Incometaxproperdoc
Incometaxproperdoc
CIR v. CA, CTA and A. SORIANO CORP. HELD: The reason behind the redemption is not material. The proceeds from redemption
Don Andres Soriano (American), founder of “A Soriano Y Cia” predecessor of ANSCOR, had are taxable and ANSCOR is duty bound to withhold the tax at source. The Soriano Estate
a total shareholdings of 185,154 shares. Broken down, the shares comprise of 50,495 definitely profited from the redemption and such profit is taxable, and again, ANSCOR had
shares which were of original issue when the corporation was founded and 134,659 shares the duty to withhold the tax. There was a total of 108,000 shares redeemed from the
as stock dividend declarations. So in 1964 when Soriano died, half of the shares he held estate. 25,247.5 of that was original issue from the capital of ANSCOR. The rest
went to his wife as her conjugal share (wife’s “legitime”) and the other half (92,577 (82,752.5) of the shares are deemed to have been from stock dividend shares.
shares, which is further broken down to 25,247.5 original issue shares and 82,752.5 stock Sale of stock dividends is taxable. It is also to be noted that in the absence of
dividend shares) went to the estate. For sometime after his death, his estate still evidence to the contrary, the Tax Code presumes that every distribution of corporate
continued to receive stock dividends from ASC until it grew to at least 108,000 shares. property, in whole or in part, is made out of corporate profits such as stock dividends.
In 1968, ANSCOR through its Board issued a resolution for the redemption of shares from It cannot be argued that all the 108,000 shares were distributed from the capital of
Soriano’s estate purportedly for the planned “Filipinization” of ANSCOR. Eventually, ANSCOR and that the latter is merely redeeming them as such. The capital cannot be
108,000 shares were redeemed from the Soriano Estate. In 1973, a tax audit was distributed in the form of redemption of stock dividends without violating the trust fund
conducted. Eventually, the Commissioner of Internal Revenue (CIR) issued an assessment doctrine — wherein the capital stock, property and other assets of the corporation are
against ASC for deficiency withholding tax-at-source based on the transactions of regarded as equity in trust for the payment of the corporate creditors. Once capital, it is
exchange and redemption of stocks always capital. That doctrine was intended for the protection of corporate
The BIR made the corresponding assessments despite the claim of ANSCOR that it availed creditors.______________________
of the tax amnesty under
(P.D.) 23. However, petitioner ruled that the invoked decrees do not cover Sections 53 and WISE & CO., INC., ET. AL., vs. MEER
FACTS: Herein plaintiff-appellants Wise & Co., Inc. et. al were stockholders of Manila Wine way as a person receives no income from taking out a loan. So there should be no tax
Merchants, Ltd. (hereinafter referred to as the Hongkong Company), a foreign corporation liability.
duly authorized to do business in the Philippines. On May 27, 1937 its Board of Directors Petitioner contends that the Wilcox rule has been in existence since 1946; that if Congress
recommended to the stockholders that they adopt resolutions necessary to sell its had intended to change the rule, it would have done so; that there was a general revision
business and assets to Manila Wine Merchants, Inc., a Philippine corporation formed on of the income tax laws in 1954 without mention of the rule; that a bill to change it was
May 27, 1937, for the sum of P400,000. This sale was duly authorized by the stockholders introduced in the Eighty-sixth Congress but was not acted upon; that, therefore, we may
of the Hongkong Company at a meeting held on July 22, 1937. not change the rule now. But the fact that Congress has remained silent or has re-enacted
The Hongkong Co. made a distribution from its earnings for the year 1937 to its a statute which we have construed, or that congressional attempts to amend a rule
stockholders. As a result of the sale of its business and assets to Philippine Co., a surplus announced by this Court have failed, does not necessarily debar us from re-examining and
was realized and the HK Co.distributed this surplus to the shareholders including Wise & correcting the Court's own errors.
Co.Inc., et.al. Philippine income tax had been paid by HK Co. on the said surplus from In Wilcox, the Court held that embezzled money does not constitute taxable income to the
which said distributions were made. At a special general meeting of the shareholders of embezzler in the year of the embezzlement under 22 (a) of the Internal Revenue Code of
the HK Co., the stockholders by resolution directed that the company be voluntarily 1939.
liquidated and its capital distributed among the stockholders. The plaintiff- appellants duly Issue: Whether embezzled funds are to be included in the "gross income" of the
filed Income Tax Returns, on which the defendant, Collector of Internal Revenue Bibiano L. embezzler in the year in which the funds are misappropriated.
Meer made deficiency assessments of P11, 931.23 for the year 1937. They paid under Held: Embezzled money is taxable income of the embezzler in the year of the
written protest. Since July 1, 1939 they requested from defendant a refund of the said embezzlement under 22 (a) of the Internal Revenue Code of 1939, which defines "gross
amounts which defendant has refused and still refuses to refund. income" as including "gains or profits and income derived from any source whatever," and
Now, before the Court of First Instance of Manila was a complaint for recovery of certain under 61 (a) of the Internal Revenue Code of 1954, which defines "gross income" as "all
amounts therein specified. CFI ruled in favor of CIR Meer stating that that the Hongkong income from whatever source derived."
corporation, was in liquidation beginning June 1, 1937, that all dividends declared and It had been a well-established principle, long before either Rutkin or Wilcox, that unlawful,
paid thereafter were distributions of all its assets in complete liquidation and were subject as well as lawful, gains are comprehended within the term "gross income." Section II B of
to tax. Appellants appealed the decision of the CFI. the Income Tax Act of 1913 provided that "the net income of a taxable person shall
ISSUE: W the distributions received by plaintiffs-appellants are ordinary dividends and include gains, profits, and income from the transaction of any lawful business carried on
therefore not taxable for gain or profit, or gains or profits and income derived from any source whatever . . . ."
HELD: No. The SC affirmed the CFI’s judgment. Appellants contend that the amounts When the statute was amended in 1916, the one word "lawful" was omitted. This
received by them and on which the taxes in question were assessed and collected were revealed, we think, the obvious intent of that Congress to tax income derived from both
ordinary dividends. On the other hand, CIR contends that they were liquidating dividends. legal and illegal sources, to remove the incongruity of having the gains of the honest
SC ruled that the distributions under consideration were not ordinary dividends. Therefore, laborer taxed and the gains of the dishonest immune. And, the Court has pointed out,
they are taxable as liquidating dividends. with approval, that there "has been a widespread and settled administrative and judicial
Income tax law states that “Where a corporation, partnership, association, joint-account, recognition of the taxability of unlawful gains of many kinds. These include protection
or insurance company distributes all of its assets in complete liquidation or dissolution, payments made to racketeers, ransom payments paid to kidnappers, bribes, money
the gain realized or loss sustained by the stockholder, whether individual or corporation, is derived from the sale of unlawful insurance policies, graft, black market gains, funds
a taxable income or a deductible loss as the case may be. Appellants received the obtained from the operation of lotteries, income from race track bookmaking and illegal
distributions in question in exchange for the surrender and relinquishment by them of prize fight pictures.________________________________________________________
their stock in the HK Co. which was dissolved and in process of complete liquidation.
Non-resident alien individual appellants contend that if the distributions received by them CIR Vs. CA, CTA & GCL Retirement Plan
were to be considered as a sale of their stock to the HK Co., the profit realized by them Facts: GCL Retirement Plan is an employees' trust maintained by the employer, GCL Inc.,
does not constitute income from Philippine sources and is not subject to Philippine taxes, to provide retirement, pension, disability and death benefits to its employees. The Plan as
"since all steps in the carrying out of this so-called sale took place outside the submitted was approved and qualified as exempt from income tax by CIR in accordance
Philippines." This contention is untenable. The HK Co. was at the time of the sale of its with RA 4917. In 1984, GCL made investments and earned there from interest income
business in the Philippines, and the PH Co. was a domestic corporation domiciled and which was withheld the 15% final withholding tax imposed by PD 1959, GCL filed with CIR
doing business also in the Philippines. The HK Co. was incorporated for the purpose of a claim for refund in the amounts of P1,312.66 withheld by Anscor and P2,064.15 by
carrying on in the Philippine Islands the business of wine, beer, and spirit merchants and Commercial Bank of Manila. In 1985, it filed a second claim for refund of the amount of
the other objects set out in its memorandum of association. Hence, its earnings, profits, P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection
and assets, including those from whose proceeds the distributions in question were made, of the 15% final withholding tax from the interest income as it is an entity fully exempt
the major part of which consisted in the purchase price of the business, had been earned from income tax as provided under RA 4917 in relation to Sec 56 (b) of the Tax Code.
and acquired in the Philippines. As such, it is clear that said distributions were income CIR – denied the refund, Petitioner elevated the matter to CTA which ruled in favor of GCL,
"from Philippine sources."________________ holding that employees' trusts are exempt from the 15%final withholding tax on interest
income and ordering a refund of the tax withheld. CA - upheld the CTA Decision.
JAMES v. US CIR’s Contention is that from 1984 when PD 1959 was promulgated, employees' trusts
Facts: The petitioner is a union official who, with another person, embezzled in excess of ceased to be exempt and thereafter became subject to the final withholding tax.
$738,000 during the years 1951 through 1954 from his employer union and from an GCL’s contention is that the tax exempt status of the employees' trusts applies to all
insurance company with which the union was doing business. Petitioner failed to report kinds of taxes, including the final withholding tax on interest income. That exemption,
these amounts in his gross income in those years. Petitioner was charged of a criminal according to GCL, is derived from Sec 56(b) and not from Sec 21 (d) or 24 (cc) of the Tax
case for embezzlement. He was sentenced for a total of three years imprisonment. Code.
In addition to criminal penalties for embezzlement, the IRS stepped in and claimed that Issue: Whether GCL is exempted from Income Tax
the $738k should be counted in James' gross income. James argued that since a person is Held: GCL Plan was qualified as exempt from income tax by the CIR in accordance with
legally obligated to repay money that they steal, they've received no income in the same RA 4917. In so far as employees' trusts are concerned, the foregoing provision should be
taken in relation to then Sec 56(b) (now 53[b]) of the Tax Code, as amended by RA 1983. for terminal leave because he is not receiving it as salary. What he applies for is a
The tax-exemption privilege of employees' trusts, as distinguished from any other kind of "commutation of leave credits." It is an accumulation of credits intended for old age or
property held in trust, springs from the foregoing provision. It is unambiguous. The tax law separation from service. . . .
has singled out employees' trusts for tax exemption and rightly so, by virtue of the raison
de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans The Court has already ruled that the terminal leave pay received by a government official
normally provide economic assistance to employees upon the occurrence of certain or employee is not subject to withholding (income) tax. In the recent case of Jesus N.
contingencies, particularly, old age retirement, death, sickness, or disability. It provides Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991, the
security against certain hazards to which members of the Plan may be exposed. It is an Court explained the rationale behind the employee's entitlement to an exemption from
independent and additional source of protection for the working group. What is more, it is withholding (income) tax on his terminal leave pay as follows:
established for their exclusive benefit and for no other purpose. The deletion in PD 1959
of the provisos regarding tax exemption and preferential tax rates under the old law, . . . commutation of leave credits, more commonly known as terminal leave, is applied for
therefore, cannot be deemed to extent to employees' trusts. by an officer or employee who retires, resigns or is separated from the service through no
Said Decree, being a general law, cannot repeal by implication a specific provision, Sec fault of his own. (Manual on Leave Administration Course for Effectiveness published by
56(b) now 53 [b]) in relation to RA 4917 granting exemption from income tax to the Civil Service Commission, pages 16-17). In the exercise of sound personnel policy, the
employees' trusts. RA 1983, which exempted employees' trusts in its Sec 56 (b) was Government encourages unused leaves to be accumulated. The Government recognizes
effective on 1957 while RA 4917 was enacted on 1967, long before the issuance of PD that for most public servants, retirement pay is always less than generous if not meager
1959 in 1984. A subsequent statute, general in character as to its terms and application, and scrimpy. A modest nest egg which the senior citizen may look forward to is thus
is not to be construed as repealing a special or specific enactment, unless the legislative avoided. Terminal leave payments are given not only at the same time but also for the
purpose to do so is manifested. This is so even if the provisions of the latter are same policy considerations governing retirement benefits.
sufficiently comprehensive to include what was set forth in the special act. There can be
no denying either that the final withholding tax is collected from income in respect of In fine, not being part of the gross salary or income of a government official or employee
which employees' trusts are declared exempt. The application of the withholdings system but a retirement benefit, terminal leave pay is not subject to income
to interest on bank deposits or yield from deposit substitutes is essentially to maximize tax.______________________________________________
and expedite the collection of income taxes by requiring its payment at the source. If an
employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in RE: REQUEST OF ATTY. BERNARDO ZIALCITA FOR RECONSIDERATION OF THE
withholding a certain percentage of that income which it is not supposed to pay in the first ACTION OF THE FINANCIAL AND BUDGET OFFICE
place. FACTS: On February 16, 1990 Atty. Zialcita retired from government service upon
We herein rule that PD 1959 did not have the effect of revoking the tax exemption reaching the compulsory retirement age of 65 years. Withholding tax for compensation
enjoyed by employees' trusts; reliance on those authorities is now misplaced. was deducted from the payment of the money value of his accumulated leave credits.
WHEREFORE, the Writ of Certiorari prayed for is DENIED.
On 23 August 1990, a resolution was issued by the Court En Banc stating that the terminal
CIR vs. CA and EFREN P. CASTANEDA G.R. No. 96016 October 17, 1991 leave pay of Atty. Zialcita received by virtue of his compulsory retirement can never be
FACTS: Private respondent Efren P. Castaneda retired from the government service as considered a part of his salary subject to the payment of income tax but falls under the
Revenue Attache in the Philippine Embassy in London, England, on 10 December 1982. phrase “other benefits received by retiring employees and workers,” within the meaning
Upon retirement, he received terminal leave pay from which petitioner CIR withheld of Section 1 of PD 220 and is thus exempt from the payment of income tax. That the
P12,557.13 allegedly representing income tax. money value of his accrued leave credits is not a part of his salary is further buttressed by
Sec. 3 of PD No. 985, otherwise known as The "Budgetary Reform Decree on
Castaneda filed a formal written claim with petitioner for a refund of the P12,557.13, Compensation and Position Classification of 1976" particularly Sec. 3 (a) thereof, which
contending that the cash equivalent of his terminal leave is exempt from income tax. To makes it clear that the actual service is the period of time for which pay has been
comply with the 2-year prescriptive period within which claims for refund may be filed, received, excluding the period covered by terminal leave.
Castaneda filed on 16 July 1984 with the Court of Tax Appeals (CTA) a Petition for Review,
seeking the refund of income tax withheld from his terminal leave pay. Accordingly, the Court Resolved to (1) ORDER the Fiscal Management and Budget Office to
refund Atty. Zialcita the amount of P59,502.33 which was deducted from his terminal
The CTA found for private respondent Castaneda and ordered the CIR to refund Castaneda leave pay as withholding tax; and (2) Declare that henceforth no withholding tax shall be
the sum of P12,557.13 withheld as income tax. Petitioner appealed the CTA decision. On deducted by any Office of this Court from the terminal leave pay benefits of all retirees
26 September 1990, the CA dismissed the petition for review and affirmed the decision of similarly situated including those who have already retired and from whose retirement
the CTA. benefits such withholding taxes were deducted.
ISSUE: WON terminal leave pay received by a government official or employee on the On September 18, 1990, the Commissioner of Internal Revenue, as intervenor- movant
occasion of his compulsory retirement from the government service is subject to and through the Solicitor General, filed a motion for clarification and/or reconsideration.
withholding (income) tax.
HELD: We resolve the issue in the negative. The Solicitor General, acting on behalf of the ISSUE: Whether commutation of leave credits (commonly known as terminal leave) is
CIR, contends that the terminal leave pay is income derived from employer-employee subject to income tax.
relationship, citing in support of his stand Section 28 of the National Internal Revenue HELD: No.
Code; that as part of the compensation for services rendered, terminal leave pay is REASONS:
actually part of gross income of the recipient. Thus — 1. Applying Section 12 (c) of Commonwealth Act 186, as incorporated into RA 660,
and Section 28 (c) of CA 186, the amount received by Atty. Zialcita as a result of
. . . It (terminal leave pay) cannot be viewed as salary for purposes which would reduce the conversion of these unused leaves into cash is exempt from income tax.
it. . . . there can thus be no "commutation of salary" when a government retiree applies Commonwealth Act No. 186. Section 12(c) of CA 186 states:
... Officials and employees retired under this Act shall be entitled to the commutation of salary increase took effect P1,500.00 salary increase was given to all employees of the
the unused vacation leave and sick leave, based on the highest rate received, which they company, current and retired, effective July 1994. However, when the four retirees
may have to their credit at the time of retirement. demanded theirs, petitioner refused and instead informed them via a letter that their
differentials would be used to offset the tax due on their retirement benefits in accordance
Section 28(c) of the same Act, in turn, provides: with the National Internal Revenue Code (NIRC).
(c) Except as herein otherwise provided, the Government Service Insurance System, all The four (4) retirees filed separate complaints against IBC TV-13 Cebu and Station
benefits granted under this Act, and all its forms and documents required of the members Manager Louella F. Cabañero for unfair labor practice and non-payment of backwages
shall be exempt from all types of taxes, documentary stamps, duties and contributions, before the NLRC, Regional Arbitration Branch VII. The complainants averred that their
fiscal or municipal, direct or indirect, established or to be established; retirement benefits are exempt from income tax under Article 32 of the NIRC.
2. The commutation of leave credits is commonly known as terminal leave. (Manual The Labor Arbiter rendered judgment in favor of the retirees. The retirement benefits of
on Leave Administration Course for Effectiveness, published by the Civil Service complainants Lagahit and Amarilla were exempt from income tax under Section 28(b) of
Commission, p. 17) Terminal leave is applied for by an officer or employee who the NIRC. However, the differentials due to the two complainants were computed three
retires, resigns or is separated from the service through no fault of his own. years backwards due to the law on prescription.
(supra, p. 16) Since terminal leave is applied for by an officer or employee who NLRC affirmed.
has already severed his connection with his employer and who is no longer
working, then it follows that the terminal leave pay, which is the cash value of his ISSUE: Whether or not the retirement benefits of respondents are part of their gross
accumulated leave credits, is no longer compensation for services rendered. It income
cannot be viewed as salary. Whether or not the petitioner is estopped from reneging on its agreement with respondent
to pay for the taxes on said retirement benefits.
3. The terminal leave pay of Atty. Zialcita may likewise be viewed as a "retirement
gratuity received by government officials and employees" which is also another HELD: We agree with petitioner’s contention that, under the CBA, it is not obliged to pay
exclusion from gross income as provided for in Section 28(b), 7(f) of the NLRC. A for the taxes on the respondents’ retirement benefits. We have carefully reviewed the CBA
gratuity is that paid to the beneficiary for past services rendered purely out of and find no provision where petitioner obliged itself to pay the taxes on the retirement
generosity of the giver or grantor. benefits of its employees.
4. Section 284 of the Revised Administrative Code grants to a government We also agree with petitioner’s contention that, under the NIRC, the retirement benefits of
employee 15 days vacation leave and 15 days sick leave for every year of respondents are part of their gross income subject to taxes.
service. Hence, even if the government employee absents himself and exhausts
his leave credits, he is still deemed to have worked and to have rendered For the retirement benefits to be exempt from the withholding tax, the taxpayer is
services. His leave benefits are already imputed in, and form part of, his salary burdened to prove the concurrence of the following elements: (1) a reasonable private
which in turn is subjected to withholding tax on income. He is taxed on the benefit plan is maintained by the employer; (2) the retiring official or employee has been
entirety of his salaries without any deductions for any leaves not utilized. It in the service of the same employer for at least 10 years; (3) the retiring official or
follows then that the money values corresponding to these leave benefits both employee is not less than 50 years of age at the time of his retirement; and (4) the benefit
the used and unused have already been taxed during the year that they were had been availed of only once.
earned. To tax them again when the retiring employee receives their money
value as a form of government concern and appreciation plainly constitutes an While it may indeed be conceded that the previous dispensation of petitioner IBC-13
attempt to tax the employee a second time. This is tantamount to double footed the bill for the withholding taxes, upon discovery by the new management, this
taxation. was stopped altogether as this was grossly prejudicial to the interest of the petitioner IBC-
The 23 August 1990 Resolution (AM 90-6-015-SC), however, specifically applies only to 13. The policy of withholding the taxes due on the differentials as a remedial measure was
employees of the Judiciary who retire, resign or are separated through no fault of their a matter of sound business judgment and dictates of good governance aimed at
own. The resolution cannot be made to apply to other government employees, absent an protecting the interests of the government. Necessarily, the newly-appointed board and
actual case or controversy, as that would be in principle an advisory officers of the petitioner, who learned about this grossly disadvantageous mistake
opinion._____________________________________________________________________________ committed by the former management of petitioner IBC-13 cannot be expected to just
follow suit blindly. An illegal act simply cannot give rise to an obligation. Accordingly, the
INTERCONTINENTAL BROADCASTING CORPORATION (IBC) vs. NOEMI B. new officers were correct in not honoring this highly suspect practice and it is now their
AMARILLA et al duty to rectify this anomalous occurrence, otherwise, they become remiss in the
performance of their sworn
FACTS: Petitioner employed the following persons at its Cebu station: Candido C. responsibilities._________________________________________________________________________
Quiñones, Jr., Corsini R. Lagahit, Anatolio G. Otadoy, and Noemi Amarilla.
On March 1, 1986, the government sequestered the station, including its properties, funds CIR v. MITSUBISHI
and other assets, and took over its management and operations from its owner, Roberto These cases, involving the same issue being contested by the same parties and having
Benedicto. The government and Benedicto entered into a temporary agreement under originated from the same factual antecedents generating the claims for tax credit of
which the latter would retain its management and operation. private respondents, the same were consolidated by resolution of this Court dated May
On November 3, 1990, the Presidential Commission on Good Government (PCGG) and 31, 1989 and are jointly decided herein.
Benedicto executed a Compromise Agreement, where Benedicto transferred and assigned FACTS: The records reflect that on April 17, 1970, Atlas Consolidated Mining and
all his rights, shares and interests in petitioner station to the government. Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with
In the meantime, the four (4) employees retired from the company and received, on Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to
staggered basis, their retirement benefits under the 1993 Collective Bargaining engage in business in the Philippines, for purposes of the projected expansion of the
Agreement (CBA) between petitioner and the bargaining unit of its employees. When a productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi
agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is
currency, for the installation of a new concentrator for copper production. Atlas, in turn complete in itself, does not appear to be suppletory or collateral to another contract and
undertook to sell to Mitsubishi all the copper concentrates produced from said machine for is, therefore, not to be distorted by other considerations aliunde.
a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that
be used for the purchase of the concentrator machinery from Japan. laws granting exemption from tax are construed strictissimi juris against the taxpayer and
Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank liberally in favor of the taxing power. Taxation is the rule and exemption is the exception.
for short) obviously for purposes of its obligation under said contract. Its loan application The burden of proof rests upon the party claiming exemption to prove that it is in fact
was approved on May 26, 1970 in the sum of ¥4,320,000,000.00, at about the same time covered by the exemption so claimed, which onus petitioners have failed to discharge.
as the approval of its loan for ¥2,880,000,000.00 from a consortium of Japanese banks. Significantly, private respondents are not even among the entities which, under Section
The total amount of both loans is equivalent to $20,000,000.00 in United States currency 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be
at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show the party in interest in this case.
that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Definitely, the taxability of a party cannot be blandly glossed over on the basis of a
Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest
copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of governmental operations suffer due to diminution of much needed funds. Otherwise, the
loan by September 30, 1981. mere expedient of having a Philippine corporation enter into a contract for loans or other
Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by domestic securities with private foreign entities, which in turn will negotiate
the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The independently with their governments, could be availed of to take advantage of the tax
corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to exemption law under discussion.
Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as WHEREFORE, the decisions of the Court of Tax Appeals dated April 18, 1980 and January
amended by Presidential Decree No. 131, and duly remitted to the Government. 15, 1981, respectively, are hereby REVERSED and SET
On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum ASIDE._____________________________________________________________
of P1,971,595.01 be applied against their existing and future tax liabilities.
The petitioner not having acted on the claim for tax credit, on April 23, 1976 private CIR v. MARUBENI
respondents filed a petition for review with respondent Court. Facts: Respondent Marubeni Corporation is a foreign corporation organized and existing
On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant under the laws of Japan. It is engaged in general import and export trading, financing and
a tax credit in favor of Atlas in the amount of P1,971,595.01. the construction business. It is duly registered to engage in such business in the
A motion for reconsideration having been denied on August 20, 1980, petitioner Philippines and maintains a branch office in Manila.
interposed an appeal to this Court. Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter
While CTA Case was still pending before the tax court, the corresponding 15% tax on the of authority to examine the books of accounts of the Manila branch office of respondent
amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and corporation for the fiscal year ending March 1985. In the course of the examination,
1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit petitioner found respondent to have undeclared income from two (2) contracts in the
with the petitioner, repeating the same basis for exemption. Philippines, both of which were completed in 1984. One of the contracts was with the
On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax National Development Company (NDC) in connection with the construction and
Appeals. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private installation of a wharf/port complex at the Leyte Industrial Development Estate in the
respondents dated November 12, 1979, denied said claim for tax credit for lack of factual municipality of Isabel, province of Leyte. The other contract was with the Philippine
or legal basis. Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage
On January 15, 1981, relying on its prior ruling, respondent court rendered judgment complex also at the Leyte Industrial Development Estate.
ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for All the materials and equipment transported to the Philippines were inspected and tested
reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution in Japan prior to shipment in accordance with the terms of the contracts. They were
dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by already finished products when shipped to the Philippines.
petitioner with respondent court and a petition for review was filed with this Court on On March 1, 1986, petitioner's revenue examiners recommended an assessment for
December 19, 1987. Said later case is now before us as G.R. No. 80041 and is deficiency income, branch profit remittance, contractor's and commercial broker's taxes.
consolidated with G.R. No. 54908. Respondent questioned this assessment in a letter dated June 5, 1986.
ISSUE/S: 1.Whether or not the interest income from the loans extended to Atlas by On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the petitioner assessing respondent several deficiency taxes.
tax code and, therefore, exempt from withholding tax. Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty
2. Whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered covering unpaid income taxes for the years 1981 to 1985 was issued. The period of the
as the creditor whose investments in the Philippines on loans are exempt from taxes amnesty in E.O. No. 41 was later extended from October 31, 1986 to December 5, 1986
under the code. by E.O. No. 54 dated November 4, 1986. The respondent availed of the amnesty.
RULING: The loan and sales contract between Mitsubishi and Atlas does not contain any It is respondent's other argument that assuming it did not validly avail of the amnesty
direct or inferential reference to Eximbank whatsoever. The agreement is strictly between under the two Executive Orders, it is still not liable for the deficiency contractor's tax
Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper because the income from the projects came from the "Offshore Portion" of the contracts.
concentrates. The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore
Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Portion. All materials and equipment in the contract under the "Offshore Portion" were
Mitsubishi stated in its loan application with the former was that the amount being manufactured and completed in Japan, not in the Philippines, and are therefore not
procured would be used as a loan to and in consideration for importing copper subject to Philippine taxes.
concentrates from Atlas. Issue: Whether or not respondent’s income from the projects is subject to taxing
jurisdiction of the Philippines
Ruling: The service of "design and engineering, supply and delivery, construction, FACTS: In its 1971 original income tax return, Smith Kline declared a net taxable income
erection and installation, supervision, direction and control of testing and commissioning, of 1,482,277, and paid 511,274 as tax due. Among the deductions claimed from gross
coordination. . . " of the two projects involved two taxing jurisdictions. These acts occurred income was 501,040 as its share of the head office overhead expenses. However, on its
in two countries — Japan and the Philippines. amended return filed on March 01, 1973, there was an overpayment of 324,255 “arising
While the construction and installation work were completed within the Philippines, the from under deduction of home office overhead”. It made a formal claim for the refund of
evidence is clear that some pieces of equipment and supplies were completely designed the alleged overpayment. It appears that sometime in October 1972, Smith Kline received
and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile from its international dependent auditors, an authenticated certification to the effect that
equipment for the NDC project and the ammonia storage tanks and refrigeration units the Philippine share in the unallocated overhead expenses of the main office for the year
were made and completed in Japan. ended December 31, 1971 was actually 1,424,484. It further stated in the certification
They were already finished products when shipped to the Philippines. The other that the allocation was made on the basis of the percentage of gross income in the
construction supplies listed under the Offshore Portion such as the steel sheets, pipes and Philippines to gross income of the corporation as a whole. By reason of the new
structures, electrical and instrumental apparatus, these were not finished products when adjustment, Smith Kline’s tax liability was greatly reduced from 511,247 to 168,992
shipped to the Philippines. They, however, were likewise fabricated and manufactured by resulting in an overpayment of 324,255.
the sub-contractors in Japan. All services for the design, fabrication, engineering and
manufacture of the materials and equipment under Japanese Yen Portion I were made and ISSUE: WON the amended return filed by respondents in contrary to law.
completed in Japan. These services were rendered outside the taxing jurisdiction of the HELD: NO. the governing law found in sec. 37 of the NIRC, which reads “Income from
Philippines and are therefore not subject to contractor's sources within the Philippines: xxxxxxx (b) Net income from the sources in the Philippines.
tax.______________________________________________________________________________ From the items specified in subsection (a) of this section there shall be deducted the
expenses, losses, or other deductions which cannot definitely be allocated to some item
CIR vs BOAC or class of gross income. The remainder, if any, shall be included in full as net income
FACTS: British Overseas Airways Corp (BOAC) is a 100% British Government-owned from sources within the Philippines. The ratable part is based upon the ratio of gross
corporation organized and existing under the laws of the United Kingdom. It is engaged in income from sources within the Philippines to the total gross income.
the international airline business. As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. BOAC had no landing Where an expense is clearly related to the production of the Philippine-derived
rights in the Philippines and was not granted a Certificate of Public Convenience except income or to Philippine operations (eg Salaries of Philippine personnel, rental of office
for a nine-month period during 1961 and 1962. Although it did not carry passengers/cargo building in the Philippines), that expenses can be deducted from the gross income
to and from the Philippines, it maintained a general sales agent – Wamer Barnes and Co., acquired in the Philippines without resorting to apportionment. Clearly, the weight of
Ltd and Qantas Airways – which was responsible for selling BOAC tickets. evidence bolsters its position that the amount of 1,427,484 represents the correct ratable
share, the same having been computed pursuant to section 37 (b) and section
The CIR initiated assessments for deficiency taxes against BOAC. After paying under 160.________
protest and denials by the CIR to refund the amount paid, BOAC filed cases with the Tax
Court. The Tax Court held that the proceeds of ticket sales in Wamer and Qantas do not
constitute income from Philippine sources "since no service of carriage of passengers or THE PHILIPPINE GUARANTY CO., INC. v. CIR
freight was performed by BOAC within the Philippines." The CTA position was that income Facts: The Philippine Guaranty Co., Inc., a domestic insurance company, entered into
from transportation is income from services so that the place where services are rendered reinsurance contracts with foreign insurance companies not doing business in the
determines the source. Philippines, thereby ceding to the foreign reinsurers a portion of the premiums on
insurances it has originally underwritten in the Philippines. Philippine Guaranty Co., Inc.
ISSUE: WON the revenue derived by BOAC from ticket sales in the Philippines, constitute ceded to the foreign reinsurers the premiums for 1953 and 1954. Said premiums were
income of BOAC from Philippine sources, and accordingly taxable? excluded by Philippine Guaranty Co., Inc. from its gross income when it filed its income
tax returns for 1953 and 1951. Furthermore, it did not withhold or pay tax on them.
HELD: The SC set aside the decision of the CTA, ordered BOAC to pay the deficiency taxes Consequently, the Commissioner of Internal Revenue assessed Philippine Guaranty Co.,
and denied the refund. The words 'income from any source whatever' disclose a Inc. against withholding tax on the ceded reinsurance premiums. Philippine Guaranty Co.,
legislative policy to include all income not expressly exempted within the class of taxable Inc. protested the assessment on the ground that the premiums are not subject to tax for
income under our laws. The source of an income is the property, activity or service that the premiums did not constitute income from sources within the Philippines because the
produced the income. For the source of income to be considered as coming from the foreign reinsurers did not engage in business in the Philippines, and CIR's previous rulings
Philippines, it is sufficient that the income is derived from activity within the Philippines. In did not require insurance companies to withhold income tax due from foreign companies.
BOAC's case, the sale of tickets in the Philippines is the activity that produces the income.
The tickets exchanged hands here and payments for fares were also made here in ISSUE: Are insurance companies required to withhold tax on reinsurance premiums ceded
Philippine currency. The site of the source of payments is the Philippines. The flow of to foreign insurance companies?
wealth proceeded from, and occurred within, Philippine territory, enjoying the protection Ruling: Yes. The reinsurance contracts however show that the transactions or activities
accorded by the Philippine government. In consideration of such protection, the flow of that constituted the undertaking to reinsure Philippine Guaranty Co., Inc. against losses
wealth should share the burden of supporting the government. arising from the original insurances in the Philippines were performed in the Philippines.
The reinsurance premiums were income created from the undertaking of the foreign
The absence of flight operations to and from the Philippines is not determinative of the reinsurance companies to reinsure Philippine Guaranty Co., Inc. against liability for loss
source of income or the site of income taxation. Admittedly, BOAC was an off-line under original insurances. Such undertaking, as explained above, took place in the
international airline at the time pertinent to this case. The test of taxability is the Philippines. These insurance premiums therefore came from sources within the Philippines
"source"; and the source of an income is that activity which produced the income. and, hence, are subject to corporate income tax.