2006 Taxation Case Digests

PERIOD TO ASSESS AND COLLECT TAX DEFICIENCY

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL vs. COMMISSIONER OF INTERNAL

REVENUE

GR. No. 155541. January 27, 2004

Facts: During the lifetime of the decedent Juliana vda. De Gabriel, her business affairs were

managed by the Philippine Trust Company (PhilTrust). The decedent died on April 3, 1979 but

two days after her death, PhilTrust filed her income tax return for 1978 not indicating that the

decedent had died. The BIR conducted an administrative investigation of the decedent’s tax

liability and found a deficiency income tax for the year 1997 in the amount of P318,233.93.

Thus, in November 18, 1982, the BIR sent by registered mail a demand letter and assessment

notice addressed to the decedent “c/o PhilTrust, Sta. Cruz, Manila, which was the address

stated in her 1978 income tax return. On June 18, 1984, respondent Commissioner of Internal

Revenue issued warrants of distraint and levy to enforce the collection of decedent’s deficiency

income tax liability and serve the same upon her heir, Francisco Gabriel. On November 22,

1984, Commissioner filed a motion to allow his claim with probate court for the deficiency tax.

The Court denied BIR’s claim against the estate on the ground that no proper notice of the tax

assessment was made on the proper party. On appeal, the CA held that BIR’s service on

PhilTrust of the notice of assessment was binding on the estate as PhilTrust failed in its legal

duty to inform the respondent of antecedent’s death. Consequently, as the estate failed to

question the assessment within the statutory period of thirty days, the assessment became

final, executory, and incontestable.

Issue: (1) Whether or not the CA erred in holding that the service of deficiency tax assessment

on Juliana through PhilTrust was a valid service as to bind the estate.

(2) Whether or not the CA erred in holding that the tax assessment had become final,

executory, and incontestable.

Held: (1) Since the relationship between PhilTrust and the decedent was automatically severed

the moment of the taxpayer’s death, none of the PhilTrust’s acts or omissions could bind the

estate of the taxpayer. Although the administrator of the estate may have been remiss in his

legal obligation to inform respondent of the decedent’s death, the consequence thereof merely

refer to the imposition of certain penal sanction on the administrator. These do not include the

indefinite tolling of the prescriptive period for making deficiency tax assessment or waiver of

the notice requirement for such assessment.

(2) The assessment was served not even on an heir or the estate but on a completely

disinterested party. This improper service was clearly not binding on the petitioner. The most

crucial point to be remembered is that PhilTust had absolutely no legal relationship with the

deceased or to her Estate. There was therefore no assessment served on the estate as to the

alleged underpayment of tax. Absent this assessment, no proceeding could be initiated in court

for collection of said tax; therefore, it could not have become final, executory and

incontestable. Respondent’s claim for collection filed with the court only on November 22, 1984

was barred for having been made beyond the five-year prescriptive period set by law.

TAX EXEMPTION; WITHDRAWAL OF TAX PRIVILEGES OF ELECTRIC COOPERATIVES BY THE LOCAL

GOVERNMENT CODE

PHILIPPINE RURAL ELECTRIC COOPERATIVES ASSOCIATION, INC., et al. vs. THE SECRETARY OF

DEPARTMENT OF INTERIOR AND LOCAL GOVERNMENT

GR. No. 143076. June 10, 2003

Facts: On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of

other electric cooperatives organized and existing under PD 269 which are members of

petitioner Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA). The other

petitioners, electric cooperatives of Agusan del Norte (ANECO), Iloilo 1 (ILECO 1) and Isabela 1

(ISELCO 1) are non-stock, non-profit electric cooperatives organized and existing under PD 269,

as amended, and registered with the National Electrification Administration (NEA).

Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all National

Government, local government, and municipal taxes and fee, including franchise, fling

recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court

or administrative proceedings in which it may be party.

From 1971to 1978, in order to finance the electrification projects envisioned by PD 269, as

amended, the Philippine Government, acting through the National Economic council (now

National Economic Development Authority) and the NEA, entered into six loan agreements with

the government of the United States of America, through the United States Agency for

International Development (USAID) with electric cooperatives as beneficiaries. The loan

agreements contain similarly worded provisions on the tax application of the loan and any

property or commodity acquired through the proceeds of the loan.

Petitioners allege that with the passage of the Local Government Code their tax exemptions

have been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of

the said code. Sec. 193 provides for the withdrawal of tax exemption privileges granted to all

persons, whether natural or juridical, except cooperatives duly registered under RA 6938, while

Sec. 234 exempts the same cooperatives from payment of real property tax.

Issue: (1) Does the Local Government Code (under Sec. 193 and 234) violate the equal

protection clause since the provisions unduly discriminate against petitioners who are duly

registered cooperatives under PD 269, as amended, and no under RA 6938 or the Cooperatives

Code of the Philippines?

(2) Is there an impairment of the obligations of contract under the loan entered into between

the Philippine and the US Governments?

Held: (1) No. The guaranty of the equal protection clause is not violated by a law based on a

reasonable classification. Classification, to be reasonable must (a) rest on substantial

classifications; (b) germane to the purpose of the law; (c) not limited to the existing conditions

only; and (d) apply equally to all members of the same class. We hold that there is reasonable

classification under the Local Government Code to justify the different tax treatment between

electric cooperatives covered by PD 269 and electric cooperatives under RA 6938.

First, substantial distinctions exist between cooperatives under PD 269 and those under RA

6938. In the former, the government is the one that funds those so-called electric cooperatives,

while in the latter, the members make equitable contribution as source of funds.

a. Capital Contributions by Members – Nowhere in PD 269 doe sit require cooperatives to make

equitable contributions to capital. Petitioners themselves admit that to qualify as a member of

an electric cooperative under PD 269, only the payment of a P5.00 membership fee is required

which is even refundable the moment the member is no longer interested in getting electric

service from the cooperative or will transfer to another place outside the area covered by the

cooperative. However, under the Cooperative Code, the articles of cooperation of a cooperative

applying for registration must be accompanied with the bonds of the accountable officers and a

sworn statement of the treasurer elected by the subscribers showing that at least 25% of the

authorized share capital has been subscribed and at least 25% of the total subscription has

been paid and in no case shall the paid-up share capital be less than P2,000.00.

b. Extent of Government Control over Cooperatives – The extent of government control over

electric cooperatives covered by PD 269 is largely a function of the role of the NEA as a primary

source of funds of these electric cooperatives. It is crystal clear that NEA incurred loans from

various sources to finance the development and operations of these electric cooperatives.

Consequently, amendments were primarily geared to expand the powers of NEA over the

electric cooperatives o ensure that loans granted to them would be repaid to the government.

In contrast, cooperatives under RA 6938 are envisioned to be self-sufficient and independent

organizations with minimal government intervention or regulation.

Second, the classification of tax-exempt entities in the Local Government Code is germane to

the purpose of the law. The Constitutional mandate that “every local government unit shall

enjoy local autonomy,” does not mean that the exercise of the power by the local governments

is beyond the regulation of Congress. Sec. 193 of the LGC is indicative of the legislative intent to

vet broad taxing powers upon the local government units and to limit exemptions from local

taxation to entities specifically provided therein.

Finally, Sec. 193 and 234 of the LGC permit reasonable classification as these exemptions are

not limited to existing conditions and apply equally to all members of the same class.

(2) No. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of

the obligations of contracts does not prohibit every change in existing laws. To fall within the

prohibition, the change must not only impair the obligation of the existing contract, but the

impairment must be substantial. Moreover, to constitute impairment, the law must affect a

change in the rights of the parties with reference to each other and not with respect to non-

parties.

The quoted provision under the loan agreement does not purport to grant any tax exemption in

favor of any party to the contract, including the beneficiaries thereof. The provisions simply

shift the tax burden, if any, on the transactions under the loan agreements to the borrower

and/or beneficiary of the loan. Thus, the withdrawal by the Local Government Code under Sec.

193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair the

obligation of the borrower, the lender or the beneficiary under the loan agreements as, in fact,

no tax exemption is granted therein.

TARIFF AND CUSTOMS LAWS; PRIMARY JURISDICTION OVER SEIZURE AND FORFEITURE CASES

Chief State Prosecutor JOVENCITO R. ZUÑO, ATTY. CLEMENTE P. HERALDO, Chief of the Internal

Inquiry and Prosecution Division-customs Intelligence and Investigation Service (IIPD-CIIS), and

LEONITO A. SANTIAGO, Special Investigator of the IIPD-CIIS vs. JUDGE ARNULFO G. CABREDO,

Regional Trial Court, Branch 15, Tabaco City, Albay

AM. No. RTJ-03-1779, April 30, 2003

Facts: Atty. Winston Florin, the Deputy Collector of Customs of the Sub-Port of Tabaco, Albay,

issued on September 3, 2001 Warrant of Seizure and Detention (WSD) No. 06-2001against a

shipment of 35, 000 bags of rice aboard the vessel M/V Criston for violation of Sec. 2530 of the

Tariff and Customs Code of the Philippines (TCCP).

A few days, after the issuance of the warrant of seizure and detention, Antonio Chua, Jr. and

Carlos Carillo, claiming to be consignees of the subject goods, filed before the Regional Trial

Court of Tabaco City, Albay a Petition with Prayer for the Issuance of Preliminary Injunction and

Temporary Restraining Order (TRO). The said petition sought to enjoin the Bureau of Customs

and its officials from detaining the subject shipment.

By virtue of said TRO, the 35,000 bags of rice were released from customs to Antonio Chua, Jr.

and Carlos Carillo.

In his complaint, Chief State Prosecutor Zuño alleged that respondent Judge violated

Administrative Circular No. 7-99, which cautions trial court judges in their issuance of TROs and

writs of preliminary injunctions. Said circular reminds judges of the principle, enunciated in

Mison vs. Natividad, that the Collector of Customs has exclusive jurisdiction over seizure and

forfeiture proceedings, and regular courts cannot interfere with his exercise thereof or stifle or

put it to naught.

Issue: Whether or not the issuance of the TRO was illegal and beyond the jurisdiction of the

RTC.

Held: The collection of duties and taxes due on the seized goods is not the only reason why trial

courts are enjoined from issuing orders releasing imported articles under seizure and forfeiture

proceedings by the Bureau of Customs. Administrative Circular No. 7-99 takes into account the

fact that the issuance of TROs and the granting of writs of preliminary injunction in seizure and

forfeiture proceedings before the Bureau of Customs may arouse suspicion that the issuance or

grant was fro considerations other than the strict merits of the case. Furthermore, respondent

Judge’s actuation goes against settled jurisprudence that the Collector of Customs has exclusive

jurisdiction over seizure and forfeiture proceedings, and regular courts cannot interfere with his

exercise thereof or stifle and put it to naught.

Respondent Judge cannot claim that he issued the questioned TRO because he honestly

believed tat the Bureau of Customs was effectively divested of its jurisdiction over the seized

shipment.

Even if it be assumed that in the exercise of the Collector of Customs of its exclusive jurisdiction

over seizure and forfeiture cases, a taint of illegality is correctly imputed, the most that can be

said is that under these circumstance, grave abuse of discretion may oust it of its jurisdiction.

This does mean, however, that the trial court is vested with competence to acquire jurisdiction

over these seizure and forfeiture cases. The proceedings before the Collector of Customs are

not final. An appeal lies to the Commissioner of Customs and, thereafter, to the Court of Tax

Appeals. It may even reach this Court through an appropriate petition for review. Certainly, the

RTC is not included therein. Hence, it is devoid of jurisdiction.

Clearly, therefore, respondent Judge had no jurisdiction to take cognizance of the petition and

issue the questioned TRO.

It is a basic principle that the Collector of Customs has exclusive jurisdiction over seizure and

forfeiture proceedings of dutiable goods. A studious and conscientious judge can easily be

conversant with such an elementary rule.

NATURE OF FRANCHISE TAX; TAX EXEMPTION; WITHDRAWAL OF TAX PRIVILEGES BY THE LOCAL

GOVERNMENT CODE

NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN

GR. No. 149110, April 9, 2003

Facts: NAPOCOR, the petitioner, is a government-owed and controlled corporation created

under Commonwealth Act 120. It is tasked to undertake the “development of hydroelectric

generations of power and the production of electricity from nuclear, geothermal, and other

sources, as well as, the transmission of electric power on a nationwide basis.”

For many years now, NAPOCOR sells electric power to the resident Cabanatuan City, posting a

gross income of P107,814,187.96 in 1992. Pursuant to Sec. 37 of Ordinance No. 165-92, the

respondent assessed the petitioner a franchise tax amounting to P808,606.41, representing

75% of 1% of the former’s gross receipts for the preceding year.

Petitioner, whose capital stock was subscribed and wholly paid by the Philippine Government,

refused to pay the tax assessment. It argued that the respondent has no authority to impose

tax on government entities. Petitioner also contend that as a non-profit organization, it is

exempted from the payment of all forms of taxes, charges, duties or fees in accordance with

Sec. 13 of RA 6395, as amended.

The respondent filed a collection suit in the RTC of Cabanatuan City, demanding that petitioner

pay the assessed tax, plus surcharge equivalent to 25% of the amount of tax and 2% monthly

interest. Respondent alleged that petitioner’s exemption from local taxes has been repealed by

Sec. 193 of RA 7160 (Local Government Code). The trial court issued an order dismissing the

case. On appeal, the Court of Appeals reversed the decision of the RTC and ordered the

petitioner to pay the city government the tax assessment.

Issues: (1) Is the NAPOCOR excluded from the coverage of the franchise tax simply because its

stocks are wholly owned by the National Government and its charter characterized is as a ‘non-

profit organization’?

(2) Is the NAPOCOR’s exemption from all forms of taxes repealed by the provisions of the Local

Government Code (LGC)?

Held: (1) NO. To stress, a franchise tax is imposed based not on the ownership but on the

exercise by the corporation of a privilege to do business. The taxable entity is the corporation

which exercises the franchise, and not the individual stockholders. By virtue of its charter,

petitioner was created as a separate and distinct entity from the National Government. It can

sue and be sued under its own name, and can exercise all the powers of a corporation under

the Corporation Code.

To be sure, the ownership by the National Government of its entire capital stock does not

necessarily imply that petitioner is no engage din business.

(2) YES. One of the most significant provisions of the LGC is the removal of the blanket exclusion

of instrumentalities and agencies of the National Government from the coverage of local

taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any kind on

the National Government, its agencies and instrumentalities, this rule now admits an exception,

i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fees, or charges on

the aforementioned entities. The legislative purpose to withdraw tax privileges enjoyed under

existing laws or charter is clearly manifested by the language used on Sec. 137 and 193

categorically withdrawing such exemption subject only to the exceptions enumerated. Since it

would be tedious and impractical to attempt to enumerate all the existing statutes providing for

special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawal

of such exemptions or privileges. No more unequivocal language could have been used.

TAX EXEMPTIONS vs. TAX EXCLUSION; “IN LIEU OF ALL TAXES” PROVISION

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC. (PLDT) vs. CITY OF DAVAO and

ADELAIDA B. BARCELONA, in her capacity as City Treasurer of Davao

GR. No. 143867, March 25, 2003

Facts: PLDT paid a franchise tax equal to three percent (3%) of its gross receipts. The franchise

tax was paid “in lieu of all taxes on this franchise or earnings thereof” pursuant to RA 7082. The

exemption from “all taxes on this franchise or earnings thereof” was subsequently withdrawn

by RA 7160 (LGC), which at the same time gave local government units the power to tax

businesses enjoying a franchise on the basis of income received or earned by them within their

territorial jurisdiction. The LGC took effect on January 1, 1992.

The City of Davao enacted Ordinance No. 519, Series of 1992, which in pertinent part provides:

Notwithstanding any exemption granted by law or other special laws, there is hereby imposed a

tax on businesses enjoying a franchise, a rate of seventy-five percent (75%) of one percent (1%)

of the gross annual receipts for the preceding calendar year based on the income receipts

realized within the territorial jurisdiction of Davao City.

Subsequently, Congress granted in favor of Globe Mackay Cable and Radio Corporation (Globe)

and Smart Information Technologies, Inc. (Smart) franchises which contained “in leiu of all

taxes” provisos.

In 1995, it enacted RA 7925, or the Public Telecommunication Policy of the Philippines, Sec. 23

of which provides that any advantage, favor, privilege, exemption, or immunity granted under

existing franchises, or may hereafter be granted, shall ipso facto become part of previously

granted telecommunications franchises and shall be accorded immediately and unconditionally

to the grantees of such franchises. The law took effect on March 16, 1995.

In January 1999, when PLDT applied for a mayor’s permit to operate its Davao Metro exchange,

it was required to pay the local franchise tax which then had amounted to P3,681,985.72. PLDT

challenged the power of the city government to collect the local franchise tax and demanded a

refund of what had been paid as a local franchise tax for the year 1997 and for the first to the

third quarters of 1998.

Issue: Whether or not by virtue of RA 7925, Sec. 23, PLDT is again entitled to the exemption

from payment of the local franchise tax in view of the grant of tax exemption to Globe and

Smart.

Held: Petitioner contends that because their existing franchises contain “in lieu of all taxes”

clauses, the same grant of tax exemption must be deemed to have become ipso facto part of its

previously granted telecommunications franchise. But the rule is that tax exemptions should be

granted only by a clear and unequivocal provision of law “expressed in a language too plain to

be mistaken” and assuming for the nonce that the charters of Globe and of Smart grant tax

exemptions, then this runabout way of granting tax exemption to PLDT is not a direct, “clear

and unequivocal” way of communicating the legislative intent.

Nor does the term “exemption” in Sec. 23 of RA 7925 mean tax exemption. The term refers to

exemption from regulations and requirements imposed by the National Telecommunications

Commission (NTC). For instance, RA 7925, Sec. 17 provides: The Commission shall exempt any

specific telecommunications service from its rate or tariff regulations if the service has sufficient

competition to ensure fair and reasonable rates of tariffs. Another exemption granted by the

law in line with its policy of deregulation is the exemption from the requirement of securing

permits from the NTC every time a telecommunications company imports equipment.

Tax exemptions should be granted only by clear and unequivocal provision of law on the basis

of language too plain to be mistaken.

REMEDIES OF A TAXPAYER UNDER THE NIRC; POWER OF THE CTA TO REVIEW RULINGS OR

OPINIONS OF COMMISSIONER

COMMISSIONER OF INTERNAL REVENUE vs. LEAL

GR. No. 113459, November 18, 2002

Facts: Pursuant to Sec. 116 of the Tax Code which imposes percentage tax on dealers in

securities and lending investors, the Commissioner of Internal Revenue issued Memorandum

Order (RMO) No. 15-91 dated March 11, 1991, imposing five percent (5%) lending investor’s tax

on pawnshops based on their gross income and requiring all investigating units of the Bureau to

investigate and assess the lending investor’s tax due from them. The issuance of RMO No. 15-

91 was an offshoot of petitioner’s evaluation that the nature of pawnshop business is akin to

that of lending investors.

Subsequently, petitioner issued Revenue Memorandum Circular No. 43-91 dated May 27, 1992,

subjecting the pawn ticket to the documentary stamp tax as prescribed in Title VII of the Tax

Code.

Adversely affected by those revenue orders, herein respondent Josefina Leal, owner and

operator of Josefina Pawnshop in San Mateo, Rizal, asked for a reconsideration of both RMO

No. 15-91 and RMC No. 43-91 but the same was denied with finality by petitioner in October

30, 1991.

Consequently, on March 18, 1992, respondent filed with the RTC a petition for prohibition

seeking to prohibit petitioner from implementing the revenue orders.

Petitioner, through the Office of the Solicitor-General, filed a motion to dismiss the petition on

the ground that the RTC has no jurisdiction to review the questioned revenue orders and to

enjoin their implementation. Petitioner contends that the subject revenue orders were issued

pursuant to his power “to make rulings or opinions in connection with the Implementation of

the provisions of internal revenue laws.” Thus, the case falls within the exclusive appellate

jurisdiction of the Court of Tax Appeals, citing Sec. 7(1) of RA 1125.

The RTC issued an order denying the motion to dismiss holding that the revenue orders are not

assessments to implement a Tax Code provision, but are “in effect new taxes (against

pawnshops) which are not provided for under the Code,” and which only Congress is

empowered to impose. The Court of Appeals affirmed the order issued by the RTC.

Issue: Whether or not the Court of Tax Appeals has jurisdiction to review rulings of the

Commissioner implementing the Tax Code.

Held: The jurisdiction to review rulings of the Commissioner pertains to the Court of Tax

Appeals and NOT to the RTC. The questioned RMO and RMC are actually rulings or opinions of

the Commissioner implementing the Tax Code on the taxability of the Pawnshops.

Under RA 1125, An Act Creating the Court of Tax Appeals, such rulings of the Commissioner of

Internal Revenue are appealable to that court:

Sec. 7 Jurisdiction – The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to

review by appeal, as herein provided—

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,

refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,

or other matters arising under the National Revenue Code or other laws or part of law

administered by the Bureau of Internal Revenue.

xxxxxx

tax remedies; section 220; who should institute appeal in tax cases

COMMISSIONER OF INTERNAL REVENUE vs. LA SUERTE CIGAR AND CIGARETTE FACTORY

GR. No. 144942, July 4, 2002

Facts: In its resolution, dated 15 November 2000, the Supreme Court denied the Petition for

Review on Certiorari submitted by the Commissioner of Internal Revenue for non-compliance

with the procedural requirement of verification explicit in Sec. 4, Rule 7 of the 1997 Rules of

Civil Procedure and, furthermore, because the appeal was not pursued by the Solicitor-General.

When the motion for reconsideration filed by the petitioner was likewise denied, petitioner

filed the instant motion seeking an elucidation on the supposed discrepancy between the

pronouncement of this Court, on the one hand that would require the participation of the

Office of the Solicitor-General and pertinent provisions of the Tax Code, on the other hand, that

allow legal officers of the Bureau of Internal Revenue (BIR) to institute and conduct judicial

action in behalf of the Government under Sec, 220 of the Tax Reform Act of 1997.

Issue: Are the legal officer of the BIR authorized to institute appeal proceedings (as

distinguished from commencement of proceeding) without the participation of the Solicitor-

General?

Held: NO. The institution or commencement before a proper court of civil and criminal actions

and proceedings arising under the Tax Reform Act which “shall be conducted y legal officers of

the Bureau of Internal Revenue” is not in dispute. An appeal from such court, however, is not a

matter of right. Sec. 220 of the Tax Reform Act must not be understood as overturning the long-

established procedure before this Court in requiring the Solicitor-General to represent the

interest of the Republic. This court continues to maintain that it is the Solicitor-General who has

the primary responsibility to appear for the government in appellate proceedings. This

pronouncement finds justification in the various laws defining the Office of the Solicitor-

General, beginning with Act No. 135, which took effect on 16 June 1901, up to the present

Administrative Code of 1987. Sec. 35, Chapter 12, Title III, Book IV of the said code outlines the

powers and functions of the Office of the Solicitor General which includes, but not limited to, its

duty to—

1. Represent the Government in the Supreme Court and the Court of Appeals in all criminal

proceedings; represent the Government and its officers in the Supreme Court, the Court of

Appeals, and all other courts or tribunals in all civil actions and special proceedings in which the

Government or any officer thereof in his official capacity is a party.

2. Appear in any court in any action involving the validity of any treaty, law, executive order, or

proclamation, rule or regulation when in his judgment his intervention is necessary or when

requested by the Court.

TAX EXEMPTIONS; EXECUTIVE LEGISLATION

COCONUT OIL REFINERS ASSOCIATION, INC. et al vs. RUBEN TORRES, as Executive Secretary, et

al

G.R. No. 132527. July 29, 2005

Facts: On March 13, 1992, RA No. 7227 was enacted, providing for, among other things, the

sound and balanced conversion of the Clark and Subic military reservations and their extensions

into alternative productive uses in the form of special economic zones in order to promote the

economic and social development of Central Luzon in particular and the country in general. The

law contains provisions on tax exemptions for importations of raw materials, capital and

equipment. After which the President issued several Executive Orders as mandated by the law

for the implementation of RA 7227. Herein petitioners contend the validity of the tax

exemption provided for in the law.

Issue: Whether or not the Executive Orders issued by President for the implementation of the

tax exemptions constitutes executive legislation.

Held: To limit the tax-free importation privilege of enterprises located inside the special

economic zone only to raw materials, capital and equipment clearly runs counter to the

intention of the Legislature to create a free port where the “free flow of goods or capital within,

into, and out of the zones” is insured.

The phrase “tax and duty-free importations of raw materials, capital and equipment” was

merely cited as an example of incentives that may be given to entities operating within the

zone. Public respondent SBMA correctly argued that the maxim expressio unius est exclusio

alterius, on which petitioners impliedly rely to support their restrictive interpretation, does not

apply when words are mentioned by way of example. It is obvious from the wording of RA No.

7227, particularly the use of the phrase “such as,” that the enumeration only meant to illustrate

incentives that the SSEZ is authorized to grant, in line with its being a free port zone.

The Court finds that the setting up of such commercial establishments which are the only ones

duly authorized to sell consumer items tax and duty-free is still well within the policy

enunciated in Section 12 of RA No. 7227 that “. . .the Subic Special Economic Zone shall be

developed into a self-sustaining, industrial, commercial, financial and investment center to

generate employment opportunities in and around the zone and to attract and promote

productive foreign investments.” However, the Court reiterates that the second sentences of

paragraphs 1.2 and 1.3 of Executive Order No. 97-A, allowing tax and duty-free removal of

goods to certain individuals, even in a limited amount, from the Secured Area of the SSEZ, are

null and void for being contrary to Section 12 of RA No. 7227. Said Section clearly provides that

“exportation or removal of goods from the territory of the Subic Special Economic Zone to the

other parts of the Philippine territory shall be subject to customs duties and taxes under the

Customs and Tariff Code and other relevant tax laws of the Philippines.”

TAX EXEMPTIONS; NULLITY OF TAX DECLARATIONS AND TAX ASSESSMENTS

RADIO COMMUNICATIONS OF THE PHILIPPINES, INC. (RCPI), vs. PROVINCIAL ASSESOR OF

SOUTH COTABATO, et al.

G.R. No. 144486. April 13, 2005

Facts: RCPI was granted a franchise under RA 2036, the law provides tax exemption for several

properties of the company. Section 14 of RA 2036 reads: “In consideration of the franchise and

rights hereby granted and any provision of law to the contrary notwithstanding, the grantee

shall pay the same taxes as are now or may hereafter be required by law from other individuals,

co partnerships, private, public or quasi-public associations, corporations or joint stock

companies, on real estate, buildings and other personal property except radio equipment,

machinery and spare parts needed in connection with the business of the grantee, which shall

be exempt from customs duties, tariffs and other taxes, as well as those properties declared

exempt in this section. In consideration of the franchise, a tax equal to one and one-half per

centum of all gross receipts from the business transacted under this franchise by the grantee

shall be paid to the Treasurer of the Philippines each year, within ten days after the audit and

approval of the accounts as prescribed in this Act. Said tax shall be in lieu of any and all taxes of

any kind, nature or description levied, established or collected by any authority whatsoever,

municipal, provincial or national, from which taxes the grantee is hereby expressly exempted.”

Thereafter, the municipal treasurer of Tupi, South Cotabato assessed RCPI real property taxes

from 1981 to 1985. The municipal treasurer demanded that RCPI pay P166,810 as real property

tax on its radio station building in Barangay Kablon, as well as on its machinery shed, radio relay

station tower and its accessories, and generating sets. The Local Board of Assessment Appeals

affirmed the assessment of the municipal treasurer. When the case reach the C A, it ruled that,

petitioner is exempt from paying the real property taxes assessed upon its machinery and radio

equipment mounted as accessories to its relay tower. However, the decision assessing taxes

upon petitioner’s radio station building, machinery shed, and relay station tower is valid.

Issue: (1) Whether or not appellate court erred when it excluded RCPI’s tower, relay station

building and machinery shed from tax exemption.

(2) Whether or not appellate court erred when it did not resolve the issue of nullity of the tax

declarations and assessments due to non-inclusion of depreciation allowance.

Held: (1) RCPI’s radio relay station tower, radio station building, and machinery shed are real

properties and are thus subject to the real property tax. Section 14 of RA 2036, as amended by

RA 4054, states that “in consideration of the franchise and rights hereby granted and any

provision of law to the contrary notwithstanding, the grantee shall pay the same taxes as are

now or may hereafter be required by law from other individuals, co partnerships, private, public

or quasi-public associations, corporations or joint stock companies, on real estate, buildings and

other personal property.” The clear language of Section 14 states that RCPI shall pay the real

estate tax.

(2) The court held the assessment valid. The court ruled that, records of the case shows that

RCPI raised before the LBAA and the CBAA the nullity of the assessments due to the non-

inclusion of depreciation allowance. Therefore, RCPI did not raise this issue for the first time.

However, even if we consider this issue, under the Real Property Tax Code depreciation

allowance applies only to machinery and not to real property.

SECRETARY OF FINANCE CANNOT PROMULGATE REGULATIONS FIXING A RATE OF PENALTY ON

DELINQUENT TAXES

The Honorable Secretary of Finance vs. THE HONORABLE RICARDO M. ILARDE, Presiding Judge,

Regional Trial Court, 6th Judicial Region, Branch 26, Iloilo City, and CIPRIANO P. CABALUNA, JR

G.R. No. 121782. May 9, 2005

Facts: Cabaluna with his wife owns several real property located in Iloilo City. Cabaluana is the

Regional Director of Regional Office No. VI of the Department of Finance in Iloilo City. After his

retirement, there are tax delinquencies on his properties; he paid the amount under protest

contending that the penalties imposed to him are in excess than that provided by law. After

exhausting all administrative remedies, he filed a suit before the RTC which found that Section

4(c) of Joint Assessment Regulation No. 1-85 and Local Treasury Regulation No. 2-85 issued on

August 1, 1985 by respondent Secretary (formerly Minister) of Finance is null and void; (2)

declaring that the penalty that should be imposed for delinquency in the payment of real

property taxes should be two per centum on the amount of the delinquent tax for each month

of delinquency or fraction thereof, until the delinquent tax is fully paid but in no case shall the

total penalty exceed twenty-four per centum of the delinquent tax as provided for in Section 66

of P.D. 464 otherwise known as the Real Property Tax Code.

Issue: Whether or not the then Ministry of Finance could legally promulgate Regulations

prescribing a rate of penalty on delinquent taxes other than that provided for under

Presidential Decree (P.D.) No. 464, also known as the Real Property Tax Code.

Held: The Ministry of Finance now Secretary of Finance cannot promulgate regulations

prescribing a rate of penalty on delinquent taxes. The Court ruled that despite the

promulgation of E.O. No. 73, P.D. No. 464 in general and Section 66 in particular, remained to

be good law. To accept the Secretary’s premise that E.O. No. 73 had accorded the Ministry of

Finance the authority to alter, increase, or modify the tax structure would be tantamount to

saying that E.O. No. 73 has repealed or amended P.D. No. 464. Repeal of laws should be made

clear and expressed. Repeals by implication are not favored as laws are presumed to be passed

with deliberation and full knowledge of all laws existing on the subject. Such repeals are not

favored for a law cannot be deemed repealed unless it is clearly manifest that the legislature so

intended it. Assuming argumenti that E.O. No. 73 has authorized the petitioner to issue the

objected Regulations, such conferment of powers is void for being repugnant to the well-

encrusted doctrine in political law that the power of taxation is generally vested with the

legislature. Thus, for purposes of computation of the real property taxes due from private

respondent for the years 1986 to 1991, including the penalties and interests, is still Section 66

of the Real Property Tax Code of 1974 or P.D. No. 464. The penalty that ought to be imposed

for delinquency in the payment of real property taxes should, therefore, be that provided for in

Section 66 of P.D. No. 464, i.e., two per centum on the amount of the delinquent tax for each

month of delinquency or fraction thereof but “in no case shall the total penalty exceed twenty-

four per centum of the delinquent tax.”

EVIDENCE IN TAX ASSESSMENTS; MACHINE COPIES OF RECORDS/ DOCUMENTS HAVE NO

PROBATIVE VALUE

COMMISSION OF INTERNAL REVENUE vs. HANTEX TRADING CO., INC

G.R. No. 136975. March 31, 2005

Facts: Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale

of plastic products, it imports synthetic resin and other chemicals for the manufacture of its

products. For this purpose, it is required to file an Import Entry and Internal Revenue

Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff

and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-

Intelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received

confidential information that the respondent had imported synthetic resin amounting to

P115,599,018.00 but only declared P45,538,694.57. Thus, Hentex receive a subpoena to

present its books of account which it failed to do. The bureau cannot find any original copies of

the products Hentex imported since the originals were eaten by termites. Thus, the Bureau

relied on the certified copies of the respondent’s Profit and Loss Statement for 1987 and 1988

on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted

by the informer, as well as excerpts from the entries certified by Tomas and Danganan. The

case was submitted to the CTA which ruled that Hentex have tax deficiency and is ordered to

pay, per investigation of the Bureau. The CA ruled that the income and sales tax deficiency

assessments issued by the petitioner were unlawful and baseless since the copies of the import

entries relied upon in computing the deficiency tax of the respondent were not duly

authenticated by the public officer charged with their custody, nor verified under oath by the

EIIB and the BIR investigators.

Issue: Whether or not the final assessment of the petitioner against the respondent for

deficiency income tax and sales tax for the latter’s 1987 importation of resins and calcium

bicarbonate is based on competent evidence and the law.

Held: Central to the second issue is Section 16 of the NIRC of 1977, as amended which provides

that the Commissioner of Internal Revenue has the power to make assessments and prescribe

additional requirements for tax administration and enforcement. Among such powers are those

provided in paragraph (b), which provides that “Failure to submit required returns, statements,

reports and other documents. – When a report required by law as a basis for the assessment of

any national internal revenue tax shall not be forthcoming within the time fixed by law or

regulation or when there is reason to believe that any such report is false, incomplete or

erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.” This

provision applies when the Commissioner of Internal Revenue undertakes to perform her

administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a

taxpayer’s failure to file one, or to amend a return already filed in the BIR. The “best evidence”

envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting

records of the taxpayer who is the subject of the assessment process, the accounting records of

other taxpayers engaged in the same line of business, including their gross profit and net profit

sales. Such evidence also includes data, record, paper, document or any evidence gathered by

internal revenue officers from other taxpayers who had personal transactions or from whom

the subject taxpayer received any income; and record, data, document and information secured

from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the

Bureau of Customs, and the Tariff and Customs Commission. However, the best evidence

obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies

of records/documents. The petitioner, in making a preliminary and final tax deficiency

assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of

records/documents. Mere photocopies of the Consumption Entries have no probative weight if

offered as proof of the contents thereof. The reason for this is that such copies are mere scraps

of paper and are of no probative value as basis for any deficiency income or business taxes

against a taxpayer.

Companies exempt from zero-rate tax

COMMISSIONER OF INTERNAL REVENUE vs. AMERICAN EXPRESS INTERNATIONAL, INC.

(PHILIPPINE BRANCH),

G.R.No. 152609. June 29, 2005

Facts: American Express international is a foreign corporation operating in the Philippines, it is a

registered taxpayer. On April 13, 1999, [respondent] filed with the BIR a letter-request for the

refund of its 1997 excess input taxes in the amount of P3,751,067.04, which amount was

arrived at after deducting from its total input VAT paid of P3,763,060.43 its applied output VAT

liabilities only for the third and fourth quarters of 1997 amounting to P5,193.66 and P6,799.43,

respectively. The CTA ruled in favor of the herein respondent holding that its services are

subject to zero-rate pursuant to Section 108(b) of the Tax Reform Act of 1997 and Section

4.102-2 (b)(2) of Revenue Regulations 5-96. The CA affirmed the decision of the CTA.

Issue: Whether or not the company is subject to zero-rate tax pursuant to the Tax Reform Act

of 1997.

Held: Services performed by VAT-registered persons in the Philippines (other than the

processing, manufacturing or repacking of goods for persons doing business outside the

Philippines), when paid in acceptable foreign currency and accounted for in accordance with

the rules and regulations of the BSP, are zero-rated. Respondent is a VAT-registered person that

facilitates the collection and payment of receivables belonging to its non-resident foreign client,

for which it gets paid in acceptable foreign currency inwardly remitted and accounted for in

conformity with BSP rules and regulations. Certainly, the service it renders in the Philippines is

not in the same category as “processing, manufacturing or repacking of goods” and should,

therefore, be zero-rated. In reply to a query of respondent, the BIR opined in VAT Ruling No.

080-89 that the income respondent earned from its parent company’s regional operating

centers (ROCs) was automatically zero-rated effective January 1, 1988. Service has been defined

as “the art of doing something useful for a person or company for a fee” or “useful labor or

work rendered or to be rendered by one person to another.” For facilitating in the Philippines

the collection and payment of receivables belonging to its Hong Kong-based foreign client, and

getting paid for it in duly accounted acceptable foreign currency, respondent renders service

falling under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent

should, therefore, be levied upon the supply of that service.

As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional

reach of the tax. Goods and services are taxed only in the country where they are consumed.

Thus, exports are zero-rated, while imports are taxed. VAT rate for services that are performed

in the Philippines, “paid for in acceptable foreign currency and accounted for in accordance

with the rules and regulations of the BSP.” Thus, for the supply of service to be zero-rated as an

exception, the law merely requires that first, the service be performed in the Philippines;

second, the service fall under any of the However, the law clearly provides for an exception to

the destination principle; that is, for a zero percent categories in Section 102(b) of the Tax

Code; and, third, it be paid in acceptable foreign currency accounted for in accordance with BSP

rules and regulations. Indeed, these three requirements for exemption from the destination

principle are met by respondent. Its facilitation service is performed in the Philippines. It falls

under the second category found in Section 102(b) of the Tax Code, because it is a service other

than “processing, manufacturing or repacking of goods” as mentioned in the provision.

Undisputed is the fact that such service meets the statutory condition that it be paid in

acceptable foreign currency duly accounted for in accordance with BSP rules. Thus, it should be

zero-rated.