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.