China

Banking Corporation v CA

Facts: China Banking Corporation made a 53% equity investment (P16,227,851.80)
in the First CBC Capital – a Hongkong subsidiary engaged in financing and
investment with “deposit-taking” function.

It was shown that CBC has become insolvent so China Banking wrote-off its
investment as worthless and treated it as a bad debt or as an ordinary loss
deductible from its gross income.

CIR disallowed the deduction on the ground that the investment should not be
classified as being worthless. It also held that assuming that the securities were
worthless, then they should be classified as a capital loss and not as a bad debt since
there was no indebtedness between China Banking and CBC.

Issue: Whether or not the investment should be classified as a capital loss.

Held: Yes. Section 29.d.4.B of the NIRC contains provisions on securities becoming
worthless. It conveys that capital loss normally requires the concurrence of 2
conditions:
a. there is a sale or exchange
b. the thing sold or exchanges is a capital asset.

When securities become worthless, there is strictly no sale or exchange but the law
deems it to be a loss. These are allowed to be deducted only to the extent of capital
gains and not from any other income of the taxpayer. A similar kind of treatment is
given by the NIRC on the retirement of certificates of indebtedness with interest
coupons or in registered form, short sales and options to buy or sell property where
no sale or exchange strictly exists. In these cases, The NIRC dispenses with the
standard requirements.

There is ordinary loss when the property sold is not a capital asset.

In the case, CBC as an investee corporation, is a subsidiary corporation of China
Banking whose shares in CBC are not intended for purchase or sale but as an
investment. An equity investment is a capital asset of the investor. Unquestionably,
any loss is a capital loss to the investor.

--
Additional notes:
*The loss cannot be deductible as bad debt since the shares of stock do not
constitute a loan extended by it to its subsidiary or a debt subject to obligatory
repayment by the latter.



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

Facts: Respondent corporation General Foods (Phils), which is engaged in the
manufacture of “Tang”, “Calumet” and “Kool-Aid”, filed its income tax return for the
fiscal year ending February 1985 and claimed as deduction, among other business
expenses, P9,461,246 for media advertising for “Tang”.

The Commissioner disallowed 50% of the deduction claimed and assessed
deficiency income taxes of P2,635,141.42 against General Foods, prompting the
latter to file an MR which was denied.

General Foods later on filed a petition for review at CA, which reversed and set aside
an earlier decision by CTA dismissing the company’s appeal.

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

Held: No. Tax exemptions must be construed in stricissimi juris against the taxpayer
and liberally in favor of the taxing authority, and he who claims an exemption must
be able to justify his claim by the clearest grant of organic or statute law. Deductions
for income taxes partake of the nature of tax exemptions; hence, if tax exemptions
are strictly construed, then deductions must also be strictly construed.

To be deductible from gross income, the subject advertising expense must comply
with the following requisites: (a) the expense must be ordinary and necessary; (b) it
must have been paid or incurred during the taxable year; (c) it must have been paid
or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.

While the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business,
hence necessary, the parties’ views conflict as to whether or not it was ordinary. To
be deductible, an advertising expense should not only be necessary but also
ordinary.

The Commissioner maintains that the subject advertising expense was not ordinary
on the ground that it failed the two conditions set by U.S. jurisprudence: first,
“reasonableness” of the amount incurred and second, the amount incurred must not
be a capital outlay to create “goodwill” for the product and/or private respondent’s
business. Otherwise, the expense must be considered a capital expenditure to be
spread out over a reasonable time.

There is yet to be a clear-cut criteria or fixed test for determining the
reasonableness of an advertising expense. There being no hard and fast rule on the
matter, the right to a deduction depends on a number of factors such as but not
limited to: the type and size of business in which the taxpayer is engaged; the
volume and amount of its net earnings; the nature of the expenditure itself; the
intention of the taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a proper
evaluation.

The Court finds the subject expense for the advertisement of a single product to be
inordinately large. Therefore, even if it is necessary, it cannot be considered an
ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future
sale of merchandise or use of services. The second type involves expenditures
incurred, in whole or in part, to create or maintain some form of goodwill for the
taxpayer’s trade or business or for the industry or profession of which the taxpayer
is a member. If the expenditures are for the advertising of the first kind, then, except
as to the question of the reasonableness of amount, there is no doubt such
expenditures are deductible as business expenses. If, however, the expenditures are
for advertising of the second kind, then normally they should be spread out over a
reasonable period of time.

The company’s media advertising expense for the promotion of a single product is
doubtlessly unreasonable considering it comprises almost one-half of the company’s
entire claim for marketing expenses for that year under review. Petition granted,
judgment reversed and set aside.





















CIR vs. PAL [504 SCRA 90]

Facts: A franchise is a legislative grant to operate a public utility. In the present case,
P.D. 1590 granted PAL an option to pay the lower of two alternatives: (a) “the basic
corporate income tax based on PAL’s annual net taxable income computed in
accordance with the provisions of the NIRC” or (b) “a franchise tax of 2% of gross
revenues.” Availment of either of these two alternatives shall exempt the airline
from the payment of “all other taxes” including the 20 percent final withholding tax
on bank deposits. On Nov. 5, 1997, PAL’s AVP-Revenue filed with the CIR a written
request for refund in the amount of P2M, which represents the total amount of 20%
final withholding tax withheld from the respondent by various withholding agent
banks. CTA ruled PAL was not entitled to refund. The CA held that PAL was bound to
pay only either (A) or (B); that Sec. 13 of PD 1590 exempts respondent form paying
all other taxes, duties, royalties and other feeds of any kind. Having chosen to pay its
corporate income tax liability, respondent should now be exempt from paying all
other taxes including the final withholding tax.

Issue: Whether the CA erred on a question of law ruling that the “in lieu of all other
taxes” provisions in Sec. 13 of PD No. 1590 applies even if there were in fact no taxes
paid under any of subsections (A) and (B) of the said decree.

Held: Note that the tax liability of PAL under the option it chose (Item ‘a’ of Sec. 13 of
PD 1590) is to be “computed in accordance with the provisions of the NIRC”.
“Taxable income” means the pertinent items of gross income specified in the Tax
Code, less the deductions and/or personal and additional exemptions, if any,
authorized for these types of income. Under Sec. 32 of the Tax Code, gross income
means income derived from whatever source, including compensation for services;
the conduct of trade or business or the exercise of a profession; dealings in
property; interests; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and a partner’s distributive share in the net income of a general
professional partnership. Sec. 34 enumerates the allowable deductions; Sec. 35,
personal and additional exemptions.

The definition of gross income is broad enough to include all passive incomes
subject to specific rates or final taxes. However, since these passive incomes are
already subject to different rates and taxed finally at source, they are no longer
included in the computation of gross income, which determines taxable income.

Thus, PAL’s franchise exempts it from paying any tax other than the option it
chooses: either the “basic corporate income tax” or the 2% gross revenue tax.






SOUTH AFRICAN AIRWAYS VS. CIR February 16, 2010

Facts: Petitioner South African Airways is a foreign corporation organized and
existing under and by virtue of the laws of the Republic of South Africa. Its principal
office is located at Airways Park, Jones Road, Johannesburg International Airport,
South Africa. In the Philippines, it is an internal air carrier having no landing rights
in the country. Petitioner has a general sales agent in the Philippines, Aerotel
Limited Corporation (Aerotel). Aerotel sells passage documents for compensation or
commission for petitioner’s off-line flights for the carriage of passengers and cargo
between ports or points outside the territorial jurisdiction of the Philippines.
Petitioner is not registered with the Securities and Exchange Commission as a
corporation, branch office, or partnership. It is not licensed to do business in the
Philippines. It paid a corporate tax in the rate of 32% of its gross billings. However,
it subsequently claim for refund contending that its income should be taxed at the
rate of 2 1/2% of its gross billings.

Issue: whether or not petitioner’s income is sourced within the Philippines and is to
be taxed at 32% of the gross billings?

Held: Yes! In the instant case, the general rule is that resident foreign corporations
shall be liable for a 32% income tax on their income from within the Philippines,
except for resident foreign corporations that are international carriers that derive
income “from carriage of persons, excess baggage, cargo and mail originating from
the Philippines” which shall be taxed at 2 1/2% of their Gross Philippine Billings.
Petitioner, being an international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, petitioner must fall under the
general rule. This principle is embodied in the Latin maxim, exception firmat
regulam in casibus non exceptis, which means, a thing not being excepted must be
regarded as coming within the purview of the general rule.

To reiterate, the correct interpretation of the above provisions is that, if an
international air carrier maintains flights to and from the Philippines, it shall be
taxed at the rate of 2 1/2% of its Gross Philippine Billings, while international air
carriers that do not have flights to and from the Philippines but nonetheless earn
income from other activities in the country will be taxed at the rate of 32% of such
income.










G.R. No. 178788
United Airlines vs. Commissioner of Internal Revenue
September 29, 2009

Facts: International airline, petitioner United Airlines, filed a claim for income tax
refund. Petitioner sought to be refunded the erroneously collected income tax from
in the amount of P5,028,813.23 on passenger revenue from tickets sold in the
Philippines, the uplifts of which did not originate in the Philippines. The airlines
ceased operation originating form the Philippines since February 21, 1998.

Court of tAx appeals ruled the petitioner is not entitled to a refund because under
the NIRC, income tax on GPB also includes gross revenue from carriage of cargoes
from the Philippines. And upon assessment by the CTA, it was found out that
petitioner deducted items from its cargo revenues which should have entitled the
government to an amount of P 31.43 million, which is obviously higher than the
amount the petitioner prayed to be refunded.

Petitioner argued that the petitioner’s supposed underpayment cannot offset his
claim to a refund as established by well-settled jurisprudence.

Issue: Whether or not petitioner is entitled to a refund?

HELD: Petitioner was correct in averring that his claim to a refund cannot be subject
to offsetting or, as it claimed the offsetting to be, a legal compensation under Sec.
28(A)(3)(a)

“Petitioner’s (similar) tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable
under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the
correctness of the return filed by petitioner is now put in doubt. As such, we(the
court) cannot grant the prayer for a refund.”

The court held that the petitioner is not entitled to a refund, Having underpaid the
GPB tax due on its cargo revenues for 1999, the amount of the former being even
much higher (P31.43 million) than the tax refund sought (P5.2 million).

Relevant note:

The Court have consistently ruled that there can be no off-setting [or
compensation”] of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being collected. The collection
of a tax cannot await the results of a lawsuit against the government.(francia vs
Intermediate appellate court)


The grant of a refund is founded on the assumption that the tax return is valid, that
is, the facts stated therein are true and correct. The deficiency assessment, although
not yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the refund. (CIR vs
CTA)