, and Abad, JJ., concur
IX
FIRST DIVISION
G.R. No. 117982 February 6, 1997
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and ALHAMBRA INDUSTRIES, INC., Respondents.
BELLOSILLO, J.:
ALHAMBRA INDUSTRIES, INC., is a domestic corporation engaged in the manufacture and sale of cigar and cigarette products. On 7 May 1991 private respondent received a letter dated 26 April 1991 from the Commissioner of Internal Revenue assessing it deficiency Ad Valorem Tax (AVT) in the total amount of Four Hundred Eighty-Eight Thousand Three Hundred Ninety-Six Pesos and Sixty-Two Centavos (P488,396.62), inclusive of increments, on the removals of cigarette products from their place of production during the period 2 November 1990 to 22 January 1991. 1 Petitioner computes the deficiency thus -
Total AVT due per manufacturer's declaration P 4,279,042.33Less: AVT paid under BIR Ruling No. 473-88 3,905,348.85------ Deficiency AVT 373,693.48
Add: Penalties:
25% Surcharge (Sec. 248[c][3] NIRC) 93,423.3720% Interest (P467,116.85 x 82/360 days) 21,279.27------Total Amount Due P 488,396.62
In a letter dated 22 May 1991 received by petitioner on even date, private respondent thru counsel filed a protest against the proposed assessment with a request that the same be withdrawn and cancelled. On 31 May 1991 private respondent received petitioner's reply dated 27 May 1991 denying its protest and request for cancellation stating that the decision was final, and at the same time requesting payment of the revised amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29), with interest updated, within ten (10) days from receipt thereof. In a letter dated 10 June 1991 which petitioner received on the same day, private respondent requested for the reconsideration of petitioner's denial of its protest. Without waiting for petitioner's reply to its request for reconsideration, private respondent filed on 19 June 1991 a petition for review with the Court of Tax Appeals. On 25 June 1991 private respondent received from petitioner a letter dated 21 June 1991 denying its request for reconsideration declaring again that its decision was final. On 8 July 1991 private respondent paid under protest the disputed ad valorem tax in the sum of P520,835.29. 2
In its Decision 3 of 1 December 1993 the Court of Tax Appeals ordered petitioner to refund to private respondent the amount of Five Hundred Twenty Thousand Eight Hundred Thirty-Five Pesos and Twenty-Nine Centavos (P520,835.29) representing erroneously paid ad valorem tax for the period 2 November 1990 to 22 January 1991.
The Court of Tax Appeals explained that the subject deficiency excise tax assessment resulted from private respondent's use of the computation mandated by BIR Ruling 473-88 dated 4 October 1988 as basis for computing the fifteen percent (15%) ad valorem tax due on its removals of cigarettes from 2 November 1990 to 22 January 1991. BIR Circular 473-88 was issued by Deputy Commissioner Eufracio D. Santos to Insular-Yebana Tobacco Corporation allowing the latter to exclude the value-added tax (VAT) in the determination of the gross selling price for purposes of computing the ad valorem tax of its cigar and cigarette products in accordance with Sec. 127 of the Tax Code as amended by Executive Order No. 273 which provides as follows:
Sec. 127. Payment of excise taxes on domestic products. - . . . . (b) Determination of gross selling price of goods subject to ad valorem tax. - Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price.
The computation, pursuant to the ruling, is illustrated by way of example thus -
P 44.00x1/1 = P 4.00 VATP 44.00 - P 4.00 = P 40.00 price without VATP 40.00 x 15% = P 6.00 Ad Valorem Tax
For the period 2 November 1990 to 22 January 1991 private respondent paid P3,905,348.85 ad valorem tax, applying Sec. 127 (b) of the NIRC as interpreted by BIR Ruling 473-88 by excluding the VAT in the determination of the gross selling price.
Thereafter, on 11 February 1991, petitioner issued BIR Ruling 017-91 to Insular-Yebana Tobacco Corporation revoking BIR Ruling 473-88 for being violative of Sec. 142 of the Tax Code. It included back the VAT to the gross selling price in determining the tax base for computing the ad valorem tax on cigarettes. Cited as basis by petitioner is Sec. 142 of the Tax Code, as amended by E.O. No. 273 -
Sec. 142. Cigar and cigarettes - . . . For purposes of this section, manufacturer's or importer's registered. wholesale price shall include the ad valorem tax imposed in paragraphs (a), (b), (c) or (d) hereof and the amount intended to cover the value added tax imposed under Title IV of this Code.
Petitioner sought to apply the revocation retroactively to private respondent's removals of cigarettes for the period starting 2 November 1990 to 22 January 1991 on the ground that private respondent allegedly acted in bad faith which is an exception to the rule on non-retroactivity of BIR Rulings. 4
On appeal, the Court of Appeals affirmed the Court of Tax Appeals holding that the retroactive application of BIR Ruling 017-91 cannot be allowed since private respondent did not act in bad faith; private respondent's computation under BIR Ruling 473-88 was not shown to be motivated by ill will or dishonesty partaking the nature of fraud; hence, this petition.
Petitioner imputes error to the Court of Appeals: (1) in failing to consider that private respondent's reliance on BIR Ruling 473-88 being contrary to Sec. 142 of the Tax Code does not confer vested rights to private respondent in the computation of its ad valorem tax; (2) in failing to consider that good faith and prejudice to the taxpayer in cases of reliance on a void BIR Ruling is immaterial and irrelevant and does not place the government in estoppel in collecting taxes legally due; (3) in holding that private respondent acted in good faith in applying BIR Ruling 473-88; and, (4) in failing to consider that the assessment of petitioner is presumed to be regular and the claim for tax refund must be strictly construed against private respondent for being in derogation of sovereign authority.
Petitioner claims that the main issue before us is whether private respondent's reliance on a void BIR ruling conferred upon the latter a vested right to apply the same in the computation of its ad valorem tax and claim for tax refund. Sec. 142 (d) of the Tax Code, which provides for the inclusion of the VAT in the tax base for purposes of computing the 15% ad valorem tax, is the applicable law in the instant case as it specifically applies to the manufacturer's wholesale price of cigar and cigarette products and not Sec. 127 (b) of the Tax Code which applies in general to the wholesale of goods or domestic products. Sec. 142 being a specific provision applicable to cigar and cigarettes must perforce prevail over Sec. 127 (b), a general provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is concerned. 5 Consequently, the application of Sec. 127 (b) to the wholesale price of cigar and cigarette products for purposes of computing the ad valorem tax is patently erroneous. Accordingly, BIR Ruling 473-88 is void ab initio as it contravenes the express provisions of Sec. 142 (d) of the Tax Code. 6
Petitioner contends that BIR Ruling 473-88 being an erroneous interpretation of Sec. 142 (b) of the Tax Code does not confer any vested right to private respondent as to exempt it from the retroactive application of BIR Ruling 017-91. Thus Art. 2254 of the New Civil Code is explicit that "(n)o vested or acquired right can arise from acts or omissions which are against the law . . . " 7 It is argued that the Court of Appeals erred in ruling that retroactive application cannot be made since private respondent acted in good faith. The following circumstances would show that private respondent's reliance on BIR Ruling 473-88 was induced by ill will: first, private respondent despite knowledge that Sec. 142 of the Tax Code was the specific provision applicable still shifted its accounting method pursuant to Sec. 127 (b) of the Tax Code; and, second, the shift in accounting method was made without any prior consultation with the BIR. 8
It is further contended by petitioner that claims for tax refund must be construed against private respondent. A tax refund being in the nature of a tax exemption is regarded as in derogation of the sovereign authority and is strictly construed against private respondent as the same partakes the nature of a tax exemption. Tax exemptions cannot merely be implied but must be categorically and unmistakably expressed. 9
We cannot sustain petitioner. The deficiency tax assessment issued by petitioner against private respondent is without legal basis because of the prohibition against the retroactive application of the revocation of BIR rulings in the absence of bad faith on the part of private respondent.
The present dispute arose from the discrepancy in the taxable base on which the excise tax is to apply on account of two incongruous BIR Rulings: (1) BIR Ruling 473-88 dated 4 October 1988 which excluded the VAT from the tax base in computing the fifteen percent (15%) excise tax due; and,
(2) BIR Ruling 017-91 dated 11 February 1991 which included back the VAT in computing the tax base for purposes of the fifteen percent (15%) ad valorem tax.
The question as to the correct computation of the excise tax on cigarettes in the case at bar has been sufficiently addressed by BIR Ruling 017-91 dated 11 February 1991 which revoked BIR Ruling 473-88 dated 4 October 1988 -
It is to be noted that Section 127 (b) of the Tax Code as amended applies in general to domestic products and excludes the value-added tax in the determination of the gross selling price, which is the tax base for purposes of the imposition of ad valorem tax. On the other hand, the last paragraph of Section 142 of the same Code which includes the value-added tax in the computation of the ad valorem tax, refers specifically to cigar and cigarettes only. It does not include/apply to any other articles or goods subject to the ad valorem tax. Accordingly, Section 142 must perforce prevail over Section 127 (b) which is a general provision of law insofar as the imposition of the ad valorem tax on cigar and cigarettes is concerned.
Moreover, the phrase unless otherwise provided in Section 127 (b) purports of exceptions to the general rule contained therein, such as that of Section 142, last paragraph thereof which explicitly provides that in the case of cigarettes, the tax base for purposes of the ad valorem tax shall include, among others, the value-added tax.
Private respondent did not question the correctness of the above BIR ruling. In fact, upon knowledge of the effectivity of BIR Ruling No. 017-91, private respondent immediately implemented the method of computation mandated therein by restoring the VAT in computing the tax base for purposes of the 15% ad valorem tax.
However, well-entrenched is the rule that rulings and circulars, rules and regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the taxpayers. 10
The applicable law is Sec. 246 of the Tax Code which provides -
Sec. 246. Non-retroactivity of rulings. - Any revocation, modification, or reversal of any rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers except in the following cases: a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or c) where the taxpayer acted in bad faith.
Without doubt, private respondent would be prejudiced by the retroactive application of the revocation as it would be assessed deficiency excise tax.
What is left to be resolved is petitioner's claim that private respondent falls under the third exception in Sec. 246, i.e., that the taxpayer has acted in bad faith.
Bad faith imports a dishonest purpose or some moral obliquity and conscious doing of wrong. It partakes of the nature of fraud; a breach of a known duty through some motive of interest or ill will. 11 We find no convincing evidence that private respondent's implementation of the computation mandated by BIR Ruling 473-88 was ill-motivated or attended with a dishonest purpose. To the contrary, as a sign of good faith, private respondent immediately reverted to the computation mandated by BIR Ruling 017-91 upon knowledge of its issuance on 11 February 1991.
As regards petitioner's argument that private respondent should have made consultations with it before private respondent used the computation mandated by BIR Ruling 473-88, suffice it to state that the aforesaid BIR Ruling was clear and categorical thus leaving no room for interpretation. The failure of private respondent to consult petitioner does not imply bad faith on the part of the former.
Admittedly the government is not estopped from collecting taxes legally due because of mistakes or errors of its agents. But like other principles of law, this admits of exceptions in the interest of justice and fair play, as where injustice will result to the taxpayer. 12
WHEREFORE, there being no reversible error committed by respondent Court of Appeals, the petition is DENIED and petitioner COMMISSIONER OF INTERNAL REVENUE is ordered to refund private respondent ALHAMBRA INDUSTRIES, INC., the amount of P520,835.29 upon finality of this Decision.
SO ORDERED.
X
G.R. No. 127105 June 25, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.
GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], 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 (Exh. "A").
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 (Exhs. "B" to "L" and submarkings).
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], par. 12). [Respondent's] claim for there fund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
——— ——— ——— ——— ———
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
———— ———— ———— ———
P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
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) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, 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 subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling. 3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
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 PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany Tax Treaty, 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. Even assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances" embodied in the most favored
nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and would be determinative of the said clause's application.1âwphi1.nêt
We address first the objection raised by private respondent that the certification against forum shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court and existing circulars, must certify under oath to all of the following facts or undertakings: (a) he has not theretofore commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal oragency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the summary dismissal of the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be represented only by the Solicitor General, the certification executed by the OSG in this case constitutes substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinentthat —
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.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which 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:
xxx xxx xxx
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.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states —
1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision 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 petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are to be understood in the context in which they are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account the purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of royalties, and none has been brought to our attention, which provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the contracting parties. 8 As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief — the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the othercountry. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the
Philippines may impose one of three rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or 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.
Given the purpose underlying tax treaties and 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, supra, 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. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object andpurpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country.
At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is
the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that 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.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.
Law on taxation
1. Planters Product- March 14, 2008 [G.R. NO. 166006 : March 14, 2008]
PLANTERS PRODUCTS, INC., Petitioner, v. FERTIPHIL CORPORATION -ok2. Eduardo v republic G.R. No. 180705 November 27, 2012
EDUARDO M. COJUANGCO, JR., Petitioner, vs.REPUBLIC OF THE PHILIPPINES, Respondent3. Conjuanco Consolidated Cases 4. Valley Case
5. CIR v. Dela Salle (PDF)6. St. Lukes Cases (PDF) -ok7. mirant8. CIR v. perpetual Hospt (PDF)9. CIR v. CA 117982/ feb 6, 9710. Johnson Case 127105, June 26, 99http://www.attywarrenyap.com/2012/10/commissioner-of-internal-revenue-vs-st.html
http://sc.judiciary.gov.ph/jurisprudence/2012/september2012/195909.pdf
