Ormoc Sugar Company vs Ormoc City

In 1964, Ormoc City passed a bill which read: There shall be paid to the
City Treasurer on any and all productions of centrifugal sugar milled at the
Ormoc Sugar Company Incorporated, in Ormoc City a municipal tax
equivalent to one per centum (1%) per export sale to the United States of
America and other foreign countries. Though referred to as a production
tax, the imposition actually amounts to a tax on the export of centrifugal
sugar produced at Ormoc Sugar Company, Inc. For production of sugar
alone is not taxable; the only time the tax applies is when the sugar
produced is exported. Ormoc Sugar paid the tax (P7,087.50) in protest
averring that the same is violative of Sec 2287 of the Revised
Administrative Code which provides: It shall not be in the power of the
municipal council to impose a tax in any form whatever, upon goods and
merchandise carried into the municipality, or out of the same, and any
attempt to impose an import or export tax upon such goods in the guise of
an unreasonable charge for wharfage, use of bridges or otherwise, shall be
void. And that the ordinance is violative to equal protection as it singled
out Ormoc Sugar As being liable for such tax impost for no other sugar mill
is found in the city.

ISSUE: Whether or not there has been a violation of equal protection.

HELD: The SC held in favor of Ormoc Sugar. The SC noted that even if Sec
2287 of the RAC had already been repealed by a latter statute (Sec 2 RA
2264) which effectively authorized LGUs to tax goods and merchandise
carried in and out of their turf, the act of Ormoc City is still violative of
equal protection. The ordinance is discriminatory for it taxes only
centrifugal sugar produced and exported by the Ormoc Sugar Company,
Inc. and none other. At the time of the taxing ordinances enactment,
Ormoc Sugar Company, Inc., it is true, was the only sugar central in the
city of Ormoc. Still, the classification, to be reasonable, should be in terms
applicable to future conditions as well. The taxing ordinance should not be
singular and exclusive as to exclude any subsequently established sugar
central, of the same class as plaintiff, from the coverage of the tax. As it is
now, even if later a similar company is set up, it cannot be subject to the
tax because the ordinance expressly points only to Ormoc Sugar
Company, Inc. as the entity to be levied upon.

Tiu vs CA
On March 13, 1992, Congress, with the approval of the President, passed
into law RA 7227. This was for the conversion of former military bases into
industrial and commercial uses. Subic was one of these areas. It was made
into a special economic zone.
In the zone, there were no exchange controls. Such were liberalized. There
was also tax incentives and duty free importation policies under this law.
On June 10, 1993, then President Fidel V. Ramos issued Executive Order
No. 97 (EO 97), clarifying the application of the tax and duty incentives. It
said that
On Import Taxes and Duties. Tax and duty-free importations shall apply
only to raw materials, capital goods and equipment brought in by business
enterprises into the SSEZ
On All Other Taxes. In lieu of all local and national taxes (except import
taxes and duties), all business enterprises in the SSEZ shall be required to
pay the tax specified in Section 12(c) of R.A. No. 7227.
Nine days after, on June 19, 1993, the President issued Executive Order
No. 97-A (EO 97-A), specifying the area within which the tax-and-duty-free
privilege was operative.
Section 1.1.
The Secured Area consisting of the presently fenced-in
former Subic Naval Base shall be the only completely tax and duty-free
area in the SSEFPZ. Business enterprises and individuals (Filipinos and
foreigners) residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items tax and dutyfree
Petitioners challenged the constitutionality of EO 97-A for allegedly being
violative of their right to equal protection of the laws. This was due to the
limitation of tax incentives to Subic and not to the entire area of Olongapo.
The case was referred to the Court of Appeals.
The appellate court concluded that such being the case, petitioners could
not claim that EO 97-A is unconstitutional, while at the same time
maintaining the validity of RA 7227.
The court a quo also explained that the intention of Congress was to
confine the coverage of the SSEZ to the "secured area" and not to include
the "entire Olongapo City and other areas mentioned in Section 12 of the
law
Hence, this was a petition for review under Rule 45 of the Rules of Court.
Issue:

Whether the provisions of Executive Order No. 97-A confining the

application of R.A. 7227 within the secured area and excluding the
residents of the zone outside of the secured area is discriminatory or not
owing to a violation of the equal protection clause.
Held. No. Petition dismissed,Citing Section 12 of RA 7227, petitioners
contend that the SSEZ encompasses (1) the City of Olongapo, (2) the
Municipality of Subic in Zambales, and (3) the area formerly occupied by
the Subic Naval Base. However, they claimed that the E.O. narrowed the
application to the naval base only.
OSG- The E.O. Was a valid classification.
Court- The fundamental right of equal protection of the laws is not
absolute, but is subject to reasonable classification. If the groupings are
characterized by substantial distinctions that make real differences, one
class may be treated and regulated differently from another. The
classification must also be germane to the purpose of the law and must
apply to all those belonging to the same class.
Inchong v Hernandez- Equal protection does not demand absolute equality
among residents; it merely requires that all persons shall be treated alike,
under like circumstances and conditions both as to privileges conferred
and liabilities enforced.
Classification, to be valid, must (1) rest on substantial distinctions, (2) be
germane to the purpose of the law, (3) not be limited to existing
conditions only, and (4) apply equally to all members of the same class.
RA 7227 aims primarily to accelerate the conversion of military
reservations into productive uses. This was really limited to the military
bases as the law's intent provides. Moreover, the law tasked the BCDA to
specifically develop the areas the bases occupied.
Among such enticements are: (1) a separate customs territory within the
zone, (2) tax-and-duty-free importations, (3) restructured income tax rates
on business enterprises within the zone, (4) no foreign exchange control,
(5) liberalized regulations on banking and finance, and (6) the grant of
resident status to certain investors and of working visas to certain foreign
executives and workers. The target of the law was the big investor who
can pour in capital.
Even more important, at this time the business activities outside the
"secured area" are not likely to have any impact in achieving the purpose
of the law, which is to turn the former military base to productive use for
the benefit of the Philippine economy. Hence, there was no reasonable
basis to extend the tax incentives in RA 7227.
It is well settled that the equal-protection guarantee does not require
territorial uniformity of laws. As long as there are actual and material
differences between territories, there is no violation of the constitutional
clause.
Besides, the businessmen outside the zone can always channel their
capital into it.

RA 7227, the objective is to establish a "self-sustaining, industrial,

commercial, financial and investment center. There will really be
differences between it and the outside zone of Olongapo.
The classification of the law also applies equally to the residents and
businesses in the zone. They are similarly treated to contribute to the end
goal of the law.

Province of Abra vs Hernando

FACTS
The Province of Abra sought to tax the properties of the Roman Catholic
Bishop, Inc. of Bangued. Judge Harold Hernando dismissed the petition of
Abra without hearing its side. Hernando ruled that there is no question
that the real properties sought to be taxed by the Province of Abra are
properties of the respondent Roman Catholic Bishop of Bangued, Inc.
Likewise, there is no dispute that the properties including their produce
are actually, directly and exclusively used by the Roman Catholic Bishop of
Bangued, Inc. for religious or charitable purposes.

ISSUE: Whether or not the properties of the church (in this case) is exempt
from taxes.

HELD: No, they are not tax exempt. It is true that the Constitution provides
that charitable institutions, mosques, and non-profit cemeteries are
required that for the exemption of lands, buildings, and improvements,
they should not only be exclusively but also actually and directly
used for religious or charitable purposes. The exemption from taxation is
not favored and is never presumed, so that if granted it must be strictly
construed against the taxpayer. However, in this case, there is no showing
that the said properties are actually and directly used for religious or
charitable uses.

Jose V. Herrera and Ester Herrera vs. The Quezon City Board
Of Assessment Appeals
FACTS:
Petitioners Jose and Ester Herrera were authorized by the Director of the
Bureau of Hospital to establish and operate the St. Catherines Hospital. In
1953, the petitioners sent a letter to the Quezon City Assessor requesting
exemption from payment of real estate tax on the lot, building and other
improvements comprising the hospital stating that the same was
established for charitable and humanitarian purposes and not for
commercial gain which was granted effective the years 1953 to 1955.
Subsequently, however, in a letter dated August 10, 1955 the Quezon City
Assessor notified the petitioners that the aforesaid properties were reclassified from exempt to taxable and thus assessed for real property
taxes effective 1956. The petitioners appealed the assessment to the
Quezon City Board of Assessment Appeals, which, affirmed the decision of
the City Assessor. A motion for reconsideration thereof was denied. From
this decision, the petitioners instituted
the instant appeal. The building involved in this case is principally used as
a hospital. From the evidence presented by petitioners, it is made to
appear that there are two kinds of charity patients (a) those who come for
consultation only (out-charity patients); and (b) those who remain in the
hospital for treatment (lying-in-patients). Petitioners also operate within
the premises of the hospital the St. Catherines School of Midwifery
which was granted government recognition by the Secretary of Education.
The students practice in the St. Catherines Hospital, as well as in the St.
Marys Hospital, which is also owned by the petitioners. A separate set of
accounting books is maintained by the school for midwifery distinct from

that kept by the hospital. However, the petitioners have refused to submit
a separate statement of accounts of the school.
ISSUE:
Whether or not the said properties are used exclusively for charitable or
educational purposes which are exempt from real property tax
HELD:
The Supreme Court ruled in the affirmative. The Court of Tax Appeals
decided the issue in the negative, upon the ground that the St. Catherines
Hospital has a pay ward for ... pay-patients, who are charged for the use of
the private rooms, operating room, laboratory room, delivery room, etc.,
like other hospitals operated for profit and that petitioners and their family
occupy a portion of the building for their residence. It should be noted,
however, that, according to the very statement of facts made in the
decision appealed from, of the thirty-two (32) beds in the hospital, twenty
(20) are for charity-patients; that the income realized from pay-patients is
spent for improvement of the charity wards; and that petitioners, Dr. Ester
Ochangco Herrera, as directress of said hospital,does not receive any
salary, although its resident physician gets a monthly salary of P170.00. It
is well settled, in this connection, that the admission of pay-patients does
not detract from the charitable character of a hospital, if all its funds are
devoted exclusively to the maintenance of the institution as a public
charity. In other words, where rendering charity is its primary object, and
the funds derived from payments made by patients able to pay are
devoted to the benevolent purposes of the institution, the mere fact that a
profit has been made will not deprive the hospital of its benevolent
character. Moreover, the exemption in favor of property used exclusively
for charitable or educational purposes is not limited to property actually
indispensable therefor but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purposes, such as, in
the case of hospitals, a school for training nurses, a nurses home,
property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational
facilities for student nurses, interns and residents. Within the purview of
the Constitutional exemption from taxation, the St. Catherines Hospital is,
therefore, a charitable institution, and the fact that it admits pay-patients
does not bar it from claiming that it is devoted exclusively to benevolent
purposes, it being admitted that the income derived from pay-patients is
devoted to the improvement of the charity wards, which represent almost
two-thirds (2/3) of the bed capacity of the hospital, aside from outcharity
patients who come only for consultation.

Case Digest: Lung Center of the Philippines vs. Quezon City and
Constantino Rosas
FACTS:
The Petitioner is a non-stock, non-profit entity which owns a parcel of land
in Quezon City. Erected in the middle of the aforesaid lot is a hospital
known as the Lung Center of the Philippines. The ground floor is being
leased to a canteen, medical professionals whom use the same as their
private clinics, as well as to other private parties. The right portion of the
lot is being leased for commercial purposes to the Elliptical Orchids and
Garden Center. The petitioner accepts paying and non-paying patients. It
also renders medical services to out-patients, both paying and non-paying.
Aside from its income from paying patients, the petitioner receives annual
subsidies from the government.
Petitioner filed a Claim for Exemption from realty taxes amounting to
about Php4.5 million, predicating its claim as a charitable institution. The
city assessor denied the Claim. When appealed to the QC-Local Board of
Assessment, the same was dismissed. The decision of the QC-LBAA was
affirmed by the Central Board of Assessment Appeals, despite the
Petitioners claim that 60% of its hospital beds are used exclusively for
charity.

ISSUE: Whether or not the Petitioner is entitled to exemption from realty

taxes notwithstanding the fact that it admits paying clients and leases out
a portion of its property for commercial purposes.

HELD:
The Court held that the petitioner is indeed a charitable institution based
on its charter and articles of incorporation. As a general principle, a
charitable institution does not lose its character as such and its exemption
from taxes simply because it derives income from paying patients,
whether out-patient or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or used
altogether to the charitable object which it is intended to achieve; and no
money inures to the private benefit of the persons managing or operating
the institution.
Despite this, the Court held that the portions of real property that are
leased to private entities are not exempt from real property taxes as these
are not actually, directly and exclusively used for charitable purposes.
(strictissimi juris) Moreover, P.D. No. 1823 only speaks of tax exemptions
as regards to:
income and gift taxes for all donations, contributions, endowments
and equipment and supplies to be imported by authorized entities or
persons and by the Board of Trustees of the Lung Center of the Philippines
for the actual use and benefit of the Lung Center; and
taxes, charges and fees imposed by the Government or any political
subdivision or instrumentality thereof with respect to equipment
purchases (expression unius est exclusion alterius/expressium facit
cessare tacitum).

Abra Valley College v. Aquino

FACTS:
Petitioner filed a complaint to annul and declare void the Notice of
Seizure and the Notice of Sale of its lot and building located at
Bangued, Abra, for non-payment of real estate taxes and penalties
amounting To P5,140.31. Said Notice of Seizure by respondents
Municipal Treasurer and Provincial Treasurer was issued for the satisfaction
of the said taxes thereon. The trial court ruled for the government, holding
that the second floor of the building is being used by the director for
residential purposes and that the ground floor is being used and rented by

Northern Marketing Corporation, a commercial establishment, and thus

the property is not being used exclusively for educational purposes.
ISSUE:
Whether or not the lot and building are used exclusively for educational
purposes and is thus tax exempt.
HELD: Section 22, paragraph 3, Article VI, of the then 1935 Philippine
Constitution, expressly grants exemption from realty taxes for cemeteries,
churches and parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious, charitable or
educational purposes. In the case at bar, the lease of the first floor of the
building to the Northern Marketing Corporation cannot by any stretch of
the imagination be considered incidental to the purpose of education. The
test of exemption from taxation is the use of the property for purposes
mentioned in the Constitution. The decision of the CFI Abra (Branch I) is
affirmed subject to the modification that half of the assessed tax be
returned to the petitioner. The modification is derived from the fact that
the ground floor is being used for commercial purposes and the second
floor being used as incidental to education.

CIR vs Johnson
Facts:
Respondent is a domestic corporation organized and operating under the
Philippine Laws, entered into a licensed agreement with the SC Johnson
and Son, USA, a non-resident foreign corporation based in the USA
pursuant to which the respondent was granted the right to use the
trademark, patents and technology owned by the later including the right
to manufacture, package and distribute the products covered by the

Agreement and secure assistance in management, marketing and

production from SC Johnson and Son USA.
For the use of trademark or technology, respondent was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and
subjected the same to 25% withholding tax on royalty payments which
respondent paid for the period covering July 1992 to May 1993 in the total
amount of P1,603,443.00.
On October 29, 1993, respondent filed with the International Tax Affairs
Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on
royalties arguing that, the antecedent facts attending respondents case
fall squarely within the same circumstances under which said MacGeorge
and Gillette rulings were issued. Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10% should apply to
the respondent. So, royalties paid by the respondent to SC Johnson and
Son, USA is only subject to 10% withholding tax.
The Commissioner did not act on said claim for refund. Private respondent
SC Johnson & Son, Inc. then filed a petition for review before the CTA, to
claim a refund of the overpaid withholding tax on royalty payments from
July 1992 to May 1993.
On May 7, 1996, the CTA rendered its decision in favor of SC Johnson and
ordered the CIR to issue a tax credit certificate in the amount of
P163,266.00 representing overpaid withholding tax on royalty payments
beginning July 1992 to May 1993. The CIR thus filed a petition for review
with the CA which rendered the decision subject of this appeal on
November 7, 1996 finding no merit in the petition and affirming in toto the
CTA ruling.

Issue: Whether or not tax refunds are considered as tax exemptions.

Held: It bears stress that tax refunds are in the nature of tax exemptions.
As such they are registered as in derogation of sovereign authority and to
be construed strictissimi juris against the person or entity claiming the
exemption. The burden of proof is upon him who claims the exemption in
his favor and he must be able to justify his claim by the clearest grant of
organic or statute law. Private respondent is claiming for a refund of the
alleged overpayment of tax on royalties; however there is nothing on
record to support a claim that the tax on royalties under the RP-US Treaty
is paid under similar circumstances as the tax on royalties under the RPWest Germany Tax Treaty.

Republic vs. Mambulao Lumber

FACTS:
Mambulao Lumber Company paid the Government a total of P9,127.50 as
reforestation charges. Having found liable for an aggregate amount of
P4,802.37 for forest charges, it contended that since the Republic
(Government) has not made use of the reforestation charges for
reforesting the denuded area of the land covered by the companys
license, the Republic should refund said amount or, if it cannot be
refunded, at least the company should be compensated with what it owed
the Republic for reforestation charges.

ISSUE:
Whether taxes may be subject of set-off or compensation.

HELD:
Internal revenue taxes, such as forest charges, cannot be the subject of
set-off or compensation. A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off under the statutes of setoff, which are construed uniformly, in the light of public policy, to exclude
the remedy in an action or any indebtedness of the State or municipality
to one who is liable to the State or municipality for taxes. Neither are they
subject of recoupment since they do not arise out of the contract or
transaction sued on.

Taxes are not in the nature of contracts between the parties but grow out
of a duty to, and are the positive acts of the government, to the making
and enforcing of which, the personal consent of individual taxpayers is not
required.

Domingo vs. Garlito

FACTS: In Domingo vs. Moscoso, the Supreme Court declared at final
and executor the order of the court of first instance of Leyte for the
payment of estate and inheritance taxes, charges and penalties
amounting to 40, 058.55 by the estate of the late Walter Scott
Pine. He petition for execution filed by the fiscal, however, was
denied by the lower court the court held that the execution is
unjustified as the government itself is indebted to the estate for
262,200; and ordered the amount of inheritance taxes be deducted
from the governments indebtedness to the estate.
Issues: Can there be legal compensation?
Ruling: Yes. The fact that the court having jurisdiction of the estate
had found that the claim of the estate against the government has
been appropriated for the purpose by a corresponding law ( RA
2700) shows that both the claim of the government for inheritance
taxes and the claim of the intestate for services regarded have
already become overdue and demandable as well as fully
liquidated. Compensation, therefore,take place by operation of law,
in accordance with the provisions of article 1279 and 1290 of the
civil code, and both debts are extinguished to the
amount.Exception: SC allowed set off in the case of Domingo v.
Garlitos [8 SCRA 443] re: claimfor payment of unpaid services of a
government employee vis--vis the estate taxes duefrom his estate.
The fact that the court having jurisdiction of the estate had found
that the claim of the estate against the government has been
appropriated for the purpose by a corresponding law shows that
both the claim of the government for inheritance taxes and the
claim of the intestate for services rendered have already become
overdueand demandable as well as fully liquidated. Compensation
therefore takes place by operation of law.

Francia vs IAC
FACTS
Engracio Francia was the owner of a 328 square meter land in Pasay
City. In October 1977, a portion of his land (125 square meter) was
expropriated by the government for P4,116.00. The expropriation
was made to give way to the expansion of a nearby road.
It also appears that Francia failed to pay his real estate taxes since
1963 amounting to P2,400.00. So in December 1977, the remaining
203 square meters of his land was sold at a public auction (after due
notice was given him). The highest bidder was a certain Ho
Fernandez who paid the purchase price of P2,400.00 (which was
lesser than the price of the portion of his land that was
expropriated).
Later, Francia filed a complaint to annul the auction sale on the
ground that the selling price was grossly inadequate. He further
argued that his land should have never been auctioned because the
P2,400.00 he owed the government in taxes should have been setoff by the debt the government owed him (legal compensation). He
alleged that he was not paid by the government for the expropriated
portion of his land because though he knew that the payment
therefor was deposited in the Philippine National Bank, he never
withdrew it.
ISSUE: Whether or not the tax owed by Francia should be set-off by
the debt owed him by the government.
HELD: No. As a rule, set-off of taxes is not allowed. There is no legal
basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and
creditors of each other, are extinguished (Art. 1278, Civil Code). This
is not applicable in taxes. There can be no off-setting of taxes
against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that
the government owes him an amount equal to or greater than the
tax being collected. The collection of a tax cannot await the results
of a lawsuit against the government.
The Supreme Court emphasized: A claim for taxes is not such a
debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the
light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the
state or municipality for taxes. Neither are they a proper subject of

recoupment since they do not arise out of the contract or

transaction sued on.
Further, the government already Francia. All he has to do was to
withdraw the money. Had he done that, he could have paid his tax
obligations even before the auction sale or could have exercised his
right to redeem which he did not do.
Anent the issue that the selling price of P2,400.00 was grossly
inadequate, the same is not tenable. The Supreme Court said:
alleged gross inadequacy of price is not material when the law
gives the owner the right to redeem as when a sale is made at
public auction, upon the theory that the lesser the price, the easier
it is for the owner to effect redemption. If mere inadequacy of price
is held to be a valid objection to a sale for taxes, the collection of
taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. Where land is sold for taxes, the
inadequacy of the price given is not a valid objection to the sale.
This rule arises from necessity, for, if a fair price for the land were
essential to the sale, it would be useless to offer the property.
Indeed, it is notorious that the prices habitually paid by purchasers
at tax sales are grossly out of proportion to the value of the land.

Caltex Philippines, Inc. v Commission on Audit GR No. 92585, May 8,

1992

FACTS:
In 1989, COA sent a letter to Caltex, directing it to remit its
collection to the Oil Price Stabilization Fund (OPSF), excluding that
unremitted for the years 1986 and 1988, of the additional tax on
petroleum products authorized under the PD 1956. Pending such
remittance, all of its claims for reimbursement from the OPSF shall
be held in abeyance. The grant total of its unremitted collections of
the above tax is P1,287,668,820.
Caltex submitted a proposal to COA for the payment and the
recovery of claims. COA approved the proposal but prohibited Caltex
from further offsetting remittances and reimbursements for the
current and ensuing years. Caltex moved for reconsideration but
was denied. Hence, the present petition.

ISSUE:
Whether the amounts due from Caltex to the OPSF may be offsetted
against Caltexs outstanding claims from said funds

RULING:
No. Taxation is no longer envisioned as a measure merely to raise
revenue to support the existence of government. Taxes may be
levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is

affected with public interest as to be within the police power of the

State.
PD 1956, as amended by EO 137, explicitly provides that the source
of OPSF is taxation. A taxpayer may not offset taxes due from the
claims he may have against the government. Taxes cannot be
subject of compensation because the government and taxpayer are
not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand,, contract or judgment as is
allowed to be set-off.
Hence, COA decision is affirmed except that Caltexs claim for
reimbursement of underrecovery arising from sales to the National
Power Corporation is allowed.

PHILEX MINING CORP. v. CIR

GR No. 125704, August 28, 1998
294 SCRA 687

FACTS: Petitioner Philex Mining Corp. assails the decision of the

Court of Appeals affirming the Court of Tax Appeals decision
ordering it to pay the amount of P110.7 M as excise tax liability for
the period from the 2nd quarter of 1991 to the 2nd quarter of 1992
plus 20% annual interest from 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977. Philex protested the
demand for payment of the tax liabilities stating that it has pending
claims for VAT input credit/refund for the taxes it paid for the years
1989 to 1991 in the amount of P120 M plus interest. Therefore these
claims for tax credit/refund should be applied against the tax
liabilities.

ISSUE: Can there be an off-setting between the tax liabilities vis-avis claims of tax refund of the petitioner?

HELD: No. Philex's claim is an outright disregard of the basic

principle in tax law that taxes are the lifeblood of the government
and so should be collected without unnecessary hindrance.
Evidently, to countenance Philex's whimsical reason would render

ineffective our tax collection system. Too simplistic, it finds no

support in law or in jurisprudence.
To be sure, Philex cannot be allowed to refuse the payment of its
tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet been
granted.Taxes cannot be subject to compensation for the simple
reason that the government and the taxpayer are not creditors and
debtors of each other. There is a material distinction between a tax
and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign
capacity. xxx There can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the
government.

COMMISSIONER OF INTERNAL REVENUE vs.SAN MIGUEL

CORPORATION
Facts: Respondent San Miguel Corporation, a domestic corporation
engaged in the manufacture and sale of fermented liquor, produces
as one of its products "Red Horse" beer which is sold in 500-ml. and
1-liter bottle variants. On January 1, 1998, Republic Act (R.A.) No.
8424 or the Tax Reform Act of 1997 took effect. It reproduced, as
Section 143 thereof, the provisions of Section 140 of the old
National Internal Revenue Code as amended by R.A. No. 8240 which
became effective on January 1, 1997. Part of Section 143 of the Tax
Reform Act of 1997 reads:
The excise tax from any brand of fermented liquor within the next
three (3) years from the effectivity of Republic Act No. 8240 shall not
be lower than the tax which was due from each brand on October 1,
1996.
The rates of excise tax on fermented liquor under paragraphs (a),
(b) and (c) hereof shall be increased by twelve percent (12%) on
January 1, 2000.
Thereafter, on December 16, 1999, the Secretary of Finance issued
Revenue Regulations No. 17-99 increasing the applicable tax rates

on fermented liquor by 12%. This increase, however, was qualified

by the last paragraph of Section 1 of Revenue Regulations No. 17-99
which reads:
Provided, however, that the new specific tax rate for any existing
brand of cigars, cigarettes packed by machine, distilled spirits,
wines and fermented liquors shall not be lower than the excise tax
that is actually being paid prior to January 1, 2000.
For the period June 1, 2004 to December 31, 2004, respondent was
assessed and paid excise taxes amounting to P2,286,488,861.58.
Respondent, however, later contended that the said qualification in
the last paragraph of Section 1 of Revenue Regulations No. 17-99
has no basis in the plain wording of Section 143 and filed before the
BIR a claim for refund or tax credit of the amount of P60,778,519.56
as erroneously paid excise taxes for the period of May 22, 2004 to
December 31, 2004. Later, said amount was reduced to
P58,213,294.92 because of prescription.
On September 26, 2007, the CTA Second Division granted the
petition and ordered petitioner to refund P58,213,294.92 to
respondent or to issue in the latters favor a Tax Credit Certificate for
the said amount for the erroneously paid excise taxes. The CTA held
that Revenue Regulations No. 17-99 modified or altered the
mandate of Section 143 of the Tax Reform Act of 1997. The CTA En
Banc affirmed the Decision. Hence, this petition for review on
certiorari.

Issue: Whether or not Section 1 of Revenue Regulations No. 17-99 is

an invalid administrative interpretation of Section 143 of the Tax
Reform Act of 1997.

Ruling:
Yes. Section 143 of the Tax Reform Act of 1997 is clear and
unambiguous. It provides for two periods: the first is the 3- year
transition period beginning January 1, 1997, the date when R.A. No.
8240 took effect, until December 31, 1999; and the second is the
period thereafter. During the 3-year transition period, Section 143
provides that "the excise tax from any brand of fermented
liquor...shall not be lower than the tax which was due from each
brand on October 1, 1996." After the transitory period, Section 143
provides that the excise tax rate shall be the figures provided under
paragraphs (a), (b) and (c) of Section 143 but increased by 12%,
without regard to whether the revenue collection starting January 1,
2000 may turn out to be lower than that collected prior to said date.
Revenue Regulations No. 17-99, however, created a new tax rate
when it added in the last paragraph of Section 1 thereof, the

qualification that the tax due after the 12% increase becomes
effective "shall not be lower than the tax actually paid prior to
January 1, 2000."
It bears reiterating that tax burdens are not to be imposed, nor
presumed to be imposed beyond what the statute expressly and
clearly imports, tax statutes being construed strictissimi juris
against the government. In case of discrepancy between the basic
law and a rule or regulation issued to implement said law, the basic
law prevails as said rule or regulation cannot go beyond the terms
and provisions of the basic law.
As there is nothing in Section 143 of the Tax Reform Act of 1997
which clothes the BIR with the power or authority to rule that the
new specific tax rate should not be lower than the excise tax that is
actually being paid prior to January 1, 2000, such interpretation is
clearly an invalid exercise of the power of the Secretary of Finance
to interpret tax laws and to promulgate rules and regulations
necessary for the effective enforcement of the Tax Reform Act of
1997.