Tax 1 Cases:

Carlos Superdrug vs DSWD

Petitioners are domestic corporations and proprietors operating drugstores in the Philippines.

Public respondents, on the other hand, include the DSWD, DOH, DOF, DOJ, and the DILG, specifically
tasked to monitor the drugstores’ compliance with the law; promulgate the implementing rules and
regulations for the effective implementation of the law; and prosecute and revoke the licenses of erring
drugstore establishments.

President Gloria Macapagal-Arroyo signed into law R.A. No. 9257 otherwise known as the “Expanded
Senior Citizens Act of 2003.”

Sec. 4(a) of the Act states that The senior citizens shall be entitled to the following: (a) the grant of
twenty percent (20%) discount from all establishments relative to the utilization of services in hotels and
similar lodging establishments, restaurants and recreation centers, and purchase of medicines in all
establishments for the exclusive use or enjoyment of senior citizens, including funeral and burial services
for the death of senior citizens;

Petitioners assert that Section 4(a) of the law is unconstitutional because it constitutes deprivation of
private property. Compelling drugstore owners and establishments to grant the discount will result in a
loss of profit and capital because according to them drugstores impose a mark-up of only 5% to 10% on
branded medicines, and the law failed to provide a scheme whereby drugstores will be justly
compensated for the discount.

ISSUE:

WON RA 9257 is constitutional.

HELD:

YES. The law is a legitimate exercise of police power which, similar to the power of eminent domain, has
general welfare for its object.

For this reason, when the conditions so demand as determined by the legislature, property rights must
bow to the primacy of police power because property rights, though sheltered by due process, must
yield to general welfare.

Given these, it is incorrect for petitioners to insist that the grant of the senior citizen discount is unduly
oppressive to their business, because petitioners have not taken time to calculate correctly and come up
with a financial report, so that they have not been able to show properly whether or not the tax
deduction scheme really works greatly to their disadvantage.

In treating the discount as a tax deduction, petitioners insist that they will incur losses.
However,petitioner’s computation is clearly flawed.
For purposes of reimbursement, the law states that the cost of the discount shall be deducted from
gross income, the amount of income derived from all sources before deducting allowable expenses,
which will result in net income. Here, petitioners tried to show a loss on a per transaction basis, which
should not be the case. An income statement, showing an accounting of petitioners sales, expenses, and
net profit (or loss) for a given period could have accurately reflected the effect of the discount on their
income. Absent any financial statement, petitioners cannot substantiate their claim that they will be
operating at a loss should they give the discount. In addition, the computation was erroneously based
on the assumption that their customers consisted wholly of senior citizens. Lastly, the 32% tax rate is to
be imposed on income, not on the amount of the discount.

While the Constitution protects property rights, petitioners must accept the realities of business and the
State, in the exercise of police power, can intervene in the operations of a business which may result in
an impairment of property rights in the process

Modes of eliminating double tax:

1. Tax Credit- Peso-for-peso deduction from a taxpayer liability due to the government. The
establishment recovers the full amount of discount given to a senior citizen and hence, the
government shoulders 100% of the discounts granted
a. It must be noted, however, that conceptually, a tax credit scheme under the Philippine
tax system, necessitates that prior payments of taxes have been made and the taxpayer
is attempting to recover this tax payment
2. Tax deduction- Deduction from Gross income, based on the net cost of goods sold
a. Under this scheme, the establishment concerned is allowed to deduct from gross
income, in computing for its tax liability, the amount of discounts granted to senior
citizens.

Francia v IAC

Facts:

Francia was the owner of a residential lot in Pasay. The property was then expropriated by the
Government. Francia then failed to pay his real estate taxes, and his lot was sold at a public auction.
Francia was not present during the auction sale due to the reason that he has to help his uncle in Iligan
City to ship bananas.

The petitioner then received a notice of the cancellation of the TCT due to the sale on the auction. Thus
this complaint.

Petitioner Contention:

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was expropriated on
October 15, 1977.
Issue:
W/N the tax delinquency was offset by the government’s debt to the petitioner, via legal compensation

Held:
No. SC ruled that this is not the case since legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished. They are not principal
debtors and creditors of each other, and that no two debts are due.

Further, SC held that it consistently ruled that 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.

Caltex v COA

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 Caltex’s 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 Caltex’s claim for reimbursement of underrecovery arising
from sales to the National Power Corporation is allowed.

People v Castaneda:

Facts:

ometime in 1971, two (2) informants submitted sworn information. The respondents were charged of
two criminal informations on alleged violations of the Internal Revenue Code.

After investigation, respondents filed for Motion to Quash, which was granted by the lower court.
People filed for a motion for reconsideration, which was denied.

Thus, this petition.

Petitoner contention:

-They are entitled to tax amnesty as provided for on benefits under PD 370.

Issue: W/N the Respondents are entitled tax amnesty

Held:

No. Tax amnesty would have the effect of would have the effect of condoning not just income tax
liabilities but also "all internal revenue taxes including the increments or penalties on account of non-
payment as well as all civil, criminal or administrative liabilities, under the Internal Revenue Code.

However, the respondents were not qualified due to two grounds:

1. Informations were Criminal Informations

It is necessary to note that the "valid information under Republic Act No. 2338" referred to in Section 1
(a) (4) of P.D. No. 370, refers not to a criminal information filed in court by a fiscal or special prosecutor,
but rather to the sworn information or complaint filed by an informer with the BIR, which was clearly
not the case at bar.

2. No Voluntary disclosure of the untaxed income.

IN THIS CASE, it was not voluntary since it was found out after the disclosure of the tax assessments on
court. To be entitled to the extinction of liability provided by P.D. No. 370, the claimant must have
voluntarily disclosed his previously untaxed income or wealth and paid the required fifteen percent
(15%) tax on such previously untaxed income

Accused Valencia argued that the People were estopped from questioning his entitlement to the
benefits of the tax amnesty, considering that agents of the BIR had already accepted his application for
tax amnesty and his payment of the required fifteen percent (15%) special tax.
This contention does not persuade. At the time he paid the special fifteen percent (15%) tax under P.D.
No. 370, accused Francisco Valencia had in fact already been subjected by the BIR to extensive
investigation such that the criminal charges against him could not be condoned under the provisions of
the amnesty statute.

Domingo v Garlitos

FACTS:

In the 1960 case of Domingo v Moscoso, the Supreme Court declared as final and executory the order
for the payment by the estate of the late Walter Scott Price of estate and inheritance taxes, charges and
penalties, amounting to P40,058.55 issued by the Court of First Instance – Leyte. The fiscal then
presented a petition for the execution of the judgment before the Court of First Instance – Leyte.

The petition was denied as the execution is not justifiable as the government is indebted to the estate
under administration in the amount of P 262,200. Hence, the present petition for certiorari and
mandamus.

ISSUE:

Is execution proper?

RULING:

No. The tax and the debt are compensated. The court having jurisdiction of the estate had found that
the claim of the estate against the government has been recognized and an amount of P262,200 has
already been appropriated by a corresponding law (RA 2700). Under the circumstances, both the claim
of the Government for the inheritance taxes and the claim of the intestate for services rendered have
already become overdue and demandable as well as fully liquidated.

Compensation, therefore, takes place by operation of law, in accordance with Article 1279 and 1290 of
the Civil Code, and both debts are extinguished to their concurrent amounts. If the obligation to pay
taxes and the taxpayer’s claim against the government are both overdue, demandable, as well as fully
liquidated, compensation takes place by operation of law and both obligations are extinguished to their
concurrent amounts.

Republic v Mambulao

Mambulao Lumber Company paid the Government a total of P 9,127.50 as reforestation charges for the
years 1947 to
1956. It is the company’s contention that said sum of 9,127.50, not having been used in the
reforestation of the area covered by its license, the same is refundable to it or may be applied in
compensation of P 4,802.37 due from it as forest charges.

Court of First Instance of Manila ordered the company to pay the government the sum of P 4,802.37
with 6% interest thereon from date of the filing of the complaint until fully paid, plus costs. Thus, the
present appeal.

ISSUE: Whether the set-off or compensation is proper

RULING:

No. There is nothing in the law which requires that the amount collected as reforestation charges should
be used exclusively for the reforestation of the area covered by the license of a licensee or
concessionaire, and that if not so used, the same shall be refunded to him.

The conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature
of a tax which forms part of the Forestation Fund, payable by him irrespective of whether the area
covered by his license is reforested or not.

Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for
thereunder, namely, the reforestation or afforestation, among others, of denuded areas needing
reforestation or afforestation.

The weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question is not subject to set-off or compensation. Taxes are not in the nature of contracts between the
parties but grow out of a duty to, and are positive acts of the government, to the making and enforcing
of which, the personal consent of the individual taxpayers is not required.

With respect to the forest charges which the company has paid to the government, they are in the
coffers of the government as tax collected, and the government does not owe anything. It is crystal clear
that the Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors
of each other, because compensation refers to mutual debts