Gross Income-Tax Base Cases
Gross Income-Tax Base Cases
Gross Income-Tax Base Cases
Other income:
4,136.23
Deficiency tax still due & assessable ............................
P4,426.24
1949:
1950:
1951:
Net income per return ..................................
P32,605.83
Add: house rental allowance from AIU
5,782.91
Net income per investigation ............................................
P83,388.74
Less: Personal exemption .................................................
3,000.00
Amount of income subject to tax ....................................
P35,388.74
Tax due thereon ................................................................
P 8,560.00
Less: tax already assessed and paid per O.R. Nos. A33250
& 383318 .......................
6,502.00
Deficiency tax due ..................
P2,058.00
1952:
PADILLA, J.:p
The issue to be resolved in this petition for review on certiorari is whether or
not terminal leave pay received by a government official or employee on the
occasion of his compulsory retirement from the government service is subject
to withholding (income) tax.
We resolve the issue in the negative.
Private respondent Efren P. Castaneda retired from the government service
as Revenue Attache in the Philippine Embassy in London, England, on 10
December 1982 under the provisions of Section 12 (c) of Commonwealth Act
186, as amended. Upon retirement, he received, among other benefits,
terminal leave pay from which petitioner Commissioner of Internal Revenue
withheld P12,557.13 allegedly representing income tax thereon.
Castaneda filed a formal written claim with petitioner for a refund of the
P12,557.13, contending that the cash equivalent of his terminal leave is
exempt from income tax. To comply with the two-year prescriptive period
within which claims for refund may be filed, Castaneda filed on 16 July 1984
with the Court of Tax Appeals a Petition for Review, seeking the refund of
income tax withheld from his terminal leave pay.
The Court of Tax Appeals found for private respondent Castaneda and
ordered the Commissioner of Internal Revenue to refund Castaneda the sum
of P12,557.13 withheld as income tax. (,Annex "C", petition).
Petitioner appealed the above-mentioned Court of Tax Appeals decision to
this Court, which was docketed as G.R. No. 80320. In turn, we referred the
case to the Court of Appeals for resolution. The case was docketed in the
Court of Appeals as CA-G.R. SP No. 20482.
On 26 September 1990, the Court of Appeals dismissed the petition for
review and affirmed the decision of the Court of Tax Appeals. Hence, the
present recourse by the Commissioner of Internal Revenue.
The Solicitor General, acting on behalf of the Commissioner of Internal
Revenue, contends that the terminal leave pay is income derived from
employer-employee relationship, citing in support of his stand Section 28 of
the National Internal Revenue Code; that as part of the compensation for
services rendered, terminal leave pay is actually part of gross income of the
recipient. Thus
. . . It (terminal leave pay) cannot be viewed as salary for purposes which
would reduce it. . . . there can thus be no "commutation of salary" when a
government retiree applies for terminal leave because he is not receiving it as
salary. What he applies for is a "commutation of leave credits." It is an
accumulation of credits intended for old age or separation from service. . . .
The Court has already ruled that the terminal leave pay received by a
government official or employee is not subject to withholding (income) tax. In
the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., G.R. No. 96032, 31 July 1991, the Court explained the
rationale behind the employee's entitlement to an exemption from withholding
(income) tax on his terminal leave pay as follows:
. . . commutation of leave credits, more commonly known as terminal leave,
is applied for by an officer or employee who retires, resigns or is separated
from the service through no fault of his own. (Manual on Leave Administration
Course for Effectiveness published by the Civil Service Commission, pages
16-17). In the exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The Government recognizes
that for most public servants, retirement pay is always less than generous if
not meager and scrimpy. A modest nest egg which the senior citizen may
look forward to is thus avoided. Terminal leave payments are given not only
at the same time but also for the same policy considerations governing
retirement benefits.
In fine, not being part of the gross salary or income of a government official or
employee but a retirement benefit, terminal leave pay is not subject to income
tax.
ACCORDINGLY, the petition for review is hereby DENIED.
SO ORDERED.
However,ifacorporationcancelsorredeemsstockissuedasadividendat
suchtimeandinsuchmannerastomakethedistributionandcancellation
orredemption,inwholeorinpart,essentiallyequivalenttothe
distributionofataxabledividend,theamountsodistributedinredemption
orcancellationofthestockshallbeconsideredastaxableincometothe
extentitrepresentsadistributionofearningsorprofitsaccumulatedafter
Marchfirst,nineteenhundredandthirteen.(Emphasissupplied).
InaresponsetotherulingoftheAmericanSupremeCourtinthecaseof
Eisnerv.Macomber[if!supportFootnotes][75][endif](thatproratastockdividendsarenot
taxableincome),theexemptingclauseabovequotedwasaddedbecause
corporationsfoundaloopholeintheoriginalprovision.Theyresortedto
deviousmeanstocircumventthelawandevadethetax.Corporate
earningswouldbedistributedundertheguiseofitsinitialcapitalizationby
declaringthestockdividendspreviouslyissuedandlaterredeemsaid
dividendsbypayingcashtothestockholder.Thisprocessofissuance
redemptionamountstoadistributionoftaxablecashdividendswhichwas
justdelayedsoastoescapethetax.Itbecomesaconvenienttechnical
strategytoavoidtheeffectsoftaxation.
Thus,toplugtheloopholetheexemptingclausewasadded.Itprovides
thattheredemptionorcancellationofstockdividends,dependingonthe
timeandmanneritwasmadeisessentiallyequivalenttoadistributionof
taxabledividends,makingtheproceedsthereoftaxableincometothe
extentitrepresentsprofits.Theexceptionwasdesignedtopreventthe
issuanceandcancellationorredemptionofstockdividends,whichis
fundamentallynottaxable,frombeingmadeuseofasadeviceforthe
actualdistributionofcashdividends,whichistaxable.[if!supportFootnotes][76][endif]
Thus,
theprovisionhadtheobviouspurposeofpreventingacorporationfrom
avoidingdividendtaxtreatmentbydistributingearningstoitsshareholders
intwotransactionsaproratastockdividendfollowedbyaprorata
redemptionthatwouldhavethesameeconomicconsequencesasasimple
dividend.[if!supportFootnotes][77][endif]
Although redemption and cancellation are generally considered capital
transactions, as such, they are not subject to tax. However, it does not
necessarily mean that a shareholder may not realize a taxable gain from
such transactions.[if !supportFootnotes][78][endif] Simply put, depending on the
circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes the
absolute property of the stockholder. Thereafter, the latter becomes the
exclusive owner thereof and can exercise the freedom of choice [if !supportFootnotes]
[79][endif]
Having realized gain from that redemption, the income earner cannot
escape income tax.[if !supportFootnotes][80][endif]
As qualified by the phrase such time and in such manner, the
exception was not intended to characterize as taxable dividend every
distribution of earnings arising from the redemption of stock dividends. [if !
supportFootnotes][81][endif]
So that, whether the amount distributed in the redemption
should be treated as the equivalent of a taxable dividend is a question of
fact,[if !supportFootnotes][82][endif] which is determinable on the basis of the particular
facts of the transaction in question.[if !supportFootnotes][83][endif] No decisive test can be
used to determine the application of the exemption under Section 83(b)
The use of the words such manner and essentially equivalent negative any
idea that a weighted formula can resolve a crucial issue Should the
distribution be treated as taxable dividend. [if !supportFootnotes][84][endif] On this aspect,
American courts developed certain recognized criteria, which includes the
following:[if !supportFootnotes][85][endif]
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular
dividend and the corporations past record with respect to the declaration of
dividends,
3) the effect of the distribution as compared with the declaration of regular
dividend,
4) the lapse of time between issuance and redemption,[if !supportFootnotes][86][endif]
5) the presence of a substantial surplus[if !supportFootnotes][87][endif] and a generous supply of
cash which invites suspicion as does a meager policy in relation both to current
earnings and accumulated surplus.[if !supportFootnotes][88][endif]
REDEMPTION AND CANCELLATION
The two purposes invoked by ANSCOR under the facts of this case
are no excuse for its tax liability. First, the alleged filipinization plan
cannot be considered legitimate as it was not implemented until the BIR
started making assessments on the proceeds of the redemption. Such
corporate plan was not stated in nor supported by any Board Resolution
but a mere afterthought interposed by the counsel of ANSCOR. Being a
separate entity, the corporation can act only through its Board of Directors.
[if !supportFootnotes][117][endif]
The Board Resolutions authorizing the redemptions state
only one purpose reduction of foreign exchange remittances in case cash
dividends are declared. Not even this purpose can be given credence.
Records show that despite the existence of enormous corporate profits no
cash dividend was ever declared by ANSCOR from 1945 until the BIR
started making assessments in the early 1970s. Although a corporation
under certain exceptions, has the prerogative when to issue dividends, yet
when no cash dividends was issued for about three decades, this
circumstance negates the legitimacy of ANSCORs alleged purposes.
Moreover, to issue stock dividends is to increase the shareholdings of
ANSCORs foreign stockholders contrary to its filipinization plan. This
would also increase rather than reduce their need for foreign exchange
remittances in case of cash dividend declaration, considering that
ANSCOR is a family corporation where the majority shares at the time of
redemptions were held by Don Andres foreign heirs.
Secondly, assuming arguendo, that those business purposes are
legitimate, the same cannot be a valid excuse for the imposition of tax.
Otherwise, the taxpayers liability to pay income tax would be made to
depend upon a third person who did not earn the income being taxed.
Furthermore, even if the said purposes support the redemption and justify
the issuance of stock dividends, the same has no bearing whatsoever on the
imposition of the tax herein assessed because the proceeds of the
redemption are deemed taxable dividends since it was shown that income
was generated therefrom.
Thirdly, ANSCOR argued that to treat as taxable dividend the
proceeds of the redeemed stock dividends would be to impose on such
stock an undisclosed lien and would be extremely unfair to intervening
purchasers, i.e. those who buys the stock dividends after their issuance. [if !
supportFootnotes][118][endif]
Such argument, however, bears no relevance in this case as
no intervening buyer is involved. And even if there is an intervening buyer,
it is necessary to look into the factual milieu of the case if income was
realized from the transaction. Again, we reiterate that the dividend
equivalence test depends on such time and manner of the transaction and
its net effect. The undisclosed lien[if !supportFootnotes][119][endif] may be unfair to a
subsequent stock buyer who has no capital interest in the company. But the
unfairness may not be true to an original subscriber like Don Andres, who
holds stock dividends as gains from his investments. The subsequent buyer
who buys stock dividends is investing capital. It just so happen that what
he bought is stock dividends. The effect of its (stock dividends)
redemption from that subsequent buyer is merely to return his capital
subscription, which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the
issuance and redemption of stock dividends were made, there is no other
conclusion but that the proceeds thereof are essentially considered
equivalent to a distribution of taxable dividends. As taxable dividend under
Section 83(b), it is part of the entire income subject to tax under Section 22
in relation to Section 21[if !supportFootnotes][120][endif] of the 1939 Code. Moreover,
under Section 29(a) of said Code, dividends are included in gross income.
As income, it is subject to income tax which is required to be withheld at
source. The 1997 Tax Code may have altered the situation but it does not
change this disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES[if !
supportFootnotes][121][endif]
Exchange is an act of taking or giving one thing for another [if !supportFootnotes]
[122][endif]
involving reciprocal transfer[if !supportFootnotes][123][endif] and is generally
considered as a taxable transaction. The exchange of common stocks with
preferred stocks, or preferred for common or a combination of either for
both, may not produce a recognized gain or loss, so long as the provisions
of Section 83(b) is not applicable. This is true in a trade between two (2)
persons as well as a trade between a stockholder and a corporation. In
general, this trade must be parts of merger, transfer to controlled
corporation, corporate acquisitions or corporate reorganizations. No
taxable gain or loss may be recognized on exchange of property, stock or
securities related to reorganizations.[if !supportFootnotes][124][endif]
Both the Tax Court and the Court of Appeals found that ANSCOR
reclassified its shares into common and preferred, and that parts of the
common shares of the Don Andres estate and all of Doa Carmens shares
were exchanged for the whole 150, 000 preferred shares. Thereafter, both
the Don Andres estate and Doa Carmen remained as corporate subscribers
except that their subscriptions now include preferred shares. There was no
change in their proportional interest after the exchange. There was no cash
flow. Both stocks had the same par value. Under the facts herein, any
difference in their market value would be immaterial at the time of
exchange because no income is yet realized it was a mere corporate paper
transaction. It would have been different, if the exchange transaction
resulted into a flow of wealth, in which case income tax may be imposed.
[if !supportFootnotes][125][endif]
DEDUCTIONS
CRUZ, J.:
On appeal before us is the decision of the Court of Tax Appeals 1 denying
petitioner's claims for refund of overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558 respectively.
I
In CTA Case No. 1251, petitioner ESSO deducted from its gross income for
1959, as part of its ordinary and necessary business expenses, the amount it
had spent for drilling and exploration of its petroleum concessions. This claim
was disallowed by the respondent Commissioner of Internal Revenue on the
ground that the expenses should be capitalized and might be written off as a
loss only when a "dry hole" should result. ESSO then filed an amended return
where it asked for the refund of P323,279.00 by reason of its abandonment
as dry holes of several of its oil wells. Also claimed as ordinary and necessary
expenses in the same return was the amount of P340,822.04, representing
margin fees it had paid to the Central Bank on its profit remittances to its New
York head office.
On August 5, 1964, the CIR granted a tax credit of P221,033.00 only,
disallowing the claimed deduction for the margin fees paid.
In CTA Case No. 1558, the CR assessed ESSO a deficiency income tax for
the year 1960, in the amount of P367,994.00, plus 18% interest thereon of
P66,238.92 for the period from April 18,1961 to April 18, 1964, for a total of
P434,232.92. The deficiency arose from the disallowance of the margin fees
of Pl,226,647.72 paid by ESSO to the Central Bank on its profit remittances to
its New York head office.
ESSO settled this deficiency assessment on August 10, 1964, by applying the
tax credit of P221,033.00 representing its overpayment on its income tax for
1959 and paying under protest the additional amount of P213,201.92. On
August 13, 1964, it claimed the refund of P39,787.94 as overpayment on the
interest on its deficiency income tax. It argued that the 18% interest should
have been imposed not on the total deficiency of P367,944.00 but only on the
amount of P146,961.00, the difference between the total deficiency and its
tax credit of P221,033.00.
This claim was denied by the CIR, who insisted on charging the 18% interest
on the entire amount of the deficiency tax. On May 4,1965, the CIR also
denied the claims of ESSO for refund of the overpayment of its 1959 and
1960 income taxes, holding that the margin fees paid to the Central Bank
could not be considered taxes or allowed as deductible business expenses.
ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959,
contending that the margin fees were deductible from gross income either as
a tax or as an ordinary and necessary business expense. It also claimed an
overpayment of its tax by P434,232.92 in 1960, for the same reason.
Additionally, ESSO argued that even if the amount paid as margin fees were
not legally deductible, there was still an overpayment by P39,787.94 for 1960,
representing excess interest.
After trial, the CTA denied petitioner's claim for refund of P102,246.00 for
1959 and P434,234.92 for 1960 but sustained its claim for P39,787.94 as
excess interest. This portion of the decision was appealed by the CIR but was
affirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R.
No. L-28502- 03, promulgated on April 18, 1989. ESSO for its part appealed
the CTA decision denying its claims for the refund of the margin fees
P102,246.00 for 1959 and P434,234.92 for 1960. That is the issue now
before us.
II
The first question we must settle is whether R.A. 2009, entitled An Act to
Authorize the Central Bank of the Philippines to Establish a Margin Over
Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue
measure. If it is a revenue measure, the margin fees paid by the petitioner to
the Central Bank on its profit remittances to its New York head office should
be deductible from ESSO's gross income under Sec. 30(c) of the National
Internal Revenue Code. This provides that all taxes paid or accrued during or
within the taxable year and which are related to the taxpayer's trade,
business or profession are deductible from gross income.
The petitioner maintains that margin fees are taxes and cites the background
and legislative history of the Margin Fee Law showing that R.A. 2609 was
nothing less than a revival of the 17% excise tax on foreign exchange
imposed by R.A. 601. This was a revenue measure formally proposed by
President Carlos P. Garcia to Congress as part of, and in order to balance,
the budget for 1959-1960. It was enacted by Congress as such and,
significantly, properly originated in the House of Representatives. During its
two and a half years of existence, the measure was one of the major sources
of revenue used to finance the ordinary operating expenditures of the
government. It was, moreover, payable out of the General Fund.
On the claimed legislative intent, the Court of Tax Appeals, quoting
established principles, pointed out that
We are not unmindful of the rule that opinions expressed in debates, actual
proceedings of the legislature, steps taken in the enactment of a law, or the
history of the passage of the law through the legislature, may be resorted to
as an aid in the interpretation of a statute which is ambiguous or of doubtful
meaning. The courts may take into consideration the facts leading up to,
coincident with, and in any way connected with, the passage of the act, in
order that they may properly interpret the legislative intent. But it is also well-
settled jurisprudence that only in extremely doubtful matters of interpretation
does the legislative history of an act of Congress become important. As a
matter of fact, there may be no resort to the legislative history of the
enactment of a statute, the language of which is plain and unambiguous,
since such legislative history may only be resorted to for the purpose of
solving doubt, not for the purpose of creating it. [50 Am. Jur. 328.]
Apart from the above consideration, there are at least two cases where we
have held that a margin fee is not a tax but an exaction designed to curb the
excessive demands upon our international reserve.
In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated
through Justice Jose P. Bengzon:
A margin levy on foreign exchange is a form of exchange control or restriction
designed to discourage imports and encourage exports, and ultimately,
'curtail any excessive demand upon the international reserve' in order to
stabilize the currency. Originally adopted to cope with balance of payment
pressures, exchange restrictions have come to serve various purposes, such
as limiting non-essential imports, protecting domestic industry and when
combined with the use of multiple currency rates providing a source of
revenue to the government, and are in many developing countries regarded
as a more or less inevitable concomitant of their economic development
programs. The different measures of exchange control or restriction cover
different phases of foreign exchange transactions, i.e., in quantitative
restriction, the control is on the amount of foreign exchange allowable. In the
case of the margin levy, the immediate impact is on the rate of foreign
exchange; in fact, its main function is to control the exchange rate without
changing the par value of the peso as fixed in the Bretton Woods Agreement
Act. For a member nation is not supposed to alter its exchange rate (at par
value) to correct a merely temporary disequilibrium in its balance of
payments. By its nature, the margin levy is part of the rate of exchange as
fixed by the government.
As to the contention that the margin levy is a tax on the purchase of foreign
exchange and hence should not form part of the exchange rate, suffice it to
state that We have already held the contrary for the reason that a tax is levied
to provide revenue for government operations, while the proceeds of the
margin fee are applied to strengthen our country's international reserves.
Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v.
Central Bank, 3 the same idea was expressed, though in connection with a
different levy, through Justice J.B.L. Reyes:
Neither do we find merit in the argument that the 20% retention of exporter's
foreign exchange constitutes an export tax. A tax is a levy for the purpose of
providing revenue for government operations, while the proceeds of the 20%
retention, as we have seen, are applied to strengthen the Central Bank's
international reserve.
We conclude then that the margin fee was imposed by the State in the
exercise of its police power and not the power of taxation.
Alternatively, ESSO prays that if margin fees are not taxes, they should
nevertheless be considered necessary and ordinary business expenses and
therefore still deductible from its gross income. The fees were paid for the
remittance by ESSO as part of the profits to the head office in the Unites
States. Such remittance was an expenditure necessary and proper for the
conduct of its corporate affairs.
The applicable provision is Section 30(a) of the National Internal Revenue
Code reading as follows:
SEC. 30. Deductions from gross income in computing net income there shall
be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; traveling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments required to be
made as a condition to the continued use or possession, for the purpose of
the trade or business, of property to which the taxpayer has not taken or is
not taking title or in which he has no equity.
(2) Expenses allowable to non-resident alien individuals and foreign
corporations. In the case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the necessary expenses paid or
incurred in carrying on any business or trade conducted within the Philippines
exclusively.
In the case of Atlas Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, 4 the Court laid down the rules on the
deductibility of business expenses, thus:
The principle is recognized that when a taxpayer claims a deduction, he must
point to some specific provision of the statute in which that deduction is
authorized and must be able to prove that he is entitled to the deduction
which the law allows. As previously adverted to, the law allowing expenses as
deduction from gross income for purposes of the income tax is Section 30(a)
(1) of the National Internal Revenue which allows a deduction of 'all the
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business.' An item of expenditure, in order to be
deductible under this section of the statute, must fall squarely within its
language.
We come, then, to the statutory test of deductibility where it is axiomatic that
to be deductible as a business expense, three conditions are imposed,
namely: (1) the expense must be ordinary and necessary, (2) it must be paid
or incurred within the taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only must the taxpayer meet
the business test, he must substantially prove by evidence or records the
deductions claimed under the law, otherwise, the same will be disallowed.
The mere allegation of the taxpayer that an item of expense is ordinary and
necessary does not justify its deduction.
While it is true that there is a number of decisions in the United States delving
on the interpretation of the terms 'ordinary and necessary' as used in the
federal tax laws, no adequate or satisfactory definition of those terms is
possible. Similarly, this Court has never attempted to define with precision the
terms 'ordinary and necessary.' There are however, certain guiding principles
worthy of serious consideration in the proper adjudication of conflicting
claims. Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of the taxpayer's
business. It is 'ordinary' when it connotes a payment which is normal in
relation to the business of the taxpayer and the surrounding circumstances.
The term 'ordinary' does not require that the payments be habitual or normal
in the sense that the same taxpayer will have to make them often; the
payment may be unique or non-recurring to the particular taxpayer affected.
There is thus no hard and fast rule on the matter. The right to a deduction
depends in each case on the particular facts and the relation of the payment
to the type of business in which the taxpayer is engaged. The intention of the
taxpayer often may be the controlling fact in making the determination.
Assuming that the expenditure is ordinary and necessary in the operation of
the taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must be
determined from the nature of the expenditure itself, which in turn depends on
the extent and permanency of the work accomplished by the expenditure.
In the light of the above explanation, we hold that the Court of Tax Appeals
did not err when it held on this issue as follows:
Considering the foregoing test of what constitutes an ordinary and necessary
deductible expense, it may be asked: Were the margin fees paid by petitioner
on its profit remittance to its Head Office in New York appropriate and helpful
in the taxpayer's business in the Philippines? Were the margin fees incurred
for purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines? Or were the margin fees incurred for the purpose of realizing a
profit or of minimizing a loss in the Philippines? Obviously not. As stated in
the Lopez case, the margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the Philippines. They were
expenses incurred in the disposition of said incomes; expenses for the
remittance of funds after they have already been earned by petitioner's
branch in the Philippines for the disposal of its Head Office in New York which
is already another distinct and separate income taxpayer.
xxx
Since the margin fees in question were incurred for the remittance of funds to
petitioner's Head Office in New York, which is a separate and distinct income
taxpayer from the branch in the Philippines, for its disposal abroad, it can
never be said therefore that the margin fees were appropriate and helpful in
the development of petitioner's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs of petitioner's
branch in the Philippines exclusively or for the purpose of realizing a profit or
of minimizing a loss in the Philippines exclusively. If at all, the margin fees
were incurred for purposes proper to the conduct of the corporate affairs of
Standard Vacuum Oil Company in New York, but certainly not in the
Philippines.
ESSO has not shown that the remittance to the head office of part of its
profits was made in furtherance of its own trade or business. The petitioner
merely presumed that all corporate expenses are necessary and appropriate
in the absence of a showing that they are illegal or ultra vires. This is error.
The public respondent is correct when it asserts that "the paramount rule is
that claims for deductions are a matter of legislative grace and do not turn on
mere equitable considerations ... . The taxpayer in every instance has the
burden of justifying the allowance of any deduction claimed." 5
It is clear that ESSO, having assumed an expense properly attributable to its
head office, cannot now claim this as an ordinary and necessary expense
paid or incurred in carrying on its own trade or business.
WHEREFORE, the decision of the Court of Tax Appeals denying the
petitioner's claims for refund of P102,246.00 for 1959 and P434,234.92 for
1960, is AFFIRMED, with costs against the petitioner.
AQUINO, J.:
This case is about the refund of a 1971 income tax amounting to P324,255.
Smith Kline and French Overseas Company, a multinational firm domiciled in
Philadelphia, Pennsylvania, is licensed to do business in the Philippines. It is
engaged in the importation, manufacture and sale of pharmaceuticals drugs
and chemicals.
In its 1971 original income tax return, Smith Kline declared a net taxable
income of P1,489,277 (Exh. A) and paid P511,247 as tax due. Among the
deductions claimed from gross income was P501,040 ($77,060) as its share
of the head office overhead expenses. However, in its amended return filed
on March 1, 1973, there was an overpayment of P324,255 "arising from
underdeduction of home office overhead" (Exh. E). It made a formal claim for
the refund of the alleged overpayment.
It appears that sometime in October, 1972, Smith Kline received from its
international independent auditors, Peat, Marwick, Mitchell and Company, an
authenticated certification to the effect that the Philippine share in the
unallocated overhead expenses of the main office for the year ended
December 31, 1971 was actually $219,547 (P1,427,484). It further stated in
the certification that the allocation was made on the basis of the percentage
of gross income in the Philippines to gross income of the corporation as a
whole. By reason of the new adjustment, Smith Kline's tax liability was greatly
reduced from P511,247 to P186,992 resulting in an overpayment of
P324,255.
On April 2, 1974, without awaiting the action of the Commissioner of Internal
Revenue on its claim Smith Kline filed a petition for review with the Court of
Tax Appeals.
In its decision of March 21, 1980, the Tax Court ordered the Commissioner to
refund the overpayment or grant a tax credit to Smith Kline. The
Commissioner appealed to this Court.
The governing law is found in section 37 of the old National Internal Revenue
Code, Commonwealth Act No. 466, which is reproduced in Presidential
Decree No. 1158, the National Internal Revenue Code of 1977 and which
reads:
SEC. 37. Income form sources within the Philippines.
xxx xxx xxx
(b) Net income from sources in the Philippines. From the items of gross
income specified in subsection (a) of this section there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated
thereto and a ratable part of any expenses, losses, or other deductions which
cannot definitely be allocated to some item or class of gross income. The
remainder, if any, shall be included in full as net income from sources within
the Philippines.
xxx xxx xxx
Revenue Regulations No. 2 of the Department of Finance contains the
following provisions on the deductions to be made to determine the net
income from Philippine sources:
SEC. 160. Apportionment of deductions. From the items specified in
section 37(a), as being derived specifically from sources within the
Philippines there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a ratable part of any
other expenses, losses or deductions which can not definitely be allocated to
some item or class of gross income. The remainder shall be included in full as
net income from sources within the Philippines. The ratable part is based
upon the ratio of gross income from sources within the Philippines to the total
gross income.
Example: A non-resident alien individual whose taxable year is the calendar
year, derived gross income from all sources for 1939 of P180,000, including
therein:
Interest on bonds of a domestic corporation P9,000
Dividends on stock of a domestic corporation 4,000
Royalty for the use of patents within the Philippines 12,000
Gain from sale of real property located within the Philippines 11,000
Total P36,000
that is, one-fifth of the total gross income was from sources within the
Philippines. The remainder of the gross income was from sources without the
Philippines, determined under section 37(c).
The expenses of the taxpayer for the year amounted to P78,000. Of these
expenses the amount of P8,000 is properly allocated to income from sources
within the Philippines and the amount of P40,000 is properly allocated to
income from sources without the Philippines.
The remainder of the expense, P30,000, cannot be definitely allocated to any
class of income. A ratable part thereof, based upon the relation of gross
income from sources within the Philippines to the total gross income, shall be
deducted in computing net income from sources within the Philippines. Thus,
these are deducted from the P36,000 of gross income from sources within the
Philippines expenses amounting to P14,000 [representing P8,000 properly
apportioned to the income from sources within the Philippines and P6,000, a
ratable part (one-fifth) of the expenses which could not be allocated to any
item or class of gross income.] The remainder, P22,000, is the net income
from sources within the Philippines.
From the foregoing provisions, it is manifest that where an expense is clearly
related to the production of Philippine-derived income or to Philippine
operations (e.g. salaries of Philippine personnel, rental of office building in the
Philippines), that expense can be deducted from the gross income acquired
in the Philippines without resorting to apportionment.
The overhead expenses incurred by the parent company in connection with
finance, administration, and research and development, all of which direct
benefit its branches all over the world, including the Philippines, fall under a
different category however. These are items which cannot be definitely
allocated or Identified with the operations of the Philippine branch. For 1971,
the parent company of Smith Kline spent $1,077,739. Under section 37(b) of
the Revenue Code and section 160 of the regulations, Smith Kline can claim
as its deductible share a ratable part of such expenses based upon the ratio
of the local branch's gross income to the total gross income, worldwide, of the
multinational corporation.
In his petition for review, the Commissioner does not dispute the right of
Smith Kline to avail itself of section 37(b) of the Tax Code and section 160 of
the regulations. But the Commissioner maintains that such right is not
absolute and that as there exists a contract (in this case a service agreement)
which Smith Kline has entered into with its home office, prescribing the
amount that a branch can deduct as its share of the main office's overhead
expenses, that contract is binding.
The Commissioner contends that since the share of the Philippine branch has
been fixed at $77,060, Smith Kline itself cannot claim more than the said
amount. To allow Smith Kline to deduct more than what was expressly
provided in the agreement would be to ignore its existence. It is a cardinal
rule that a contract is the law between the contracting parties and the
stipulations therein must be respected unless these are proved to be contrary
to law, morals, good customs and public policy. There being allegedly no
showing to the contrary, the provisions thereof must be followed.
The Commissioner also argues that the Tax Court erred in relying on the
certification of Peat, Marwick, Mitchell and Company that Smith Kline is
entitled to deduct P1,427,484 ($219,547) as its allotted share and that Smith
Kline has not presented any evidence to show that the home office expenses
chargeable to Philippine operations exceeded $77,060.
On the other hand, Smith Kline submits that the contract between itself and
its home office cannot amend tax laws and regulations. The matter of
allocated expenses which are deductible under the law cannot be the subject
of an agreement between private parties nor can the Commissioner
acquiesce in such an agreement.
Smith Kline had to amend its return because it is of common knowledge that
audited financial statements are generally completed three or four months
after the close of the accounting period. There being no financial statements
yet when the certification of January 11, 1972 was made the treasurer could
not have correctly computed Smith Kline's share in the home office overhead
expenses in accordance with the gross income formula prescribed in section
160 of the Revenue Regulations. What the treasurer certified was a mere
estimate.
Smith Kline likewise submits that it has presented ample evidence to support
its claim for refund. To this end, it has presented before the Tax Court the
authenticated statement of Peat, Marwick, Mitchell and Company to show
that since the gross income of the Philippine branch was P7,143,155
($1,098,617) for 1971 as per audit report prepared by Sycip, Gorres, Velayo
and Company, and the gross income of the corporation as a whole was
$6,891,052, Smith Kline's share at 15.94% of the home office overhead
expenses was P1,427,484 ($219,547) (Exh. G to G-2, BIR Records, 4-5).
Clearly, the weight of evidence bolsters its position that the amount of
P1,427,484 represents the correct ratable share, the same having been
computed pursuant to section 37(b) and section 160.
In a manifestation dated July 19, 1983, Smith Kline declared that with respect
to its share of the head office overhead expenses in its income tax returns for
the years 1973 to 1981, it deducted its ratable share of the total overhead
expenses of its head office for those years as computed by the independent
auditors hired by the parent company in Philadelphia, Pennsylvania U.S.A.,
as soon as said computations were made available to it.
We hold that Smith Kline's amended 1971 return is in conformity with the law
and regulations. The Tax Court correctly held that the refund or credit of the
resulting overpayment is in order.
WHEREFORE, the decision of the Tax Court is hereby affirmed. No costs.
Here it is admitted that the estate and inheritance taxes in question were
finally assessed on August 18, 1952, and the warrant of distraint and levy was
issued within the 5-year period in Section 331 of the National Internal
Revenue Code from the time the return was filed. It is also admitted that the
warrant of distraint and levy was issued by respondent on June 23, 1955, but
that said warrant has not been fully executed in view of the request of counsel
for petitioners for an itemized statement of the amount due from each heir
and the assurance given by said counsel that upon receipt of respondent's
reply the heirs will immediately make arrangement for the settlement of their
shares. We, therefore, hold that the right of the Government to collect the
estate and inheritance taxes in question has not yet prescribed because the
warrant of distraint and levy for their collection was begun within the 5-year
period prescribed by law from the date of the assessment of said taxes.
Petitioners, however, contend that the issuance of the warrant in question
cannot be considered as having begun the summary remedy of distraint and
levy because (a) said warrant is defective and (b) it was not served upon the
taxpayer in accordance with law. With regard to the first contention,
petitioners allege that the warrant of distraint and levy is defective because
(1) it does not contain any description of the property sought to be levied
upon; (2) it was issued against the estate whose legal existence had long
terminated, and (3) it states the amount due in lump sum and does not
itemize the tax and penalty due from petitioners. And with regard to the
second contention, the defect is made to consist in that the warrant was
served not upon the taxpayer himself but upon one Arturo Cristi, secretary of
Atty. Manuel V. San Jose, contrary to what the law provides that a warrant
should be served upon the taxpayer himself except when he is absent from
the Philippines.
Petitioners apparently confuse the warrant of distraint and levy with the
certificate mentioned in Section 324 of the Tax Code. The warrant of distraint
and levy is not the certificate referred to in said section. Said warrant is the
order to distraint and levy upon the properties of the taxpayer. The certificate
mentioned in Section 324 is one prepared and issued by the agent
designated by the Commissioner of Internal Revenue to execute the order of
distraint and levy. It is issued after the seizure of the property distrained and
levied upon. In other words, the issuance of the warrant is merely the step
that starts the summary proceeding while the seizure of the properties is the
next step. It is for this reason that the warrant did not contain the details
regarding the properties to be distrained or levied upon because they are only
required in certificate referred to in Section 324.
As regards the claim that the warrant was issued against the estate which
has no longer legal existence because the testate proceedings were already
closed, suffice it to state that said warrant is a mere order to an agent of the
internal revenue office to collect the tax either from the estate or from the
heirs if said estate is closed. It is well-settled that an estate or inheritance tax,
whether assessed before or after the death of the deceased, can be collected
from the heirs even after the distribution of the properties of the decedent
(Pineda v. Court of First Instance of Tayabas, 52 Phil., 805).
The contention that the warrant is ineffective because it was not served upon
the taxpayers themselves is also untenable considering that the same was
served upon Atty. Manuel V. Jose, or his secretary, who has always acted
right along not only in behalf of the estate but also of the heirs of the
deceased. While the law provides that said warrant should be served upon
the taxpayer except when he is absent from the Philippines when it may be
served upon his agent or upon an occupant of the property, there is nothing
therein that would prevent the service to be made upon his authorized
representative. Here it is admitted that Atty. San Jose was the duly authorized
representative of the estate and of the heirs.
With regard to the contention that the issuance of the warrant is not sufficient
to begin the proceeding by summary method but that it is necessary that it be
actually executed, the Court of Tax Appeals said the following on the point:
Section 332 of the Revenue Code provides that the collection of an internal
revenue tax may be made by distraint and levy if the proceeding is begun
within five years after assessment. In this case, the distraint and levy and the
service thereof to Attorney Manuel V. San Jose. It is true that the warrant has
not been fully executed with the seizure and sale of any property subject to
the lien, but it was not due to the voluntary desistance of respondent; rather it
was because of the request of the then counsel for petitioners for a statement
of the amount due from each heir and for an opportunity to make
arrangement for the settlement of the obligation, which request was
considered reasonable by respondent. Under the law, it is not essential that
the warrant of distraint and levy be fully executed in order that it may have the
effect of suspending the running of the statute of limitation upon collection of
the tax. It is enough that the proceeding be validly begun or commenced and
that its execution has not been suspended by reason of the voluntary
desistance of the respondent. In our opinion, the warrant of distraint and levy
of June 23, 1955 was validly issued and was duly served upon counsel for
petitioners, and therefore, the five-year period for collection of the estate and
inheritance taxes in question was suspended. And it continued to be
suspended up to the date when the present appeal was filed by petitioners on
May 3, 1958. Accordingly, the right to collect said taxes has not prescribed.
We agree to the foregoing view. Indeed, the record shows that the warrant
was not actually executed or carried out with the seizure and sale of any
property of the deceased, not because of any voluntary desistance on the
part of respondent, but because of the many requests for postponement,
reinvestigation, revaluation, or other matters which had the effect of delaying
or postponing the execution of said warrant. Were it not for said requests for
postponement or revaluation, the warrant would have been fully executed
well within the period prescribed by law. Indeed, if by acceding to the request
for postponement of a taxpayer the period of prescription would be allowed to
run even if there is no voluntary desistance on the part of the tax collector, we
would not only countenance the commission of an injustice but would place
the collection of the tax at the mercy or caprice of the taxpayer to the
prejudice of the Government. Such a theory certainly cannot be entertained.
WHEREFORE, the decision appealed from is affirmed, with costs against
appellants.
FELICIANO, J.:
The Paper Industries Corporation of the Philippines ("Picop"), which is
petitioner in G.R. Nos. 106949-50 and private respondent in G.R. Nos.
106984-85, is a Philippine corporation registered with the Board of
Investments ("BOI") as a preferred pioneer enterprise with respect to its
integrated pulp and paper mill, and as a preferred non-pioneer enterprise with
respect to its integrated plywood and veneer mills.
On 21 April 1983, Picop received from the Commissioner of Internal Revenue
("CIR") two (2) letters of assessment and demand both dated 31 March 1983:
(a) one for deficiency transaction tax and for documentary and science stamp
tax; and (b) the other for deficiency income tax for 1977, for an aggregate
amount of P88,763,255.00. These assessments were computed as follows:
Transaction Tax
Interest payments on
money market
borrowings P 45,771,849.00
T o t a l P 20,025,183.75
Add:
14% int. fr.
1-20-78 to
7-31-80 P 7,093,302.57
20% int, fr.
8-1-80 to
3-31-83 10,675,523.58
17,768,826.15
P 37,794,009.90
Documentary and Science Stamps Tax
Total face value of
debentures P100,000,000.00
Documentary Stamps
Tax Due
(P0.30 x P100,000.000 )
( P200 ) P 150,000.00
Science Stamps Tax Due
(P0.30 x P100,000,000 )
( P200 ) P 150,000.00
T o t a l P 300,000.00
Add: Compromise for
non-affixture 300.00
300,300.00
P91,406,194.00
Net income per investigation P91,664,360.00
Income tax due thereon 34,734,559.00
Less: Tax already assessed per return 80,358.00
Deficiency P34,654,201.00
Add:
14% int. fr.
4-15-78 to
7-31-81 P 11,128,503.56
20% int. fr.
8-1-80 to
4-15-81 4,886,242.34
P16,014,745.90
Discrepancy P 604,018.00
============
Picop did not deny the existence of the above noted discrepancies. In the
proceedings before the CTA, Picop presented one of its officials to explain the
foregoing discrepancies. That explanation is perhaps best presented in
Picop's own words as set forth in its Memorandum before this Court:
. . . that the adjustment discussed in the testimony of the witness, represent
the best and most objective method of determining in pesos the amount of
the correct and actual export sales during the year. It was this correct and
actual export sales and costs of sales that were reflected in the income tax
return and in the audited financial statements. These corrections did not
result in realization of income and should not give rise to any deficiency tax.
xxx xxx xxx
What are the facts of this case on this matter? Why were adjustments
necessary at the year-end?
Because of PICOP's procedure of recording its export sales (reckoned in U.S.
dollars) on the basis of a fixed rate, day to day and month to month,
regardless of the actual exchange rate and without waiting when the actual
proceeds are received. In other words, PICOP recorded its export sales at a
pre-determined fixed exchange rate. That pre-determined rate was decided
upon at the beginning of the year and continued to be used throughout the
year.
At the end of the year, the external auditors made an examination. In that
examination, the auditors determined with accuracy the actual dollar
proceeds of the export sales received. What exchange rate was used by the
auditors to convert these actual dollar proceeds into Philippine pesos? They
used the average of the differences between (a) the recorded fixed exchange
rate and (b) the exchange rate at the time the proceeds were actually
received. It was this rate at time of receipt of the proceeds that determined
the amount of pesos credited by the Central Bank (through the agent banks)
in favor of PICOP. These accumulated differences were averaged by the
external auditors and this was what was used at the year-end for income tax
and other government-report purposes. (T.s.n., Oct. 17/85, pp. 20-25) 40
The above explanation, unfortunately, at least to the mind of the Court, raises
more questions than it resolves. Firstly, the explanation assumes that all of
Picop's sales were export sales for which U.S. dollars (or other foreign
exchange) were received. It also assumes that the expenses summed up as
"cost of sales" were all dollar expenses and that no peso expenses had been
incurred. Picop's explanation further assumes that a substantial part of
Picop's dollar proceeds for its export sales were not actually surrendered to
the domestic banking system and seasonably converted into pesos; had all
such dollar proceeds been converted into pesos, then the peso figures could
have been simply added up to reflect the actual peso value of Picop's export
sales. Picop offered no evidence in respect of these assumptions, no
explanation why and how a "pre-determined fixed exchange rate" was chosen
at the beginning of the year and maintained throughout. Perhaps more
importantly, Picop was unable to explain why its Books of Accounts did not
pick up the same adjustments that Picop's External Auditors were alleged to
have made for purposes of Picop's Income Tax Return. Picop attempted to
explain away the failure of its Books of Accounts to reflect the same
adjustments (no correcting entries, apparently) simply by quoting a passage
from a case where this Court refused to ascribe much probative value to the
Books of Accounts of a corporate taxpayer in a tax case. 41 What appears to
have eluded Picop, however, is that its Books of Accounts, which are kept by its
own employees and are prepared under its control and supervision, reflect what
may be deemed to be admissions against interest in the instant case. For Picop's
Books of Accounts precisely show higher sales figures and lower cost of sales
figures than Picop's Income Tax Return.
It is insisted by Picop that its Auditors' adjustments simply present the "best
and most objective" method of reflecting in pesos the "correct and ACTUAL
export sales" 42 and that the adjustments or "corrections" "did not result in
realization of [additional] income and should not give rise to any deficiency tax."
The correctness of this contention is not self-evident. So far as the record of this
case shows, Picop did not submit in evidence the aggregate amount of its U.S.
dollar proceeds of its export sales; neither did it show the Philippine pesos it had
actually received or been credited for such U.S. dollar proceeds. It is clear to this
Court that the testimonial evidence submitted by Picop fell far short of
demonstrating the correctness of its explanation.
Upon the other hand, the CIR has made out at least a prima facie case that
Picop had understated its sales and overstated its cost of sales as set out in
its Income Tax Return. For the CIR has a right to assume that Picop's Books
of Accounts speak the truth in this case since, as already noted, they embody
what must appear to be admissions against Picop's own interest.
Accordingly, we must affirm the findings of the Court of Appeals and the CTA.
(2) Whether Picop is liable for
the corporate development
tax of five percent (5%)
of its income for 1977.
The five percent (5%) corporate development tax is an additional corporate
income tax imposed in Section 24 (e) of the 1977 Tax Code which reads in
relevant part as follows:
(e) Corporate development tax. In addition to the tax imposed in
subsection (a) of this section, an additional tax in an amount equivalent to 5
per cent of the same taxable net income shall be paid by a domestic or a
resident foreign corporation; Provided, That this additional tax shall be
imposed only if the net income exceeds 10 per cent of the net worth, in case
of a domestic corporation, or net assets in the Philippines in case of a
resident foreign corporation: . . . .
The additional corporate income tax imposed in this subsection shall be
collected and paid at the same time and in the same manner as the tax
imposed in subsection (a) of this section.
Since this five percent (5%) corporate development tax is an income tax,
Picop is not exempted from it under the provisions of Section 8 (a) of R.A. No.
5186.
For purposes of determining whether the net income of a corporation exceeds
ten percent (10%) of its net worth, the term "net worth" means the
stockholders' equity represented by the excess of the total assets over
liabilities as reflected in the corporation's balance sheet provided such
balance sheet has been prepared in accordance with generally accepted
accounting principles employed in keeping the books of the corporation. 43
The adjusted net income of Picop for 1977, as will be seen below, is
P48,687,355.00. Its net worth figure or total stockholders' equity as reflected
in its Audited Financial Statements for 1977 is P464,749,528.00. Since its
adjusted net income for 1977 thus exceeded ten percent (10%) of its net
worth, Picop must be held liable for the five percent (5%) corporate
development tax in the amount of P2,434,367.75.
Recapitulating, we hold:
(1) Picop is liable for the thirty-five percent (35%) transaction tax in the
amount of P3,578,543.51.
(2) Picop is not liable for interest and surcharge on unpaid transaction tax.
(3) Picop is exempt from payment of documentary and science stamp taxes
in the amount of P300,000.00 and the compromise penalty of P300.00.
(4) Picop is entitled to its claimed deduction of P42,840,131.00 for interest
payments on loans for, among other things, the purchase of machinery and
equipment.
(5) Picop's claimed deduction in the amount of P44,196,106.00 for the
operating losses previously incurred by RPPM, is disallowed for lack of merit.
(6) Picop's claimed deduction for certain financial guarantee expenses in the
amount P1,237,421.00 is disallowed for failure adequately to prove such
expenses.
(7) Picop has understated its sales by P2,391,644.00 and overstated its cost
of sales by P604,018.00, for 1977.
(8) Picop is liable for the corporate development tax of five percent (5%) of its
adjusted net income for 1977 in the amount of P2,434,367.75.
Considering conclusions nos. 4, 5, 6, 7 and 8, the Court is compelled to hold
Picop liable for deficiency income tax for the year 1977 computed as follows:
Deficiency Income Tax
Net Income Per Return P 258,166.00
Add:
Unallowable Deductions
(1) Deduction of net
operating losses
incurred by RPPM P 44,196,106.00
(2) Unexplained financial
guarantee expenses P 1,237,421.00
(3) Understatement of
Sales P 2,391,644.00
(4) Overstatement of
Cost of Sales P 604,018.00
Total P 48,429,189.00
Separate Opinions
VITUG, J., concurring and dissenting:
In usual erudite manner, Mr. Justice Florentino P. Feliciano has written for the
Court the ponencia that presents in clear and logical sequence the issues, the
facts and the law involved. While I share, in most part, the conclusions
expressed in the opinion, I regrettably find it difficult, nevertheless, not to
propose a re-examination of the Court's holding in Western Minolco
Corporation vs. Commissioner of Internal Revenue (124 SCRA 121),
reiterated in Marinduque Mining and Industrial Corporation vs. Commissioner
of Internal Revenue (137 SCRA 88), that has taken the 35% transaction tax
on commercial papers issued in the primary market under the 1977 Revenue
Code, in relation to Republic Act ("R.A.") 5186, to be an income tax.
R.A. No. 5186, also known as the Investment Incentives Act, has provided for
incentives by, among other things, granting to registered pioneer enterprises
an exemption from all taxes, except income tax, under the National Internal
Revenue Code. The income tax, referred to, in my view, is that imposed in
Title II, entitled "Income Tax," of the Revenue Code. Nowhere under that title
is there a 35% transaction tax.
There was, to be sure, a 35% transaction tax still in effect in 1977 but it was a
tax not on the investor-lender in whose favor the interest income on the
commercial paper accrues. The tax was, instead, levied on the borrower-
issuer of commercial papers transacted in the primary market. Being the
principal taxpayer, the borrower-issuer could not have been likewise
contemplated to be a mere tax withholding agent. The tax was conceived as
a tax on business transaction, and so it was rightly incorporated in Title V,
entitled "Privilege Taxes on Business and Occupation" of the Tax Code.
The fact that a taxpayer on whom the tax is imposed can shift, characteristic
of indirect taxes, the burden thereof to another does not make the latter the
taxpayer and the former the withholding agent. Indeed, the facility of shifting
the burden of the tax is opposed to the idea of a direct tax to which class the
income tax actually belongs.
Accordingly, I vote to so reduce the tax liability of petitioners as adjudged by
the amount corresponding to the 35% transaction tax. In all other respects, I
concur with the majority in the judgment.
Separate Opinions
VITUG, J., concurring and dissenting:
In usual erudite manner, Mr. Justice Florentino P. Feliciano has written for the
Court the ponencia that presents in clear and logical sequence the issues, the
facts and the law involved. While I share, in most part, the conclusions
expressed in the opinion, I regrettably find it difficult, nevertheless, not to
propose a re-examination of the Court's holding in Western Minolco
Corporation vs. Commissioner of Internal Revenue (124 SCRA 121),
reiterated in Marinduque Mining and Industrial Corporation vs. Commissioner
of Internal Revenue (137 SCRA 88), that has taken the 35% transaction tax
on commercial papers issued in the primary market under the 1977 Revenue
Code, in relation to Republic Act ("R.A.") 5186, to be an income tax.
R.A. No. 5186, also known as the Investment Incentives Act, has provided for
incentives by, among other things, granting to registered pioneer enterprises
an exemption from all taxes, except income tax, under the National Internal
Revenue Code. The income tax, referred to, in my view, is that imposed in
Title II, entitled "Income Tax," of the Revenue Code. Nowhere under that title
is there a 35% transaction tax.
There was, to be sure, a 35% transaction tax still in effect in 1977 but it was a
tax not on the investor-lender in whose favor the interest income on the
commercial paper accrues. The tax was, instead, levied on the borrower-
issuer of commercial papers transacted in the primary market. Being the
principal taxpayer, the borrower-issuer could not have been likewise
contemplated to be a mere tax withholding agent. The tax was conceived as
a tax on business transaction, and so it was rightly incorporated in Title V,
entitled "Privilege Taxes on Business and Occupation" of the Tax Code.
The fact that a taxpayer on whom the tax is imposed can shift, characteristic
of indirect taxes, the burden thereof to another does not make the latter the
taxpayer and the former the withholding agent. Indeed, the facility of shifting
the burden of the tax is opposed to the idea of a direct tax to which class the
income tax actually belongs.
Accordingly, I vote to so reduce the tax liability of petitioners as adjudged by
the amount corresponding to the 35% transaction tax. In all other respects, I
concur with the majority in the judgment.
The question of whether or not the sale of drugs and medicines made at the
pharmacy department of the St. Paul's Hospital of Iloilo were taxable was, in
our opinion, a fairly debatable issue. The Collector, therefore, can not be said
to have acted arbitrarily in assessing the corresponding tax on the hospital.
This being the case, we see no real conflict between our decision in the
Carcar case, on the one hand, and the one rendered in the St. Paul's Hospital
of Iloilo case.
The question we now have to decide is whether the first or the second ruling
is the one applicable to the present case. Upon consideration of the facts
appearing of record we believe that it is the first. The Collector of Internal
Revenue had no reason to insist in collecting the inheritance tax from
respondents on the basis of the value of the properties allotted to each of
them, in accordance with the project of partition submitted to and approved by
the court without deducting therefrom the cash payments which, in
accordance with their agreement with their co-heirs, they had to pay to the
latter for the purpose of making the share of each heir equal in value to that of
the others as ordained in the will of the deceased Doa Teresa Tuason y
de la Paz, and as agreed among the heirs. What each of the respondents
really received as his share in the estate of said deceased was the value of
the properties allotted to each of them minus the cash payments each had to
make in order to equalize their respective share with that of the other heirs.
The collection of the inheritance taxes herein involved being clearly
unjustified, we are constrained, as already stated above, to hold the ruling in
the Carcar case applicable to the present.
WHEREFORE, petitioner's motion for reconsideration is hereby denied.
P516,345.15
and therewith filed a claim for refund of the sum of P166,384.00, which was
later reduced to P150,269.00.
The respondents Lednicky brought suit in the Tax Court, which was docketed
therein as CTA Case No. 570.
In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to
respondents Lednickys' income tax return for 1957, filed on 28 February
1958, and for which respondents paid a total sum of P196,799.65. In 1959,
they filed an amended return for 1957, claiming deduction of P190,755.80,
representing taxes paid to the U.S. Government on income derived wholly
from Philippine sources. On the strength thereof, respondents seek refund of
P90 520.75 as overpayment. The Tax Court again decided for respondents.
The common issue in all three cases, and one that is of first impression in this
jurisdiction, is whether a citizen of the United States residing in the
Philippines, who derives income wholly from sources within the Republic of
the Philippines, may deduct from his gross income the income taxes he has
paid to the United States government for the taxable year on the strength of
section 30 (C-1) of the Philippine Internal Revenue Code, reading as follows:
SEC. 30. Deduction from gross income. In computing net income there
shall be allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by the authority of
any foreign country; but this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any extent
the benefits of paragraph (3) of this subsection (relating to credit for foreign
countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed. (Emphasis supplied)
The Tax Court held that they may be deducted because of the undenied fact
that the respondent spouses did not "signify" in their income tax return a
desire to avail themselves of the benefits of paragraph 3 (B) of the
subsection, which reads:
Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer
signifies in his return his desire to have the benefits of this paragraph, the tax
imposed by this Title shall be credited with
(A) ...;
(B) Alien resident of the Philippines. In the case of an alien resident of the
Philippines, the amount of any such taxes paid or accrued during the taxable
year to any foreign country, if the foreign country of which such alien resident
is a citizen or subject, in imposing such taxes, allows a similar credit to
citizens of the Philippines residing in such country;
It is well to note that the tax credit so authorized is limited under paragraph 4
(A and B) of the same subsection, in the following terms:
Par. (c) (4) Limitation on credit. The amount of the credit taken under this
section shall be subject to each of the following limitations:
(A) The amount of the credit in respect to the tax paid or accrued to any
country shall not exceed the same proportion of the tax against which such
credit is taken, which the taxpayer's net income from sources within such
country taxable under this Title bears to his entire net income for the same
taxable year; and
(B) The total amount of the credit shall not exceed the same proportion of the
tax against which such credit is taken, which the taxpayer's net income from
sources without the Philippines taxable under this Title bears to his entire net
income for the same taxable year.
We agree with appellant Commissioner that the Construction and wording of
Section 30 (c) (1) (B) of the Internal Revenue Act shows the law's intent that
the right to deduct income taxes paid to foreign government from the
taxpayer's gross income is given only as an alternative or substitute to his
right to claim a tax credit for such foreign income taxes under section 30 (c)
(3) and (4); so that unless the alien resident has a right to claim such tax
credit if he so chooses, he is precluded from deducting the foreign income
taxes from his gross income. For it is obvious that in prescribing that such
deduction shall be allowed in the case of a taxpayer who does not signify in
his return his desire to have to any extent the benefits of paragraph (3)
(relating to credits for taxes paid to foreign countries), the statute assumes
that the taxpayer in question also may signify his desire to claim a tax credit
and waive the deduction; otherwise, the foreign taxes would always be
deductible, and their mention in the list of non-deductible items in Section
30(c) might as well have been omitted, or at least expressly limited to taxes
on income from sources outside the Philippine Islands.
Had the law intended that foreign income taxes could be deducted from gross
income in any event, regardless of the taxpayer's right to claim a tax credit, it
is the latter right that should be conditioned upon the taxpayer's waiving the
deduction; in which Case the right to reduction under subsection (c-1-B)
would have been made absolute or unconditional (by omitting foreign taxes
from the enumeration of non-deductions), while the right to a tax credit under
subsection (c-3) would have been expressly conditioned upon the taxpayer's
not claiming any deduction under subsection (c-1). In other words, if the law
had been intended to operate as contended by the respondent taxpayers and
by the Court of Tax Appeals section 30 (subsection (c-1) instead of providing
as at present:
SEC. 30. Deduction from gross income. In computing net income there
shall be allowed as deductions
(a) ...
(b) ...
(c) Taxes:
(1) In general. Taxes paid or accrued within the taxable year, except
(A) The income tax provided for under this Title;
(B) Income, war-profits, and excess profits taxes imposed by the authority of
any foreign country; but this deduction shall be allowed in the case of a
taxpayer who does not signify in his return his desire to have to any extent
the benefits of paragraph (3) of this subsection (relating to credit for taxes of
foreign countries);
(C) Estate, inheritance and gift taxes; and
(D) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.
would have merely provided:
SEC. 30. Decision from grow income. In computing net income there shall
be allowed as deductions:
(a) ...
(b) ...
(c) Taxes paid or accrued within the taxable year, EXCEPT
(A) The income tax provided for in this Title;
(B) Omitted or else worded as follows:
Income, war profits and excess profits taxes imposed by authority of any
foreign country on income earned within the Philippines if the taxpayer does
not claim the benefits under paragraph 3 of this subsection;
(C) Estate, inheritance or gift taxes;
(D) Taxes assessed against local benefits of a kind tending to increase the
value of the property assessed.
while subsection (c-3) would have been made conditional in the following or
equivalent terms:
(3) Credits against tax for taxes of foreign countries. If the taxpayer has
not deducted such taxes from his gross income but signifies in his return his
desire to have the benefits of this paragraph, the tax imposed by Title shall be
credited with ... (etc.).
Petitioners admit in their brief that the purpose of the law is to prevent the
taxpayer from claiming twice the benefits of his payment of foreign taxes, by
deduction from gross income (subs. c-1) and by tax credit (subs. c-3). This
danger of double credit certainly can not exist if the taxpayer can not claim
benefit under either of these headings at his option, so that he must be
entitled to a tax credit (respondent taxpayers admittedly are not so entitled
because all their income is derived from Philippine sources), or the option to
deduct from gross income disappears altogether.
Much stress is laid on the thesis that if the respondent taxpayers are not
allowed to deduct the income taxes they are required to pay to the
government of the United States in their return for Philippine income tax, they
would be subjected to double taxation. What respondents fail to observe is
that double taxation becomes obnoxious only where the taxpayer is taxed
twice for the benefit of the same governmental entity (cf. Manila vs.
Interisland Gas Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89
Phil. 357). In the present case, while the taxpayers would have to pay two
taxes on the same income, the Philippine government only receives the
proceeds of one tax. As between the Philippines, where the income was
earned and where the taxpayer is domiciled, and the United States, where
that income was not earned and where the taxpayer did not reside, it is
indisputable that justice and equity demand that the tax on the income should
accrue to the benefit of the Philippines. Any relief from the alleged double
taxation should come from the United States, and not from the Philippines,
since the former's right to burden the taxpayer is solely predicated on his
citizenship, without contributing to the production of the wealth that is being
taxed.
Aside from not conforming to the fundamental doctrine of income taxation that
the right of a government to tax income emanates from its partnership in the
production of income, by providing the protection, resources, incentive, and
proper climate for such production, the interpretation given by the
respondents to the revenue law provision in question operates, in its
application, to place a resident alien with only domestic sources of income in
an equal, if not in a better, position than one who has both domestic and
foreign sources of income, a situation which is manifestly unfair and short of
logic.
Finally, to allow an alien resident to deduct from his gross income whatever
taxes he pays to his own government amounts to conferring on the latter the
power to reduce the tax income of the Philippine government simply by
increasing the tax rates on the alien resident. Everytime the rate of taxation
imposed upon an alien resident is increased by his own government, his
deduction from Philippine taxes would correspondingly increase, and the
proceeds for the Philippines diminished, thereby subordinating our own taxes
to those levied by a foreign government. Such a result is incompatible with
the status of the Philippines as an independent and sovereign state.
IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals
are reversed, and, the disallowance of the refunds claimed by the
respondents Lednicky is affirmed, with costs against said respondents-
appellees.
P 11,841.00
==========
The above defiency tax came about by the disallowance of deductions from
gross income representing depreciation, expenses Gutierrez allegely incurred
in carrying on his business, and the addition to gross income of receipts
which he did not report in his income tax returns. The disallowed business
expenses which were considered by the Commissioner either as personal or
capital expenditures consisted of:
1951
Personal expenses:
Transportation expenses to attend funeral of various persons
P 96.50
Repair of car and salary of driver
59.80
Expenses in attending National Convention of Filipino Businessmen in Baguio
121.35
Alms to indigent family
15.00
Capital expenditures:
Electrical fixtures and supplies
100.00
Transportation and other expenses to watch laborers in construction work
516.00
Realty tax not paid by former owner of property acquired by Gutierrez
350.00
Litigation expenses to collect rental and eject lessee
702.65
Other disallowed deductions:
Fines and penalties for late payment of taxes
64.48
1952
Personal expenses:
Car expenses, salary of driver and car depreciation
P1,454.37
Contribution to Lydia Samson and G. Trinidad
52.00
Officers' jewels and aprons donated to Biak-na-Bato Lodge No. 7, Free
Masons
280.00
Luncheon of Homeowners' Association
5.50
Ticket to opera "Aida"
15.00
1953
Personal expenses:
Car expenses, salary of driver, car depreciation
P 1,409.24
Cruise to Corregidor with Homeowners' Association
43.00
Contribution to alms to various individuals
70.00
Tickets to operas
28.00
Capital expenditures:
Cost of one set of Comments on the Rules of Court by Moran
P 145.00
1954
Personal expenses:
Car expenses, salary of driver and car depreciation
P 1,413.67
Furniture given as commission in connection with business transaction
115.00
Cost of iron door of Gutierrez' residence
55.00
Capital expenditures:
Painting of rental apartments
P 908.00
Carpentry and lumber for rental apartments
335.83
Tinsmith and plumbing for rental apartments
605.25
Cement, tiles, gravel, sand and masonry for rental apartments
199.48
Iron bars, venetian blind, water pumps for rental apartments
1,340.00
Relocation and registration of property used in taxpayer's business
1,758.12
He also claimed the depreciation of his residence as follows:
1952 . . . . . .
P 992.22
1953 . . . . . .
942.61
1954 . . . . . .
895.45
The following are the items of income which Gutierrez did not declare in his
income tax returns:
1951
Income of wife (admitted by Gutierrez)
P 2,749.90.
1953
Overstatement of purchase price of real estate
P 8,476.92
Understatement of profits from sale of real estate
5,803.74
1954
Understatement of profits from sale of real estate
P 5,444.24
The overstatement of purchase price of real estate refers to the sale of two
pieces of property in 1953. In 1943 Gutierrez bought a parcel of land situated
along Padre Faura St. in Manila for P35,000.00. Sometime in 1953, he sold
the same for P30,400.00. Expenses of sale amounted to P631.80. In his
return he claimed a loss of P5,231.80. 1 However, the Commissioner,
including the said property was bought in Japanese military notes, converting
the buying price to its equivalent in PhilippineCommonwealth peso by the use
of the Ballantyne Scale of Values. At P1.30 Japanese military notes per
Commonwealth peso, the acquisition cost of P35,000.00 Japanese military
notes was valued at P26,923.00 PhilippineCommonwealth peso. Accordingly,
the Commissioner determined a profit of P3,476.92 after restoring to
Gutierrez' gross income the P5,231.80 deductionfor loss.
In another transaction, Gutierrez sold a piece of land for P1,200.00. Alleging
the said property was purchased for P1,200.00, he reported no profit
hereunder. However, after verifying the deed of acquisition, the Commissioner
discovered the purchase price to be only P800.00. Consequently, he
determined a profit of P400.00 which was added to the gross income for
1953.1wph1.t
The understatement of profit from the sale of real estate may be explained
thus: In 1953 and 1954 Gutierrez sold four other properties upon which he
made substantial profits.2Convinced that said properties were capital assets,
he declared only 50% of the profits from their sale. However, treating said
properties as ordinary assets (as property held and used byGutierrez in his
business), the Commissioner taxed 100% of the profits from their disposition
pursuant to Section 35 of the Tax Code.
Having unsuccessfully questioned the legality and correctness of the
aforesaid assessment, Gutierrez instituted on February 17, 1958, the
Commissioner issued a warrant of distraint and levy on one of Gutierrez' real
properties but desisted from enforcing the same when Gutierrez filed a bond
to assure payment of his tax liability.
In a decision dated January 28, 1962, the Court of Tax Appeals upheld in toto
the assessment of the Commissioner of Internal Revenue. Hence, this
appeal.
On October 18, 1962, Lino Guttierrez died and he was substituted by Andrea
C. Vda. de Gutierrez, Antonio D. Gutierrez, Santiago D. Gutierrez, Guillermo
D. Gutierrez and Tomas D. Gutierrez, his heirs,as party petitioners.
The issues are: (1) Are the taxpayer's aforementioned claims for deduction
proper and allowable? (2) May the Ballantyne Scale of Values be applied
indetermining the acquisition cost in 1943 of a real property sold in 1953, for
income tax purposes? (3) Are real properties used in the trade or business of
the taxpayer capital or ordinary assets? (4) Has the right of the Commissioner
of Internal Revenue to collect the deficiency income tax for the years 1951
and 1952 prescribed? (5) Has the right of the Commissioner of Internal
Revenue to collect by distraint and levy the deficiency income tax for 1953
prescribed? If not, may the taxpayer's rea lproperty be distrained and levied
upon without first exhausting his personal property?
We come first to question whether or not the deductions claimed by Gutierrez
are allowable. Section 30(a) of the Tax Code allows business expenses tobe
deducted from gross income. We quote:
SEC. 30. Deductions from gross income. In computing net income there
shall be allowed as deductions
(a) Expenses:
(1) In general. All the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; travelling expenses while away from home in the
pursuit of a trade or business; and rentals or other payments required to be
made as a condition to be continued use of possession, for the purposes of
the trade or business, or property to which the taxpayer has not taken or is
not taking title or in which he has no equity.
To be deductible, therefore, an expense must be (1) ordinary and necessary;
(2) paid or incurred within the taxable year; and, (3) paid or incurred in
carrying on a trade or business. 3
The transportation expenses which petitioner incurred to attend the funeral of
his friends and the cost of admission tickets to operas were expenses relative
to his personal and social activities rather than to his business of leasing real
estate. Likewise, the procurement and installation of an iron door to is
residence is purely a personal expense. Personal, living, or family expenses
are not deductible. 4
On the other hand, the cost of furniture given by the taxpayer as commission
in furtherance of a business transaction, the expenses incurred in attending
the National Convention of Filipino Businessmen, luncheon meeting and
cruise to Corregidor of the Homeowners' Association were shown to have
been made in the pursuit of his business. Commissions given in consideration
for bringing about a profitable transaction are part of the cost of the business
transaction and are deductible.
The record shows that Gutierrez was an officer of the Junior Chamber of
Commerce which sponsored the National Convention of Filipino
Businessmen. He was also the president of the Homeowners' Association, an
organization established by those engaged in the real estate trade. Having
proved that his membership thereof and activities in connection therewith
were solely to enhance his business, the expenses incurred thereunder are
deductible as ordinary and necessary business expenses.
With respect to the taxpayer's claim for deduction for car expenses, salary of
his driver and car depreciation, one-third of the same was disallowed by the
Commissioner on the ground that the taxpayer used his car and driver both
for personal and business purposes. There is no clear showing, however, that
the car was devoted more for the taxpayer's business than for his personal
and business needs. 5 According to the evidence, the taxpayer's car was
utilized both for personal and business needs. We therefore find it reasonable
to allow as deduction one-half of the driver's salary, car expenses and
depreciation.
The electrical supplies, paint, lumber, plumbing, cement, tiles, gravel,
masonry and labor used to repair the taxpayer's rental apartments did not
increase the value of such apartments, or prolong their life. They merely kept
the apartments in an ordinary operating condition. Hence, the expenses
incurred therefor are deductible as necessary expenditures for the
maintenance of the taxpayer's business.
Similarly, the litigation expenses defrayed by Gutierrez to collect apartment
rentals and to eject delinquent tenants are ordinary and necessary expenses
in pursuing his business. It is routinary and necessary for one in the leasing
business to collect rentals and to eject tenants who refuse to pay their
accounts.
The following are not deductible business expenses but should be integrated
into the cost of the capital assets for which they were incurred and
depreciated yearly: (1) Expenses in watching over laborers in construction
work. Watching over laborers is an activity more akin to the construction work
than to running the taxpayer's business. Hence, the expenses incurred
therefor should form part of the construction cost. (2) Real estate tax which
remained unpaid by the former owner of Gutierrez' rental property but which
the latter paid, is an additional cost to acquire such property and ought
therefore to be treated as part of the property's purchase price. (3) The iron
bars, venetian blind and water pump augmented the value of the, apartments
where they were installed. Their cost is not a maintenance charge, 6 hence,
not deductible.. 7 (4) Expenses for the relocation, survey and registration of
property tend to strengthen title over the property, hence, they should be
considered as addition to the costs of such property. (5) The set of
"Comments on the Rules of Court" having a life span of more than one year
should be depreciated ratably during its whole life span instead of its total
cost being deducted in one year.
Coming to the claim for depreciation of Gutierrez' residence, we find the
same not deductible. A taxpayer may deduct from gross income a reasonable
allowance for deterioration of property arising out of its use or employment in
business or trade. 8 Gutierrez' residence was not used in his trade or business.
Gutierrez also claimed for deduction the fines and penalties which he paid for
late payment of taxes. While Section 30 allows taxes to be deducted from
gross income, it does not specifically allow fines and penalties to be so
deducted. Deductions from gross income are matters of legislative grace;
what is not expressly granted by Congress is withheld. Moreover, when acts
are condemned, by law and their commission is made punishable by fines or
forfeitures, to allow them to be deducted from the wrongdoer's gross income,
reduces, and so in part defeats, the prescribed punishment. .9
As regards the alms to an indigent family and various individuals,
contributions to Lydia Yamson and G. Trinidad and a donation consisting of
officers' jewels and aprons to Biak-na-Bato Lodge No. 7, the same are not
deductible from gross income inasmuch as their recipients have not been
shown to be among those specified by law. Contributions are deductible when
given to the Government of the Philippines, or any of its political subdivisions
for exclusively public purposes, to domestic corporations or associations
organized and operated exclusively for religious, charitable, scientific, athletic,
cultural or educational purposes, or for the rehabilitation of veterans, or to
societies for the prevention of cruelty to children or animals, no part of the net
income of which inures to the benefit of any private stockholder or individual.
10
(1) Capital assets. The term "capital assets" means property held by the
taxpayer (whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year, or property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or business, or property used in
the trade or business, of a character which is subject to the allowance for
depreciation provided in subsection (f) of section thirty; or real property used
in the trade or business of the taxpayer.
xxx xxx xxx
(b) Percentage taken into account. In the case of a taxpayer, other than a
corporation, only the following percentages of the gain or loss recognized
upon the sale or exchange of capital asset hall be taken into account in
computing net capital gain, net capital loss, and net income:
(1) One hundred per centum if the capital asset has been held for not more
than twelve months;
(2) Fifty per centum if the capital asset has been held for not more than
twelve months.
Section 34, before it was amended by Republic Act 82 in 1947, considered as
capital assets real property used in the trade or business of a taxpayer.
However, with the passage of Republic Act 82, Congress classified "real
property used in the trade or business of the taxpayer" is ordinary asset. The
explanatory note to Republic Act 82 says "... the words "or real property
used in the trade or business of the taxpayer" have been included among the
non-capital assets. This has the effect of withdrawing the gain or loss from the
sale or exchange of real property used in the trade or business of the
taxpayer from the operation of the capital gains and losses provisions. As
such real property is used in the trade or business of the taxpayer, it is logical
that the gain or loss from the sale or exchange thereof should be treated as
ordinary income or loss. 11 Accordingly, the real estate, admittedly used by
Gutierrez in his business, which he sold in 1953 and 1954 should be treated
as ordinary assets and the gain from the sale thereof, as ordinary gain,
hence, fully taxable. 12
With regard to the issue of the prescription of the Commissioner's right to
collect deficiency tax for 1951 and 1952, Gutierrez claims that the counting of
the 5-year period to collect income tax should start from the time the income
tax returns were filed. He, therefore, urges us to declare the Commissioner's
right to collect the deficiency tax for 1951 and 1952 to have prescribed, the
income tax returns for 1951 and 1952 having been filed in March 1952 and on
February 28, 1953, respectively, and the action to collect the tax having been
instituted on March 5, 1958 when the Commissioner filed his answer to the
petition for review in C.T.A. Case No. 504. On the other hand, the
Commissioner argues that the running of the prescriptive period to collect
commences from the time of assessment. Inasmuch as the tax for 1951 and
1952 were assessed only on July 10, 1956, less than five years lapsed when
he filed his answer on March 5, 1958.
The period of limitation to collect income tax is counted from the assessment
of the tax as provided for in paragraph (c) of Section 332 quoted below:
SEC. 332(c). Where the assessment of any internal revenue tax has been
made within the period of limitation above prescribed such tax may be
collected by distraint or levy or by a proceeding in court, but only if begun (1)
within five years after the assessment of the tax, or (2) prior to the expiration
of any period for collection agreed upon in writing by the Collector of Internal
Revenue and the taxpayer before the expiration of such five-year period. The
period so agreed upon may be extended by subsequent agreements in
writing made before the expiration of the period previously agreed upon.
Inasmuch as the assessment for deficiency income tax was made on July 10,
1956 which is 7 months and 25 days prior to the action for collection, the right
of the Commissioner to collect such tax has not prescribed.
The next issue relates to the prescription of the right of the Commissioner of
Internal Revenue to collect the deficiency tax for 1954 by distraint and levy.
The pertinent provision of the Tax Code states:
SEC. 51(d). Refusal or neglect to make returns; fraudulent returns, etc. In
cases of refusal or neglect to make a return and in cases of erroneous, false,
or fraudulent returns, the Collector of Internal Revenue shall, upon the
discovery thereof, at any time within three years after said return is due or
has been made, make a return upon information obtained as provided for in
this code or by existing law, or require the necessary corrections to be made,
and the assessment made by the Collector of Internal Revenue thereon shall
be paid by such person or corporation immediately upon notification of the
amount of such assessment.
On February 23, 1955 Gutierrez filed his income tax return for 1954 and on
February 24, 1958 the Commissioner of Internal Revenue issued a warrant of
distraint and levy to collect the tax due thereunder. Gutierrez contends that
the Commissioner's right to issue said warrant is barred, for the same was
issued more than 3 years from the time he filed his income tax return. On the
other hand, the Commissioner of Internal Revenue maintains that his right did
not lapse inasmuch as from the last day prescribed by law for the filing of the
1954 return to the date when he issued the warrant of distraint and levy, less
than 3 years passed. The question now is: should the counting of the
prescriptive period commence from the actual filing of the return or from the
last day prescribed by law for the filing thereof?
We observe that Section 51(d) speaks of erroneous, false or fraudulent
returns, and refusal or neglect of the taxpayer to file a return. It also provides
for two dates from which to count the three-year prescriptive period, namely,
the date when the return is due and the date the return has been made. We
are inclined to conclude that the date when the return is due refers to cases
where the taxpayer refused or neglected to file a return, and the date when
the return has been made refers to instances where the taxpayer filed
erroneous, false or fraudulent returns. Since Gutierrez filed an income tax
return, the three-year prescriptive period should be counted from the time he
filed such return. From February 23, 1955 when the income tax return for
1954 was filed, to February 24, 1958, when the warrant of distraint and levy
was issued, 3 years and 2 days elapsed. The right of the Commissioner to
issue said warrant of distraint and levy having lapsed by two days, the
warrant issued is null and void.
The above finding has made academic the question of whether or not the
warrant of distraint and levy can be enforced against the taxpayer's real
property without first exhausting his personal properties.
In resume the tax liability of Lino Gutierrez for 1951, 1952, 1953 and 1954
may be computed as follows:
1951
Net income per investigation
P29,471.81
Add: Disallowed deductions for salary of
driver and car expenses
29.90
P29,501.81
Less: Allowable deductions:
Expenses in attending National
Convention of Filipino Businessmen
P 121.35
Repair of rental apartments
802.65
924.00
Net income
P30,425.71
Less: Personal exemption
3,600.00
Amount subject to tax
P26,825.71
P 1,687.00
==========
1952
Net income per investigation
P21,632.22
Add: Disallowed deductions:
Salary of driver
P 260.67
Car expenses
401.51
Car depreciation
65.00
727.18
P22,359.40
Less Allowable deduction:
Luncheon, Homeowners' Association
5.50
Net income
P22,364.90
Less: Personal exemption
3,600.00
Amount subject to tax
P18,764.90
848.00
==========
1953
Net income per investigation
P69,180.91
Add: Disallowed deductions:
Salary of driver
P 140.00
Car expenses
406.00
Car depreciation
58.50
604.50
P69,785.40
Less: Allowable deduction:
Cruise to Corregidor with Homeowners'
Association
42.00
Net Income
P69,828 40
Less: Personal exemption
3,600.00
Amount subject to tax
P66,228.40
P 5,374.00
==========
1954
Net income per investigation
P43,881.92
Add: Disallowed deductions:
Salary of driver
P 140.00
Car expenses
414.18
Car depreciation
72.65
626.83
P44,508.75
Less: Allowable deductions:
Furniture given in connection with business transaction
P 115.00
Repairs of rental apartments
2,048.56
2,163.56
Net income
P42,345.19
Less: Personal exemption
3,000.00
Amount subject to tax
P39,345.19
P 4,020.00
==========
SUMMARY
1951 . . . . . . . . . . . . . . . .
P 1,687.00
1952 . . . . . . . . . . . . . . . .
848.00
1953 . . . . . . . . . . . . . . . .
5,374.00
1954 . . . . . . . . . . . . . . . .
4,020.00
TOTAL . . . . . . . . . .
P 11,929.00
=========
WHEREFORE, the decision appealed from is modified and Lino Gutierrez
and/or his heirs, namely, Andrea C. Vda. de Gutierrez, Antonio D. Gutierrez,
Santiago D. Gutierrez, Guillermo D. Gutierrez and Tomas D. Gutierrez, are
ordered to pay the sums of P1,687.00, P848.00, P5,374.00, and P4,020.00,
as deficiency income tax for the years 1951, 1952, 1953 and 1954,
respectively, or a total of P11,929.00, plus the statutory penalties in case of
delinquency. No costs. So ordered.
claimed in 1957.
Now, petitioner's submission is that its case is an exception. Citing Cu
Unjieng Sons, Inc. v. Board of Tax Appeals,6 and American cases also,
petitioner argues that even if there is a right to compensation by insurance or
otherwise, the deduction can be taken in the year of actual loss where the
possibility of recovery is remote. The pronouncement, however to this effect
in the Cu Unjieng case is not as authoritative as petitioner would have it since
it was there found that the taxpayer had no legal right to compensation either
by insurance or otherwise.7 And the American cases cited8 are not in point.
None of them involved a taxpayer who had, as in the present case, obtained
a final judgment against third persons for reimbursement of payments made.
In those cases, there was either no legally enforceable right at all or such
claimed right was still to be, or being, litigated.
On the other hand, the rule is that loss deduction will be denied if there is a
measurable right to compensation for the loss, with ultimate collection
reasonably clear. So where there is reasonable ground for reimbursement,
the taxpayer must seek his redress and may not secure a loss deduction until
he establishes that no recovery may be had.9 In other words, as the Tax Court
put it, the taxpayer (petitioner) must exhaust his remedies first to recover or
reduce his loss.
It is on record that petitioner had not exhausted its remedies, especially
against Ramon Cuervo who was solidarily liable with San Jose for
reimbursement to it. Upon being prodded by the Tax Court to go after Cuervo,
Hermogenes Dimaguiba, president of petitioner corporation, said that they
would10 but no evidence was submitted that anything was really done on the
matter. Moreover, petitioner's evidence on remote possibility of recovery is
fatally wanting. Its right to reimbursement is not only secured by the
mortgages executed by San Jose and Cuervo but also by a final and
executory judgment in the civil case itself. Thus, other properties of San Jose
and Cuervo were subject to levy and execution. But no writ of execution,
satisfied or unsatisfied, was ever submitted. Neither has it been established
that Cuervo was insolvent. The only evidence on record on the point is
Dimaguiba's testimony that he does not really know if Cuervo has other
properties.11 This is not substantial proof of insolvency. Thus, it was too
itc-alf
provides merely:
In the case of a corporation, losses sustained during the taxable year and not
compensated for by insurance or otherwise.
Petitioner, who had the burden of proof 14 failed to adduce evidence that there
was a charge-off in connection with the P44,490.00or P30,600.00 which
it paid to Galang Machinery.
In connection with the claimed interest deduction of P10,000.00, the Solicitor
General correctly points out that this question was never raised before the
Tax Court. Petitioner, thru counsel, had admitted before said court 15 and in the
memorandum it filed16 that the only issue in the case was whether the entire
P44,490.00 paid by it was or was not a deductible loss under Sec. 30 (d) (2)
of the Tax Code. Even in petitioner's return, the P44,490.00 was claimed
wholly as losses on its bond.17 The alleged interest deduction not having been
properly litigated as an issue before the Tax Court, it is now too late to raise
and assert it before this Court.
WHEREFORE, the appealed decision is, as it is hereby, affirmed. Costs
against petitioner Plaridel Surety & Insurance Co. So ordered.
TEEHANKEE, J.:
These four appears involve two decisions of the Court of Tax Appeals
determining the taxpayer's income tax liability for the years 1950 to 1954 and
for the year 1957. Both the taxpayer and the Commissioner of Internal
Revenue, as petitioner and respondent in the cases a quo respectively,
appealed from the Tax Court's decisions, insofar as their respective
contentions on particular tax items were therein resolved against them. Since
the issues raised are interrelated, the Court resolves the four appeals in this
joint decision.
Cases L-21551 and L-21557
The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation
organized for the principal purpose of engaging in business as an "investment
company" with main office at Manila. Upon verification of the taxpayer's
income tax returns for the period in question, the Commissioner of Internal
Revenue assessed against the taxpayer the sums of P13,414.00,
P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as alleged deficiency
income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively.
Said assessments were the result of alleged discrepancies found upon the
examination and verification of the taxpayer's income tax returns for the said
years, summarized by the Tax Court in its decision of June 10, 1963 in CTA
Case No. 787, as follows:
1. Losses
a. Losses in Mati Lumber Co. (1950) P 8,050.00
b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951)
353,134.25
c. Losses in Balamban Coal Mines
1950
8,989.76
1951
27,732.66
d. Losses in Hacienda Dalupiri
1950
17,418.95
1951
29,125.82
1952
26,744.81
1953
21,932.62
1954
42,938.56
e. Losses in Hacienda Samal
1951
8,380.25
1952
7,621.73
2. Excessive depreciation of Houses
1950
P 8,180.40
1951
8,768.11
1952
18,002.16
1953
13,655.25
1954
29,314.98
3. Taxable increase in net worth
1950
P 30,050.00
1951
1,382.85
4. Gain realized from sale of real property in 1950 P 11,147.2611
The Tax Court sustained the Commissioner's disallowances of Item 1, sub-
items (b) and (e) and Item 2 of the above summary, but overruled the
Commissioner's disallowances of all the remaining items. It therefore
modified the deficiency assessments accordingly, found the total deficiency
income taxes due from the taxpayer for the years under review to amount to
P123,436.00 instead of P166,063.00 as originally assessed by the
Commissioner, and rendered the following judgment:
RESUME
1950
P2,748.00
1951
108,724.00
1952
3,600.00
1953
2,501.00
1954
5,863.00
Total
P123,436.00
WHEREFORE, the decision appealed from is hereby modified, and petitioner
is ordered to pay the sum of P123,436.00 within 30 days from the date this
decision becomes final. If the said amount, or any part thereof, is not paid
within said period, there shall be added to the unpaid amount as surcharge of
5%, plus interest as provided in Section 51 of the National Internal Revenue
Code, as amended. With costs against petitioner. (Pp. 75, 76, Taxpayer's
Brief as appellant)
Both parties have appealed from the respective adverse rulings against them
in the Tax Court's decision. Two main issues are raised by the parties: first,
the correctness of the Tax Court's rulings with respect to the disputed items of
disallowances enumerated in the Tax Court's summary reproduced above,
and second, whether or not the government's right to collect the deficiency
income taxes in question has already prescribed.
On the first issue, we will discuss the disputed items of disallowances
seriatim.
1. Re allowances/disallowances of losses.
(a) Allowance of losses in Mati Lumber Co. (1950). The Commissioner of
Internal Revenue questions the Tax Court's allowance of the taxpayer's
writing off as worthless securities in its 1950 return the sum of P8,050.00
representing the cost of shares of stock of Mati Lumber Co. acquired by the
taxpayer on January 1, 1948, on the ground that the worthlessness of said
stock in the year 1950 had not been clearly established. The Commissioner
contends that although the said Company was no longer in operation in 1950,
it still had its sawmill and equipment which must be of considerable value.
The Court, however, found that "the company ceased operations in 1949
when its Manager and owner, a certain Mr. Rocamora, left for Spain ,where
he subsequently died. When the company eased to operate, it had no assets,
in other words, completely insolvent. This information as to the insolvency of
the Company reached (the taxpayer) in 1950," when it properly claimed
the loss as a deduction in its 1950 tax return, pursuant to Section 30(d) (4) (b)
or Section 30 (e) (3) of the National Internal Revenue Code. 2
We find no reason to disturb this finding of the Tax Court. There was
adequate basis for the writing off of the stock as worthless securities.
Assuming that the Company would later somehow realize some proceeds
from its sawmill and equipment, which were still existing as claimed by the
Commissioner, and that such proceeds would later be distributed to its
stockholders such as the taxpayer, the amount so received by the taxpayer
would then properly be reportable as income of the taxpayer in the year it is
received.
(b) Disallowance of losses in or bad debts of Palawan Manganese Mines,
Inc. (1951). The taxpayer appeals from the Tax Court's disallowance of its
writing off in 1951 as a loss or bad debt the sum of P353,134.25, which it had
advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's
findings on this item follow:
Sometime in 1945, Palawan Manganese Mines, Inc., the controlling
stockholders of which are also the controlling stockholders of petitioner
corporation, requested financial help from petitioner to enable it to resume it
mining operations in Coron, Palawan. The request for financial assistance
was readily and unanimously approved by the Board of Directors of petitioner,
and thereafter a memorandum agreement was executed on August 12, 1945,
embodying the terms and conditions under which the financial assistance was
to be extended, the pertinent provisions of which are as follows:
"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August
10, 1945, has agreed to extend to the SECOND PARTY the requested
financial help by way of accommodation advances and for this purpose has
authorized its President, Mr. Ramon J. Fernandez to cause the release of
funds to the SECOND PARTY.
"WHEREAS, to compensate the FIRST PARTY for the advances that it has
agreed to extend to the SECOND PARTY, the latter has agreed to pay to the
former fifteen per centum (15%) of its net profits.
"NOW THEREFORE, for and in consideration of the above premises, the
parties hereto have agreed and covenanted that in consideration of the
financial help to be extended by the FIRST PARTY to the SECOND PARTY to
enable the latter to resume its mining operations in Coron, Palawan, the
SECOND PARTY has agreed and undertaken as it hereby agrees and
undertakes to pay to the FIRST PARTY fifteen per centum (15%) of its net
profits." (Exh. H-2)
Pursuant to the agreement mentioned above, petitioner gave to Palawan
Manganese Mines, Inc. yearly advances starting from 1945, which advances
amounted to P587,308.07 by the end of 1951. Despite these advances and
the resumption of operations by Palawan Manganese Mines, Inc., it continued
to suffer losses. By 1951, petitioner became convinced that those advances
could no longer be recovered. While it continued to give advances, it decided
to write off as worthless the sum of P353,134.25. This amount "was arrived at
on the basis of the total of advances made from 1945 to 1949 in the sum of
P438,981.39, from which amount the sum of P85,647.14 had to be deducted,
the latter sum representing its pre-war assets. (t.s.n., pp. 136-139, Id)." (Page
4, Memorandum for Petitioner.) Petitioner decided to maintain the advances
given in 1950 and 1951 in the hope that it might be able to recover the same,
as in fact it continued to give advances up to 1952. From these facts, and as
admitted by petitioner itself, Palawan Manganese Mines, Inc., was still in
operation when the advances corresponding to the years 1945 to 1949 were
written off the books of petitioner. Under the circumstances, was the sum of
P353,134.25 properly claimed by petitioner as deduction in its income tax
return for 1951, either as losses or bad debts?
It will be noted that in giving advances to Palawan Manganese Mine Inc.,
petitioner did not expect to be repaid. It is true that some testimonial evidence
was presented to show that there was some agreement that the advances
would be repaid, but no documentary evidence was presented to this effect.
The memorandum agreement signed by the parties appears to be very clear
that the consideration for the advances made by petitioner was 15% of the
net profits of Palawan Manganese Mines, Inc. In other words, if there were no
earnings or profits, there was no obligation to repay those advances. It has
been held that the voluntary advances made without expectation of
repayment do not result in deductible losses. 1955 PH Fed. Taxes, Par. 13,
329, citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR 395; George
B. Markle, 17 TC. 1593.
Is the said amount deductible as a bad debt? As already stated, petitioner
gave advances to Palawan Manganese Mines, Inc., without expectation of
repayment. Petitioner could not sue for recovery under the memorandum
agreement because the obligation of Palawan Manganese Mines, Inc. was to
pay petitioner 15% of its net profits, not the advances. No bad debt could
arise where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and subsisting debt and
that the debtor was incapable of paying the debt in 1951, when petitioner
wrote off the advances and deducted the amount in its return for said year,
yet the debt is not deductible in 1951 as a worthless debt. It appears that the
debtor was still in operation in 1951 and 1952, as petitioner continued to give
advances in those years. It has been held that if the debtor corporation,
although losing money or insolvent, was still operating at the end of the
taxable year, the debt is not considered worthless and therefore not
deductible. 3
The Tax Court's disallowance of the write-off was proper. The Solicitor
General has rightly pointed out that the taxpayer has taken an "ambiguous
position " and "has not definitely taken a stand on whether the amount
involved is claimed as losses or as bad debts but insists that it is either a loss
or a bad debt." 4 We sustain the government's position that the advances
made by the taxpayer to its 100% subsidiary, Palawan Manganese Mines,
Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5
The evidence on record shows that the board of directors of the two
companies since August, 1945, were identical and that the only capital of
Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered in the
taxpayer's balance sheet as its investment in its subsidiary company. 6 This
fact explains the liberality with which the taxpayer made such large advances
to the subsidiary, despite the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its subsidiary as
against the Tax Court's finding that under their memorandum agreement, the
taxpayer did not expect to be repaid, since if the subsidiary had no earnings,
there was no obligation to repay those advances, becomes immaterial, in the
light of our resolution of the question. The Tax Court correctly held that the
subsidiary company was still in operation in 1951 and 1952 and the taxpayer
continued to give it advances in those years, and, therefore, the alleged debt
or investment could not properly be considered worthless and deductible in
1951, as claimed by the taxpayer. Furthermore, neither under Section 30 (d)
(2) of our Tax Code providing for deduction by corporations of losses actually
sustained and charged off during the taxable year nor under Section 30 (e)
(1) thereof providing for deduction of bad debts actually ascertained to be
worthless and charged off within the taxable year, can there be a partial
writing off of a loss or bad debt, as was sought to be done here by the
taxpayer. For such losses or bad debts must be ascertained to be so and
written off during the taxable year, are therefore deductible in full or not at all,
in the absence of any express provision in the Tax Code authorizing partial
deductions.
The Tax Court held that the taxpayer's loss of its investment in its subsidiary
could not be deducted for the year 1951, as the subsidiary was still in
operation in 1951 and 1952. The taxpayer, on the other hand, claims that its
advances were irretrievably lost because of the staggering losses suffered by
its subsidiary in 1951 and that its advances after 1949 were "only limited to
the purpose of salvaging whatever ore was already available, and for the
purpose of paying the wages of the laborers who needed help." 7 The
correctness of the Tax Court's ruling in sustaining the disallowance of the
write-off in 1951 of the taxpayer's claimed losses is borne out by subsequent
events shown in Cases L-24972 and L-24978 involving the taxpayer's 1957
income tax liability. (Infra, paragraph 6.) It will there be seen that by 1956, the
obligation of the taxpayer's subsidiary to it had been reduced from
P587,398.97 in 1951 to P442,885.23 in 1956, and that it was only on January
1, 1956 that the subsidiary decided to cease operations. 8
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). The
Court sustains the Tax Court's disallowance of the sums of P8,989.76 and
P27,732.66 spent by the taxpayer for the operation of its Balamban coal
mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the
taxpayer's returns for said years. The Tax Court correctly held that the losses
"are deductible in 1952, when the mines were abandoned, and not in 1950
and 1951, when they were still in operation." 9 The taxpayer's claim that these
expeditions should be allowed as losses for the corresponding years that they
were incurred, because it made no sales of coal during said years, since the
promised road or outlet through which the coal could be transported from the
mines to the provincial road was not constructed, cannot be sustained. Some
definite event must fix the time when the loss is sustained, and here it was
the event of actual abandonment of the mines in 1952. The Tax Court held
that the losses, totalling P36,722.42 were properly deductible in 1952, but the
appealed judgment does not show that the taxpayer was credited therefor in
the determination of its tax liability for said year. This additional deduction of
P36,722.42 from the taxpayer's taxable income in 1952 would result in the
elimination of the deficiency tax liability for said year in the sum of P3,600.00
as determined by the Tax Court in the appealed judgment.
(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and
Hacienda Samal (1951-1952). The Tax Court overruled the
Commissioner's disallowance of these items of losses thus:
Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums
of P17,418.95 in 1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62
in 1953, and P42,938.56 in 1954. These deductions were disallowed by
respondent on the ground that the farm was operated solely for pleasure or
as a hobby and not for profit. This conclusion is based on the fact that the
farm was operated continuously at a loss. 1awphl.nt
From the evidence, we are convinced that the Hacienda Dalupiri was
operated by petitioner for business and not pleasure. It was mainly a cattle
farm, although a few race horses were also raised. It does not appear that the
farm was used by petitioner for entertainment, social activities, or other non-
business purposes. Therefore, it is entitled to deduct expenses and losses in
connection with the operation of said farm. (See 1955 PH Fed. Taxes, Par.
13, 63, citing G.C.M. 21103, CB 1939-1, p.164)
Section 100 of Revenue Regulations No. 2, otherwise known as the Income
Tax Regulations, authorizes farmers to determine their gross income on the
basis of inventories. Said regulations provide:
"If gross income is ascertained by inventories, no deduction can be made for
livestock or products lost during the year, whether purchased for resale,
produced on the farm, as such losses will be reflected in the inventory by
reducing the amount of livestock or products on hand at the close of the
year."
Evidently, petitioner determined its income or losses in the operation of said
farm on the basis of inventories. We quote from the memorandum of counsel
for petitioner:
"The Taxpayer deducted from its income tax returns for the years from 1950
to 1954 inclusive, the corresponding yearly losses sustained in the operation
of Hacienda Dalupiri, which losses represent the excess of its yearly
expenditures over the receipts; that is, the losses represent the difference
between the sales of livestock and the actual cash disbursements or
expenses." (Pages 21-22, Memorandum for Petitioner.)
As the Hacienda Dalupiri was operated by petitioner for business and since it
sustained losses in its operation, which losses were determined by means of
inventories authorized under Section 100 of Revenue Regulations No. 2, it
was error for respondent to have disallowed the deduction of said losses. The
same is true with respect to loss sustained in the operation of the Hacienda
Samal for the years 1951 and 1952. 10
The Commissioner questions that the losses sustained by the taxpayer were
properly based on the inventory method of accounting. He concedes,
however, "that the regulations referred to does not specify how the
inventories are to be made. The Tax Court, however, felt satisfied with the
evidence presented by the taxpayer ... which merely consisted of an alleged
physical count of the number of the livestock in Hacienda Dalupiri for the
years involved." 11 The Tax Court was satisfied with the method adopted by
the taxpayer as a farmer breeding livestock, reporting on the basis of receipts
and disbursements. We find no Compelling reason to disturb its findings.
2. Disallowance of excessive depreciation of buildings (1950-1954). During
the years 1950 to 1954, the taxpayer claimed a depreciation allowance for its
buildings at the annual rate of 10%. The Commissioner claimed that the
reasonable depreciation rate is only 3% per annum, and, hence, disallowed
as excessive the amount claimed as depreciation allowance in excess of 3%
annually. We sustain the Tax Court's finding that the taxpayer did not submit
adequate proof of the correctness of the taxpayer's claim that the depreciable
assets or buildings in question had a useful life only of 10 years so as to
justify its 10% depreciation per annum claim, such finding being supported by
the record. The taxpayer's contention that it has many zero or one-peso
assets, 12 representing very old and fully depreciated assets serves but to
support the Commissioner's position that a 10% annual depreciation rate was
excessive.
3. Taxable increase in net worth (1950-1951). The Tax Court set aside the
Commissioner's treatment as taxable income of certain increases in the
taxpayer's net worth. It found that:
For the year 1950, respondent determined that petitioner had an increase in
net worth in the sum of P30,050.00, and for the year 1951, the sum of
P1,382.85. These amounts were treated by respondent as taxable income of
petitioner for said years.
It appears that petitioner had an account with the Manila Insurance Company,
the records bearing on which were lost. When its records were reconstituted
the amount of P349,800.00 was set up as its liability to the Manila Insurance
Company. It was discovered later that the correct liability was only
319,750.00, or a difference of P30,050.00, so that the records were adjusted
so as to show the correct liability. The correction or adjustment was made in
1950. Respondent contends that the reduction of petitioner's liability to Manila
Insurance Company resulted in the increase of petitioner's net worth to the
extent of P30,050.00 which is taxable. This is erroneous. The principle
underlying the taxability of an increase in the net worth of a taxpayer rests on
the theory that such an increase in net worth, if unreported and not explained
by the taxpayer, comes from income derived from a taxable source. (See
Perez v. Araneta, G.R. No. L-9193, May 29, 1957; Coll. vs. Reyes, G.R. Nos.
L- 11534 & L-11558, Nov. 25, 1958.) In this case, the increase in the net
worth of petitioner for 1950 to the extent of P30,050.00 was not the result of
the receipt by it of taxable income. It was merely the outcome of the
correction of an error in the entry in its books relating to its indebtedness to
the Manila Insurance Company. The Income Tax Law imposes a tax on
income; it does not tax any or every increase in net worth whether or not
derived from income. Surely, the said sum of P30,050.00 was not income to
petitioner, and it was error for respondent to assess a deficiency income tax
on said amount.
The same holds true in the case of the alleged increase in net worth of
petitioner for the year 1951 in the sum of P1,382.85. It appears that certain
items (all amounting to P1,382.85) remained in petitioner's books as
outstanding liabilities of trade creditors. These accounts were discovered in
1951 as having been paid in prior years, so that the necessary adjustments
were made to correct the errors. If there was an increase in net worth of the
petitioner, the increase in net worth was not the result of receipt by petitioner
of taxable income." 13 The Commissioner advances no valid grounds in his
brief for contesting the Tax Court's findings. Certainly, these increases in the
taxpayer's net worth were not taxable increases in net worth, as they were
not the result of the receipt by it of unreported or unexplained taxable income,
but were shown to be merely the result of the correction of errors in its entries
in its books relating to its indebtednesses to certain creditors, which had been
erroneously overstated or listed as outstanding when they had in fact been
duly paid. The Tax Court's action must be affirmed.
4. Gain realized from sale of real property (1950). We likewise sustain as
being in accordance with the evidence the Tax Court's reversal of the
Commissioner's assessment on all alleged unreported gain in the sum of
P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As
found by the Tax Court, the evidence shows that this property was acquired in
1926 for P11,852.74, and was sold in 1950 for P60,000.00, apparently,
resulting in a gain of P48,147.26. 14 The taxpayer reported in its return a gain
of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved
from the taxpayer's books that after acquiring the property, the taxpayer had
made improvements totalling P11,147.26, 16 accounting for the apparent
discrepancy in the reported gain. In other words, this figure added to the
original acquisition cost of P11,852.74 results in a total cost of P23,000.00,
and the gain derived from the sale of the property for P60,000.00 was
correctly reported by the taxpayer at P37,000.00.
On the second issue of prescription, the taxpayer's contention that the
Commissioner's action to recover its tax liability should be deemed to have
prescribed for failure on the part of the Commissioner to file a complaint for
collection against it in an appropriate civil action, as contradistinguished from
the answer filed by the Commissioner to its petition for review of the
questioned assessments in the case a quo has long been rejected by this
Court. This Court has consistently held that "a judicial action for the collection
of a tax is begun by the filing of a complaint with the proper court of first
instance, or where the assessment is appealed to the Court of Tax Appeals,
by filing an answer to the taxpayer's petition for review wherein payment of
the tax is prayed for." 17 This is but logical for where the taxpayer avails of the
right to appeal the tax assessment to the Court of Tax Appeals, the said Court
is vested with the authority to pronounce judgment as to the taxpayer's
liability to the exclusion of any other court. In the present case, regardless of
whether the assessments were made on February 24 and 27, 1956, as
claimed by the Commissioner, or on December 27, 1955 as claimed by the
taxpayer, the government's right to collect the taxes due has clearly not
prescribed, as the taxpayer's appeal or petition for review was filed with the
Tax Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his
Answer with a prayer for payment of the taxes due, long before the expiration
of the five-year period to effect collection by judicial action counted from the
date of assessment.
Cases L-24972 and L-24978
These cases refer to the taxpayer's income tax liability for the year 1957.
Upon examination of its corresponding income tax return, the Commissioner
assessed it for deficiency income tax in the amount of P38,918.76, computed
as follows:
Net income per return
P29,178.70
P167,297.65
Tax due thereon
38,818.00
Less: Amount already assessed
5,836.00
Balance
P32,982.00
Add: 1/2% monthly interest from 6-20-59 to 6-20-62
5,936.76
TOTAL AMOUNT DUE AND COLLECTIBLE
P38,918.76
18
2,300.40
19,560.06
P90,788.75
=========
The Commissioner disallowed:
Over-claimed depreciation
P10,500.49
Miscellaneous expenses
6,759.17
Officer's travelling expenses
2,300.40
DEDUCTIONS
A. Depreciation. Basilan Estates, Inc. claimed deductions for the
depreciation of its assets up to 1949 on the basis of their acquisition cost. As
of January 1, 1950 it changed the depreciable value of said assets by
increasing it to conform with the increase in cost for their replacement.
Accordingly, from 1950 to 1953 it deducted from gross income the value of
depreciation computed on the reappraised value.
In 1953, the year involved in this case, taxpayer claimed the following
depreciation deduction:
Reappraised assets
P47,342.53
New assets consisting of hospital building and equipment
3,910.45
Total depreciation
P51,252.98
Upon investigation and examination of taxpayer's books and papers, the
Commissioner of Internal Revenue found that the reappraised assets
depreciated in 1953 were the same ones upon which depreciation was
claimed in 1952. And for the year 1952, the Commissioner had already
determined, with taxpayer's concurrence, the depreciation allowable on said
assets to be P36,842.04, computed on their acquisition cost at rates fixed by
the taxpayer. Hence, the Commissioner pegged the deductible depreciation
for 1953 on the same old assets at P36,842.04 and disallowed the excess
thereof in the amount of P10,500.49.
The question for resolution therefore is whether depreciation shall be
determined on the acquisition cost or on the reappraised value of the assets.
Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. The term is also
applied to amortization of the value of intangible assets, the use of which in
the trade or business is definitely limited in duration. 2 Depreciation
commences with the acquisition of the property and its owner is not bound to
see his property gradually waste, without making provision out of earnings for
its replacement. It is entitled to see that from earnings the value of the
property invested is kept unimpaired, so that at the end of any given term of
years, the original investment remains as it was in the beginning. It is not only
the right of a company to make such a provision, but it is its duty to its bond
and stockholders, and, in the case of a public service corporation, at least, its
plain duty to the public.3 Accordingly, the law permits the taxpayer to recover
gradually his capital investment in wasting assets free from income tax. 4
Precisely, Section 30 (f) (1) which states:
(1)In general. A reasonable allowance for deterioration of property arising
out of its use or employment in the business or trade, or out of its not being
used: Provided, That when the allowance authorized under this subsection
shall equal the capital invested by the taxpayer . . . no further allowance shall
be made. . . .
allows a deduction from gross income for depreciation but limits the recovery
to the capital invested in the asset being depreciated.
The income tax law does not authorize the depreciation of an asset beyond
its acquisition cost. Hence, a deduction over and above such cost cannot be
claimed and allowed. The reason is that deductions from gross income are
privileges,5 not matters of right.6 They are not created by implication but upon
clear expression in the law.7
Moreover, the recovery, free of income tax, of an amount more than the
invested capital in an asset will transgress the underlying purpose of a
depreciation allowance. For then what the taxpayer would recover will be, not
only the acquisition cost, but also some profit. Recovery in due time thru
depreciation of investment made is the philosophy behind depreciation
allowance; the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of
P10,500.49 has no justification in the law. The determination, therefore, of the
Commissioner of Internal Revenue disallowing said amount, affirmed by the
Court of Tax Appeals, is sustained.
B. Expenses. The next item involves disallowed expenses incurred in
1953, broken as follows:
Miscellaneous expenses
P6,759.17
Officer's travelling expenses
2,300.40
Total
P9,059.57
These were disallowed on the ground that the nature of these expenses could
not be satisfactorily explained nor could the same be supported by
appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual
expenses credited to the account of the president of the corporation incurred
in the interest of the corporation during the president's trip to Manila (pp. 33-
34 of TSN of Dec. 5, 1962); he stated that the P2,300.40 was the president's
travelling expenses to and from Manila as to the vouchers and receipts of
these, he said the same were made but got burned during the Basilan fire on
March 30, 1962 (p. 40 of same TSN). Petitioner further argues that when it
sent its records to Manila in February, 1959, the papers in support of these
miscellaneous and travelling expenses were not included for the reason that
by February 9, 1959, when the Bureau of Internal Revenue decided to
investigate, petitioner had no more obligation to keep the same since five
years had lapsed from the time these expenses were incurred (p. 41 of same
TSN). On this ground, the petitioner may be sustained, for under Section 337
of the Tax Code, receipts and papers supporting such expenses need be kept
by the taxpayer for a period of five years from the last entry. At the time of the
investigation, said five years had lapsed. Taxpayer's stand on this issue is
therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably
accumulated, provides:
Sec. 25. Additional tax on corporations improperly accumulating profits or
surplus (a) Imposition of tax. If any corporation, except banks,
insurance companies, or personal holding companies, whether domestic or
foreign, is formed or availed of for the purpose of preventing the imposition of
the tax upon its shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated profits
or surplus which shall be in addition to the tax imposed by section twenty-
four, and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax.
1awphl.nt
P50,643.39
20% tax on P50,643.39
P10,128.67
Less: Tax already assessed
8,028.00
Deficiency income tax
P2,100.67
Add: 25% surtax on P347,507.01
86,876.75
Total tax due and collectible
P88,977.42
===========
WHEREFORE, the judgment appealed from is modified to the extent that
petitioner is allowed its deductions for travelling and miscellaneous expenses,
but affirmed insofar as the petitioner is liable for P2,100.67 as deficiency
income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably
accumulated profit of P347,507.01. No costs. So ordered.
ROXAS Y CIA.:
1953
Contributions to Contribution to
Our Lady of Fatima Chapel, FEU
50.00
ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund
25.00
Pasay City Police Dept. X'mas fund
50.00
1955
Contributions to
Baguio City Police Christmas fund
25.00
Pasay City Firemen Christmas fund
25.00
Pasay City Police Christmas fund
50.00
EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de Manresa
450.00
Philippines Herald's fund for Manila's neediest families
100.00
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families
120.00
JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families
120.00
The Roxas brothers protested the assessment but inasmuch as said protest
was denied, they instituted an appeal in the Court of Tax Appeals on January
9, 1961. The Tax Court heard the appeal and rendered judgment on July 31,
1965 sustaining the assessment except the demand for the payment of the
fixed tax on dealer of securities and the disallowance of the deductions for
contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de
Manresa. The Tax Court's judgment reads:
WHEREFORE, the decision appealed from is hereby affirmed with respect to
petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby
ordered to pay the respondent Commissioner of Internal Revenue the
amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as
deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and
1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and
modified with respect to the partnership Roxas y Cia. in the sense that it
should pay only P150.00, as real estate dealer's tax. With costs against
petitioners.
Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court.
The Commissioner of Internal Revenue did not appeal.
The issues:
(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary
gain, hence 100% taxable?
(2) Are the deductions for business expenses and contributions deductible?
(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate
dealers?
The Commissioner of Internal Revenue contends that Roxas y Cia. could be
considered a real estate dealer because it engaged in the business of selling
real estate. The business activity alluded to was the act of subdividing the
Nasugbu farm lands and selling them to the farmers-occupants on
installment. To bolster his stand on the point, he cites one of the purposes of
Roxas y Cia. as contained in its articles of partnership, quoted below:
4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que
pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas
condiciones, estime convenientes y vendiendo aquellas que a juicio de sus
gerentes no deben conservarse;
The above-quoted purpose notwithstanding, the proposition of the
Commissioner of Internal Revenue cannot be favorably accepted by Us in
this isolated transaction with its peculiar circumstances in spite of the fact that
there were hundreds of vendees. Although they paid for their respective
holdings in installment for a period of ten years, it would nevertheless not
make the vendor Roxas y Cia. a real estate dealer during the ten-year
amortization period.
It should be borne in mind that the sale of the Nasugbu farm lands to the very
farmers who tilled them for generations was not only in consonance with, but
more in obedience to the request and pursuant to the policy of our
Government to allocate lands to the landless. It was the bounden duty of the
Government to pay the agreed compensation after it had persuaded Roxas y
Cia. to sell its haciendas, and to subsequently subdivide them among the
farmers at very reasonable terms and prices. However, the Government could
not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered
the Government's burden, went out of its way and sold lands directly to the
farmers in the same way and under the same terms as would have been the
case had the Government done it itself. For this magnanimous act, the
municipal council of Nasugbu passed a resolution expressing the people's
gratitude.
The power of taxation is sometimes called also the power to destroy.
Therefore it should be exercised with caution to minimize injury to the
proprietary rights of a taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in
order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously. It does not conform with
Our sense of justice in the instant case for the Government to persuade the
taxpayer to lend it a helping hand and later on to penalize him for duly
answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in
question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the
farmers are capital assets, and the gain derived from the sale thereof is
capital gain, taxable only to the extent of 50%.
DISALLOWED DEDUCTIONS
Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets
to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel
beer given as gifts to various persons. The deduction were claimed as
representation expenses. Representation expenses are deductible from gross
income as expenditures incurred in carrying on a trade or business under
Section 30(a) of the Tax Code provided the taxpayer proves that they are
reasonable in amount, ordinary and necessary, and incurred in connection
with his business. In the case at bar, the evidence does not show such link
between the expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay City
Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila
Police Trust Fund, Philippines Herald's fund for Manila's neediest families and
Our Lady of Fatima chapel at Far Eastern University.
The contributions to the Christmas funds of the Pasay City Police, Pasay City
Firemen and Baguio City Police are not deductible for the reason that the
Christmas funds were not spent for public purposes but as Christmas gifts to
the families of the members of said entities. Under Section 39(h), a
contribution to a government entity is deductible when used exclusively for
public purposes. For this reason, the disallowance must be sustained. On the
other hand, the contribution to the Manila Police trust fund is an allowable
deduction for said trust fund belongs to the Manila Police, a government
entity, intended to be used exclusively for its public functions.
The contributions to the Philippines Herald's fund for Manila's neediest
families were disallowed on the ground that the Philippines Herald is not a
corporation or an association contemplated in Section 30 (h) of the Tax Code.
It should be noted however that the contributions were not made to the
Philippines Herald but to a group of civic spirited citizens organized by the
Philippines Herald solely for charitable purposes. There is no question that
the members of this group of citizens do not receive profits, for all the funds
they raised were for Manila's neediest families. Such a group of citizens may
be classified as an association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the contribution to
Our Lady of Fatima chapel at the Far Eastern University on the ground that
the said university gives dividends to its stockholders. Located within the
premises of the university, the chapel in question has not been shown to
belong to the Catholic Church or any religious organization. On the other
hand, the lower court found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of the Tax Code
for the reason that the net income of said university injures to the benefit of its
stockholders. The disallowance should be sustained.
Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed
tax upon it, because although it earned a rental income of P8,000.00 per
annum in 1952, said rental income came from Jose Roxas, one of the
partners. Section 194 of the Tax Code, in considering as real estate dealers
owners of real estate receiving rentals of at least P3,000.00 a year, does not
provide any qualification as to the persons paying the rentals. The law, which
states:1wph1.t
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas,
Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency
income tax in the sum of P109.00, P91.00 and P49.00, respectively,
computed as follows: *
ANTONIO ROXAS
Net income per return
P315,476.59
Add: 1/3 share, profits in Roxas y Cia.
P 153,249.15
P 7,113.69
Contributions disallowed
115.00
P 7,228.69
Less 1/3 share of contributions amounting to P21,126.06 disallowed from
partnership but allowed to partners
7,042.02
186.67
Net income per review
P315,663.26
Less: Exemptions
4,200.00
Net taxable income
P311,463.26
Tax due
154,169.00
Tax paid
154,060.00
Deficiency
P 109.00
==========
EDUARDO ROXAS
Net income per return
P 304,166.92
Add: 1/3 share, profits in Roxas y Cia
P 153,249.15
Less profits declared
146,052.58
Amount understated
P 7,196.57
Less 1/3 share in contributions amounting to P21,126.06 disallowed from
partnership but allowed to partners
7,042.02
155.55
Net income per review
P304,322.47
Less: Exemptions
4,800.00
Net taxable income
P299,592.47
Tax Due
P147,250.00
Tax paid
147,159.00
Deficiency
P91.00
===========
JOSE ROXAS
Net income per return
P222,681.76
Add: 1/3 share, profits in Roxas y Cia.
P153,429.15
7,113.69
Less 1/3 share of contributions disallowed from partnership but allowed as
deductions to partners
7,042.02
71.67
Net income per review
P222,753.43
Less: Exemption
1,800.00
Net income subject to tax
P220,953.43
Tax due
P102,763.00
Tax paid
102,714.00
Deficiency
P 49.00
===========
WHEREFORE, the decision appealed from is modified. Roxas y Cia. is
hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for
1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to
pay the respective sums of P109.00, P91.00 and P49.00 as their individual
deficiency income tax all corresponding for the year 1955. No costs. So
ordered.
FERNAN, C.J.:
Petitioner, Marubeni Corporation, representing itself as a foreign corporation
duly organized and existing under the laws of Japan and duly licensed to
engage in business under Philippine laws with branch office at the 4th Floor,
FEEMI Building, Aduana Street, Intramuros, Manila seeks the reversal of the
decision of the Court of Tax Appeals 1 dated February 12, 1986 denying its claim
for refund or tax credit in the amount of P229,424.40 representing alleged
overpayment of branch profit remittance tax withheld from dividends by Atlantic Gulf
and Pacific Co. of Manila (AG&P).
The following facts are undisputed: Marubeni Corporation of Japan has equity
investments in AG&P of Manila. For the first quarter of 1981 ending March 31,
AG&P declared and paid cash dividends to petitioner in the amount of
P849,720 and withheld the corresponding 10% final dividend tax thereon.
Similarly, for the third quarter of 1981 ending September 30, AG&P declared
and paid P849,720 as cash dividends to petitioner and withheld the
corresponding 10% final dividend tax thereon. 2
AG&P directly remitted the cash dividends to petitioner's head office in Tokyo,
Japan, net not only of the 10% final dividend tax in the amounts of P764,748
for the first and third quarters of 1981, but also of the withheld 15% profit
remittance tax based on the remittable amount after deducting the final
withholding tax of 10%. A schedule of dividends declared and paid by AG&P
to its stockholder Marubeni Corporation of Japan, the 10% final intercorporate
dividend tax and the 15% branch profit remittance tax paid thereon, is shown
below:
1981
FIRST QUARTER (three months ended 3.31.81) (In Pesos)
THIRD QUARTER (three months ended 9.30.81)
TOTAL OF FIRST and THIRD quarters
Cash Dividends Paid
849,720.44
849,720.00
1,699,440.00
10% Dividend Tax Withheld
84,972.00
84,972.00
169,944.00
Cash Dividend net of 10% Dividend Tax Withheld
764,748.00
764,748.00
1,529,496.00
15% Branch Profit Remittance Tax Withheld
114,712.20
114,712.20
229,424.40 3
Net Amount Remitted to Petitioner
650,035.80
650,035.80
1,300,071.60
The 10% final dividend tax of P84,972 and the 15% branch profit remittance
tax of P114,712.20 for the first quarter of 1981 were paid to the Bureau of
Internal Revenue by AG&P on April 20, 1981 under Central Bank Receipt No.
6757880. Likewise, the 10% final dividend tax of P84,972 and the 15%
branch profit remittance tax of P114,712 for the third quarter of 1981 were
paid to the Bureau of Internal Revenue by AG&P on August 4, 1981 under
Central Bank Confirmation Receipt No. 7905930. 4
Thus, for the first and third quarters of 1981, AG&P as withholding agent paid
15% branch profit remittance on cash dividends declared and remitted to
petitioner at its head office in Tokyo in the total amount of P229,424.40 on
April 20 and August 4, 1981. 5
In a letter dated January 29, 1981, petitioner, through the accounting firm
Sycip, Gorres, Velayo and Company, sought a ruling from the Bureau of
Internal Revenue on whether or not the dividends petitioner received from
AG&P are effectively connected with its conduct or business in the
Philippines as to be considered branch profits subject to the 15% profit
remittance tax imposed under Section 24 (b) (2) of the National Internal
Revenue Code as amended by Presidential Decrees Nos. 1705 and 1773.
In reply to petitioner's query, Acting Commissioner Ruben Ancheta ruled:
Pursuant to Section 24 (b) (2) of the Tax Code, as amended, only profits
remitted abroad by a branch office to its head office which are effectively
connected with its trade or business in the Philippines are subject to the 15%
profit remittance tax. To be effectively connected it is not necessary that the
income be derived from the actual operation of taxpayer-corporation's trade
or business; it is sufficient that the income arises from the business activity in
which the corporation is engaged. For example, if a resident foreign
corporation is engaged in the buying and selling of machineries in the
Philippines and invests in some shares of stock on which dividends are
subsequently received, the dividends thus earned are not considered
'effectively connected' with its trade or business in this country. (Revenue
Memorandum Circular No. 55-80).
In the instant case, the dividends received by Marubeni from AG&P are not
income arising from the business activity in which Marubeni is engaged.
Accordingly, said dividends if remitted abroad are not considered branch
profits for purposes of the 15% profit remittance tax imposed by Section 24
(b) (2) of the Tax Code, as amended . . . 6
Consequently, in a letter dated September 21, 1981 and filed with the
Commissioner of Internal Revenue on September 24, 1981, petitioner
claimed for the refund or issuance of a tax credit of P229,424.40
"representing profit tax remittance erroneously paid on the dividends remitted
by Atlantic Gulf and Pacific Co. of Manila (AG&P) on April 20 and August 4,
1981 to ... head office in Tokyo. 7
On June 14, 1982, respondent Commissioner of Internal Revenue denied
petitioner's claim for refund/credit of P229,424.40 on the following grounds:
While it is true that said dividends remitted were not subject to the 15% profit
remittance tax as the same were not income earned by a Philippine Branch of
Marubeni Corporation of Japan; and neither is it subject to the 10%
intercorporate dividend tax, the recipient of the dividends, being a non-
resident stockholder, nevertheless, said dividend income is subject to the 25
% tax pursuant to Article 10 (2) (b) of the Tax Treaty dated February 13, 1980
between the Philippines and Japan.
Inasmuch as the cash dividends remitted by AG&P to Marubeni Corporation,
Japan is subject to 25 % tax, and that the taxes withheld of 10 % as
intercorporate dividend tax and 15 % as profit remittance tax totals (sic) 25 %,
the amount refundable offsets the liability, hence, nothing is left to be
refunded. 8
Petitioner appealed to the Court of Tax Appeals which affirmed the denial of
the refund by the Commissioner of Internal Revenue in its assailed judgment
of February 12, 1986. 9
In support of its rejection of petitioner's claimed refund, respondent Tax Court
explained:
Whatever the dialectics employed, no amount of sophistry can ignore the fact
that the dividends in question are income taxable to the Marubeni Corporation
of Tokyo, Japan. The said dividends were distributions made by the Atlantic,
Gulf and Pacific Company of Manila to its shareholder out of its profits on the
investments of the Marubeni Corporation of Japan, a non-resident foreign
corporation. The investments in the Atlantic Gulf & Pacific Company of the
Marubeni Corporation of Japan were directly made by it and the dividends on
the investments were likewise directly remitted to and received by the
Marubeni Corporation of Japan. Petitioner Marubeni Corporation Philippine
Branch has no participation or intervention, directly or indirectly, in the
investments and in the receipt of the dividends. And it appears that the funds
invested in the Atlantic Gulf & Pacific Company did not come out of the funds
infused by the Marubeni Corporation of Japan to the Marubeni Corporation
Philippine Branch. As a matter of fact, the Central Bank of the Philippines, in
authorizing the remittance of the foreign exchange equivalent of (sic) the
dividends in question, treated the Marubeni Corporation of Japan as a non-
resident stockholder of the Atlantic Gulf & Pacific Company based on the
supporting documents submitted to it.
Subject to certain exceptions not pertinent hereto, income is taxable to the
person who earned it. Admittedly, the dividends under consideration were
earned by the Marubeni Corporation of Japan, and hence, taxable to the said
corporation. While it is true that the Marubeni Corporation Philippine Branch
is duly licensed to engage in business under Philippine laws, such dividends
are not the income of the Philippine Branch and are not taxable to the said
Philippine branch. We see no significance thereto in the identity concept or
principal-agent relationship theory of petitioner because such dividends are
the income of and taxable to the Japanese corporation in Japan and not to
the Philippine branch. 10
Hence, the instant petition for review.
It is the argument of petitioner corporation that following the principal-agent
relationship theory, Marubeni Japan is likewise a resident foreign corporation
subject only to the 10 % intercorporate final tax on dividends received from a
domestic corporation in accordance with Section 24(c) (1) of the Tax Code of
1977 which states:
Dividends received by a domestic or resident foreign corporation liable to tax
under this Code (1) Shall be subject to a final tax of 10% on the total
amount thereof, which shall be collected and paid as provided in Sections 53
and 54 of this Code ....
Public respondents, however, are of the contrary view that Marubeni, Japan,
being a non-resident foreign corporation and not engaged in trade or
business in the Philippines, is subject to tax on income earned from Philippine
sources at the rate of 35 % of its gross income under Section 24 (b) (1) of the
same Code which reads:
(b) Tax on foreign corporations (1) Non-resident corporations. A foreign
corporation not engaged in trade or business in the Philippines shall pay a tax
equal to thirty-five per cent of the gross income received during each taxable
year from all sources within the Philippines as ... dividends ....
but expressly made subject to the special rate of 25% under Article 10(2) (b)
of the Tax Treaty of 1980 concluded between the Philippines and Japan. 11
Thus:
Article 10 (1) Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting State may be taxed in
that other Contracting State.
(2) However, such dividends may also be taxed in the Contracting State of
which the company paying the dividends is a resident, and according to the
laws of that Contracting State, but if the recipient is the beneficial owner of
the dividends the tax so charged shall not exceed;
(a) . . .
(b) 25 per cent of the gross amount of the dividends in all other cases.
Central to the issue of Marubeni Japan's tax liability on its dividend income
from Philippine sources is therefore the determination of whether it is a
resident or a non-resident foreign corporation under Philippine laws.
Under the Tax Code, a resident foreign corporation is one that is "engaged in
trade or business" within the Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines through its Philippine
branch that it must be considered as a resident foreign corporation. Petitioner
reasons that since the Philippine branch and the Tokyo head office are one
and the same entity, whoever made the investment in AG&P, Manila does not
matter at all. A single corporate entity cannot be both a resident and a non-
resident corporation depending on the nature of the particular transaction
involved. Accordingly, whether the dividends are paid directly to the head
office or coursed through its local branch is of no moment for after all, the
head office and the office branch constitute but one corporate entity, the
Marubeni Corporation, which, under both Philippine tax and corporate laws, is
a resident foreign corporation because it is transacting business in the
Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this
wise:
The general rule that a foreign corporation is the same juridical entity as its
branch office in the Philippines cannot apply here. This rule is based on the
premise that the business of the foreign corporation is conducted through its
branch office, following the principal agent relationship theory. It is understood
that the branch becomes its agent here. So that when the foreign corporation
transacts business in the Philippines independently of its branch, the
principal-agent relationship is set aside. The transaction becomes one of the
foreign corporation, not of the branch. Consequently, the taxpayer is the
foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch office,
the latter becomes the taxpayer, and not the foreign corporation. 12
In other words, the alleged overpaid taxes were incurred for the remittance of
dividend income to the head office in Japan which is a separate and distinct
income taxpayer from the branch in the Philippines. There can be no other
logical conclusion considering the undisputed fact that the investment
(totalling 283.260 shares including that of nominee) was made for purposes
peculiarly germane to the conduct of the corporate affairs of Marubeni Japan,
but certainly not of the branch in the Philippines. It is thus clear that petitioner,
having made this independent investment attributable only to the head office,
cannot now claim the increments as ordinary consequences of its trade or
business in the Philippines and avail itself of the lower tax rate of 10 %.
But while public respondents correctly concluded that the dividends in dispute
were neither subject to the 15 % profit remittance tax nor to the 10 %
intercorporate dividend tax, the recipient being a non-resident stockholder,
they grossly erred in holding that no refund was forthcoming to the petitioner
because the taxes thus withheld totalled the 25 % rate imposed by the
Philippine-Japan Tax Convention pursuant to Article 10 (2) (b).
To simply add the two taxes to arrive at the 25 % tax rate is to disregard a
basic rule in taxation that each tax has a different tax basis. While the tax on
dividends is directly levied on the dividends received, "the tax base upon
which the 15 % branch profit remittance tax is imposed is the profit actually
remitted abroad." 13
Public respondents likewise erred in automatically imposing the 25 % rate
under Article 10 (2) (b) of the Tax Treaty as if this were a flat rate. A closer
look at the Treaty reveals that the tax rates fixed by Article 10 are the
maximum rates as reflected in the phrase "shall not exceed." This means that
any tax imposable by the contracting state concerned should not exceed the
25 % limitation and that said rate would apply only if the tax imposed by our
laws exceeds the same. In other words, by reason of our bilateral
negotiations with Japan, we have agreed to have our right to tax limited to a
certain extent to attain the goals set forth in the Treaty.
Petitioner, being a non-resident foreign corporation with respect to the
transaction in question, the applicable provision of the Tax Code is Section 24
(b) (1) (iii) in conjunction with the Philippine-Japan Treaty of 1980. Said
section provides:
(b) Tax on foreign corporations. (1) Non-resident corporations ... (iii) On
dividends received from a domestic corporation liable to tax under this
Chapter, the tax shall be 15% of the dividends received, which shall be
collected and paid as provided in Section 53 (d) of this Code, subject to the
condition that the country in which the non-resident foreign corporation is
domiciled shall allow a credit against the tax due from the non-resident
foreign corporation, taxes deemed to have been paid in the Philippines
equivalent to 20 % which represents the difference between the regular tax
(35 %) on corporations and the tax (15 %) on dividends as provided in this
Section; ....
Proceeding to apply the above section to the case at bar, petitioner, being a
non-resident foreign corporation, as a general rule, is taxed 35 % of its gross
income from all sources within the Philippines. [Section 24 (b) (1)].
However, a discounted rate of 15% is given to petitioner on dividends
received from a domestic corporation (AG&P) on the condition that its
domicile state (Japan) extends in favor of petitioner, a tax credit of not less
than 20 % of the dividends received. This 20 % represents the difference
between the regular tax of 35 % on non-resident foreign corporations which
petitioner would have ordinarily paid, and the 15 % special rate on dividends
received from a domestic corporation.
Consequently, petitioner is entitled to a refund on the transaction in question
to be computed as follows:
Total cash dividend paid ................P1,699,440.00
less 15% under Sec. 24
(b) (1) (iii ) .........................................254,916.00
------------------
Cash dividend net of 15 % tax
due petitioner ...............................P1,444.524.00
less net amount
actually remitted .............................1,300,071.60
-------------------
Amount to be refunded to petitioner
representing overpayment of
taxes on dividends remitted ..............P 144 452.40
===========
It is readily apparent that the 15 % tax rate imposed on the dividends
received by a foreign non-resident stockholder from a domestic corporation
under Section 24 (b) (1) (iii) is easily within the maximum ceiling of 25 % of
the gross amount of the dividends as decreed in Article 10 (2) (b) of the Tax
Treaty.
There is one final point that must be settled. Respondent Commissioner of
Internal Revenue is laboring under the impression that the Court of Tax
Appeals is covered by Batas Pambansa Blg. 129, otherwise known as the
Judiciary Reorganization Act of 1980. He alleges that the instant petition for
review was not perfected in accordance with Batas Pambansa Blg. 129 which
provides that "the period of appeal from final orders, resolutions, awards,
judgments, or decisions of any court in all cases shall be fifteen (15) days
counted from the notice of the final order, resolution, award, judgment or
decision appealed from ....
This is completely untenable. The cited BP Blg. 129 does not include the
Court of Tax Appeals which has been created by virtue of a special law,
Republic Act No. 1125. Respondent court is not among those courts
specifically mentioned in Section 2 of BP Blg. 129 as falling within its scope.
Thus, under Section 18 of Republic Act No. 1125, a party adversely affected
by an order, ruling or decision of the Court of Tax Appeals is given thirty (30)
days from notice to appeal therefrom. Otherwise, said order, ruling, or
decision shall become final.
Records show that petitioner received notice of the Court of Tax Appeals's
decision denying its claim for refund on April 15, 1986. On the 30th day, or on
May 15, 1986 (the last day for appeal), petitioner filed a motion for
reconsideration which respondent court subsequently denied on November
17, 1986, and notice of which was received by petitioner on November 26,
1986. Two days later, or on November 28, 1986, petitioner simultaneously
filed a notice of appeal with the Court of Tax Appeals and a petition for review
with the Supreme Court. 14 From the foregoing, it is evident that the instant appeal
was perfected well within the 30-day period provided under R.A. No. 1125, the
whole 30-day period to appeal having begun to run again from notice of the denial
of petitioner's motion for reconsideration.
WHEREFORE, the questioned decision of respondent Court of Tax Appeals
dated February 12, 1986 which affirmed the denial by respondent
Commissioner of Internal Revenue of petitioner Marubeni Corporation's claim
for refund is hereby REVERSED. The Commissioner of Internal Revenue is
ordered to refund or grant as tax credit in favor of petitioner the amount of
P144,452.40 representing overpayment of taxes on dividends received. No
costs.
VITUG, J.:
Section 24(b) (2) (ii) of the National Internal Revenue Code, in the language it
was worded in 1982 (the taxable period relevant to the case at bench),
provided, in part, thusly:
Sec. 24. Rates of tax on corporations. . . .
(b) Tax on foreign corporations. . . .
(2) (ii) Tax on branch profit and remittances.
Any profit remitted abroad by a branch to its head office shall be subject to a
tax of fifteen per cent (15%) . . . ."
Petitioner Bank of America NT & SA argues that the 15% branch profit
remittance tax on the basis of the above provision should be assessed on the
amount actually remitted abroad, which is to say that the 15% profit
remittance tax itself should not form part of the tax base. Respondent
Commissioner of Internal Revenue, contending otherwise, holds the position
that, in computing the 15% remittance tax, the tax should be inclusive of the
sum deemed remitted.
The statement of facts made by the Court of Tax Appeals, later adopted by
the Court of Appeals, and not in any serious dispute by the parties, can be
quoted thusly:
Petitioner is a foreign corporation duly licensed to engage in business in the
Philippines with Philippine branch office at BA Lepanto Bldg., Paseo de
Roxas, Makati, Metro Manila. On July 20, 1982 it paid 15% branch profit
remittance tax in the amount of P7,538,460.72 on profit from its regular
banking unit operations and P445,790.25 on profit from its foreign currency
deposit unit operations or a total of P7,984,250.97. The tax was based on net
profits after income tax without deducting the amount corresponding to the
15% tax.
Petitioner filed a claim for refund with the Bureau of Internal Revenue of that
portion of the payment which corresponds to the 15% branch profit remittance
tax, on the ground that the tax should have been computed on the basis of
profits actually remitted, which is P45,244,088.85, and not on the amount
before profit remittance tax, which is P53,228,339.82. Subsequently, without
awaiting respondent's decision, petitioner filed a petition for review on June
14, 1984 with this Honorable Court for the recovery of the amount of
P1,041,424.03 computed as follows:
Net Profits After Profit Tax Due Alleged
Income Tax But Remittance Alleged by Overpayment
Before Profit Tax Paid Petitioner Item 1-2
Remittance Tax _________ _________ ___________
A. Regular Banking
Unit Operations
(P50,256,404.82)
1. Computation of BIR
15% x P50,256,404.82 - P7,538,460.72
2. Computation of
Petitioner
- P50,256,404.82 x 15% P6,555,183.24 P983,277.48
1.15
B. Foreign Currency
Deposit Unit
Operations
(P2,971,935)
1. Computation of BIR
15% x - P2,971,935.00 P445,790.25
2. Computation of
Petitioner
- P2,971,935.00 x 15% P387,643.70 P58,146.55
T O T A L. . P7,984,250.97 P6,942,286.94 P1,041,424.02" 1
The Court of Tax Appeals upheld petitioner bank in its claim for refund. The
Commissioner of Internal Revenue filed a timely appeal to the Supreme Court
(docketed G.R. No. 76512) which referred it to the Court of Appeals following
this Court's pronouncement in Development Bank of the Philippines vs. Court
of Appeals, et al. (180 SCRA 609). On 19 September 1990, the Court of
Appeals set aside the decision of the Court of Tax Appeals. Explaining its
reversal of the tax court's decision, the appellate court said:
The Court of Tax Appeals sought to deduce legislative intent vis-a-vis the
aforesaid law through an analysis of the wordings thereof, which to their
minds reveal an intent to mitigate at least the harshness of successive
taxation. The use of the word remitted may well be understood as referring to
that part of the said total branch profits which would be sent to the head office
as distinguished from the total profits of the branch (not all of which need be
sent or would be ordered remitted abroad). If the legislature indeed had
wanted to mitigate the harshness of successive taxation, it would have been
simpler to just lower the rates without in effect requiring the relatively novel
and complicated way of computing the tax, as envisioned by the herein
private respondent. The same result would have been achieved. 2
Hence, these petitions for review in G.R. No. 103092 and G.R.
No. 103106 (filed separately due to inadvertence) by the law firms of "Agcaoili
and Associates" and of "Sycip, Salazar, Hernandez and Gatmaitan" in
representation of petitioner bank.
We agree with the Court of Appeals that not much reliance can be made on
our decision in Burroughs Limited vs. Commission of Internal Revenue (142
SCRA 324), for there we ruled against the Commissioner mainly on the basis
of what the Court so then perceived as his position in a 21 January 1980
ruling the reversal of which, by his subsequent ruling of 17 March 1982, could
not apply retroactively against Burroughs in conformity with Section 327 (now
Section 246, re: non-retroactivity of rulings) of the National Internal Revenue
Code. Hence, we held:
Petitioner's aforesaid contention is without merit. What is applicable in the
case at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in
question on March 14, 1979. Memorandum Circular
No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the light
of Section 327 of the National Internal Revenue Code which
provides
Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal
of any of the rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation,
modification, or reversal will be prejudicial to the taxpayer except in the
following cases (a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the
Bureau of Internal Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-
CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a
retroactive application of Memorandum Circular No. 8-82 is beyond question
for it would be deprived of the substantial amount of P172,058.90. And,
insofar as the enumerated exceptions are concerned, admittedly, Burroughs
Limited does not fall under any of them.
The Court of Tax Appeals itself commented similarly when it observed thusly
in its decision:
In finding the Commissioner's contention without merit, this Court however
ruled against the applicability of Revenue Memorandum Circular No. 8-82
dated March 17, 1982 to the Burroughs Limited case because the taxpayer
paid the branch profit remittance tax involved therein on March 14, 1979 in
accordance with the ruling of the Commissioner of Internal Revenue dated
January 21, 1980. In view of Section 327 of the then in force National Internal
Revenue Code, Revenue Memorandum Circular No. 8-82 dated March 17,
1982 cannot be given retroactive effect because any revocation or
modification of any ruling or circular of the Bureau of Internal Revenue should
not be given retroactive application if such revocation or modification will,
subject to certain exceptions not pertinent thereto, prejudice taxpayers. 3
The Solicitor General correctly points out that almost invariably in an ad
valorem tax, the tax paid or withheld is not deducted from the tax base. Such
impositions as the ordinary income tax, estate and gift taxes, and the value
added tax are generally computed in like manner. In these cases, however, it
is so because the law, in defining the tax base and in providing for tax
withholding, clearly spells it out to be such. As so well expounded by the Tax
Court
. . . In all the situations . . . where the mechanism of withholding of taxes at
source operates to ensure collection of the tax, and which respondent claims
the base on which the tax is computed is the amount to be paid or remitted,
the law applicable expressly, specifically and unequivocally mandates that the
tax is on the total amount thereof which shall be collected and paid as
provided in Sections 53 and 54 of the Tax Code. Thus:
Dividends received by an individual who is a citizen or resident of the
Philippines from a domestic corporation, shall be subject to a final tax at the
rate of fifteen (15%) per cent on the total amount thereof, which shall be
collected and paid as provided in Sections 53 and 54 of this Code. (Emphasis
supplied; Sec. 21, Tax Code)
Interest from Philippine Currency bank deposits and yield from deposit
substitutes whether received by citizens of the Philippines or by resident alien
individuals, shall be subject to a final tax as follows: (a) 15% of the interest or
savings deposits, and (b) 20% of the interest on time deposits and yield from
deposits substitutes, which shall be collected and paid as provided in
Sections 53 and 54 of this Code: . . . (Emphasis supplied; Sec. 21, Tax Code
applicable.)
And on rental payments payable by the lessee to the lessor (at 5%), also
cited by respondent, Section 1, paragraph (C), of Revenue Regulations No.
13-78, November 1, 1978, provides that:
Section 1. Income payments subject to withholding tax and rates prescribed
therein. Except as therein otherwise provided, there shall be withheld a
creditable income tax at the rates herein specified for each class of payee
from the following items of income payments to persons residing in the
Philippines.
xxx xxx xxx
(C) Rentals When the gross rental or the payment required to be made as
a condition to the continued use or possession of property, whether real or
personal, to which the payor or obligor has not taken or is not taking title or in
which he has no equity, exceeds five hundred pesos (P500.00) per contract
or payment whichever is greater five per centum (5%).
Note that the basis of the 5% withholding tax, as expressly and
unambiguously provided therein, is on the gross rental. Revenue Regulations
No. 13-78 was promulgated pursuant to Section 53(f) of the then in force
National Internal Revenue Code which authorized the Minister of Finance,
upon recommendation of the Commissioner of Internal Revenue, to require
the withholding of income tax on the same items of income payable to
persons (natural or judicial) residing in the Philippines by the persons making
such payments at the rate of not less than 2 1/2% but not more than 35%
which are to be credited against the income tax liability of the taxpayer for the
taxable year.
On the other hand, there is absolutely nothing in Section 24(b) (2) (ii), supra,
which indicates that the 15% tax on branch profit remittance is on the total
amount of profit to be remitted abroad which shall be collected and paid in
accordance with the tax withholding device provided in Sections 53 and 54 of
the Tax Code. The statute employs "Any profit remitted abroad by a branch to
its head office shall be subject to a tax of fifteen per cent (15%)" without
more. Nowhere is there said of "base on the total amount actually applied for
by the branch with the Central Bank of the Philippines as profit to be remitted
abroad, which shall be collected and paid as provided in Sections 53 and 54
of this Code." Where the law does not qualify that the tax is imposed and
collected at source based on profit to be remitted abroad, that qualification
should not be read into the law. It is a basic rule of statutory construction that
there is no safer nor better canon of interpretation than that when the
language of the law is clear and unambiguous, it should be applied as written.
And to our mind, the term "any profit remitted abroad" can only mean such
profit as is "forwarded, sent, or transmitted abroad" as the word "remitted" is
commonly and popularly accepted and understood. To say therefore that the
tax on branch profit remittance is imposed and collected at source and
necessarily the tax base should be the amount actually applied for the branch
with the Central Bank as profit to be remitted abroad is to ignore the
unmistakable meaning of plain words. 4
In the 15% remittance tax, the law specifies its own tax base to be on the
"profit remitted abroad." There is absolutely nothing equivocal or uncertain
about the language of the provision. The tax is imposed on the amount sent
abroad, and the law (then in force) calls for nothing further. The taxpayer is a
single entity, and it should be understandable if, such as in this case, it is the
local branch of the corporation, using its own local funds, which remits the tax
to the Philippine Government.
The remittance tax was conceived in an attempt to equalize the income tax
burden on foreign corporations maintaining, on the one hand, local branch
offices and organizing, on the other hand, subsidiary domestic corporations
where at least a majority of all the latter's shares of stock are owned by such
foreign corporations. Prior to the amendatory provisions of the Revenue
Code, local branches were made to pay only the usual corporate income tax
of 25%-35% on net income (now a uniform 35%) applicable to resident
foreign corporations (foreign corporations doing business in the Philippines).
While Philippine subsidiaries of foreign corporations were subject to the same
rate of 25%-35% (now also a uniform 35%) on their net income, dividend
payments, however, were additionally subjected to a 15% (withholding) tax
(reduced conditionally from 35%). In order to avert what would otherwise
appear to be an unequal tax treatment on such subsidiaries vis-a-vis local
branch offices, a 20%, later reduced to 15%, profit remittance tax was
imposed on local branches on their remittances of profits abroad. But this is
where the tax pari-passu ends between domestic branches and subsidiaries
of foreign corporations.
The Solicitor General suggests that the analogy should extend to the ordinary
application of the withholding tax system and so with the rule on constructive
remittance concept as well. It is difficult to accept the proposition. In the
operation of the withholding tax system, the payee is the taxpayer, the person
on whom the tax is imposed, while the payor, a separate entity, acts no more
than an agent of the government for the collection of the tax in order to
ensure its payment. Obviously, the amount thereby used to settle the tax
liability is deemed sourced from the proceeds constitutive of the tax base.
Since the payee, not the payor, is the real taxpayer, the rule on constructive
remittance (or receipt) can be easily rationalized, if not indeed, made clearly
manifest. It is hardly the case, however, in the imposition of the 15%
remittance tax where there is but one taxpayer using its own domestic funds
in the payment of the tax. To say that there is constructive remittance even of
such funds would be stretching far too much that imaginary rule. Sound logic
does not defy but must concede to facts.
We hold, accordingly, that the written claim for refund of the excess tax
payment filed, within the two-year prescriptive period, with the Court of Tax
Appeals has been lawfully made.
WHEREFORE, the decision of the Court of Appeals appealed from is
REVERSED and SET ASIDE, and that of the Court of Tax Appeals is
REINSTATED.
RESOLUTION
FELICIANO, J.:p
For the taxable year 1974 ending on 30 June 1974, and the taxable year
1975 ending 30 June 1975, private respondent Procter and Gamble
Philippine Manufacturing Corporation ("P&G-Phil.") declared dividends
payable to its parent company and sole stockholder, Procter and Gamble Co.,
Inc. (USA) ("P&G-USA"), amounting to P24,164,946.30, from which dividends
the amount of P8,457,731.21 representing the thirty-five percent (35%)
withholding tax at source was deducted.
On 5 January 1977, private respondent P&G-Phil. filed with petitioner
Commissioner of Internal Revenue a claim for refund or tax credit in the
amount of P4,832,989.26 claiming, among other things, that pursuant to
Section 24 (b) (1) of the National Internal Revenue Code ("NITC"), 1 as amended
by Presidential Decree No. 369, the applicable rate of withholding tax on the dividends remitted was only
fifteen percent (15%) (and not thirty-five percent [35%]) of the dividends.
There being no responsive action on the part of the Commissioner, P&G-
Phil., on 13 July 1977, filed a petition for review with public respondent Court
of Tax Appeals ("CTA") docketed as CTA Case No. 2883. On 31 January
1984, the CTA rendered a decision ordering petitioner Commissioner to
refund or grant the tax credit in the amount of P4,832,989.00.
On appeal by the Commissioner, the Court through its Second Division
reversed the decision of the CTA and held that:
(a) P&G-USA, and not private respondent P&G-Phil., was the proper party to
claim the refund or tax credit here involved;
(b) there is nothing in Section 902 or other provisions of the US Tax Code that
allows a credit against the US tax due from P&G-USA of taxes deemed to
have been paid in the Philippines equivalent to twenty percent (20%) which
represents the difference between the regular tax of thirty-five percent (35%)
on corporations and the tax of fifteen percent (15%) on dividends; and
(c) private respondent P&G-Phil. failed to meet certain conditions necessary
in order that "the dividends received by its non-resident parent company in
the US (P&G-USA) may be subject to the preferential tax rate of 15% instead
of 35%."
These holdings were questioned in P&G-Phil.'s Motion for Re-consideration
and we will deal with them seriatim in this Resolution resolving that Motion.
I
1. There are certain preliminary aspects of the question of the capacity of
P&G-Phil. to bring the present claim for refund or tax credit, which need to be
examined. This question was raised for the first time on appeal, i.e., in the
proceedings before this Court on the Petition for Review filed by the
Commissioner of Internal Revenue. The question was not raised by the
Commissioner on the administrative level, and neither was it raised by him
before the CTA.
We believe that the Bureau of Internal Revenue ("BIR") should not be allowed
to defeat an otherwise valid claim for refund by raising this question of alleged
incapacity for the first time on appeal before this Court. This is clearly a
matter of procedure. Petitioner does not pretend that P&G-Phil., should it
succeed in the claim for refund, is likely to run away, as it were, with the
refund instead of transmitting such refund or tax credit to its parent and sole
stockholder. It is commonplace that in the absence of explicit statutory
provisions to the contrary, the government must follow the same rules of
procedure which bind private parties. It is, for instance, clear that the
government is held to compliance with the provisions of Circular No. 1-88 of
this Court in exactly the same way that private litigants are held to such
compliance, save only in respect of the matter of filing fees from which the
Republic of the Philippines is exempt by the Rules of Court.
More importantly, there arises here a question of fairness should the BIR,
unlike any other litigant, be allowed to raise for the first time on appeal
questions which had not been litigated either in the lower court or on the
administrative level. For, if petitioner had at the earliest possible opportunity,
i.e., at the administrative level, demanded that P&G-Phil. produce an express
authorization from its parent corporation to bring the claim for refund, then
P&G-Phil. would have been able forthwith to secure and produce such
authorization before filing the action in the instant case. The action here was
commenced just before expiration of the two (2)-year prescriptive period.
2. The question of the capacity of P&G-Phil. to bring the claim for refund has
substantive dimensions as well which, as will be seen below, also ultimately
relate to fairness.
Under Section 306 of the NIRC, a claim for refund or tax credit filed with the
Commissioner of Internal Revenue is essential for maintenance of a suit for
recovery of taxes allegedly erroneously or illegally assessed or collected:
Sec. 306. Recovery of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any national
internal revenue tax hereafter alleged to have been erroneously or illegally
assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly
filed with the Commissioner of Internal Revenue; but such suit or proceeding
may be maintained, whether or not such tax, penalty, or sum has been paid
under protest or duress. In any case, no such suit or proceeding shall be
begun after the expiration of two years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after payment: . .
. (Emphasis supplied)
Section 309 (3) of the NIRC, in turn, provides:
Sec. 309. Authority of Commissioner to Take Compromises and to Refund
Taxes.The Commissioner may:
xxx xxx xxx
(3) credit or refund taxes erroneously or illegally received, . . . No credit or
refund of taxes or penalties shall be allowed unless the taxpayer files in
writing with the Commissioner a claim for credit or refund within two (2) years
after the payment of the tax or penalty. (As amended by P.D. No. 69)
(Emphasis supplied)
Since the claim for refund was filed by P&G-Phil., the question which arises
is: is P&G-Phil. a "taxpayer" under Section 309 (3) of the NIRC? The term
"taxpayer" is defined in our NIRC as referring to "any person subject to tax
imposed by the Title [on Tax on Income]." 2 It thus becomes important to note that under
Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold any tax" is made "
personally liable for such tax" and indeed is indemnified against any claims and demands which the
stockholder might wish to make in questioning the amount of payments effected by the withholding agent in
accordance with the provisions of the NIRC. The withholding agent, P&G-Phil., is directly and independently
liable 3 for the correct amount of the tax that should be withheld from the dividend remittances. The
withholding agent is, moreover, subject to and liable for deficiency assessments, surcharges and penalties
should the amount of the tax withheld be finally found to be less than the amount that should have been
withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and
properly considered a "taxpayer." 4 The terms liable for tax" and "subject to tax" both connote
legal obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to consider a person
who is statutorily made "liable for tax" as not "subject to tax." By any reasonable standard, such a person
should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him.
In Philippine Guaranty Company, Inc. v. Commissioner of Internal Revenue, 5
this Court pointed out that a withholding agent is in fact the agent both of the government and of the
taxpayer, and that the withholding agent is not an ordinary government agent:
The law sets no condition for the personal liability of the withholding agent to
attach. The reason is to compel the withholding agent to withhold the tax
under all circumstances. In effect, the responsibility for the collection of the
tax as well as the payment thereof is concentrated upon the person over
whom the Government has jurisdiction. Thus, the withholding agent is
constituted the agent of both the Government and the taxpayer. With respect
to the collection and/or withholding of the tax, he is the Government's agent.
In regard to the filing of the necessary income tax return and the payment of
the tax to the Government, he is the agent of the taxpayer. The withholding
agent, therefore, is no ordinary government agent especially because under
Section 53 (c) he is held personally liable for the tax he is duty bound to
withhold; whereas the Commissioner and his deputies are not made liable by
law. 6 (Emphasis supplied)
If, as pointed out in Philippine Guaranty, the withholding agent is also an
agent of the beneficial owner of the dividends with respect to the filing of the
necessary income tax return and with respect to actual payment of the tax to
the government, such authority may reasonably be held to include the
authority to file a claim for refund and to bring an action for recovery of such
claim. This implied authority is especially warranted where, is in the instant
case, the withholding agent is the wholly owned subsidiary of the parent-
stockholder and therefore, at all times, under the effective control of such
parent-stockholder. In the circumstances of this case, it seems particularly
unreal to deny the implied authority of P&G-Phil. to claim a refund and to
commence an action for such refund.
We believe that, even now, there is nothing to preclude the BIR from requiring
P&G-Phil. to show some written or telexed confirmation by P&G-USA of the
subsidiary's authority to claim the refund or tax credit and to remit the
proceeds of the refund., or to apply the tax credit to some Philippine tax
obligation of, P&G-USA, before actual payment of the refund or issuance of a
tax credit certificate. What appears to be vitiated by basic unfairness is
petitioner's position that, although P&G-Phil. is directly and personally liable
to the Government for the taxes and any deficiency assessments to be
collected, the Government is not legally liable for a refund simply because it
did not demand a written confirmation of P&G-Phil.'s implied authority from
the very beginning. A sovereign government should act honorably and fairly at
all times, even vis-a-vis taxpayers.
We believe and so hold that, under the circumstances of this case, P&G-Phil.
is properly regarded as a "taxpayer" within the meaning of Section 309,
NIRC, and as impliedly authorized to file the claim for refund and the suit to
recover such claim.
II
1. We turn to the principal substantive question before us: the applicability to
the dividend remittances by P&G-Phil. to P&G-USA of the fifteen percent
(15%) tax rate provided for in the following portion of Section 24 (b) (1) of the
NIRC:
(b) Tax on foreign corporations.
(1) Non-resident corporation. A foreign corporation not engaged in trade
and business in the Philippines, . . ., shall pay a tax equal to 35% of the gross
income receipt during its taxable year from all sources within the Philippines,
as . . . dividends . . . Provided, still further, that on dividends received from a
domestic corporation liable to tax under this Chapter, the tax shall be 15% of
the dividends, which shall be collected and paid as provided in Section 53 (d)
of this Code, subject to the condition that the country in which the non-
resident foreign corporation, is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation, taxes deemed to have been
paid in the Philippines equivalent to 20% which represents the difference
between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this Section . . .
The ordinary thirty-five percent (35%) tax rate applicable to dividend
remittances to non-resident corporate stockholders of a Philippine
corporation, goes down to fifteen percent (15%) if the country of domicile of
the foreign stockholder corporation "shall allow" such foreign corporation a
tax credit for "taxes deemed paid in the Philippines," applicable against the
tax payable to the domiciliary country by the foreign stockholder corporation.
In other words, in the instant case, the reduced fifteen percent (15%) dividend
tax rate is applicable if the USA "shall allow" to P&G-USA a tax credit for
"taxes deemed paid in the Philippines" applicable against the US taxes of
P&G-USA. The NIRC specifies that such tax credit for "taxes deemed paid in
the Philippines" must, as a minimum, reach an amount equivalent to twenty
(20) percentage points which represents the difference between the regular
thirty-five percent (35%) dividend tax rate and the preferred fifteen percent
(15%) dividend tax rate.
It is important to note that Section 24 (b) (1), NIRC, does not require that the
US must give a "deemed paid" tax credit for the dividend tax (20 percentage
points) waived by the Philippines in making applicable the preferred divided
tax rate of fifteen percent (15%). In other words, our NIRC does not require
that the US tax law deem the parent-corporation to have paid the twenty (20)
percentage points of dividend tax waived by the Philippines. The NIRC only
requires that the US "shall allow" P&G-USA a "deemed paid" tax credit in an
amount equivalent to the twenty (20) percentage points waived by the
Philippines.
2. The question arises: Did the US law comply with the above requirement?
The relevant provisions of the US Intemal Revenue Code ("Tax Code") are
the following:
Sec. 901 Taxes of foreign countries and possessions of United States.
(a) Allowance of credit. If the taxpayer chooses to have the benefits of this
subpart, the tax imposed by this chapter shall, subject to the applicable
limitation of section 904, be credited with the amounts provided in the
applicable paragraph of subsection (b) plus, in the case of a corporation, the
taxes deemed to have been paid under sections 902 and 960. Such choice
for any taxable year may be made or changed at any time before the
expiration of the period prescribed for making a claim for credit or refund of
the tax imposed by this chapter for such taxable year. The credit shall not be
allowed against the tax imposed by section 531 (relating to the tax on
accumulated earnings), against the additional tax imposed for the taxable
year under section 1333 (relating to war loss recoveries) or under section
1351 (relating to recoveries of foreign expropriation losses), or against the
personal holding company tax imposed by section 541.
(b) Amount allowed. Subject to the applicable limitation of section 904, the
following amounts shall be allowed as the credit under subsection (a):
(a) Citizens and domestic corporations. In the case of a citizen of the
United States and of a domestic corporation, the amount of any income, war
profits, and excess profits taxes paid or accrued during the taxable year to
any foreign country or to any possession of the United States; and
xxx xxx xxx
Sec. 902. Credit for corporate stockholders in foreign corporation.
(A) Treatment of Taxes Paid by Foreign Corporation. For purposes of this
subject, a domestic corporation which owns at least 10 percent of the voting
stock of a foreign corporation from which it receives dividends in any taxable
year shall
xxx xxx xxx
(2) to the extent such dividends are paid by such foreign corporation out of
accumulated profits [as defined in subsection (c) (1) (b)] of a year for which
such foreign corporation is a less developed country corporation, be deemed
to have paid the same proportion of any income, war profits, or excess profits
taxes paid or deemed to be paid by such foreign corporation to any foreign
country or to any possession of the United States on or with respect to such
accumulated profits, which the amount of such dividends bears to the amount
of such accumulated profits.
xxx xxx xxx
(c) Applicable Rules
(1) Accumulated profits defined. For purposes of this section, the term
"accumulated profits" means with respect to any foreign corporation,
(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains,
profits, or income computed without reduction by the amount of the income,
war profits, and excess profits taxes imposed on or with respect to such
profits or income by any foreign country. . . .; and
(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains,
profits, or income in excess of the income, war profits, and excess profits
taxes imposed on or with respect to such profits or income.
The Secretary or his delegate shall have full power to determine from the
accumulated profits of what year or years such dividends were paid, treating
dividends paid in the first 20 days of any year as having been paid from the
accumulated profits of the preceding year or years (unless to his satisfaction
shows otherwise), and in other respects treating dividends as having been
paid from the most recently accumulated gains, profits, or earning. . . .
(Emphasis supplied)
Close examination of the above quoted provisions of the US Tax Code 7 shows
the following:
a. US law (Section 901, Tax Code) grants P&G-USA a tax credit for the
amount of the dividend tax actually paid (i.e., withheld) from the dividend
remittances to P&G-USA;
b. US law (Section 902, US Tax Code) grants to P&G-USA a "deemed paid'
tax credit 8 for a proportionate part of the corporate income tax actually paid to the Philippines by P&G-
Phil.
The parent-corporation P&G-USA is "deemed to have paid" a portion of the
Philippine corporate income tax although that tax was actually paid by its
Philippine subsidiary, P&G-Phil., not by P&G-USA. This "deemed paid"
concept merely reflects economic reality, since the Philippine corporate
income tax was in fact paid and deducted from revenues earned in the
Philippines, thus reducing the amount remittable as dividends to P&G-USA.
In other words, US tax law treats the Philippine corporate income tax as if it
came out of the pocket, as it were, of P&G-USA as a part of the economic
cost of carrying on business operations in the Philippines through the medium
of P&G-Phil. and here earning profits. What is, under US law, deemed paid
by P&G- USA are not "phantom taxes" but instead Philippine corporate
income taxes actually paid here by P&G-Phil., which are very real indeed.
It is also useful to note that both (i) the tax credit for the Philippine dividend
tax actually withheld, and (ii) the tax credit for the Philippine corporate income
tax actually paid by P&G Phil. but "deemed paid" by P&G-USA, are tax
credits available or applicable against the US corporate income tax of P&G-
USA. These tax credits are allowed because of the US congressional desire
to avoid or reduce double taxation of the same income stream. 9
In order to determine whether US tax law complies with the requirements for
applicability of the reduced or preferential fifteen percent (15%) dividend tax
rate under Section 24 (b) (1), NIRC, it is necessary:
a. to determine the amount of the 20 percentage points dividend tax waived
by the Philippine government under Section 24 (b) (1), NIRC, and which
hence goes to P&G-USA;
b. to determine the amount of the "deemed paid" tax credit which US tax law
must allow to P&G-USA; and
c. to ascertain that the amount of the "deemed paid" tax credit allowed by US
law is at least equal to the amount of the dividend tax waived by the
Philippine Government.
Amount (a), i.e., the amount of the dividend tax waived by the Philippine
government is arithmetically determined in the following manner:
P100.00 Pretax net corporate income earned by P&G-Phil.
x 35% Regular Philippine corporate income tax rate
100,000 **
(2) The amount of 15% of
P75,000 withheld = 11,250
P30,000
The amount of P18,750 deemed paid and to be credited against the U.S. tax
on the dividends received by the U.S. corporation from a Philippine subsidiary
is clearly more than 20% requirement of Presidential Decree No. 369 as 20%
of P75,000.00 the dividends to be remitted under the above example,
amounts to P15,000.00 only.
In the light of the foregoing, BIR Ruling No. 75-005 dated September 10,
1975 is hereby amended in the sense that the dividends to be remitted by
your client to its parent company shall be subject to the withholding tax at the
rate of 15% only.
This ruling shall have force and effect only for as long as the present pertinent
provisions of the U.S. Federal Tax Code, which are the bases of the ruling,
are not revoked, amended and modified, the effect of which will reduce the
percentage of tax deemed paid and creditable against the U.S. tax on
dividends remitted by a foreign corporation to a U.S. corporation. (Emphasis
supplied)
The 1976 Ruling was reiterated in, e.g., BIR Ruling dated 22 July 1981
addressed to Basic Foods Corporation and BIR Ruling dated 20 October
1987 addressed to Castillo, Laman, Tan and Associates. In other words, the
1976 Ruling of Hon. Efren I. Plana was reiterated by the BIR even as the
case at bar was pending before the CTA and this Court.
4. We should not overlook the fact that the concept of "deemed paid" tax
credit, which is embodied in Section 902, US Tax Code, is exactly the same
"deemed paid" tax credit found in our NIRC and which Philippine tax law
allows to Philippine corporations which have operations abroad (say, in the
United States) and which, therefore, pay income taxes to the US government.
Section 30 (c) (3) and (8), NIRC, provides:
(d) Sec. 30. Deductions from Gross Income.In computing net income, there
shall be allowed as deductions . . .
(c) Taxes. . . .
xxx xxx xxx
(3) Credits against tax for taxes of foreign countries. If the taxpayer
signifies in his return his desire to have the benefits of this paragraphs, the
tax imposed by this Title shall be credited with . . .
(a) Citizen and Domestic Corporation. In the case of a citizen of the
Philippines and of domestic corporation, the amount of net income, war
profits or excess profits, taxes paid or accrued during the taxable year to any
foreign country. (Emphasis supplied)
Under Section 30 (c) (3) (a), NIRC, above, the BIR must give a tax credit to a
Philippine corporation for taxes actually paid by it to the US government
e.g., for taxes collected by the US government on dividend remittances to the
Philippine corporation. This Section of the NIRC is the equivalent of Section
901 of the US Tax Code.
Section 30 (c) (8), NIRC, is practically identical with Section 902 of the US
Tax Code, and provides as follows:
(8) Taxes of foreign subsidiary. For the purposes of this subsection a
domestic corporation which owns a majority of the voting stock of a foreign
corporation from which it receives dividends in any taxable year shall be
deemed to have paid the same proportion of any income, war-profits, or
excess-profits taxes paid by such foreign corporation to any foreign country,
upon or with respect to the accumulated profits of such foreign corporation
from which such dividends were paid, which the amount of such dividends
bears to the amount of such accumulated profits: Provided, That the amount
of tax deemed to have been paid under this subsection shall in no case
exceed the same proportion of the tax against which credit is taken which the
amount of such dividends bears to the amount of the entire net income of the
domestic corporation in which such dividends are included. The term
"accumulated profits" when used in this subsection reference to a foreign
corporation, means the amount of its gains, profits, or income in excess of
the income, war-profits, and excess-profits taxes imposed upon or with
respect to such profits or income; and the Commissioner of Internal Revenue
shall have full power to determine from the accumulated profits of what year
or years such dividends were paid; treating dividends paid in the first sixty
days of any year as having been paid from the accumulated profits of the
preceding year or years (unless to his satisfaction shown otherwise), and in
other respects treating dividends as having been paid from the most recently
accumulated gains, profits, or earnings. In the case of a foreign corporation,
the income, war-profits, and excess-profits taxes of which are determined on
the basis of an accounting period of less than one year, the word "year" as
used in this subsection shall be construed to mean such accounting period.
(Emphasis supplied)
Under the above quoted Section 30 (c) (8), NIRC, the BIR must give a tax
credit to a Philippine parent corporation for taxes "deemed paid" by it, that is,
e.g., for taxes paid to the US by the US subsidiary of a Philippine-parent
corporation. The Philippine parent or corporate stockholder is "deemed"
under our NIRC to have paid a proportionate part of the US corporate income
tax paid by its US subsidiary, although such US tax was actually paid by the
subsidiary and not by the Philippine parent.
Clearly, the "deemed paid" tax credit which, under Section 24 (b) (1), NIRC,
must be allowed by US law to P&G-USA, is the same "deemed paid" tax
credit that Philippine law allows to a Philippine corporation with a wholly- or
majority-owned subsidiary in (for instance) the US. The "deemed paid" tax
credit allowed in Section 902, US Tax Code, is no more a credit for "phantom
taxes" than is the "deemed paid" tax credit granted in Section 30 (c) (8),
NIRC.
III
1. The Second Division of the Court, in holding that the applicable dividend
tax rate in the instant case was the regular thirty-five percent (35%) rate
rather than the reduced rate of fifteen percent (15%), held that P&G-Phil. had
failed to prove that its parent, P&G-USA, had in fact been given by the US tax
authorities a "deemed paid" tax credit in the amount required by Section 24
(b) (1), NIRC.
We believe, in the first place, that we must distinguish between the legal
question before this Court from questions of administrative implementation
arising after the legal question has been answered. The basic legal issue is of
course, this: which is the applicable dividend tax rate in the instant case: the
regular thirty-five percent (35%) rate or the reduced fifteen percent (15%)
rate? The question of whether or not P&G-USA is in fact given by the US tax
authorities a "deemed paid" tax credit in the required amount, relates to the
administrative implementation of the applicable reduced tax rate.
In the second place, Section 24 (b) (1), NIRC, does not in fact require that the
"deemed paid" tax credit shall have actually been granted before the
applicable dividend tax rate goes down from thirty-five percent (35%) to
fifteen percent (15%). As noted several times earlier, Section 24 (b) (1),
NIRC, merely requires, in the case at bar, that the USA "shall allow a credit
against the
tax due from [P&G-USA for] taxes deemed to have been paid in the
Philippines . . ." There is neither statutory provision nor revenue regulation
issued by the Secretary of Finance requiring the actual grant of the "deemed
paid" tax credit by the US Internal Revenue Service to P&G-USA before the
preferential fifteen percent (15%) dividend rate becomes applicable. Section
24 (b) (1), NIRC, does not create a tax exemption nor does it provide a tax
credit; it is a provision which specifies when a particular (reduced) tax rate is
legally applicable.
In the third place, the position originally taken by the Second Division results
in a severe practical problem of administrative circularity. The Second
Division in effect held that the reduced dividend tax rate is not applicable until
the US tax credit for "deemed paid" taxes is actually given in the required
minimum amount by the US Internal Revenue Service to P&G-USA. But, the
US "deemed paid" tax credit cannot be given by the US tax authorities unless
dividends have actually been remitted to the US, which means that the
Philippine dividend tax, at the rate here applicable, was actually imposed and
collected. 11 It is this practical or operating circularity that is in fact avoided by our BIR when it issues
rulings that the tax laws of particular foreign jurisdictions (e.g., Republic of Vanuatu 12 Hongkong, 13
Denmark, 14 etc.) comply with the requirements set out in Section 24 (b) (1), NIRC, for applicability of the
fifteen percent (15%) tax rate. Once such a ruling is rendered, the Philippine subsidiary begins to withhold at
the reduced dividend tax rate.
A requirement relating to administrative implementation is not properly
imposed as a condition for the applicability, as a matter of law, of a particular
tax rate. Upon the other hand, upon the determination or recognition of the
applicability of the reduced tax rate, there is nothing to prevent the BIR from
issuing implementing regulations that would require P&G Phil., or any
Philippine corporation similarly situated, to certify to the BIR the amount of the
"deemed paid" tax credit actually subsequently granted by the US tax
authorities to P&G-USA or a US parent corporation for the taxable year
involved. Since the US tax laws can and do change, such implementing
regulations could also provide that failure of P&G-Phil. to submit such
certification within a certain period of time, would result in the imposition of a
deficiency assessment for the twenty (20) percentage points differential. The
task of this Court is to settle which tax rate is applicable, considering the state
of US law at a given time. We should leave details relating to administrative
implementation where they properly belong with the BIR.
2. An interpretation of a tax statute that produces a revenue flow for the
government is not, for that reason alone, necessarily the correct reading of
the statute. There are many tax statutes or provisions which are designed,
not to trigger off an instant surge of revenues, but rather to achieve longer-
term and broader-gauge fiscal and economic objectives. The task of our
Court is to give effect to the legislative design and objectives as they are
written into the statute even if, as in the case at bar, some revenues have to
be foregone in that process.
The economic objectives sought to be achieved by the Philippine
Government by reducing the thirty-five percent (35%) dividend rate to fifteen
percent (15%) are set out in the preambular clauses of P.D. No. 369 which
amended Section 24 (b) (1), NIRC, into its present form:
WHEREAS, it is imperative to adopt measures responsive to the
requirements of a developing economy foremost of which is the financing of
economic development programs;
WHEREAS, nonresident foreign corporations with investments in the
Philippines are taxed on their earnings from dividends at the rate of 35%;
WHEREAS, in order to encourage more capital investment for large projects
an appropriate tax need be imposed on dividends received by non-resident
foreign corporations in the same manner as the tax imposed on interest on
foreign loans;
xxx xxx xxx
(Emphasis supplied)
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-flow of
foreign equity investment in the Philippines by reducing the tax cost of
earning profits here and thereby increasing the net dividends remittable to the
investor. The foreign investor, however, would not benefit from the reduction
of the Philippine dividend tax rate unless its home country gives it some relief
from double taxation (i.e., second-tier taxation) (the home country would
simply have more "post-R.P. tax" income to subject to its own taxing power)
by allowing the investor additional tax credits which would be applicable
against the tax payable to such home country. Accordingly, Section 24 (b) (1),
NIRC, requires the home or domiciliary country to give the investor
corporation a "deemed paid" tax credit at least equal in amount to the twenty
(20) percentage points of dividend tax foregone by the Philippines, in the
assumption that a positive incentive effect would thereby be felt by the
investor.
The net effect upon the foreign investor may be shown arithmetically in the
following manner:
P65.00 Dividends remittable to P&G-USA (please
see page 392 above
- 9.75 Reduced R.P. dividend tax withheld by P&G-Phil.
BIDIN, J.:
This is a petition for review on certiorari of the January 19, 1984 Decision of
the Court of Tax Appeals * in C.T.A. Case No.2884, entitled Wander Philippines, Inc. vs.
Commissioner of Internal Revenue, holding that Wander Philippines, Inc. is entitled to the preferential rate of
15% withholding tax on the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of
Switzerland, a non-resident foreign corporation.
Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a
domestic corporation organized under Philippine laws. It is wholly-owned
subsidiary of the Glaro S.A. Ltd. (Glaro for short), a Swiss corporation not
engaged in trade or business in the Philippines.
On July 18, 1975, Wander filed its withholding tax return for the second
quarter ending June 30, 1975 and remitted to its parent company, Glaro
dividends in the amount of P222,000.00, on which 35% withholding tax
thereof in the amount of P77,700.00 was withheld and paid to the Bureau of
Internal Revenue.
Again, on July 14, 1976, Wander filed a withholding tax return for the second
quarter ending June 30, 1976 on the dividends it remitted to Glaro amounting
to P355,200.00, on wich 35% tax in the amount of P124,320.00 was withheld
and paid to the Bureau of Internal Revenue.
On July 5, 1977, Wander filed with the Appellate Division of the Internal
Revenue a claim for refund and/or tax credit in the amount of P115,400.00,
contending that it is liable only to 15% withholding tax in accordance with
Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos.
369 and 778, and not on the basis of 35% which was withheld and paid to
and collected by the government.
Petitioner herein, having failed to act on the above-said claim for refund, on
July 15, 1977, Wander filed a petition with respondent Court of Tax Appeals.
On October 6, 1977, petitioner file his Answer.
On January 19, 1984, respondent Court of Tax Appeals rendered a Decision,
the decretal portion of which reads:
WHEREFORE, respondent is hereby ordered to grant a refund and/or tax
credit to petitioner in the amount of P115,440.00 representing overpaid
withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of
Switzerland during the second quarter of the years 1975 and 1976.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same
was denied in a Resolution dated August 13, 1984. Hence, the instant
petition.
Petitioner raised two (2) assignment of errors, to wit:
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS
ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED INHOLDING
THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, INC. IS
ENTITLED TO THE SAID REFUND.
II
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE
PARENT COMPANY OF THE HEREIN RESPONDENT WANDER
PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS
SWISS INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20
PERCENTAGE-POINT PORTION (OF THE 35 PERCENT PHILIPPINE
DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF
PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE
PHILIPPINE TAX CODE.
The sole issue in this case is whether or not private respondent Wander is
entitled to the preferential rate of 15% withholding tax on dividends declared
and remitted to its parent corporation, Glaro.
From this issue, two questions were posed by petitioner: (1) Whether or not
Wander is the proper party to claim the refund; and (2) Whether or not
Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on
such dividends.
Petitioner maintains and argues that it is Glaro the tax payer, and not Wander,
the remitter or payor of the dividend income and a mere withholding agent for
and in behalf of the Philippine Government, which should be legally entitled to
receive the refund if any.
It will be noted, however, that Petitioner's above-entitled argument is being
raised for the first time in this Court. It was never raised at the administrative
level, or at the Court of Tax Appeals. To allow a litigant to assume a different
posture when he comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a procedure
whereby the Courtwhich is supposed to review administrative
determinationswould not review, but determine and decide for the first time,
a question not raised at the administrative forum. Thus, it is well settled that
under the same underlying principle of prior exhaustion of administrative
remedies, on the judicial level, issues not raised in the lower court cannot be
raised for the first time on appeal (Aguinaldo Industries Corporation vs.
Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev.
Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA
597; Matialonzo vs. Servidad, 107 SCRA 726,
In any event, the submission of petitioner that Wander is but a withholding
agent of the government and therefore cannot claim reimbursement of the
alleged overpaid taxes, is untenable. It will be recalled, that said corporation
is first and foremost a wholly owned subsidiary of Glaro. The fact that it
became a withholding agent of the government which was not by choice but
by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch of
the imagination be considered as an abdication of its responsibility to its
mother company. Thus, this Court construing Section 53 (b) of the Internal
Revenue Code held that "the obligation imposed thereunder upon the
withholding agent is compulsory." It is a device to insure the collection by the
Philippine Government of taxes on incomes, derived from sources in the
Philippines, by aliens who are outside the taxing jurisdiction of this Court
(Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21
SCRA 944). In fact, Wander may be assessed for deficiency withholding tax
at source, plus penalties consisting of surcharge and interest (Section 54,
NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity
who should for the refund or credit of overpaid withholding tax on dividends
paid or remitted by Glaro.
Closely intertwined with the first assignment of error is the issue of whether or
not Switzerland, the foreign country where Glaro is domiciled, grants to Glaro
a tax credit against the tax due it, equivalent to 20%, or the difference
between the regular 35% rate of the preferential 15% rate. The dispute in this
issue lies on the fact that Switzerland does not impose any income tax on
dividends received by Swiss corporation from corporations domiciled in
foreign countries.
Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the law
involved in this case, reads:
Sec. 1. The first paragraph of subsection (b) of Section 24 of the National
Internal Revenue Code, as amended, is hereby further amended to read as
follows:
(b) Tax on foreign corporations. 1) Non-resident corporation. A foreign
corporation not engaged in trade or business in the Philippines, including a
foreign life insurance company not engaged in the life insurance business in
the Philippines, shall pay a tax equal to 35% of the gross income received
during its taxable year from all sources within the Philippines, as interest
(except interest on foreign loans which shall be subject to 15% tax),
dividends, premiums, annuities, compensations, remuneration for technical
services or otherwise, emoluments or other fixed or determinable, annual,
periodical or casual gains, profits, and income, and capital gains: ... Provided,
still further That on dividends received from a domestic corporation liable to
tax under this Chapter, the tax shall be 15% of the dividends received, which
shall be collected and paid as provided in Section 53 (d) of this Code, subject
to the condition that the country in which the non-resident foreign corporation
is domiciled shall allow a credit against the tax due from the non-resident
foreign corporation taxes deemed to have been paid in the Philippines
equivalent to 20% which represents the difference between the regular tax
(35%) on corporations and the tax (15%) dividends as provided in this
section: ...
From the above-quoted provision, the dividends received from a domestic
corporation liable to tax, the tax shall be 15% of the dividends received,
subject to the condition that the country in which the non-resident foreign
corporation is domiciled shall allow a credit against the tax due from the non-
resident foreign corporation taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the difference between the
regular tax (35%) on corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the dividends
received by Glaro. Accordingly, Wander claims that full credit is granted and
not merely credit equivalent to 20%. Petitioner, on the other hand, avers the
tax sparing credit is applicable only if the country of the parent corporation
allows a foreign tax credit not only for the 15 percentage-point portion actually
paid but also for the equivalent twenty percentage point portion spared,
waived or otherwise deemed as if paid in the Philippines; that private
respondent does not cite anywhere a Swiss law to the effect that in case
where a foreign tax, such as the Philippine 35% dividend tax, is spared
waived or otherwise considered as if paid in whole or in part by the foreign
country, a Swiss foreign-tax credit would be allowed for the whole or for the
part, as the case may be, of the foreign tax so spared or waived or
considered as if paid by the foreign country.
While it may be true that claims for refund are construed strictly against the
claimant, nevertheless, the fact that Switzerland did not impose any tax or the
dividends received by Glaro from the Philippines should be considered as a
full satisfaction of the given condition. For, as aptly stated by respondent
Court, to deny private respondent the privilege to withhold only 15% tax
provided for under Presidential Decree No. 369, amending Section 24 (b) (1)
of the Tax Code, would run counter to the very spirit and intent of said law
and definitely will adversely affect foreign corporations" interest here and
discourage them from investing capital in our country.
Besides, it is significant to note that the conclusion reached by respondent
Court is but a confirmation of the May 19, 1977 ruling of petitioner that "since
the Swiss Government does not impose any tax on the dividends to be
received by the said parent corporation in the Philippines, the condition
imposed under the above-mentioned section is satisfied. Accordingly, the
withholding tax rate of 15% is hereby affirmed."
Moreover, as a matter of principle, this Court will not set aside the conclusion
reached by an agency such as the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise on the subject
unless there has been an abuse or improvident exercise of authority (Reyes
vs. Commissioner of Internal Revenue, 24 SCRA 198, which is not present in
the instant case.
WHEREFORE, the petition filed is DISMISSED for lack of merit.
[G.R. No. L-26145. February 20, 1984.]
SYLLABUS
3. ID.; ID.; ID.; ID.; ID.; "REASONABLE NEEDS OF THE BUSINESS," CONSTRUED.
To determine the "reasonable needs" of the business in order to justify an
accumulation of earnings, the Courts of the United States have invented the so-called
"Immediacy Test" which construed the words "reasonable needs of the business" to
mean the immediate needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of the business, and the
penalty tax would apply. American cases likewise hold that investment of the earnings
and profits of the corporation in stock or securities of an unrelated business usually
indicates an accumulation beyond the reasonable needs of the business. (Helvering v.
Chicago Stockyards Co., 318 US 693; Helvering v. National Grocery Co., 304 US 282).
6. ID.; ID.; ID.; ID.; ID.; ID.; INTENTION AT THE TIME OF ACCUMULATION, BASIS OF
THE TAX; ACCUMULATION OF PROFITS IN CASE AT BAR, UNREASONABLE. In order
to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subsequently
declared intentions which are merely the product of afterthought (Basilan Estates, Inc.
v. Comm. of Internal Revenue, 21 SCRA 17 citing Jacob Mertens, Jr., The law of
Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213; Smoot and San &
Gravel Corp. v. Comm., 241 F 2d 197). A speculative and indefinite purpose will not
suffice. The mere recognition of a future problem and the discussion of possible and
alternative solutions is not sufficient. Definiteness of plan coupled with action taken
towards its consummation are essential (Fuel Carriers, Inc. v. US 202 F supp. 497;
Smoot Sand & Gravel Corp. v. Comm., supra). Viewed on the foregoing analysis and
tested under the "immediacy doctrine," We are convinced that the Court of Tax
Appeals is correct in finding that the investment made by petitioner in the U.S.A.
Treasury shares in 1951 was an accumulation of profits in excess of the reasonable
needs of petitioners business.
chanroblesvirtuallawlibrary
7. ID.; ID.; ID.; ID.; ACCUMULATIONS OF PRIOR YEARS TAKEN INTO ACCOUNT IN
DETERMINATION OF LIABILITY THEREFOR. The rule is now settled in Our
jurisprudence that undistributed earnings or profits of prior years are taken into
consideration in determining unreasonable accumulation for purposes of the 25%
surtax. The case of Basilan Estates, Inc. v. Commissioner of Internal Revenue further
strengthen this rule in determining unreasonable accumulation for the year
concerned.In determining whether accumulations of earnings or profits in a particular
year are within the reasonable needs of a corporation, it is necessary to take into
account prior accumulations, since accumulations prior to the year involved may have
been sufficient to cover the business needs and additional accumulations during the
year involved would not reasonably be necessary.
DECISION
GUERRERO, J.:
In this Petition for Review on Certiorari, Petitioner, the Manila Wine Merchants, Inc.,
disputes the decision of the Court of Tax Appeals ordering it (petitioner) to pay
respondent, the Commissioner of Internal Revenue, the amount of P86,804.38 as
25% surtax plus interest which represents the additional tax due petitioner for
improperly accumulating profits or surplus in the taxable year 1957 under Sec. 25 of
the National Internal Revenue Code. chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
The Court of Tax Appeals made the following finding of facts, to wit: jgc:chanrobles.com.ph
On February 26, 1963, the Commissioner of Internal Revenue demanded upon the
Manila Wine Merchants, Inc. payment of P126,536.12 as 25% surtax and interest on
the latters unreasonable accumulation of profits and surplus for the year 1957,
computed as follows: chanrob1es virtual 1aw library
=========
Respondent contends that petitioner has accumulated earnings beyond the reasonable
needs of its business because the average ratio of the cash dividends declared and
paid by petitioner from 1947 to 1957 was 40.33% of the total surplus available for
distribution at the end of each calendar year. On the other hand, petitioner contends
that in 1957, it distributed 100% of its net earnings after income tax and part of the
surplus for prior years. Respondent further submits that the accumulated earnings tax
should be based on 25% of the total surplus available at the end of each calendar
year while petitioner maintains that the 25% surtax is imposed on the total surplus or
net income for the year after deducting therefrom the income tax due.
The records show the following analysis of petitioners net income, cash dividends and
earned surplus for the years 1946 to 1957: 1
Percentage of
Dividends to
Another basis of respondent in assessing petitioner for accumulated earnings tax is its
substantial investment of surplus or profits in unrelated business. These investments
are itemized as follows:
chanrob1es virtual 1aw library
1. Acme Commercial Co., Inc. P 27,501.00
of Canton 1,145.76
375,865.26
=========
The first item consists of shares of Acme Commercial Co., Inc. which the Company
acquired in 1947 and 1949. In the said years, we thought it prudent to invest in a
business which patronizes us. As a supermarket, Acme Commercial Co., Inc. is one of
our best customers. The investment has proven to be beneficial to the stockholders of
this Company. As an example, the Company received cash dividends in 1961 totalling
P16,875.00 which was included in its income tax return for the said year.
The second and fourth items are small amounts which we believe would not affect
this case substantially. As regards the Union Insurance Society of Canton shares, this
was a pre-war investment, when Wise & Co., Inc., Manila Wine Merchants and the said
insurance firm were common stockholders of the Wise Bldg. Co.,, Inc. and the three
companies were all housed in the same building. Union Insurance invested in Wise
Bldg. Co., Inc. but invited Manila Wine Merchants, Inc. to buy a few of its shares.
With regards to the U.S.A. Treasury Bills in the amount of P347,217.50, in 1950, our
balance sheet for the said year shows the Company had deposited in current account
in various banks P629,403.64 which was not earning any interest. We decided to
utilize part of this money as reserve to finance our importations and to take care of
future expansion including acquisition of a lot and the construction of our own office
building and bottling plant.
At that time, we believed that a dollar reserve abroad would be useful to the Company
in meeting immediate urgent orders of its local customers. In order that the money
may earn interest, the Company, on May 31, 1951 purchased US Treasury bills with
90-day maturity and earning approximately 1% interest with the face value of
US$175,000.00. US Treasury Bills are easily convertible into cash and for the said
reason they may be better classified as cash rather than investments.
The Treasury Bills in question were held as such for many years in view of our
expectation that the Central Bank inspite of the controls would allow no-dollar licenses
importations. However, since the Central Bank did not relax its policy with respect
thereto, we decided sometime in 1957 to hold the bills for a few more years in view of
our plan to buy a lot and construct a building of our own. According to the lease
agreement over the building formerly occupied by us in Dasmarias St., the lease was
to expire sometime in 1957. At that time, the Company was not yet qualified to own
real property in the Philippines. We therefore waited until 60% of the stocks of the
Company would be owned by Filipino citizens before making definite plans. Then in
1959 when the Company was already more than 60% Filipino owned, we commenced
looking for a suitable location and then finally in 1961, we bought the man lot with an
old building on Otis St., Paco, our present site, for P665,000.00. Adjoining smaller lots
were bought later. After the purchase of the main property, we proceeded with the
remodelling of the old building and the construction of additions, which were
completed at a cost of P143,896.00 in April, 1962.
In view of the needs of the business of this Company and the purchase of the Otis lots
and the construction of the improvements thereon, most of its available funds
including the Treasury Bills had been utilized, but inspite of the said expenses the
Company consistently declared dividends to its stockholders. The Treasury Bills were
liquidated on February 15, 1962.
On the basis of the tabulated figures, supra, the Court of Tax Appeals found that the
average percentage of cash dividends distributed was 85.77% for a period of 11 years
from 1946 to 1957 and not only 40.33% of the total surplus available for distribution
at the end of each calendar year actually distributed by the petitioner to its
stockholders, which is indicative of the view that the Manila Wine Merchants, Inc. was
not formed for the purpose of preventing the imposition of income tax upon its
shareholders. 5
As to the U.S.A. Treasury Bonds amounting to P347,217.50, the Court of Tax Appeals
ruled that its purchase was in no way related to petitioners business of importing and
selling wines, whisky, liquors and distilled spirits. Respondent Court was convinced
that the surplus of P347,217.50 which was invested in the U.S.A. Treasury Bonds was
availed of by petitioner for the purpose of preventing the imposition of the surtax
upon petitioners shareholders by permitting its earnings and profits to accumulate
beyond the reasonable needs of business. Hence, the Court of Tax Appeals modified
respondents decision by imposing upon petitioner the 25% surtax for 1957 only in
the amount of P86,804.38 computed as follows: chanrob1es virtual 1aw library
Unreasonable accumulation
of surplus P347,217.50
On May 30, 1966, the Court of Tax Appeals denied the motion for reconsideration filed
by petitioner on March 30, 1966. Hence, this petition.
The Court of Tax Appeals erred in holding that petitioner was availed of for the
purpose of preventing the imposition of a surtax on its shareholders.
II
The Court of Tax Appeals erred in holding that petitioners purchase of U.S.A. Treasury
Bills in 1951 was an investment in unrelated business subject to the 25% surtax in
1957 as surplus profits improperly accumulated in the latter years.
III
The Court of Tax Appeals erred in not finding that petitioner did not accumulate its
surplus profits improperly in 1957, and in not holding that such surplus profits,
including the so-called unrelated investments, were necessary for its reasonable
business needs.
IV
The Court of Tax Appeals erred in not holding that petitioner had overcome the prima
facie presumption provided for in Section 25(c) of the Revenue Code.
The Court of Tax Appeals erred in finding petition liable for the payment of the surtax
of P86,804.38 and in denying petitioners Motion for Reconsideration and/or New Trial.
The issues in this case can be summarized as follows: (1) whether the purchase of the
U.S.A. Treasury bonds by petitioner in 1951 can be construed as an investment to an
unrelated business and hence, such was availed of by petitioner for the purpose of
preventing the imposition of the surtax upon petitioners shareholders by permitting
its earnings and profits to accumulate beyond the reasonable needs of the business,
and if so, (2) whether the penalty tax of twenty-five percent (25%) can be imposed
on such improper accumulation in 1957 despite the fact that the accumulation
occurred in 1951.chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
The pertinent provision of the National Internal Revenue Code reads as follows: jgc:chanrobles.com.ph
x x x
(c) Evidence determinative of purpose. The fact that the earnings of profits of a
corporation are permitted to accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon its shareholders or
members unless the corporation, by clear preponderance of evidence, shall prove the
contrary." (As amended by Republic Act No. 1823).
As correctly pointed out by the Court of Tax Appeals, inasmuch as the provisions of
Section 25 of the National Internal Revenue Code were bodily lifted from Section 102
of the U.S. Internal Revenue Code of 1939, including the regulations issued in
connection therewith, it would be proper to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment. chanrobles virtual lawlibrary
A prerequisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax (or surtax) on its shareholders,
or on the shareholders of any other corporation by permitting the earnings and profits
of the corporation to accumulate instead of dividing them among or distributing them
to the shareholders. If the earnings and profits were distributed, the shareholders
would be required to pay an income tax thereon whereas, if the distribution were not
made to them, they would incur no tax in respect to the undistributed earnings and
profits of the corporation. 8 The touchstone of liability is the purpose behind the
accumulation of the income and not the consequences of the accumulation. 9 Thus, if
the failure to pay dividends is due to some other cause, such as the use of
undistributed earnings and profits for the reasonable needs of the business, such
purpose does not fall within the interdiction of the statute. 10
In purchasing the U.S.A. Treasury Bonds, in 1951, petitioner argues that these bonds
were so purchased (1) in order to finance their importation; and that a dollar reserve
abroad would be useful to the Company in meeting urgent orders of its local
customers and (2) to take care of future expansion including the acquisition of a lot
and the construction of their office building and bottling plant.
To avoid the twenty-five percent (25%) surtax, petitioner has to prove that the
purchase of the U.S.A. Treasury Bonds in 1951 with a face value of $175,000.00 was
an investment within the reasonable needs of the Corporation.
The finding of the Court of Tax Appeals that the purchase of the U.S.A. Treasury bonds
were in no way related to petitioners business of importing and selling wines whisky,
liquors and distilled spirits, and thus construed as an investment beyond the
reasonable needs of the business 14 is binding on Us, the same being factual. 15
Furthermore, the wisdom behind thus finding cannot be doubted, The case of J.M.
Perry & Co. v. Commissioner of Internal Revenue 16 supports the same. In that case,
the U.S. Court said the following: jgc:chanrobles.com.ph
"It appears that the taxpayer corporation was engaged in the business of cold storage
and wareshousing in Yahima, Washington. It maintained a cold storage plant, divided
into four units, having a total capacity of 490,000 boxes of fruits. It presented
evidence to the effect that various alterations and repairs to its plant were
contemplated in the tax years, . . .
It also appeared that in spite of the fact that the taxpayer contended that it needed to
maintain this large cash reserve on hand, it proceeded to make various investments
which had no relation to its storage business. In 1934, it purchased mining stock
which it sold in 1935 at a profit of US $47,995.29. . . .
All these things may reasonably have appealed to the Board as incompatible with a
purpose to strengthen the financial position of the taxpayer and to provide for needed
alteration."
cralaw virtua1aw library
The records further reveal that from May 1951 when petitioner purchased the U.S.A.
Treasury shares, until 1962 when it finally liquidated the same, it (petitioner) never
had the occasion to use the said shares in aiding or financing its importation. This
militates against the purpose enunciated earlier by petitioner that the shares were
purchased to finance its importation business. To justify an accumulation of earnings
and profits for the reasonably anticipated future needs, such accumulation must be
used within a reasonable time after the close of the taxable year. 17
Petitioner advanced the argument that the U.S.A. Treasury shares were held for a few
more years from 1957, in view of a plan to buy a lot and construct a building of their
own; that at that time (1957), the Company was not yet qualified to own real
property in the Philippines, hence it (petitioner) had to wait until sixty percent (60%)
of the stocks of the Company would be owned by Filipino citizens before making
definite plans. 18
These arguments of petitioner indicate that it considers the U.S.A. Treasury shares not
only for the purpose of aiding or financing its importation but likewise for the purpose
of buying a lot and constructing a building thereon in the near future, but conditioned
upon the completion of the 60% citizenship requirement of stock ownership of the
Company in order to qualify it to purchase and own a lot. The time when the company
would be able to establish itself to meet the said requirement and the decision to
pursue the same are dependent upon various future contingencies. Whether these
contingencies would unfold favorably to the Company and if so, whether the Company
would decide later to utilize the U.S.A. Treasury shares according to its plan, remains
to be seen. From these assertions of petitioner, We cannot gather anything definite or
certain. This, We cannot approve. chanrobles law library
In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subsequently
declared intentions which are merely the product of afterthought. 19 A speculative
and indefinite purpose will not suffice. The mere recognition of a future problem and
the discussion of possible and alternative solutions is not sufficient. Definiteness of
plan coupled with action taken towards its consummation are essential. 20 The Court
of Tax Appeals correctly made the following ruling: 21
"As to the statement of Mr. Hawkins in Exh. "B" regarding the expansion program of
the petitioner by purchasing a lot and building of its own, we find no justifiable reason
for the retention in 1957 or thereafter of the US Treasury Bonds which were
purchased in 1951.
x x x
"Moreover, if there was any thought for the purchase of a lot and building for the
needs of petitioners business, the corporation may not with impunity permit its
earnings to pile up merely because at some future time certain outlays would have to
be made. Profits may only be accumulated for the reasonable needs of the business,
and implicit in this is further requirement of a reasonable time." cralaw virtua1aw library
Viewed on the foregoing analysis and tested under the "immediacy doctrine," We are
convinced that the Court of Tax Appeals is correct in finding that the investment made
by petitioner in the U.S.A. Treasury shares in 1951 was an accumulation of profits in
excess of the reasonable needs of petitioners business.
Finally, petitioner asserts that the surplus profits allegedly accumulated in the form of
U.S.A. Treasury shares in 1951 by it (petitioner) should not be subject to the surtax in
1957. In other words, petitioner claims that the surtax of 25% should be based on the
surplus accumulated in 1951 and not in 1957.
The rule is now settled in Our jurisprudence that undistributed earnings or profits of
prior years are taken into consideration in determining unreasonable accumulation for
purposes of the 25% surtax. 22 The case of Basilan Estates, Inc. v. Commissioner of
Internal Revenue 23 further strengthen this rule, and We quote: jgc:chanrobles.com.ph
"Petitioner questions why the examiner covered the period from 1948-1953 when the
taxable year on review was 1953. The surplus of P347,507.01 was taken by the
examiner from the balance sheet of the petitioner for 1953. To check the figure
arrived at, the examiner traced the accumulation process from 1947 until 1953, and
petitioners figure stood out to be correct. There was no error in the process applied,
for previous accumulations should be considered in determining unreasonable
accumulation for the year concerned.In determining whether accumulations of
earnings or profits in a particular year are within the reasonable needs of a
corporation, it is necessary to take into account prior accumulations, since
accumulations prior to the year involved may have been sufficient to cover the
business needs and additional accumulations during the year involved would not
reasonably be necessary." chanroblesvirtuallawlibrary
WHEREFORE, IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals
is AFFIRMED in toto, with costs against petitioner.
GRIO-AQUINO, J.:
Elevated to this Court for review is the decision dated October 14, 1988 of the
Court of Tax Appeals in CTA Case No. 3865, entitled "Antonio Tuason, Inc.
vs. Commissioner of Internal Revenue," which set aside the petitioner
Revenue Commissioner's assessment of P1,151,146.98 as the 25% surtax
on the private respondent's unreasonable accumulation of surplus for the
years 1975-1978.
Under date of February 27, 1981, the petitioner, Commissioner of Internal
Revenue, assessed Antonio Tuason, Inc.
a
b Deficiency income tax for the years 1975,1976 and 1978 . . . . . . .
.. P37,491.83.
c
(b) Deficiency corporate quarterly income tax for the first quarter of 1975 . . .
. . . . . . . . . . . . . . . . . . 161.49.
(c) 25% surtax on unreasonable accumulation of surplus for the years 1975-
1978 . . . . . . . . . . . . 1,151,146.98.
The private respondent did not object to the first and second items and,
therefore, paid the amounts demanded. However, it protested the
assessment on a 25% surtax on the third item on the ground that the
accumulation of surplus profits during the years in question was solely for the
purpose of expanding its business operations as real estate broker. The
request for reinvestigation was granted on condition that a waiver of the
statute of limitations should be filed by the private respondent. The latter
replied that there was no need of a waiver of the statute of limitaitons
because the right of the Government to assess said tax does not prescribe.
No investigation was conducted nor a decision rendered on Antonio Tuazon
Inc.'s protest. meantime, the Revenue Commissioner issued warrants of
distraint and levy to enforce collection of the total amount originally assessed
including the amounts already paid.
The private respondent filed a petition for review in the Court of Tax Appeals
with a request that pending determination of the case on the merits, an order
be issued restraining the Commissioner and/or his representatives from
enforcing the warrants of distraint and levy. Since the right asserted by the
Commissioner to collect the taxes involved herein by the summary methods
of distraint and levy was not clear, and it was shown that portions of the tax
liabilities involved in the assessment had already been paid, a writ of
injunction was issued by the Tax Court on November 26, 1984, ordering the
Commissioner to refrain fron enforcing said warrants of distraint and levy. It
did not require the petitioner to file a bond (Annex A, pp. 28-30, Rollo).
In view of the reversal of the Commissioner's decision by the Court of Tax
Appeals, the petitioner appealed to this Court, raising the following issues:
1. Whether or not private respondent Antonio Tuason, Inc. is a holding
company and/or investment company;
2. Whether or not privaaate respondent Antonio Tuason, Inc. accumulated
surplus for the years 1975 to 1978; and
3. Whether or not Antonio Tuason, Inc. is liable for the 25% surtax on undue
accumulation of surplus for the years 1975 to 1978.
Section 25 of the Tax Code at the time the surtax was assessed, provided:
Sec. 25. Additional tax on corporation improperly accumulating profits or
surplus.
(a) Imposition of tax. If any corporation, except banks, insurance
companies, or personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of the tax
upon its shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its gains and profits to
accumulate instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated profits
or surplus which shall be in addition to the tax imposed by section twenty-
four, and shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that tax.
(b) Prima facie evidence. The fact that any corporation is a mere holding
company shall be prima facie evidence of a purpose to avoid the tax upon its
shareholders or members. Similar presumption will lie in the case of an
investment company where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned, directly or indirectly, by
one person.
(c) Evidence determinative of purpose. The fact that the earnings or profits
of a corporation are permitted to accumulate beyond the reasonable needs of
the business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear preponderance of
evidence, shall prove the contrary.
The petition for review is meritorious.
The Court of Tax Appeals conceded that the Revenue Commissioner's
determination that Antonio Tuason, Inc. was a mere holding or investment
company, was "presumptively correct" (p. 7, Annex A), for the corporation did
not involve itself in the development of subdivisions but merely subdivided its
own lots and sold them for bigger profits. It derived its income mostly from
interest, dividends and rental realized from the sale of realty.
Another circumstance supporting that presumption is that 99.99% in value of
the outstanding stock of Antonio Tuason, Inc., is owned by Antonio Tuason
himself. The Commissioner "conclusively presumed" that when the
corporation accumulated (instead of distributing to the shareholders) a
surplus of over P3 million fron its earnings in 1975 up to 1978, the purpose
was to avoid the imposition of the progressive income tax on its shareholders.
That Antonio Tuason, Inc. accumulated surplus profits amounting to
P3,263,305.88 for 1975 up to 1978 is not disputed. However, the private
respondent vehemently denies that its purpose was to evade payment of the
progressive income tax on such dividends by its stockholders. According to
the private respondent, surplus profits were set aside by the company to build
up sufficient capital for its expansion program which included the construction
in 1979-1981 of an apartment building, and the purchase in 1980 of a
condominium unit which was intended for resale or lease.
However, while these investments were actually made, the Commissioner
points out that the corporation did not use up its surplus profits. It allegation
that P1,525,672.74 was spent for the construction of an apartment building in
1979 and P1,752,332.87 for the purchase of a condominium unit in Urdaneta
Village in 1980 was refuted by the Declaration of Real Property on the
apartment building (Exh. C) which shows that its market value is only
P429,890.00, and the Tax Declaration on the condominium unit which reflects
a market value of P293,830.00 only (Exh. D-1). The enormous discrepancy
between the alleged investment cost and the declared market value of these
pieces of real estate was not denied nor explained by the private respondent.
Since the company as of the time of the assessment in 1981, had invested in
its business operations only P 773,720 out of its accumulated surplus profits
of P3,263,305.88 for 1975-1978, its remaining accumulated surplus profits of
P2,489,858.88 are subject to the 25% surtax.
All presumptions are in favor of the correctness of petitioner's assessment
against the private respondent. It is incumbent upon the taxpayer to prove the
contrary (Mindanao Bus Company vs. Commissioner of Internal Revenue, 1
SCRA 538). Unfortunately, the private respondent failed to overcome the
presumption of correctness of the Commissioner's assessment.
The touchstone of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation. Thus, if the failure to
pay dividends were for the purpose of using the undistributed earnings and
profits for the reasonable needs of the business, that purpose would not fall
within the interdiction of the statute" (Mertens Law of Federal Income
Taxation, Vol. 7, Chapter 39, p. 45 cited in Manila Wine Merchants, Inc. vs.
Commissioner of Internal Revenue, 127 SCRA 483, 493).
It is plain to see that the company's failure to distribute dividends to its
stockholders in 1975-1978 was for reasons other than the reasonable needs
of the business, thereby falling within the interdiction of Section 25 of the Tax
Code of 1977.
WHEREFORE, the appealed decision of the Court of Tax Appeals is hereby
set aside. The petitioner's assessment of a 25% surtax against the Antonio
Tuason, Inc. is reinstated but only on the latter's unspent accumulated
surplus profits of P2,489,585.88. No costs.
14,575,210.00
Add: Discrepancies:
Professional fees/yr.
per investigation
17018
262,877.00
110,399.37
Total Adjustment
152,477.00
Net income per Investigation
14,727,687.00
Less: Personal and additional exemptions
___________
Amount subject to tax
14,727,687.00
Income tax due thereon .25% Surtax 2,385,231.50
3,237,495.00
Less: Amount already assessed .
5,161,788.00
BALANCE .
75,709.00
_______ monthly interest from ..1,389,636.00
44,108.00
_________
____________
Compromise penalties ...
___________
TOTAL AMOUNT DUE ..3,774,867.50
119,817.00"[if !supportFootnotes][3][endif]
Sc-lex
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[if!supportMisalignedColumns]
[endif]
On March 4, 1985, petitioner protested the assessments particularly, (1) the
25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency Income
Assessment of P119,817.00; and 1981 Deficiency Percentage Assessment
of P8,846.72. Petitioner, through its external accountant,
[if !supportFootnotes][4][endif]
Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax for the
undue accumulation of earnings was not proper because the said profits
were retained to increase petitioners working capital and it would be used
for reasonable business needs of the company. Petitioner contended that it
availed of the tax amnesty under Executive Order No. 41, hence enjoyed
amnesty from civil and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused
to allow the cancellation of the assessment notices and rendered its
resolution, as follows:
"It appears that your client availed of Executive Order No. 41 under File
No. 32A-F-000455-41B as certified and confirmed by our Tax Amnesty
Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of the
tax amnesty under Executive Order No. 41, as amended is sufficient basis,
in appropriate cases, for the cancellation of the assessment issued after
August 21, 1986. (Revenue Memorandum Order No. 4-87) Said availment
does not, therefore, result in cancellation of assessments issued before
August 21, 1986, as in the instant case. In other words, the assessments in
this case issued on January 30, 1985 despite your clients availment of the
tax amnesty under Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client to pay
this Office the aforementioned deficiency income tax and surtax on undue
accumulation of surplus in the respective amounts of P119,817.00 and
P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty
(30) days from receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter."
[if !supportFootnotes][5]
[endif]
= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
states: Sd-aad-sc
"Sec. 25. Additional tax on corporation improperly accumulating profits
or surplus -
"(a) Imposition of tax. -- If any corporation is formed or availed of for the
purpose of preventing the imposition of the tax upon its
shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its
gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-
five per-centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to
the tax imposed by section twenty-four, and shall be
computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties,
as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is mere holding
company shall be prima facie evidence of a purpose to
avoid the tax upon its shareholders or members. Similar
presumption will lie in the case of an investment company
where at any time during the taxable year more than fifty
per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
"(c) Evidence determinative of purpose. -- The fact that the earnings or
profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative
of the purpose to avoid the tax upon its shareholders or
members unless the corporation, by clear preponderance of
evidence, shall prove the contrary. M-issdaa
"(d) Exception -- The provisions of this sections shall not apply to banks,
non-bank financial intermediaries, corporation organized
primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends,
income taxes are not paid on the undeclared dividends
received by the shareholders. The tax on improper
accumulation of surplus is essentially a penalty tax
designed to compel corporations to distribute earnings so
that the said earnings by shareholders could, in turn, be
taxed.
Relying on decisions of the American Federal Courts, petitioner stresses
that the accumulated earnings tax does not apply to
Cyanamid, a wholly owned subsidiary of a publicly owned
company. Specifically, petitioner cites
[if !supportFootnotes][10][endif]
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we held that:
"...[T]here is no need to have such a large amount at the beginning of the
following year because during the year, current assets are
converted into cash and with the income realized from the
business as the year goes, these expenses may well be taken
care of. [citation omitted]. Thus, it is erroneous to say that
the taxpayer is entitled to retain enough liquid net assets in
amounts approximately equal to current operating needs for
the year to cover cost of goods sold and operating expenses:
for it excludes proper consideration of funds generated by
the collection of notes receivable as trade accounts during
the course of the year." [if !supportFootnotes][26][endif]
If the CIR determined that the corporation avoided the tax on shareholders
by permitting earnings or profits to accumulate, and the
taxpayer contested such a determination, the burden of
proving the determination wrong, together with the
corresponding burden of first going forward with evidence,
is on the taxpayer. This applies even if the corporation is
not a mere holding or investment company and does not
have an unreasonable accumulation of earnings or profits. [if !
supportFootnotes][27][endif]
we ruled: xl-aw
supportFootnotes][29][endif]
In the present case, the Tax Court opted to determine the working capital
sufficiency by using the ratio between current assets to
current liabilities. The working capital needs of a business
depend upon the nature of the business, its credit policies,
the amount of inventories, the rate of turnover, the amount
of accounts receivable, the collection rate, the availability
of credit to the business, and similar factors. Petitioner, by
adhering to the "Bardahl" formula, failed to impress the tax
court with the required definiteness envisioned by the
statute. We agree with the tax court that the burden of proof
to establish that the profits accumulated were not beyond
the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion
reached by the Court of Tax Appeals which, by the very
nature of its function, is dedicated exclusively to the
consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been
an abuse or improvident exercise of authority. [if !supportFootnotes][31][endif]