G.R. No.

175108

PERALTA, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court which seeks the review and
reversal of the Decision[1] dated June 16, 2006 and Resolution[2] dated October 17, 2006 of the former Fifth Division
of the Court of Appeals (CA).

The factual antecedents follow.

For the four quarters of 1996, petitioner paid P93,119,433.50 as gross receipts tax (GRT) on its income from the
interests on loan investments, commissions, service and collection charges, foreign exchange profit and other
operating earnings.

In computing its taxable gross receipts, petitioner included the 20% final withholding tax on its passive interest
income,[3] hereunder summarized as follows:

On January 30, 1996, the Court of Tax Appeals (CTA) rendered a Decision entitled Asian Bank Corporation v.
Commissioner of Internal Revenue,[4] wherein it ruled that the 20% final withholding tax on a bank's passive interest
income should not form part of its taxable gross receipts.

On the strength of the aforementioned decision, petitioner filed with respondent a claim for refund on April 20,
1998, of the alleged overpaid GRT for the four (4) quarters of 1996 in the aggregate amount of P6,646,829.67,
detailed as follows:

Gross Receipts Corrected Gross Excess GRT

1996 __Tax Paid _Receipts Tax ____Payment

1st qtr. P 24,055,944.08 P 22,114,548.10 P 1,941,395.99

2nd qtr. 26,394,956.45 25,050,429.40 1,344,527.06
3rd qtr. 18,427,999.33 17,087,138.98 1,340,860.34
4th qtr. ____24,240,533.64 __22,219,487.36 ___2,021,046.28
Total: __P 93,119,433.50 _P 86,471,603.84 __P 6,646,829.67

On even date, petitioner filed its Petition for Review with the CTA.

The CTA, on November 8, 2000, rendered a Decision[5] agreeing with petitioner that the 20% final withholding tax on
interest income does not form part of its taxable gross receipts. However, the CTA dismissed petitioner's claim for
its failure to prove that the 20% final withholding tax forms part of its 1996 taxable gross receipts. The Decision
states in part:

Moreover, the Court of Appeals in the case of Commissioner of Internal Revenue vs. Citytrust Investment Philippines,
Inc., CA G.R. Sp No. 52707, August 17, 1999, affirmed our stand that the 20% final withholding tax on interest
income should not form part of the taxable gross receipts. Hence, we find no cogent reason nor justification to
depart from the wisdom of our decision in the Asian Bank case, supra.

xxxx

Lastly, since Petitioner failed to prove the inclusion of the 20% final withholding taxes as part of its 1996 taxable
gross receipts (passive income) or gross receipts (passive income) that were subjected to 5% GRT, it follows that
proof was wanting that it paid the claimed excess GRT, subject of this petition.
xxxx

IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is DISMISSED for insufficiency of evidence.

SO ORDERED.[6]

Not in conformity with the CTA's ruling, petitioner interposed an appeal before the CA.

In its appeal, petitioner insists that it erroneously included the 20% final withholding tax on the bank's passive
interest income in computing the taxable gross receipts. Therefore, it argues that it is entitled, as a matter of right,
to a refund or tax credit.

In a Decision[7] dated June 16, 2006, the CA denied petitioner's appeal. It ruled in this wise:

x x x Unfortunately for China Bank, it is flogging a dead horse as this argument has already been shot down in China
Banking Corporation vs. Court of Appeals (G.R. No. 146749 & No. 147983, June 10, 2003) where it was ruled the Tax
Court, which decided Asia Bank on June 30, 1996 not only erroneously interpreted Section 4(e) of Revenue
Regulations No. 12-80, it also cited Section 4(e) when it was no longer the applicable revenue regulation. The
revenue regulations applicable at the time the tax court decided Asia Bank was Revenue Regulations No. 17-84, not
Revenue Regulation 12-80.

xxxx

WHEREFORE, the instant petition is DENIED DUE COURSE and DISMISSED.

SO ORDERED.[8]

Petitioner sought reconsideration of the aforementioned decision arguing that Section 4 (e) of Revenue Regulations
(RR) No. 12-80 remains applicable as the basis of GRT for banks in taxable year 1996.

On October 17, 2006, the CA issued a Resolution[9] denying petitioner's motion for reconsideration on the ground
that no new or compelling reason was presented by petitioner to warrant the reversal or modification of its
decision.

Hence, this petition wherein petitioner contends that:

THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS FAILED TO POINT TO THE LEGAL BASIS FOR THE
EXCLUSION OF THE AMOUNT OF TAX WITHHELD ON PASSIVE INCOME FROM ITS GROSS RECEIPTS FOR PURPOSES
OF TAXATION.[10]

In essence, the issue to be resolved is whether the 20% final tax withheld on a bank's passive income should be
included in the computation of the GRT.

Petitioner avers that the 20% final tax withheld on its passive income should not be included in the computation of
its taxable gross receipts. It insists that the CA erred in ruling that it failed to show the legal basis for its claimed tax
refund or credit, since Section 4 (e) of RR No. 12-80 categorically provides for the exclusion of the amount of taxes
withheld from the computation of gross receipts for GRT purposes.

We do not agree.
In a catena of cases, this Court has already resolved the issue of whether the 20% final withholding tax should form
part of the total gross receipts for purposes of computing the GRT.

In China Banking Corporation v. Court of Appeals,[11] we ruled that the amount of interest income withheld, in
payment of the 20% final withholding tax, forms part of the bank's gross receipts in computing the GRT on
banks. The discussion in this case is instructive on this score:

The gross receipts tax on banks was first imposed on 1 October 1946 by Republic Act No. 39 ("RA No. 39") which
amended Section 249 of the Tax Code of 1939. Interest income on banks, without any deduction, formed part of
their taxable gross receipts. From October 1946 to June 1977, there was no withholding tax on interest income from
bank deposits.

On 3 June 1977, Presidential Decree No. 1156 required the withholding at source of a 15% tax on interest on bank
deposits. This tax was a creditable, not a final withholding tax. Despite the withholding of the 15% tax, the entire
interest income, without any deduction, formed part of the bank's taxable gross receipts. On 17 September 1980,
Presidential Decree No. 1739 made the withholding tax on interest a final tax at the rate of 15% on savings account,
and 20% on time deposits. Still, from 1980 until the Court of Tax Appeals decision in Asia Bank on 30 January 1996,
banks included the entire interest income, without any deduction, in their taxable gross receipts.

In Asia Bank, the Court of Tax Appeals held that the final withholding tax is not part of the bank's taxable gross
receipts. The tax court anchored its ruling on Section 4(e) of Revenue Regulations No. 12-80, which stated that the
gross receipts "shall be based on all items actually received" by the bank. The tax court ruled that the bank does not
actually receive the final withholding tax. As authority, the tax court cited Collector of Internal Revenue v. Manila
Jockey Club, which held that "gross receipts of the proprietor should not include any money which although
delivered to the amusement place had been especially earmarked by law or regulation for some person other than
the proprietor. x x x

Subsequently, the Court of Tax Appeals reversed its ruling in Asia Bank. In Far East Bank & Trust Co. v.
Commissioner and Standard Chartered Bank v. Commissioner, both promulgated on 16 November 2001, the tax
court ruled that the final withholding tax forms part of the bank's gross receipts in computing the gross receipts tax.
The tax court held that Section 4(e) of Revenue Regulations 12-80 did not prescribe the computation of the gross
receipts but merely authorized "the determination of the amount of gross receipts on the basis of the method of
accounting being used by the taxpayer.

The tax court also held in Far East Bank and Standard Chartered Bank that the exclusion of the final withholding tax
from gross receipts operates as a tax exemption which the law must expressly grant. No law provides for such
exemption. In addition, the tax court pointed out that Section 7(c) of Revenue Regulations No. 17-84 had already
superseded Section 4(e) of Revenue Regulations No. 12-80. x x x[12] (Emphasis supplied)

Notably, this Court, in the same case, held that under RR Nos. 12-80 and 17-84, the Bureau of Internal Revenue (BIR)
has consistently ruled that the term gross receipts do not admit of any deduction. It emphasized that interest
earned by banks, even if subject to the final tax and excluded from taxable gross income, forms part of its gross
receipt for GRT purposes. The interest earned refers to the gross interest without deduction, since the regulations
do not provide for any deduction.[13]

Further, in Commissioner of Internal Revenue v. Solidbank Corporation,[14] this Court held that "gross receipts" refer
to the total, as opposed to the net, income. These are, therefore, the total receipts before any deduction for the
expenses of management.[15]

In Commissioner of Internal Revenue v. Bank of Commerce,[16] we again adhered to the ruling that the term "gross
receipts" must be understood in its plain and ordinary meaning. In this case, we ruled that gross receipts should be
interpreted as the whole amount received as interest, without deductions; otherwise, if deductions were to be
made from gross receipts, it would be considered as "net receipts." The Court ratiocinated as follows:

The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire, total, without
deduction." A common definition is "without deduction." x x x Gross is the antithesis of net. Indeed, in China
Banking Corporation v. Court of Appeals, the Court defined the term in this wise:

As commonly understood, the term "gross receipts" means the entire receipts without any deduction. Deducting
any amount from the gross receipts changes the result, and the meaning, to net receipts. Any deduction from gross
receipts is inconsistent with a law that mandates a tax on gross receipts, unless the law itself makes an exception. As
explained by the Supreme Court of Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc.

Highly refined and technical tax concepts have been developed by the accountant and legal technician primarily
because of the impact of federal income tax legislation. However, this in no way should affect or control the normal
usage of words in the construction of our statutes; x x x Under the ordinary basic methods of handling accounts, the
term gross receipts, in the absence of any statutory definition of the term, must be taken to include the whole total
gross receipts without any deductions, x x x.[17]

Again, in Commissioner of Internal Revenue v. Bank of the Philippine Islands,[18] this Court ruled that "the legislative
intent to apply the term in its ordinary meaning may also be surmised from a historical perspective of the levy on
gross receipts. From the time the gross receipts tax on banks was first imposed in 1946 under R.A. No. 39 and
throughout its successive reenactments, the legislature has not established a definition of the term 'gross receipts.'
Absent a statutory definition of the term, the BIR had consistently applied it in its ordinary meaning, i.e., without
deduction. On the presumption that the legislature is familiar with the contemporaneous interpretation of a statute
given by the administrative agency tasked to enforce the statute, subsequent legislative reenactments of the subject
levy sans a definition of the term 'gross receipts' reflect that the BIR's application of the term carries out the
legislative purpose."[19]

In sum, all the aforementioned cases are one in saying that "gross receipts" comprise "the entire receipts without
any deduction." Clearly, then, the 20% final withholding tax should form part of petitioner's total gross receipts for
purposes of computing the GRT.

Also worth noting is the fact that petitioner's reliance on Section 4 (e) of RR 12-80 is misplaced as the same was
already superseded by a more recent issuance, RR No. 17-84.

This fact was elucidated on by the Court in the case of Commissioner of Internal Revenue v. Citytrust Investment
Phils. Inc.,[20] where it held that RR No. 12-80 had already been superseded by RR No. 17-84, viz.:

x x x Revenue Regulations No. 12-80, issued on November 7, 1980, had been superseded by Revenue Regulations No.
17-84 issued on October 12, 1984. Section 4 (e) of Revenue Regulations No. 12-80 provides that only items of
income actually received shall be included in the tax base for computing the GRT. On the other hand, Section 7 (c) of
Revenue Regulations No. 17-84 includes all interest income in computing the GRT, thus:

Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes.

The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the
(a) withholding taxes in accordance with these regulations need not be included in the gross income in computing
the depositor's/ investor's income tax liability. x x x
Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of
(b) imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense
deductible for purposes of computing taxable net income of the payor.
 If the recipient of the above-mentioned items of income are financial institutions, the same shall be included
(c)
as part of the tax base upon which the gross receipt tax is imposed.

Revenue Regulations No. 17-84 categorically states that if the recipient of the above-mentioned items of income are
financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed. x
x x.[21] (Emphasis supplied)

Significantly, the Court even categorically stated in the aforementioned case that there is an implied repeal of
Section 4 (e). It held that there exists a disparity between Section 4 (e) of RR No. 12-80, which imposes the GRT only
on all items of income actually received (as opposed to their mere accrual) and Section 7 (c) of RR No. 17-84, which
includes all interest income (whether actual or accrued) in computing the GRT. Plainly, RR No. 17-84, which
requires interest income, whether actually received or merely accrued, to form part of the bank's taxable gross
receipts, should prevail.[22]

All told, petitioner failed to point to any specific provision of law allowing the deduction, exemption or exclusion
from its taxable gross receipts, of the amount withheld as final tax. Besides, the exclusion sought by petitioner of the
20% final tax on its passive income from the taxpayer's tax base constitutes a tax exemption, which is highly
disfavored. A governing principle in taxation states that tax exemptions are to be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority and should be granted only by clear and
unmistakable terms.[23]

WHEREFORE, premises considered, the Decision dated June 16, 2006 and Resolution dated October 17, 2006 of the
former Fifth Division of the Court of Appeals are hereby AFFIRMED in toto.

SO ORDERED.

G.R. No. 198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK & TRUST COMPANY,
PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK AND PLANTERS
DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF INTERNAL REVENUE,
SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL TREASURER AND BUREAU OF
TREASURY, Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion worth of
10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001 (denominated as the
Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR Ruling),
declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding tax. Pursuant to
this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final tax from the face value
of the PEACe Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules of
Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings issued
by BIR of similar tenor and import, for being unconstitutional and for having been issued without
jurisdiction or with grave abuse of discretion amounting to lack or· excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT from the
payment of the face value of the Government Bonds upon their maturity;
 c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the
Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction, enjoining
Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on the Government
Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well asother related rulings
issued by the BIR of similar tenor and import, pending the resolution by [the court] of the merits of [the]
Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the assistance of its
financial advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and
Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc. (SEED)," 5 requested an approval from the Department
of Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-
notes would initially be purchased by a special purpose vehicle on behalf of CODE-NGO, repackaged and sold at a
premium to investors as the PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a
permanent fund (Hanapbuhay® Fund) to finance meritorious activities and projects of accredited non-government
organizations (NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon bonds
were also presented by banks and financial institutions, such as First Metro Investment Corporation (proposal dated
March 1, 2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security Bank Corporation and SB
Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed Income, Inc. (proposal
dated August 25, 1999).12 "[B]oth the proposals of First Metro Investment Corp. and ATR-Kim Eng Fixed Income
indicate that the interest income or discount earned on the proposed zerocoupon bonds would be subject to the
prevailing withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep discount), with
the face value repaid at the time of maturity.14 It does not make periodic interest payments, or have socalled
"coupons," hence the term zero-coupon bond.15 However, the discount to face value constitutes the return to the
bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10, 15, and 25, 2001,
issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds. BIR Ruling No. 020-2001,
signed by then Commissioner ofInternal Revenue René G. Bañez confirmed that the PEACe Bonds would not be
classified as deposit substitutes and would not be subject to the corresponding withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20) or more
individuals or corporate lenders at any one time. In the light of your representation that the PEACe Bonds will be
issued only to one entity, i.e., Code NGO, the same shall not be considered as "deposit substitutes" falling within the
purview of the above definition. Hence, the withholding tax on deposit substitutes will not apply.18 (Emphasis
supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in BIR
Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001
(collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to determine whether the financial
assets, i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or corporate lenders"
rule must apply. Moreover, the determination of the phrase "at any one time" for purposes of determining the "20
or more lenders" is to be determined at the time of the original issuance. Such being the case, the PEACe Bonds
were not to be treated as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former Treasurer
Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle considering that the latter
was not a Government Securities Eligible Dealer (GSED).22 Former Treasurer Edeza recommended that the issuance
of the Bonds "be done through the ADAPS"23 and that CODE-NGO "should get a GSED to bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated October
9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-year Zero[-] Coupon Bonds [would] be
auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be issued to not morethan 19
buyers/lenders hence, the necessity of a manual auction for this maiden issue." 27 It also required the GSEDs to
submit their bids not later than 12 noon on auction date and to disclose in their bid submissions the names of the
institutions bidding through them to ensure strict compliance with the 19 lender limit.28 Lastly, it stated that "the
issue being limitedto 19 lenders and while taxable shall not be subject to the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-Coupon Bond." The
memo stated inpart that the formula (in determining the purchase price and settlement amount) "is only applicable
to the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction Guidelines for the
10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001" (Auction Guidelines).32 The Auction
Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding tax as the issue will be
limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No. 020
2001)."33 The Auction Guidelines, for the first time, also stated that the Bonds are "[e]ligible as liquidity reserves
(pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also on the
same date, the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling issued by the
Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final withholding tax and the opinion of the
Monetary Board on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as 12.248%
to as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction results.40 The cut-off was at
12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder having
tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued ₱35 billion worth of
Bonds at yield-to-maturity of 12.75% to RCBC for approximately ₱10.17 billion, 43 resulting in a discount of
approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement 44 with CODE-NGO, whereby RCBC
Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. 45 RCBC
Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of the 35 billion Bonds at the price
of ₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO represented that "[a]ll income
derived from the Bonds, inclusive of premium on redemption and gains on the trading of the same, are exempt from
all forms of taxation as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and 16
August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of ₱11,995,513,716.51.
Petitioners purchased the PEACe Bonds on different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government Bonds
and directing the BTr to withhold said final tax at the maturity thereof, [allegedly without] consultation with
Petitioners as bond holders, and without conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance on the
proper tax treatment of the discount or interest income derived from the Government Bonds." 51 The Bureau of
Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-0452 dated
July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-0554 dated July 28,
2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on interest
income from deposit substitutes. It is now settled that all treasury bonds (including PEACe Bonds), regardless of the
number of purchasers/lenders at the time of origination/issuance are considered deposit substitutes. In the case of
zero-coupon bonds, the discount (i.e. difference between face value and purchase price/discounted value of the
bond) is treated as interest income of the purchaser/holder. Thus, the Php 24.3 interest income should have been
properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final tax on the
discount/interest income realized by RCBC as a result of the 2001 Rulings. Subsequently, the issuance of BIR Ruling
No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by stating that the [1997] Tax
Code is clear that the "term public means borrowing from twenty (20) or more individual or corporate lenders at
any one time." The word "any" plainly indicates that the period contemplated is the entire term of the bond, and
not merely the point of origination or issuance. . . . Thus, by taking the PEACe bonds out of the ambit of deposits
[sic] substitutes and exempting it from the 20% Final Tax, an exemption in favour of the PEACe Bonds was created
when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing System
Holdings Corporation and Subsidiaries ("PDS Group"). The Memo provides that in view of the pronouncement of the
DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no transferof the same shall be
allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12 October 2011 until the redemption
payment date on 18 October 2011. Thus, the bondholders of record appearing on the ROSS as of 18 October 2011,
which include the Petitioners, shall be treated by the BTr asthe beneficial owners of such securities for the relevant
[tax] payments to be imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of Internal Revenue
issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount or interest earned
on the PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO but also [on] ‘all subsequent
holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent
application for a temporary restraining order and/or writ of preliminary injunction) 59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the implementation of BIR
Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final withholding tax on
interest income there from shall be withheld by the petitioner banks and placed in escrow pending resolution of
[the] petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit petition-in-
intervention62 dated October 27, 2011, which was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TRO."64 They alleged that on the same day that the temporary restraining order
was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts representing the face
value of the Bonds, net however of the amounts corresponding to the 20% final withholding tax on interest income,
and that the Bureau of Treasury refused to release the amounts corresponding to the 20% final withholding
tax.65 On November 15, 2011, this court directed respondents to: "(1) SHOW CAUSE why they failed to comply with
the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-intervention
with comment on the petitionin-intervention of RCBC and RCBC Capital).67 The motion was granted by this court on
November 22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They explained that: 1) "the implementation of
[BIR Ruling No. 370-2011], which has already been performed on October 18, 2011 with the withholding of the 20%
final withholding tax on the face value of the PEACe bonds, is already fait accompli . . . when the Resolution and TRO
were served to and received by respondents BTr and National Treasurer [on October 19, 2011]"; 70 and 2) the
withheld amount has ipso facto become public funds and cannot be disbursed or released to petitioners without
congressional appropriation.71 Respondents further aver that"[i]nasmuch as the . . . TRO has already become moot .
. . the condition attached to it, i.e., ‘that the 20% final withholding tax on interest income therefrom shall be
withheld by the banks and placed in escrow . . .’has also been rendered moot[.]" 72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed by
RCBC and RCBC Capital and On November 27, 2012, petitioners filed their "Manifestation with Urgent Reiterative
Motion (To Direct Respondents to Comply with the Temporary Restraining Order)." 75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to direct
respondents to comply with the temporary restraining order); and (b) required respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply 78 on June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax under
the 1997 National Internal Revenue Code. Related to this question is the interpretation of the phrase
"borrowing from twenty (20) or more individual or corporate lenders at any one time" under Section 22(Y)
 of the 1997 National Internal Revenue Code, particularly on whether the reckoning of the 20 lenders
includes trading of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the Bureau of
Internal Revenue is estopped from imposing and/or collecting the 20% final withholding tax from the face
value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the
Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity of
rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is
obligated . . . to pay the face value amount of Ph₱35 Billion upon maturity without any deduction
whatsoever."79 They add that "the Government cannot impair the efficacy of the [Bonds] by arbitrarily, oppressively
and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity
and after several, consistent categorical declarations that such bonds are exempt from the 20% FWT, without
violating due process"80 and the constitutional principle on non-impairment of contracts.81 Petitioners aver that at
the time they purchased the Bonds, they had the right to expect that they would receive the full face value of the
Bonds upon maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR Rulings are
correct, the fact remains that [they] relied [on] good faith thereon." 83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section 22(Y) of the
1997 National Internal Revenue Code because there was only one lender (RCBC) to whom the Bureau of Treasury
issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings "erroneously interpreted that the number
of investors that participate in the ‘secondary market’ is the determining factor in reckoning the existence or non-
existence of twenty (20) or more individual or corporate lenders."85 Furthermore, they contend that the Bureau of
Internal Revenue unduly expanded the definition of deposit substitutes under Section 22 of the 1997 National
Internal Revenue Code in concluding that "the mere issuance of government debt instruments and securities is
deemed as falling within the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed]
to an unauthorized act of administrative legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from income
tax.88 They insist that "[t]hey are not lenders whose income is considered as ‘interest income or yield’ subject to the
20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]" 89 because they "acquired the
Government Bonds in the secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that the
collection of the final tax was barred by prescription.91 They point out that under Section 7 of DOF Department
Order No. 141-95,92 the final withholding tax "should have been withheld at the time of their issuance[.]" 93 Also,
under Section 203 of the 1997 National Internal Revenue Code, "internal revenuetaxes, such as the final tax,
[should] be assessed within three (3) years after the last day prescribed by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to them
was in violation of their property rights,95 their constitutional right to due process96 as well as Section 246 of the
1997 National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also have "an adverse
effect of colossal magnitude on the investors, both localand foreign, the Philippine capital market, and most
importantly, the country’s standing in the international commercial community." 98 Petitioners explained that "unless
enjoined, the government’s threatened refusal to pay the full value of the Government Bonds will negatively impact
on the image of the country in terms of protection for property rights (including financial assets), degree of legal
protection for lender’s rights, and strength of investor protection." 99 They cited the country’s ranking in the World
Economic Forum: 75th in the world in its 2011–2012 Global Competitiveness Index, 111th out of 142 countries
worldwide and 2nd to the last among ASEAN countries in terms of Strength of Investor Protection, and 105th
worldwide and last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100 It would also
allegedly "send a reverberating message to the whole world that there is no certainty, predictability, and stability of
financial transactions in the capital markets[.]"101 "[T]he integrity of Government-issued bonds and notes will be
greatly shattered and the credit of the Philippine Government will suffer" 102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce "investors’ perception that the level of regulatory risk for
contracts entered into by the Philippine Government is high,"104 thus resulting in higher interestrate for
government-issued debt instruments and lowered credit rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue "gravely
and seriously abused her discretion in the exercise of her rule-making power"106 when she issued the assailed 2011
BIR Ruling which ruled that "all treasury bonds are ‘deposit substitutes’ regardless of the number of lenders, in clear
disregard of the requirement of twenty (20)or more lenders mandated under the NIRC."107 They argue that "[b]y her
blanket and arbitrary classification of treasury bonds as deposit substitutes, respondent CIR not only amended and
expanded the NIRC, but effectively imposed a new tax on privately-placed treasury bonds."108 Petitioners-
intervenors RCBC and RCBC Capital further argue that the 2011 BIR Ruling will cause substantial impairment of their
vested rights109 under the Bonds since the ruling imposes new conditions by "subjecting the PEACe Bonds to the
twenty percent (20%) final withholding tax notwithstanding the fact that the terms and conditions thereof as
previously represented by the Government, through respondents BTr and BIR, expressly state that it is not subject
to final withholding tax upon their maturity."110 They added that "[t]he exemption from the twenty percent (20%)
final withholding tax [was] the primary inducement and principal consideration for [their] participat[ion] in the
auction and underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner of
Internal Revenue violated their rights to due process when she arbitrarily issued the 2011 BIR Ruling without prior
notice and hearing, and the oppressive timing of such ruling deprived them of the opportunity to challenge the
same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and RCBC
Capital claim that respondents Bureau of Treasury and CODE-NGO should be held liable "as [these] parties explicitly
represented . . . that the said bonds are exempt from the final withholding tax." 113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011 assailed BIR
Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of existing securities, which is
contrary to the State policies of stabilizing the financial system and of developing capital markets." 114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are "invalid because
they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the applicability of the ‘20 or
more lender’ rule to government debt instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the secondary
market instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest income, which
[are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC"[;] 116 (c) "the tax exemption privilege relating to the
issuance of the PEACe Bonds . . . partakes of a contractual commitment granted by the Government in exchange for
a valid and material consideration [i.e., the issue price paid and savings in borrowing cost derived by the
Government,] thus protected by the non-impairment clause of the 1987 Constitution"[;]117 and (d) the 2004, 2005,
and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings since no notice of revocation was issued to [it],
RCBC and [RCBC Capital] and petitioners[-bondholders], nor was there any BIR administrative guidance issued and
published[.]"118 CODE-NGO additionally argues that impleading it in a Rule 65 petition was improper because: (a) it
involves determination of a factual question;119 and (b) it is premature and states no cause of action as it amounts to
an anticipatory third-party claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the
doctrines of exhaustion of administrative remedies and hierarchy ofcourts, resulting in a lack of cause of action that
justifies the dismissal of the petition.121 According to them, "the jurisdiction to review the rulings of the
[Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative remedies, pertains to
the Court of Tax Appeals."122 They point out that "a case similar to the present Petition was [in fact] filed with the
CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal Commercial Banking Corporation
and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al.’" 123
Respondents further take issue on the timeliness of the filing of the petition and petitions-in-intervention.124 They
argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are indirectly attacking the 2004 and
2005 BIR Rulings, of which the attack is legally prohibited, and the petition insofar as it seeks to nullify the 2004 and
2005 BIR Rulings was filed way out of time pursuant to Rule 65, Section 4. 125
Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain but
interest income subject to income tax.126 They explain that "[w]ith the payment of the Ph₱35 Billion proceeds on
maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about Ph₱24.8 Billion as
payment for interest. Such interest is clearly an income of the Petitioners considering that the same is a flow of
wealth and not merely a return of capital – the capital initially invested in the Bonds being approximately Ph₱10.2
Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an
impairment of the obligations of contract, respondents aver that: "The BTr has no power to contractually grant a tax
exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a material term of the
Bonds"[;]128 "[t]here has been no change in the laws governing the taxability of interest income from deposit
substitutes and said laws are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the term
"deposit substitute" in accordance with the letter and spirit of the Tax Code"[;] 130 "[t]he withholding of the 20% FWT
does not result in a default by the Government as the latter performed its obligations to the bondholders in
full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was between RCBC/CODE-NGO/RCBC Cap
and the succeeding purchasers of the PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe Bonds does not
amount to a deprivation of property without due process of law." 133 Their imposition of the 20% final withholding
tax is not arbitrary because they were only performing a duty imposed by law;134 "[t]he 2011 BIR Ruling is
aninterpretative rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier
construction given to the termby the 2004 and 2005 BIR Rulings."135 Hence, respondents argue that "there was no
need to observe the requirements of notice, hearing, and publication[.]" 136
Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major financial
institutions equipped with both internal and external accounting and compliance departments as wellas access to
both internal and external legal counsel; actively involved in industry organizations such as the Bankers Association
of the Philippines and the Capital Market Development Council; all actively taking part in the regular and special
debt issuances of the BTr and indeed regularly proposing products for issue by BTr — had actual notice of the 2004
and 2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop — including virtually zero trading for extended
periods of six months to almost a year — in the trading volume of the PEACe Bonds after the release of BIR Ruling
No. 007-04 on July 16, 2004 tend to indicate that market participants, including the Petitioners herein, were aware
of the ruling and its consequences for the PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal
Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly expand the definition of
deposit substitutes by creating an unwarranted exception to the requirement of having 20 or more
lenders/purchasers;140 and the word "any" in Section 22(Y) of the National Internal Revenue Code plainly indicates
that the period contemplated is the entire term of the bond and not merely the point of origination or issuance. 141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice
petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners would be liable topay a 20% final withholding tax
just the same because the PEACe Bonds in their possession are legally in the nature of deposit substitutes subject to
a 20% final withholding tax under the NIRC."143 Section 7 of DOF Department Order No. 141-95 also provides that
incomederived from Treasury bonds is subject to the 20% final withholding tax.144 "[W]hile revenue regulations as a
general rule have no retroactive effect, if the revocation is due to the fact that the regulation is erroneous or
contrary to law, such revocation shall have retroactive operation as to affect past transactions, because a wrong
construction of the law cannot give rise to a vested right that can be invoked by a taxpayer." 145
Finally, respondents submit that "there are a number of variables and factors affecting a capital
market."146 "[C]apital market itself is inherently unstable."147 Thus, "[p]etitioners’ argument that the 20% final
withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition that is not a
justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could no longer be
implemented [because] the acts sought to be enjoined are already fait accompli."149 They add that "to disburse the
funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the Constitution prohibiting
‘money being paid out of the Treasury except in pursuance of an appropriation made by law[.]’" 150 "The remedy of
petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their position be upheld by the
Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code in relation
to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which prohibits courts,
except the Court of Tax Appeals, from issuing injunctions to restrain the collection of any national internal revenue
tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue Code when
it declared that all government debt instruments are deposit substitutes regardless of the 20-lender rule;
and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds,
represented by the government as an inducement and important consideration for the purchase
of the Bonds;
b) It constitutes deprivation ofproperty without due process because there was no prior notice to
bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government organizations
and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the
challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of Internal
Revenue’s power to interpret the provisions of the 1997 National Internal Revenue Code and other tax
laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in
previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which have already effectively
abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially when the
latter’s rulings are not in harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a
vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the ordinary
course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege to have
been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the Secretary
of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -The power to interpret the
provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil actions
are generally not entertained."153 The remedy within the administrative machinery must be resorted to first and
pursued to its appropriate conclusion before the court’s judicial power can be sought. 154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the
peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded (1) when
there is a violation of due process, (2) when the issue involved is purely a legal question, 155 (3) when the
administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on the
part of the administrative agency concerned,(5) when there is irreparable injury, (6) when the respondent is a
department secretary whose acts as an alter ego of the President bears the implied and assumed approval of the
latter, (7) when to require exhaustion of administrative remedies would be unreasonable, (8) when it would amount
to a nullification of a claim, (9) when the subject matter is a private land in land case proceedings, (10) when the
rule does not provide a plain, speedy and adequate remedy, (11) when there are circumstances indicating the
urgency of judicial intervention.156 (Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely: (a) the
interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under the 1997
National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the PEACe
Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and due process. Judicial
intervention is likewise urgent with the impending maturity of the PEACe Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in an
exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile exercise
because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued by the Bureau of
Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of Internal Revenue’s opinions
as his own.158 This position was in fact confirmed in the letter159 dated October 10, 2011 where he ordered the
Bureau of Treasury to withhold the amount corresponding to the 20% final withholding tax on the interest or
discounts allegedly due from the bondholders on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of
courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue
pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were issued in
connection with the implementation of the 1997 National Internal Revenue Code on the taxability of the interest
income from zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No.
9282,160 such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National
Internal Revenue or other laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a decision, ruling or
inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture or the Central Board of Assessment Appeals or the
Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the receipt of such decision or
rulingor after the expiration of the period fixed by law for action as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under the
National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be maintained,
except as herein provided, until and unless an appeal has been previously filed with the CTA and disposed of in
accordance with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the jurisdiction
of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed that
the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax Appeals,
not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of Finance,
upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of
sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice to the
power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation
of the provisionsof internal revenue laws, including ruling on the classification of articles of sales and similar
purposes." (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an
attempt to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that,
accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of taxes
and license fees to adhere strictly to the interpretation given by the defendant tothe statutory provisions
abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the Collector of
Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the
administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the purview
of Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals ‘shall exercise exclusive
appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . . matters arising
under the National Internal Revenue Code or other law or part of the law administered by the Bureau of Internal
Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare and the
advancement of public policy, or demanded by the broader interest of justice, or the orders complained of were
found to be patent nullities, or the appeal was considered as clearly an inappropriate remedy." 164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of Interior and
Local Government,165 this court noted that the petition for prohibition was filed directly before it "in disregard of the
rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and
decide the same on its merits in viewof the significant constitutional issues raised by the parties dealing with the tax
treatment of cooperatives under existing laws and in the interest of speedy justice and prompt disposition of the
matter."166
Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a
definitive declaration of whether government debt instruments are deposit substitutes under existing laws, and the
novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court in the first
instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial instrument or
product that may be issued and traded in the market. Due to the changing positions of the Bureau of Internal
Revenue on this issue, there isa need for a final ruling from this court to stabilize the expectations in the financial
market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had been
rendered moot by this court’s issuance of the temporary restraining order enjoining the implementation of the 2011
BIR Ruling. The temporary restraining order effectively recognized the urgency and necessity of direct resort to this
court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final withholdingtax at
the rate of 20% is imposed on interest on any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest fromany currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; . . . Provided, further, That interest income from
long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced by certificates in such form prescribed by the
Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That
should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax
shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the
proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds
and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby imposed upon
the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest income derived by a domestic corporation from a
depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the
rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within
the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident foreign corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income. (Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the 1977
National Internal Revenue Code through Presidential Decree No. 1739168 issued in 1980. Later, Presidential Decree
No. 1959, effective on October 15, 1984, formally added the definition of deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs
of their agent or dealer.These promissory notes, repurchase agreements, certificates of assignment or participation
and similar instrument with recourse as may be authorized by the Central Bank of the Philippines, for banks and
non-bank financial intermediaries or by the Securities and Exchange Commission of the Philippines for commercial,
industrial, finance companies and either non-financial companies: Provided, however, that only debt instruments
issued for inter-bank call loans to cover deficiency in reserves against deposit liabilities including those between or
among banks and quasi-banks shall not be considered as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the same
definition and specifically identified the following borrowings as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to engage in
quasi-banking functions evidenced by deposit substitutes instruments, except interbank call loans to cover
 deficiency in reserves against deposit liabilities as evidenced by interbank loan advice or repayment
transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including the Central Bank
of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes, certificates of
indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment companies,
trust companies, including the trust department of banks and investment houses, evidenced by deposit
substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the
addition of the qualifying phrase for public – borrowing from 20 or more individual or corporate lenders at any one
time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public(the term 'public'
means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs
of their agent or dealer. These instruments may include, but need not be limited to, bankers’ acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between
the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and
similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with
maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those
between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.
(Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty (20) or
more individual or corporate lenders at any one time." Hence, the number of lenders is determinative of whether a
debt instrument should be considered a deposit substitute and consequently subject to the 20% final withholding
tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the Government
Bonds."169 On the other hand, respondents theorize that the word "any" "indicates that the period contemplated is
the entire term of the bond and not merely the point of origination or issuance[,]"170 such that if the debt
instruments "were subsequently sold in secondary markets and so on, insuch a way that twenty (20) or more buyers
eventually own the instruments, then it becomes indubitable that funds would be obtained from the "public" as
defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial market, the words "at any one time"
create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units (households and business firms
that have savings or excess funds) flow to the deficit units (mainly business firms and government that need funds
to finance their operations or growth). They bring suppliers and users of funds together and provide the means by
which the lenders transform their funds into financial assets, and the borrowers receive these funds now considered
as their financial liabilities. The transfer of funds is represented by a security, such as stocks and bonds. Fund
suppliers earn a return on their investment; the return is necessary to ensure that funds are supplied to the financial
markets.172
"The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of the
securities[,]"173 namely: (1) the money market, which facilitates the flow of short-term funds (with maturities of one
year or less); and (2) the capital market, which facilitates the flow of long-term funds (with maturities of more than
one year).174
Whether referring to money marketsecurities or capital market securities, transactions occur either in the primary
market or in the secondary market.175 "Primary markets facilitate the issuance of new securities. Secondary markets
facilitate the trading of existing securities, which allows for a change in the ownership of the securities." 176 The
transactions in primary markets exist between issuers and investors, while secondary market transactions exist
among investors.177
"Over time, the system of financial markets has evolved from simple to more complex ways of carrying out financial
transactions."178 Still, all systems perform one basic function: the quick mobilization of money from the
lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange funds in returnfor financial
assets"181 (e.g., purchasing bonds directly from the company issuing them). This method provides certain limitations
such as: (a) "both borrower and lender must desire to exchange the same amount of funds at the same
time"[;]182 and (b) "both lender and borrower must frequently incur substantial information costs simply to find each
other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing
information costs.184 A Broker185 is "an individual or financial institution who provides information concerning
possible purchases and sales of securities. Either a buyer or a seller of securities may contact a broker, whose job is
simply to bring buyers and sellers together."186 A dealer187 "also serves as a middleman between buyers and sellers,
but the dealer actually acquires the seller’s securities in the hope of selling them at a later time at a more favorable
price."188 Frequently, "a dealer will split up a large issue of primary securities into smaller units affordable by . . .
buyers . . . and thereby expand the flow of savings into investment." 189 In semi direct financing, "[t]he ultimate
lender still winds up holding the borrower’s securities, and therefore the lender must be willing to accept the risk,
liquidity, and maturity characteristics of the borrower’s [debt security]. There still must be a fundamental
coincidence of wants and needs between [lenders and borrowers] for semidirect financial transactions to take
place."190
"The limitations of both direct and semidirect finance stimulated the development of indirect financial transactions,
carried out with the help of financial intermediaries" 191 or financial institutions, like banks, investment banks,
finance companies, insurance companies, and mutual funds.192 Financial intermediaries accept funds from surplus
units and channel the funds to deficit units.193 "Depository institutions [such as banks] accept deposits from surplus
units and provide credit to deficit units through loans and purchase of [debt] securities." 194 Nondepository
institutions, like mutual funds, issue securities of their own (usually in smaller and affordable denominations) to
surplus units and at the same time purchase debt securities of deficit units.195 "By pooling the resources of[small
savers, a financial intermediary] can service the credit needs of large firms simultaneously." 196
The financial market, therefore, is an agglomeration of financial transactions in securities performed by market
participants that works to transfer the funds from the surplus units (or investors/lenders) to those who need them
(deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining the
"20 or more lenders" would mean every transaction executed in the primary or secondary market in connection
with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds, the reckoning of "20 or more
lenders/investors" is made at any transaction in connection with the purchase or sale of the Government Bonds,
such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually
through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or
corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a public borrowing and the bonds at that point intime are deemed
deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on the imputed
interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the 1997
National Internal Revenue Code are subject to the regular income tax.
The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income, Section 32(A) of
the 1997 National Internal Revenue Code discloses a legislative policy to include all income not expressly exempted
as within the class of taxable income under our laws.
"The definition of gross income isbroad enough to include all passive incomes subject to specific tax rates or final
taxes."197 Hence, interest income from deposit substitutes are necessarily part of taxable income. "However, since
these passive incomes are already subject to different rates and taxed finally at source, they are no longer included
in the computation of gross income, which determines taxable income."198 "Stated otherwise . . . if there were no
withholding tax system in place in this country, this 20 percent portion of the ‘passive’ income of [creditors/lenders]
would actually be paid to the [creditors/lenders] and then remitted by them to the government in payment of their
income tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained the rationale behind
the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a convenient
manner to meet his probable income tax liability; second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and third, to improve
the government’s cash flow. This results in administrative savings, prompt and efficient collection of taxes,
prevention of delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of income taxes by requiring its payment at the source." 202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller isrequired
to withhold the 20% final income tax on the imputed interest income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains" contemplated under Section
32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived from trading, redemption,
or retirement of long-term securities from ordinary income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the use of
money. Gains from sale or exchange or retirement of bonds orother certificate of indebtedness fall within the
general category of "gainsderived from dealings in property" under Section 32(A)(3), while interest from bonds or
other certificate of indebtedness falls within the category of "interests" under Section 32(A)(4). 204 The use of the
term "gains from sale" in Section 32(B)(7)(g) shows the intent of Congress not toinclude interest as referred under
Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the bonds
before their maturity date, which is the difference between the selling price of the bonds in the secondary market
and the price at which the bonds were purchased by the seller; and (2) gain realized by the last holder of the bonds
when the bonds are redeemed at maturity, which is the difference between the proceeds from the retirement of
the bonds and the price atwhich such last holder acquired the bonds. For discounted instruments,like the zero-
coupon bonds, the trading gain shall be the excess of the selling price over the book value or accreted value (original
issue price plus accumulated discount from the time of purchase up to the time of sale) of the instruments. 206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not consistent with
law.207 Its interpretation of "at any one time" to mean at the point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings) that "all
treasury bonds . . . regardlessof the number of purchasers/lenders at the time of origination/issuance are
considered deposit substitutes."208 Being the subject of this petition, it is, thus, declared void because it completely
disregarded the 20 or more lender rule added by Congress in the 1997 National Internal Revenue Code. It also
created a distinction for government debt instruments as against those issued by private corporations when there
was none in the law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions must be
read together, endeavoring to make every part effective, harmonious, and sensible.209 That construction which will
leave every word operative will be favored over one that leaves some word, clause, or sentence meaningless and
insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the 1997
National Internal Revenue Code is an authoritative construction ofgreat weight, but the principle is not absolute and
may be overcome by strong reasons to the contrary. If through a misapprehension of law an officer has issued an
erroneous interpretation, the error must be corrected when the true construction is ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the nullification of
Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal Revenue because it
was contrary to the express provision of Section 230 of the 1977 National Internal Revenue Codeand, hence,
"[cannot] be given weight for to do so would, in effect, amend the statute." 212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two years
to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency with the
provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of
Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers,
whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is not
conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony with, the law they seek to apply and
implement.213 (Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a taxpayer with a
shield against judicial action [because] there are no vested rights to speak of respecting a wrong construction of the
law by the administrative officials and such wrong interpretation could not place the Government in estoppel to
correct or overrule the same."214 In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 215 this
court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No. 43-91, which imposed a 5% lending
investor's tax on pawnshops.216 It was held that "the [Commissioner] cannot, in the exercise of [its interpretative]
power, issue administrative rulings or circulars not consistent with the law sought to be applied. Indeed,
administrative issuances must not override, supplant or modify the law, but must remain consistent with the law
they intend to carry out. Only Congress can repeal or amend the law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court stated that
the Commissioner of Internal Revenue is not bound by the ruling of his predecessors,219 but, to the contrary, the
overruling of decisions is inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the delegated
authority of the administrative agency; (ii) whether itis reasonable; and (iii) whether it was issued pursuant to
proper procedure. But the court is not free to substitute its judgment as to the desirability or wisdom of the rule for
the legislative body, by its delegation of administrative judgment, has committed those questions to administrative
judgments and not to judicial judgments. In the case of an interpretative rule, the inquiry is not into the validity but
into the correctness or propriety of the rule. As a matter of power a court, when confronted with an interpretative
rule, is free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)
give some intermediate degree of authoritative weight to the interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an
"agricultural food product" within the meaning of § 103(b) of the NIRC. As the Solicitor General contends, "copra per
se is not food, that is, it is not intended for human consumption. Simply stated, nobody eats copra for food." That
previous Commissioners considered it so, is not reason for holding that the present interpretation is wrong. The
Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the contrary, the overruling of
decisions is inherent in the interpretation of laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe Bonds to
undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds were
issued at the time of origination. However, a reading of the underwriting agreement221 and RCBC term
sheet222 reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for CODE-
NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately ₱11.996 would fall
on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality,
therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury in exchange for the ₱35 billion
worth of PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC Capital/CODE-
NGO distributed the PEACe Bonds — all at the time of origination or issuance. At this point, however, we do not
know as to how many investors the PEACe Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit
substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and RCBC
Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or discount from
the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest from the
PEACe Bonds would likewise be required of any lender/investor had the latter turnedaround and sold said PEACe
Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income received
by individuals from longterm deposits or investments with a holding period of not less than five (5) years is exempt
from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper procedure was
for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and for the Bureau of
Internal Revenue to collect the unpaid final withholding tax directly from RCBC Capital/CODE-NGO, orany lender or
investor if such be the case, as the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to assess and
collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false returns with intent
to evade tax; and (3) failureto file a return, to be computed from the time of discovery of the falsity, fraud, or
omission. Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of
such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year
period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any time within
ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for
the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the
Bureau of Internal Revenue may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after the
discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-
intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties affected." 224 Moreover, service
may be made personally or by mail.225 And, "[p]ersonal service is complete upon actual delivery [of the
order.]"226 This court’s temporary restraining order was received only on October 19, 2011, or a day after the PEACe
Bonds had matured and the 20% final withholding tax on the interest income from the same was withheld.
Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized mode of
service of pleadings, court orders, or processes. Moreover, the news reports227 cited by petitioners were posted
minutes before the close of office hours or late in the evening of October 18, 2011, and they did not givethe exact
contents of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that
suchinjunction or order was served on him personally or that he had notice of the issuance or making of such
injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the tax
due"229 and return the amount of the tax withheld should it be finally determined that the income paid is not
subject to withholding.230 Hence, respondent Bureau of Treasury was justified in withholding the amount
corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received this court’s
temporary restraining order only on October 19, 2011, or the day after this tax had been withheld.
Respondents’ retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20% final
withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance of this
court’s temporary restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act to be
considered fait accompli, the act must have already been fully accomplished and consummated. 232 It must be
irreversible, e.g., demolition of properties,233 service of the penalty of imprisonment,234 and hearings on
cases.235 When the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in
nature,236 the defense of fait accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both the
withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue. Even though the
Bureau of Treasury had already withheld the 20% final withholding tax 237 when it received the temporary restraining
order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance which was due only
on November 10, 2011.238 The act enjoined by the temporary restraining order had not yet been fully satisfied and
was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government
agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it withheld to the Bureau of
Internal Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA)
supported by withholding tax returns on or before the 10th day of the following month after the said taxes had
been withheld.240 The Bureau of Internal Revenue shall transmit an original copy of the TRA to the Bureau of
Treasury,241 which shall be the basis for recording the remittance of the tax collection. 242 The Bureau of Internal
Revenue will then record the amount of taxes reflected in the TRA as tax collection in the Journal ofTax Remittance
by government agencies based on its copies of the TRA.243 Respondents did not submit any withholding tax return or
TRA to provethat the 20% final withholding tax was indeed remitted by the Bureau of Treasury to the Bureau of
Internal Revenue on October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011 submitted to
this court shows:
Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00

Coupon T/Bonds

(Peace Bonds) – 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59

Due to BIR 412-002 4,966,207,796.41

 To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.
The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41, representing the 20%
final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal Revenue on
October 18, 2011. The entries merely show that the monies corresponding to 20% final withholding tax was set
aside for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause why they
failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition."245 The 20% final withholding tax was effectively
placed in custodia legiswhen this court ordered the deposit of the amount in escrow. The Bureau of Treasury could
still release the money withheld to petitioners for the latter to place in escrow pursuant to this court’s directive.
There was no legal obstacle to the release of the 20% final withholding tax to petitioners. Congressional
appropriation is not required for the servicing of public debts in view of the automatic appropriations clause
embodied in Presidential Decree Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government service
insurance, and other similar fixed expenditures, (b) principal and interest on public debt, (c) national government
guarantees of obligations which are drawn upon, are automatically appropriated: provided, that no obligations shall
be incurred or payments made from funds thus automatically appropriated except as issued in the form of regular
budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated, such
amounts as may be necessary to effect payments on foreign or domestic loans, or foreign or domestic loans
whereon creditors make a call on the direct and indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned or controlled
corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions the proceeds of
which were relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and guaranteed by the
Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned or controlled corporations
and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a lawfuland valid
obligation of the Republic under the Government Bonds. Since said obligation represents a public debt, the release
of the monies requires no legislative appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of Government
Bonds may be lawfully taken from the continuing appropriation out of any monies in the National Treasury and is
not required to be the subject of another appropriation legislation: SEC. 2. The Secretary of Finance shall cause to be
paid out of any moneys in the National Treasury not otherwise appropriated, or from any sinking funds provided for
the purpose by law, any interest falling due, or accruing, on any portion of the public debt authorized by law. He
shall also cause to be paid out of any such money, or from any such sinking funds the principal amount of any
obligations which have matured, or which have been called for redemption or for which redemption has been
demanded in accordance with terms prescribed by him prior to date of issue. . . In the case of interest-bearing
obligations, he shall pay not less than their face value; in the case of obligations issued at a discount he shall pay the
face value at maturity; or if redeemed prior to maturity, such portion of the face value as is prescribed by the terms
and conditions under which such obligations were originally issued. There are hereby appropriated as a continuing
appropriation out of any moneys in the National Treasury not otherwise appropriated, such sums as may be
necessary from time to time to carry out the provisions of this section. The Secretary of Finance shall transmit to
Congress during the first month of each regular session a detailed statement of all expenditures made under this
section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds shall be
made through the National Treasury’s account with the Bangko Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand Deposit Account with
the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and Bonds under R.A. No. 245, as
amended, shall be credited and all payments for redemption of Treasury Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing, this court
has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its own
judgment and wisdom formulates an appropriation act precisely following the process established by the
Constitution, which specifies that no money may be paid from the Treasury except in accordance with an
appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization therefor already exists under RA
Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting authorization as embodied in
said Republic Acts and PD for debt service, Congress does not concern itself with details for implementation by the
Executive, butlargely with annual levels and approval thereof upon due deliberations as part of the whole obligation
program for the year. Upon such approval, Congress has spoken and cannot be said to havedelegated its wisdom to
the Executive, on whose part lies the implementation or execution of the legislative wisdom.246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court, which
remained in full force and effect, until set aside, vacated, or modified. Its conduct finds no justification and is
reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011 and DA
378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount
corresponding to the 20% final withholding tax despite this court's directive in the temporary restraining order and
in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow pending
resolution of this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the bondholders the amount
corresponding-to the 20% final withholding tax that it withheld on October 18, 2011.

G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.
Quasha, Asperilla, Ancheta, Peña, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of the Court of
Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set aside petitioner's assessment
of deficiency income taxes against respondent British Overseas Airways Corporation (BOAC) for the fiscal years 1959
to 1967, 1968-69 to 1970-71, respectively, as well as its Resolution of 18 November, 1983 denying reconsideration.
BOAC is a 100% British Government-owned corporation organized and existing under the laws of the United
Kingdom It is engaged in the international airline business and is a member-signatory of the Interline Air Transport
Association (IATA). As such it operates air transportation service and sells transportation tickets over the routes of
the other airline members. During the periods covered by the disputed assessments, it is admitted that BOAC had
no landing rights for traffic purposes in the Philippines, and was not granted a Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly
in 1961 and partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not
carry passengers and/or cargo to or from the Philippines, although during the period covered by the assessments, it
maintained a general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas Airways
— which was responsible for selling BOAC tickets covering passengers and cargoes. 1
G.R. No. 65773 (CTA Case No. 2373, the First Case)
On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the aggregate
amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was protested by BOAC.
Subsequent investigation resulted in the issuance of a new assessment, dated 16 January 1970 for the years 1959 to
1967 in the amount of P858,307.79. BOAC paid this new assessment under protest.
On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied by the CIR
on 16 February 1972. But before said denial, BOAC had already filed a petition for review with the Tax Court on 27
January 1972, assailing the assessment and praying for the refund of the amount paid.
G.R. No. 65774 (CTA Case No. 2561, the Second Case)
On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal years 1968-
1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of P1,000.00 and
P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of corporation returns) penalized
under Section 74 of the National Internal Revenue Code (NIRC).
On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter, dated 16
February 1972, however, the CIR not only denied the BOAC request for refund in the First Case but also re-issued in
the Second Case the deficiency income tax assessment for P534,132.08 for the years 1969 to 1970-71 plus
P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's request for reconsideration was denied
by the CIR on 24 August 1973. This prompted BOAC to file the Second Case before the Tax Court praying that it be
absolved of liability for deficiency income tax for the years 1969 to 1971.
This case was subsequently tried jointly with the First Case.
On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court held that
the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and Company, Ltd., and later by
Qantas Airways, during the period in question, do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by BOAC within the Philippines" and, therefore, said
income is not subject to Philippine income tax. The CTA position was that income from transportation is income
from services so that the place where services are rendered determines the source. Thus, in the dispositive portion
of its Decision, the Tax Court ordered petitioner to credit BOAC with the sum of P858,307.79, and to cancel the
deficiency income tax assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-
71.
Hence, this Petition for Review on certiorari of the Decision of the Tax Court.
The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:
1. Whether or not the revenue derived by private respondent British Overseas Airways
Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while having no
landing rights here, constitute income of BOAC from Philippine sources, and, accordingly, taxable.
2. Whether or not during the fiscal years in question BOAC s a resident foreign corporation doing
business in the Philippines or has an office or place of business in the Philippines.
3. In the alternative that private respondent may not be considered a resident foreign corporation
but a non-resident foreign corporation, then it is liable to Philippine income tax at the rate of
thirty-five per cent (35%) of its gross income received from all sources within the Philippines.
Under Section 20 of the 1977 Tax Code:
(h) the term resident foreign corporation engaged in trade or business within the Philippines or
having an office or place of business therein.
(i) The term "non-resident foreign corporation" applies to a foreign corporation not engaged in
trade or business within the Philippines and not having any office or place of business therein
It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to what
constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization. 2 "In order that a foreign corporation may be regarded as doing business within a State, there must be
continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character. 3
BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the Philippines,
That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the
fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." 4 Those activities were in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air
carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation
of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the
Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign
corporation subject to tax upon its total net income received in the preceding taxable year from all sources within
the Philippines. 5
Sec. 24. Rates of tax on corporations. — ...
(b) Tax on foreign corporations. — ...
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
any foreign country, except a foreign fife insurance company, engaged in trade or business within
the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources within the Philippines. (Emphasis
supplied)
Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax laws.
The Tax Code defines "gross income" thus:
"Gross income" includes gains, profits, and income derived from salaries, wages or compensation
for personal service of whatever kind and in whatever form paid, or from profession, vocations,
trades, business, commerce, sales, or dealings in property, whether real or personal, growing out
of the ownership or use of or interest in such property; also from interests, rents, dividends,
securities, or the transactions of any business carried on for gain or profile, or gains, profits,
and income derived from any source whatever (Sec. 29[3]; Emphasis supplied)
The definition is broad and comprehensive to include proceeds from sales of transport documents. "The words
'income from any source whatever' disclose a legislative policy to include all income not expressly exempted within
the class of taxable income under our laws." Income means "cash received or its equivalent"; it is the amount of
money coming to a person within a specific time ...; it means something distinct from principal or capital. For, while
capital is a fund, income is a flow. As used in our income tax law, "income" refers to the flow of wealth. 6
The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71 amounted to
P10,428,368 .00. 7
Did such "flow of wealth" come from "sources within the Philippines",
The source of an income is the property, activity or service that produced the income. 8 For the source of income to
be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the
Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets
exchanged hands here and payments for fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying
the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth
should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the contract
between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the ticket to pay the fare
and the corresponding obligation of the carrier to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling public in general embraces within its terms all the
elements to constitute it a valid contract, binding upon the parties entering into the relationship. 9
True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the Philippines,
namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real property, and (6) sale of
personal property, does not mention income from the sale of tickets for international transportation. However, that
does not render it less an income from sources within the Philippines. Section 37, by its language, does not intend
the enumeration to be exclusive. It merely directs that the types of income listed therein be treated as income from
sources within the Philippines. A cursory reading of the section will show that it does not state that it is an all-
inclusive enumeration, and that no other kind of income may be so considered. " 10
BOAC, however, would impress upon this Court that income derived from transportation is income for services, with
the result that the place where the services are rendered determines the source; and since BOAC's service of
transportation is performed outside the Philippines, the income derived is from sources without the Philippines and,
therefore, not taxable under our income tax laws. The Tax Court upholds that stand in the joint Decision under
review.
The absence of flight operations to and from the Philippines is not determinative of the source of income or the site
of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test
of taxability is the "source"; and the source of an income is that activity ... which produced the
income. 11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the
revenue therefrom was derived from a activity regularly pursued within the Philippines. business a And even if the
BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", 12 it cannot alter the
fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential
idea, that of origin, and the origin of the income herein is the Philippines. 13
It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered by the
questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to 1970-71. For,
pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international carriers are now taxed as
follows:
... Provided, however, That international carriers shall pay a tax of 2-½ per cent on their cross
Philippine billings. (Sec. 24[b] [21, Tax Code).
Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term "gross
Philippine billings," thus:
... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in the world by
any international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail provided the cargo or mail originates from the
Philippines. ...
The foregoing provision ensures that international airlines are taxed on their income from Philippine sources. The 2-
½ % tax on gross Philippine billings is an income tax. If it had been intended as an excise or percentage tax it would
have been place under Title V of the Tax Code covering Taxes on Business.
Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the appeal in JAL
vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res judicata to the present case. The
ruling by the Tax Court in that case was to the effect that the mere sale of tickets, unaccompanied by the physical
act of carriage of transportation, does not render the taxpayer therein subject to the common carrier's tax. As
elucidated by the Tax Court, however, the common carrier's tax is an excise tax, being a tax on the activity of
transporting, conveying or removing passengers and cargo from one place to another. It purports to tax the
business of transportation. 14 Being an excise tax, the same can be levied by the State only when the acts, privileges
or businesses are done or performed within the jurisdiction of the Philippines. The subject matter of the case under
consideration is income tax, a direct tax on the income of persons and other entities "of whatever kind and in
whatever form derived from any source." Since the two cases treat of a different subject matter, the decision in one
cannot be res judicata to the other.
WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private respondent, the
British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of P534,132.08 as deficiency
income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1% monthly interest from April 16, 1972
for a period not to exceed three (3) years in accordance with the Tax Code. The BOAC claim for refund in the
amount of P858,307.79 is hereby denied. Without costs.
SO ORDERED.
Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.
Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint
decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority opinion
penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by respondent
BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the
Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment through P.D.
No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income
tax on foreign corporations, international carriers such as respondent BOAC, have since then been taxed at a
reduced rate of 2-½% on their gross Philippine billings. There is, therefore, no longer ant source of substantial
conflict between the two opinions as to the present 2-½% tax on their gross Philippine billings charged against such
international carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera
speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC),
a foreign airline company which does not maintain any flight operations to and from the Philippines, is liable for
Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of
the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC to Philippine
income taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such income is derived from
"source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an
office or place of business in the Philippines is subject to Philippine income taxation only in respect of income
derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"),
as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969, read as follows:
(2) Resident corporations. — A foreign corporation engaged in trade or business with in the
Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a)
of this section.
Section 24 (a) of the Tax Code in turn provides:
Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be livied,
collected, and paid annually upon the total net income received in the preceeding taxable
year from all sources within the Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once more
Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. — A corporation, organized, authorized or existing under the laws of
any foreign counrty, except foreign life insurance company, engaged in trade or business within
 the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources within the Philippines. (Emphasis
supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph
upon the amount received by every foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative
annual or periodical gains, profits and income a tax equal to thirty per centum of such amount:
provided, however, that premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign
corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to
income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine
source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient
foreign corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of
not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical
sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which
produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the issue of
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign
reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took place
in the Philippines. — [T]he reinsurance, the liabilities insured and the risk originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were
based, were all situated in the Philippines. —4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was
the indemnification of the local insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in case the casualty insured against
occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax
system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was
subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466,
as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text
on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital
assets. While the three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a particular item is from "source
within the United States" and suggest an investigation into the nature and location of the activities
or property which produce the income. If the income is from labor (services) the place where the
labor is done should be decisive; if it is done in this counrty, the income should be from "source
within the United States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income should be from "source
within the United States". If the income is from the sale of capital assets, the place where the sale
 is made should be likewise decisive. Much confusion will be avoided by regarding the term
"source" in this fundamental light. It is not a place; it is an activity or property. As such, it has a
situs or location; and if that situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations. The intention of Congress in the 1916 and
subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of which the income issue or is
derived must be situated within the jurisdiction so that the source of the income may be said to
have a situs in this country. The underlying theory is that the consideration for taxation
is protection of life and property and that the income rightly to be levied upon to defray the
burdens of the United States Government is that income which is created by activities and
property protected by this Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are two
possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect
of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows:
the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code
reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. — The following items of gross income shall
be treated as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. — Compensation for labor or personal services performed in the
Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in the
following manner:
(c) Gross income from sources without the Philippines. — The following items of gross income shall
be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a juridical
person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue Regulations
to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines. — Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this
section shall be allocated or apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and partly without the Philippines,
or (2) from the sale of personnel property produced (in whole or in part) by the taxpayer within
and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and
sold within the Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax Code
which "was based upon a recognition that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived
from transportation or other services rendered entirely outside the Philippines must be treated as derived entirely
from sources without the Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first promulgated by the Department of
Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:
 Section 155. Compensation for labor or personnel services. — Gross income from sources within
the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for services
was made, or of the place of payment — (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular species
of foreign transportation companies — i.e., foreign steamship companies deriving income from sources partly within
and partly without the Philippines:
Section 163 Foreign steamship companies. — The return of foreign steamship companies whose
vessels touch parts of the Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both within and without the Philippines of
all vessels, whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, — . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. — A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside
the Philippines derives income partly form source within and partly from sources without the
Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship
and telegraph and cable services rendered between points both outside the Philippines give rise to income wholly
from sources outside the Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the
purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the place
where the sale of such personal property occurs; and (b) the place where such personal property was produced or
manufactured. If the personal property involved was both produced or manufactured and sold outside the
Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the
personal property had been produced outside the Philippines, or if the sale of the property takes place outside the
Philippines and the personal was produced in the Philippines, then, the income derived from the sale will be
deemed partly as income sourced without the Philippines. In other words, the income (and the related expenses,
losses and deductions) will be allocated between sources within and sources without the Philippines. Thus, Section
37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and
income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property — i. e., trading — is, under the Tax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax Code
provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and
income derived from the purchase of personal property within and its sale without the Philippines
or from the purchase of personal property without and its sale within the Philippines, shall be
treated as derived entirely from sources within the country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal
property shall be treated as derived entirely from the country in which sold. The word "sold"
includes "exchange." The "country" in which "sold" ordinarily means the place where the property
 is marketed. This Section does not apply to income from the sale personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or
in part) by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the
Philippines. Those transactions may be characterized either as sales of personal property (i. e., "sales of airline
tickets") or as entering into a lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter
of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies
wholly in the right acquired by the "purchaser" — the passenger — to demand a prestation from BOAC, which
prestation consists of the carriage of the "purchaser" or passenger from the one point to another outside the
Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase
price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is really
the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC
properly regarded as engaged in trading — in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider next sales: can BOAC be
regarded as "selling" personal property produced or manufactured by it? In a popular or journalistic sense, BOAC
might be described as "selling" "a product" — its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules"
specifically and precisely applicable to the rendition of services must preclude the application here of "source rules"
applying generally to sales, and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized as derived
from a "service", rather than from an "activity" (a broader term than service and including the activity of selling) or
from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by
Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated
on 21 April 1978, in the following manner:
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in the preceeding
taxable year from all sources within the Philippines: Provided, however, That international carriers
shall pay a tax of two and one-half per cent on their gross Philippine billings. "Gross Philippines of
passage documents sold therein, whether for passenger, excess baggege or mail, provide the
cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or
mail shall include the gross freight charge up to final destination. Gross revenues from chartered
flights originating from the Philippines shall likewise form part of "gross Philippine billings"
regardless of the place of sale or payment of the passage documents. For purposes of determining
the taxability to revenues from chartered flights, the term "originating from the Philippines" shall
include flight of passsengers who stay in the Philippines for more than forty-eight (48) hours prior
to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or points in the Philippines are treated
in exactly the same way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly within and partly
without the Philippines, or wholly without the Philippines, has been set aside. in place of Philippine income taxation,
the Tax Code now imposes this 2½ per cent tax computed on the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation and debarkation would be taking place. This 2-½
per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses, losses and
deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the
amount of taxes collectible by the state is sometimes, with varying degrees of consciousness, considered in choosing
from among competing possible characterizations under or interpretation of tax statutes. It is hence perhaps useful
to point out that the determination of the appropriate characterization here — that of contracts of air carriage
rather than sales of airline tickets — entails no down-the-road loss of income tax revenues to the Government. In
lieu thereof, the Government takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

Separate Opinions
TEEHANKEE, C.J., concurring:
I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed joint
decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the majority opinion
penned by Mr. Justice Feliciano as to the proper characterization of the taxable income derived by respondent
BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its general sales agent in the
Philippines gas become moot after November 24, 1972. Booth opinions state that by amendment through P.D.
No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax Code providing dor the rate of income
tax on foreign corporations, international carriers such as respondent BOAC, have since then been taxed at a
reduced rate of 2-½% on their gross Philippine billings. There is, therefore, no longer ant source of substantial
conflict between the two opinions as to the present 2-½% tax on their gross Philippine billings charged against such
international carriers as herein respondent foreign corporation.
FELICIANO, J., dissenting:
With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-Herrera
speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA Cases Nos. 2373 and
2561, dated 26 January 1983, is correct and should be affirmed.
The fundamental issue raised in this petition for review is whether the British Overseas Airways Corporation (BOAC),
a foreign airline company which does not maintain any flight operations to and from the Philippines, is liable for
Philippine income taxation in respect of "sales of air tickets" in the Philippines through a general sales agent, relating
to the carriage of passengers and cargo between two points both outside the Philippines.
1. The Solicitor General has defined as one of the issue in this case the question of:
2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation
doing business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the lialibity of
the BOAC to Philippine income taxation in respect of the income here involved. The liability of BOAC to Philippine
income taxation in respect of such income depends, not on BOAC's status as a "resident foreign corporation" or
alternatively, as a "non-resident foreign corporation," but rather on whether or not such income is derived from
"source within the Philippines."
A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or having an
office or place of business in the Philippines is subject to Philippine income taxation only in respect of income
derived from sources within the Philippines. Section 24 (b) (2) of the National Internal Revenue CODE ("Tax Code"),
as amended by Republic Act No. 2343, approved 20 June 1959, as it existed up to 3 August 1969, read as follows:
(2) Resident corporations. — A foreign corporation engaged in trade or business with in the
Philippines (expect foreign life insurance companies) shall be taxable as provided in subsection (a)
of this section.
Section 24 (a) of the Tax Code in turn provides:
 Rate of tax on corporations. — (a) Tax on domestic corporations. — ... and a like tax shall be livied,
collected, and paid annually upon the total net income received in the preceeding taxable
year from all sources within the Philippines by every corporation organized, authorized, or
existing under the laws of any foreign country: ... . (Emphasis supplied)
Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once more
Section 24 (b) (2) of the Tax Code so as to read as follows:
(2) Resident Corporations. — A corporation, organized, authorized or existing under the laws of
any foreign counrty, except foreign life insurance company, engaged in trade or business within
the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net
income received in the preceding taxable year from all sources within the Philippines. (Emphasis
supplied)
Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign corporations.
Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as follows:
(b) Tax on foreign corporations. — (1) Non-resident corporations. — There shall be levied,
collected and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph
upon the amount received by every foreign corporation not engaged in trade or business within
the Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premium, annuities, compensations, remunerations, emoluments, or other fixed or determinative
annual or periodical gains, profits and income a tax equal to thirty per centum of such amount:
provided, however, that premiums shall not include reinsurance premiums. 2
Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a resident foreign
corporation, or not doing business in the Philippines and therefore a non-resident foreign corporation, it is liable to
income tax only to the extent that it derives income from sources within the Philippines. The circumtances that a
foreign corporation is resident in the Philippines yields no inference that all or any part of its income is Philippine
source income. Similarly, the non-resident status of a foreign corporation does not imply that it has no Philippine
source income. Conversely, the receipt of Philippine source income creates no presumption that the recipient
foreign corporation is a resident of the Philippines. The critical issue, for present purposes, is therefore whether of
not BOAC is deriving income from sources within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the physical
sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or service which
produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court dealt with the issue of
the applicable source rule relating to reinsurance premiums paid by a local insurance company to a foreign
reinsurance company in respect of risks located in the Philippines. The Court said:
The source of an income is the property, activity or services that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contract, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took place
in the Philippines. — [T]he reinsurance, the liabilities insured and the risk originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were
based, were all situated in the Philippines. —4
The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the activity
giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation was
the indemnification of the local insurance company. Such indemnification could take place only in the Philippines
where the risks were located and where payment from the foreign reinsurance (in case the casualty insured against
occurs) would be received in Philippine pesos under the reinsurance premiums paid by the local insurance
companies constituted Philippine source income of the foreign reinsurances.
The concept of "source of income" for purposes of income taxation originated in the United States income tax
system. The phrase "sources within the United States" was first introduced into the U.S. tax system in 1916, and was
subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code (Commonwealth Act 466,
as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems useful to refer to a standard U.S. text
on federal income taxation:
The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor and/or (3) the sale of capital
 assets. While the three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a particular item is from "source
within the United States" and suggest an investigation into the nature and location of the activities
or property which produce the income. If the income is from labor (services) the place where the
labor is done should be decisive; if it is done in this counrty, the income should be from "source
within the United States." If the income is from capital, the place where the capital is
employed should be decisive; if it is employed in this country, the income should be from "source
within the United States". If the income is from the sale of capital assets, the place where the sale
is made should be likewise decisive. Much confusion will be avoided by regarding the term
"source" in this fundamental light. It is not a place; it is an activity or property. As such, it has a
situs or location; and if that situs or location is within the United States the resulting income is
taxable to nonresident aliens and foreign corporations. The intention of Congress in the 1916 and
subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source", or situs of the activities or
property which produce the income . . . . Thus, if income is to taxed, the recipient thereof must be
resident within the jurisdiction, or the property or activities out of which the income issue or is
derived must be situated within the jurisdiction so that the source of the income may be said to
have a situs in this country. The underlying theory is that the consideration for taxation
is protection of life and property and that the income rightly to be levied upon to defray the
burdens of the United States Government is that income which is created by activities and
property protected by this Government or obtained by persons enjoying that protection. 5
3. We turn now to the question what is the source of income rule applicable in the instant case. There are two
possibly relevant source of income rules that must be confronted; (a) the source rule applicable in respect
of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as follows:
the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3) of our Tax Code
reads as follows:
Section 37. Income for sources within the Philippines.
(a) Gross income from sources within the Philippines. — The following items of gross income shall
be treated as gross income from sources within the Philippines:
xxx xxx xxx
(3) Services. — Compensation for labor or personal services performed in the
Philippines;... (Emphasis supplied)
Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the Philippines in the
following manner:
(c) Gross income from sources without the Philippines. — The following items of gross income shall
be treated as income from sources without the Philippines:
(3) Compensation for labor or personal services performed without the Philippines; ... (Emphasis
supplied)
It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of services
rendered by individual natural persons; they also apply to services rendered by or through the medium of a juridical
person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax Code and Revenue Regulations
to a contract for services. Thus, Section 37 (e) of the Tax Code provides as follows:
(e) Income form sources partly within and partly without the Philippines. — Items of gross income,
expenses, losses and deductions, other than those specified in subsections (a) and (c) of this
section shall be allocated or apportioned to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of Finance. ... Gains, profits, and income
from (1) transportation or other services rendered partly within and partly without the Philippines,
or (2) from the sale of personnel property produced (in whole or in part) by the taxpayer within
and sold without the Philippines, or produced (in whole or in part) by the taxpayer without and
sold within the Philippines, shall be treated as derived partly from sources within and partly from
sources without the Philippines. ... (Emphasis supplied)
It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S. Tax Code
which "was based upon a recognition that transportation was a service and that the source of the income derived
therefrom was to be treated as being the place where the service of transportation was rendered. 7
Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income derived
from transportation or other services rendered entirely outside the Philippines must be treated as derived entirely
from sources without the Philippines. This implication is reinforced by a consideration of certain provisions of
Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first promulgated by the Department of
Finance on 10 February 1940. Section 155 of Revenue Regulations No. 2 (implementing Section 37 of the Tax Code)
provides in part as follows:
Section 155. Compensation for labor or personnel services. — Gross income from sources within
the Philippines includes compensation for labor or personal services within the
Philippines regardless of the residence of the payer, of the place in which the contract for services
was made, or of the place of payment — (Emphasis supplied)
Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a particular species
of foreign transportation companies — i.e., foreign steamship companies deriving income from sources partly within
and partly without the Philippines:
Section 163 Foreign steamship companies. — The return of foreign steamship companies whose
vessels touch parts of the Philippines should include as gross income, the total receipts of all out-
going business whether freight or passengers. With the gross income thus ascertained, the ratio
existing between it and the gross income from all ports, both within and without the Philippines of
all vessels, whether touching of the Philippines or not, should be determined as the basis upon
which allowable deductions may be computed, — . (Emphasis supplied)
Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2 (again
implementing Section 37 of the Tax Code) with provides as follows:
Section 164. Telegraph and cable services. — A foreign corporation carrying on the business of
transmission of telegraph or cable messages between points in the Philippines and points outside
the Philippines derives income partly form source within and partly from sources without the
Philippines.
... (Emphasis supplied)
Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that steamship
and telegraph and cable services rendered between points both outside the Philippines give rise to income wholly
from sources outside the Philippines, and therefore not subject to Philippine income taxation.
We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to the
purchase and sale of personal property, upon the other hand.
We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a) the place
where the sale of such personal property occurs; and (b) the place where such personal property was produced or
manufactured. If the personal property involved was both produced or manufactured and sold outside the
Philippines, the income derived therefrom will be regarded as sourced entirely outside the Philippines, although the
personal property had been produced outside the Philippines, or if the sale of the property takes place outside the
Philippines and the personal was produced in the Philippines, then, the income derived from the sale will be
deemed partly as income sourced without the Philippines. In other words, the income (and the related expenses,
losses and deductions) will be allocated between sources within and sources without the Philippines. Thus, Section
37 (e) of the Tax Code, although already quoted above, may be usefully quoted again:
(e) Income from sources partly within and partly without the Philippines. ... Gains, profits and
income from (1) transportation or other services rendered partly within and partly without the
Philippines; or (2) from the sale of personal property produced (in whole or in part) by the taxpayer
within and sold without the Philippines, or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as derived partly from sources within and partly
from sources without the Philippines. ... (Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property — i. e., trading — is, under the Tax
Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e) of the Tax Code
provides in part as follows:
(e) Income from sources partly within and partly without the Philippines ... Gains, profits and
income derived from the purchase of personal property within and its sale without the Philippines
or from the purchase of personal property without and its sale within the Philippines, shall be
treated as derived entirely from sources within the country in which sold. (Emphasis supplied)
Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:
Section 159. Sale of personal property. Income derived from the purchase and sale of personal
property shall be treated as derived entirely from the country in which sold. The word "sold"
includes "exchange." The "country" in which "sold" ordinarily means the place where the property
is marketed. This Section does not apply to income from the sale personal property produced (in
whole or in part) by the taxpayer within and sold without the Philippines or produced (in whole or
in part) by the taxpayer without and sold within the Philippines. (See Section 162 of these
regulations). (Emphasis supplied)
4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC in the
Philippines. Those transactions may be characterized either as sales of personal property (i. e., "sales of airline
tickets") or as entering into a lease of services or a contract of service or carriage. The applicable "source of income"
rules differ depending upon which characterization is given to the BOAC transactions.
The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts of
service, i.e., carriage of passengers or cargo between points located outside the Philippines.
The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as a matter
of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value of the ticket lies
wholly in the right acquired by the "purchaser" — the passenger — to demand a prestation from BOAC, which
prestation consists of the carriage of the "purchaser" or passenger from the one point to another outside the
Philippines. The ticket is really the evidence of the contract of carriage entered into between BOAC and the
passenger. The money paid by the passenger changes hands in the Philippines. But the passenger does not receive
undertaken to be delivered by BOAC. The "purchase price of the airline ticket" is quite different from the purchase
price of a physical good or commodity such as a pair of shoes of a refrigerator or an automobile; it is really
the compensation paid for the undertaking of BOAC to transport the passenger or cargo outside the Philippines.
The characterization of the BOAC transactions either as sales of personal property or as purchases and sales of
personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and sales: is BOAC
properly regarded as engaged in trading — in the purchase and sale of personal property? Certainly, BOAC was not
purchasing tickets outside the Philippines and selling them in the Philippines. Consider next sales: can BOAC be
regarded as "selling" personal property produced or manufactured by it? In a popular or journalistic sense, BOAC
might be described as "selling" "a product" — its service. However, for the technical purposes of the law on income
taxation, BOAC is in fact entering into contracts of service or carriage. The very existance of "source rules"
specifically and precisely applicable to the rendition of services must preclude the application here of "source rules"
applying generally to sales, and purchases and sales, of personal property which can be invoked only by the grace of
popular language. On a slighty more abstract level, BOAC's income is more appropriately characterized as derived
from a "service", rather than from an "activity" (a broader term than service and including the activity of selling) or
from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as amended by
Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree No. 1355, promulgated
on 21 April 1978, in the following manner:
(2) Resident corporations. — A corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the Philippines, shall be taxable as
provided in subsection (a) of this section upon the total net income received in the preceeding
taxable year from all sources within the Philippines: Provided, however, That international carriers
shall pay a tax of two and one-half per cent on their gross Philippine billings. "Gross Philippines of
passage documents sold therein, whether for passenger, excess baggege or mail, provide the
cargo or mail originates from the Philippines. The gross revenue realized from the said cargo or
mail shall include the gross freight charge up to final destination. Gross revenues from chartered
 flights originating from the Philippines shall likewise form part of "gross Philippine billings"
regardless of the place of sale or payment of the passage documents. For purposes of determining
the taxability to revenues from chartered flights, the term "originating from the Philippines" shall
include flight of passsengers who stay in the Philippines for more than forty-eight (48) hours prior
to embarkation. (Emphasis supplied)
Under the above-quoted proviso international carriers issuing for compensation passage documentation in the
Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating from the
Philippines). Under this new approach, international carriers who service port or points in the Philippines are treated
in exactly the same way as international carriers not serving any port or point in the Philippines. Thus, the source of
income rule applicable, as above discussed, to transportation or other services rendered partly within and partly
without the Philippines, or wholly without the Philippines, has been set aside. in place of Philippine income taxation,
the Tax Code now imposes this 2½ per cent tax computed on the basis of billings in respect of passengers and cargo
originating from the Philippines regardless of where embarkation and debarkation would be taking place. This 2-½
per cent tax is effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses, losses and
deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or "gain" in the
amount of taxes collectible by the state is sometimes, with varying degrees of consciousness, considered in choosing
from among competing possible characterizations under or interpretation of tax statutes. It is hence perhaps useful
to point out that the determination of the appropriate characterization here — that of contracts of air carriage
rather than sales of airline tickets — entails no down-the-road loss of income tax revenues to the Government. In
lieu thereof, the Government takes in revenues generated by the 2-½ per cent tax on the gross Philippine billings or
receipts of international carriers.
I would vote to affirm the decision of the Court of Tax Appeals.

THIRD DIVISION
G.R. No. 178788 : September 29, 2010
UNITED AIRLINES, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION
VILLARAMA, JR., J.:
Before us is a petition for review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, of
the Decision1 dated July 5, 2007 of the Court of Tax Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying
petitioner’s claim for tax refund of P5.03 million.
The undisputed facts are as follows:
Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the laws of the State of
Delaware, U.S.A., engaged in the international airline business.
Petitioner used to be an online international carrier of passenger and cargo, i.e., it used to operate passenger and
cargo flights originating in the Philippines. Upon cessation of its passenger flights in and out of the Philippines
beginning February 21, 1998, petitioner appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an
independent general sales agent acting as such for several international airline companies. 2 Petitioner continued
operating cargo flights from the Philippines until January 31, 2001. 3cräläwvirtualibräry
On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax refund, pursuant to Section
28(A)(3)(a)4 of the National Internal Revenue Code of 1997 (NIRC) in relation to Article 4(7)5 of the Convention
between the Government of the Republic of the Philippines and the Government of the United States of America
with respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total amount of P15,916,680.69
pertaining to income taxes paid on gross passenger and cargo revenues for the taxable years 1999 to 2001, which
included the amount of P5,028,813.23 allegedly representing income taxes paid in 1999 on passenger revenue from
tickets sold in the Philippines, the uplifts of which did not originate in the Philippines. Citing the change in definition
of Gross Philippine Billings (GPB) in the NIRC, petitioner argued that since it no longer operated passenger flights
originating from the Philippines beginning February 21, 1998, its passenger revenue for 1999, 2000 and 2001 cannot
be considered as income from sources within the Philippines, and hence should not be subject to Philippine income
tax under Article 96 of the RP-US Tax Treaty.7cräläwvirtualibräry
As no resolution on its claim for refund had yet been made by the respondent and in view of the two (2)-year
prescriptive period (from the time of filing the Final Adjustment Return for the taxable year 1999) which was about
to expire on April 15, 2002, petitioner filed on said date a petition for review with the Court of Tax Appeals
(CTA).8cräläwvirtualibräry
Petitioner asserted that under the new definition of GPB under the 1997 NIRC and Article 4(7) of the RP-US Tax
Treaty, Philippine tax authorities have jurisdiction to tax only the gross revenue derived by US air and shipping
carriers from outgoing traffic in the Philippines. Since the Bureau of Internal Revenue (BIR) erroneously imposed
and collected income tax in 1999 based on petitioner’s gross passenger revenue, as beginning 1998 petitioner no
longer flew passenger flights to and from the Philippines, petitioner is entitled to a refund of such erroneously
collected income tax in the amount of P5,028,813.23.9cräläwvirtualibräry
In its Decision10 dated May 18, 2006, the CTA’s First Division11 ruled that no excess or erroneously paid tax may be
refunded to petitioner because the income tax on GPB under Section 28(A)(3)(a) of the NIRC applies as well to gross
revenue from carriage of cargoes originating from the Philippines. It agreed that petitioner cannot be taxed on its 1999
passenger revenue from flights originating outside the Philippines. However, in reporting a cargo revenue of P740.33
million in 1999, it was found that petitioner deducted two (2) items from its gross cargo revenue of P2.84
billion: P141.79 million as commission and P1.98 billion as other incentives of its agent. These deductions were
erroneous because the gross revenue referred to in Section 28(A)(3)(a) of the NIRC was total revenue before any
deduction of commission and incentives. Petitioner’s gross cargo revenue in 1999, being P2.84 billion, the GPB tax
thereon was P42.54 million and not P11.1 million, the amount petitioner paid for the reported net cargo revenue
of P740.33 million. The CTA First Division further noted that petitioner even underpaid its taxes on cargo revenue
by P31.43 million, which amount was much higher than the P5.03 million it asked to be refunded.
A motion for reconsideration was filed by petitioner but the First Division denied the same. It held that petitioner’s
claim for tax refund was not offset with its tax liability; that petitioner’s tax deficiency was due to erroneous
deductions from its gross cargo revenue; that it did not make an assessment against petitioner; and that it merely
determined if petitioner was entitled to a refund based on the undisputed facts and whether petitioner had paid the
correct amount of tax.12cräläwvirtualibräry
Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First Division.
Hence, this petition anchored on the following grounds:
I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE PETITIONER’S CLAIM FOR REFUND OF ERRONEOUSLY PAID
INCOME TAX ON GROSS PHILIPPINE BILLINGS [GPB] BASED ON ITS FINDING THAT PETITIONER’S UNDERPAYMENT OF
[P31.43 MILLION] GPB TAX ON CARGO REVENUES IS A LOT HIGHER THAN THE GPB TAX OF [P5.03 MILLION] ON
PASSENGER REVENUES, WHICH IS THE SUBJECT OF THE INSTANT CLAIM FOR REFUND. THE DENIAL OF PETITIONER’S
CLAIM ON SUCH GROUND CLEARLY AMOUNTS TO AN OFF-SETTING OF TAX LIABILITIES, CONTRARY TO WELL-
SETTLED JURISPRUDENCE.
II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONER’S RIGHT TO DUE PROCESS.
III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY DENYING PETITIONER’S CLAIM FOR REFUND OF
ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE BILLINGS BASED ON ITS FINDING THAT PETITIONER
UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT OF [P31.43 MILLION] FOR THE TAXABLE YEAR 1999.
IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE ANY ASSESSMENTS FOR DEFICIENCY
TAXES. THE AUTHORITY TO MAKE ASSESSMENTS FOR DEFICIENCY NATIONAL INTERNAL REVENUE TAXES IS VESTED
BY THE 1997 NIRC UPON RESPONDENT.
V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME TAX FOR THE TAXABLE YEAR 1999 IS
ALREADY BARRED BY PRESCRIPTION.13
The main issue to be resolved is whether the petitioner is entitled to a refund of the amount of P5,028,813.23 it
paid as income tax on its passenger revenues in 1999.
Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line passenger revenues cannot be
denied based on the finding of the CTA that petitioner allegedly underpaid the GPB tax on cargo revenues
by P31,431,171.09, which underpayment is allegedly higher than the GPB tax of P5,028,813.23 on passenger
revenues, the amount of the instant claim. The denial of petitioner’s claim for refund on such ground is tantamount
to an offsetting of petitioner’s claim for refund of erroneously paid GPB against its alleged tax liability. Petitioner
thus cites the well-entrenched rule in taxation cases that internal revenue taxes cannot be the subject of set-off or
compensation.14cräläwvirtualibräry
According to petitioner, the offsetting of the liabilities is very clear in the instant case because the amount of
petitioner’s claim for refund of erroneously paid GPB tax of P5,028,813.23 for the taxable year 1999 is being offset
against petitioner’s alleged deficiency GPB tax liability on cargo revenues for the same year, which was not even the
subject of an investigation nor any valid assessment issued by respondent against the petitioner. Under Section
22815of the NIRC, the “taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.” This administrative process of issuing an assessment is part of
procedural due process enshrined in the 1987 Constitution. Records do not show that petitioner has been assessed
by the BIR for any deficiency GBP tax for 1999, nor was there any finding or investigation being conducted by
respondent of any liability of petitioner for GPB tax for the said taxable period. Clearly, petitioner’s right to due
process was violated.16cräläwvirtualibräry
Petitioner further argues that the CTA acted in excess of its jurisdiction because the exclusive appellate jurisdiction
of the CTA covers only decisions or inactions of the respondent in cases involving disputed assessments. The CTA
has effectively assessed petitioner with a P31.43 million tax deficiency when it concluded that petitioner underpaid
its GPB tax on cargo revenue. Since respondent did not issue an assessment for any deficiency tax, the alleged
deficiency tax on its cargo revenue in 1999 cannot be considered a disputed assessment that may be passed upon
by the CTA. Petitioner stresses that the authority to issue an assessment for deficiency internal revenue taxes is
vested by law on respondent, not with the CTA.17cräläwvirtualibräry
Lastly, petitioner argues that any assessment against it for deficiency income tax for taxable year 1999 is barred by
prescription. Petitioner claims that the prescriptive period within which an assessment for deficiency income tax
may be made has prescribed on April 17, 2003, three (3) years after it filed its 1999 tax return.18cräläwvirtualibräry
Respondent Commissioner maintains that the CTA acted within its jurisdiction in denying petitioner’s claim for tax
refund. It points out that the objective of the CTA’s determination of whether petitioner correctly paid its GPB tax
for the taxable year 1999 was to ascertain the latter’s entitlement to the claimed refund and not for the purpose of
imposing any deficiency tax. Hence, petitioner’s arguments regarding the propriety of the CTA’s determination of its
deficiency tax on its GPB for gross cargo revenues for 1999 are clearly misplaced. 19cräläwvirtualibräry
The petition has no merit.
As correctly pointed out by petitioner, inasmuch as it ceased operating passenger flights to or from the Philippines
in 1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues. This much was also
found by the CTA. In South African Airways v. Commissioner of Internal Revenue,20 we ruled that the correct
interpretation of the said provisions is that, if an international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2½% of its GPB, while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate
of 32% of such income.
Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable year 1999 at the time
when petitioner was still operating cargo flights originating from the Philippines although it had ceased passenger
flight operations. The CTA found that petitioner had underpaid its GPB tax for 1999 because petitioner had made
deductions from its gross cargo revenues in the income tax return it filed for the taxable year 1999, the amount of
underpayment even greater than the refund sought for erroneously paid GPB tax on passenger revenues for the
same taxable period. Hence, the CTA ruled petitioner is not entitled to a tax refund.
Petitioner’s arguments regarding the propriety of such determination by the CTA are misplaced.
Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made erroneous deductions on its
gross cargo revenue; that because of the erroneous deductions, petitioner reported a lower cargo revenue and paid
a lower income tax thereon; and that petitioner's underpayment of the income tax on cargo revenue is even higher
than the income tax it paid on passenger revenue subject of the claim for refund, such that the refund cannot be
granted.
Section 72 of the NIRC reads:
SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an assessment is made in case of any list,
statement or return, which in the opinion of the Commissioner was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be recovered by any suit, unless it
is proved that the said list, statement or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made
in good faith regarding annual depreciation of oil or gas wells and mines.
In the afore-cited case of South African Airways, this Court rejected similar arguments on the denial of claim for tax
refund, as follows:
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a) with their liability under
Sec. 28(A)(1), considering that there has not yet been any assessment of their obligation under the latter provision.
Petitioner argues that such offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:
Art. 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:
In several instances prior to the instant case, we have already made the pronouncement that 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. We find no cogent reason to
deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be
subject to set-off or compensation, thus:
We have 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. The collection of a tax cannot await the results of a lawsuit
against the government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit,
which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be
the 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.
Verily, petitioner’s argument is correct that the offsetting of its tax refund with its alleged tax deficiency is unavailing
under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax
deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental motion for
reconsideration alleging bringing to said court’s attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein
private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for
the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are
true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim
of Citytrust was filed, provides that “(w)hen an assessment is made in case of any list, statement, or return, which in
the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the
said list, statement, or return was not false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.”
Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the
Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which
recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved.This would necessarily require and entail additional efforts and expenses on
the part of the Government, impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally
appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax
refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer
and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other’s
claim and to determine all matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to
determine how much the Government is entitled to collect as taxes. This would necessarily include the
determination of the correct liability of the taxpayer and, certainly, a determination of this case would constitute res
judicata on both parties as to all the matters subject thereof or necessarily involved therein. nad (Emphasis
supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements
are, therefore, still applicable today.
Here, petitioner’s similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the
finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec.
28(A)(1), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer
for a refund.21 (Additional emphasis supplied.)
In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to a refund based on
the facts. On the assumption that petitioner filed a correct return, it had the right to file a claim for refund of GPB
tax on passenger revenues it paid in 1999 when it was not operating passenger flights to and from the
Philippines. However, upon examination by the CTA, petitioner’s return was found erroneous as it understated its
gross cargo revenue for the same taxable year due to deductions of two (2) items consisting of commission and
other incentives of its agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is not
entitled to a refund of its GPB tax on its passenger revenue, the amount of the former being even much higher
(P31.43 million) than the tax refund sought (P5.2 million). The CTA therefore correctly denied the claim for tax
refund after determining the proper assessment and the tax due. Obviously, the matter of prescription raised by
petitioner is a non-issue. The prescriptive periods under Sections 20322 and 22223 of the NIRC find no application in
this case.
We must emphasize that tax refunds, like tax exemptions, are construed strictly against the taxpayer and liberally in
favor of the taxing authority.24 In any event, petitioner has not discharged its burden of proof in establishing the
factual basis for its claim for a refund and we find no reason to disturb the ruling of the CTA. It has been a long-
standing policy and practice of the Court to respect the conclusions of quasi-judicial agencies such as the CTA, a
highly specialized body specifically created for the purpose of reviewing tax cases.25cräläwvirtualibräry
WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated July 5, 2007 of the Court of Tax
Appeals En Banc in C.T.A. EB No. 227.
With costs against the petitioner.
SO ORDERED.

G.R. No. 103092 July 21, 1994

BANK OF AMERICA NT & SA, Petitioner, v. HONORABLE COURT OF APPEALS, AND THE COMMISSIONER OF INTERNAL
REVENUE, Respondents.

G.R. No. 103106 July 21, 1994

BANK OF AMERICA NT & SA, Petitioner, v. THE HONORABLE COURT OF APPEALS AND THE COMMISSIONER OF
INTERNAL REVENUE, Respondents.chanrobles virtual law library

Sycip, Salazar, Hernandez & Gatmaitan and Agcaoili & Associates for petitioner.chanrobles virtual law library

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. . . .chanroblesvirtualawlibrary chanrobles virtual law library

(b) Tax on foreign corporations. . . .chanroblesvirtualawlibrary chanrobles virtual law library

(2) (ii) Tax on branch profit and remittances. -chanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles
virtual law library

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" 1chanrobles virtual law library

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. 2chanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles
virtual law library

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. 3chanrobles virtual law library

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)chanrobles virtual
law library

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 xxxchanrobles virtual law library

(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.chanroblesvirtualawlibrarychanrobles virtual law library

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.
4chanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library
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.chanroblesvirtualawlibrarychanrobles virtual law library

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.chanroblesvirtualawlibrarychanrobles
virtual law library

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.chanroblesvirtualawlibrarychanrobles virtual law library

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the
Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals
in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
[Respondent], a domestic corporation organized and operating under the Philippine laws, entered
into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident
foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right
to use the trademark, patents and technology owned by the latter 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, U. S. A.
The said License Agreement was duly registered with the Technology Transfer Board of the Bureau
of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh.
"A").
For the use of the 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 (Exhs. "B" to "L" and submarkings).
 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 [respondent's] case fall squarely within the same circumstances under which
said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the
Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We
therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only
subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax
Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12
(2) (b)]" (Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for
there fund of P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance
——— ——— ——— ——— ———
July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877
March 547,253 136,813 54,725 82,088
April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461
———— ———— ———— ———
P6,421,770 P1,605,443 P642,177 P963,2661
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson)
then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No.
5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing
overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993.2
The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals 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.3
This petition for review was filed by the Commissioner of Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE
"MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX
TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored
nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the
United States from sources within the Philippines only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit"
provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US
Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even
assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as
held by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a
tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter,
these must necessarily refer to circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's
invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the
regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it
contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation"
clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to
tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to
the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the
taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-
US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends
that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar
circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in
Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in
1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor
are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-
West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer
pursuant to Section 246 of the National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's
counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to
original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should
be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor
General as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not
taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a
material circumstance to such payment and would be determinative of the said clause's application.1âwphi1.nêt
We address first the objection raised by private respondent that the certification against forum shopping was not
executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its
Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJECT: ADDITIONAL REQUISITES FOR
PETITIONS FILED WITH THE SUPREME
COURT AND THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR MULTIPLE
FILING OF PETITIONS AND COMPLAINTS
TO: xxx xxx xxx
The attention of the Court has been called to the filing of multiple petitions and complaints
involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or
agencies, with the result that said courts, tribunals or agencies have to resolve the same issues.
(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals,
the petitioner aside from complying with pertinent provisions of the Rules of Court and existing
circulars, must certify under oath to all of the following facts or undertakings: (a) he has not
theretofore commenced any other action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or any tribunal or
agency; . . .
(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for
the summary dismissal of the multiple petitions or complaints; . . .
The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before
this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions
and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which
is to prevent multiple petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other
action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are
inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be
represented only by the Solicitor General, the certification executed by the OSG in this case constitutes substantial
compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article
13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties
received by a non-resident foreign corporation. The provision states insofar as pertinent
that —
1) Royalties derived by a resident of one of the Contracting States from sources
within the other Contracting State may be taxed by both Contracting States.
2) However, the tax imposed by that Contracting State shall not exceed.
a) In the case of the United States, 15 percent of the gross
amount of the royalties, and
b) In the case of the Philippines, the least of:
(i) 25 percent of the gross amount of the
royalties;
(ii) 15 percent of the gross amount of the
royalties, where the royalties are paid by a
corporation registered with the Philippine
Board of Investments and engaged in
preferred areas of activities; and
(iii) the lowest rate of Philippine tax that may
be imposed on royalties of the same kind
paid under similar circumstances to a
resident of a third State.
xxx xxx xxx
(emphasis supplied)
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the
concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which
provides:
(2) However, such royalties may also be taxed in the Contracting State in which
they arise, and according to the law of that State, but the tax so charged shall
not exceed:
xxx xxx xxx
b) 10 percent of the gross amount of royalties arising from the
use of, or the right to use, any patent, trademark, design or
model, plan, secret formula or process, or from the use of or
the right to use, industrial, commercial, or scientific
equipment, or for information concerning industrial,
commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the
limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic
of the Philippines, only apply if the contract giving rise to such royalties has been approved by the
Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of
such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties
where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states
—
1) Tax shall be determined in the case of a resident of the Federal Republic of
Germany as follows:
xxx xxx xxx
b) Subject to the provisions of German tax law regarding credit
for foreign tax, there shall be allowed as a credit against
German income and corporation tax payable in respect of the
 following items of income arising in the Republic of the
Philippines, the tax paid under the laws of the Philippines in
accordance with this Agreement on:
xxx xxx xxx
dd) royalties, as defined in paragraph 3 of
Article 12;
xxx xxx xxx
c) For the purpose of the credit referred in subparagraph; b)
the Philippine tax shall be deemed to be
xxx xxx xxx
cc) in the case of royalties for which the tax
is reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the
gross amount of such royalties.
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances
similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in
the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most
favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus:
Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on
income from sources within the Philippines is allowed as a credit against German income and
corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or
15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit
shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German
resident from sources within the Philippines arising from the use of, or the right to use, any
patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross
amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the
German income and corporation tax on said royalty is allowed in favor of the German resident.
That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit
against the income and corporation tax of West Germany. The clear intent of the "matching
credit" is to soften the impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West
Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the
"most favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in
interpreting the provisions of the RP-US Tax Treaty.5
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that
the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted
to refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid under similar
circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are
to be understood in the context in which they are used", and since what is paid to a resident of a third state is not a
tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same kind paid
under similar circumstances.
The above construction is based principally on syntax or sentence structure but fails to take into account the
purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the
payment of royalties, and none has been brought to our attention, which provides for the payment of royalties
under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same
for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such
payment.6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the
provisions on relief from or avoidance of double taxation7 as this is a matter of negotiation between the contracting
parties.8 As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the
United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the
avoidance of double taxation.9 The purpose of these international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different
jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same
taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away
with double taxation is of encourage the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign
investments will only thrive in a fairly predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a climate. 13
Double taxation usually takes place when a person is resident of a contracting state and derives income from, or
owns capital in, the other contracting state and both states impose tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the
state of source or situs and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or
capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of
source is limited. 14
The second method for the elimination of double taxation applies whenever the state of source is given a full or
limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state
of residence to allow relief in order to avoid double taxation. There are two methods of relief — the exemption
method and the credit method. In the exemption method, the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the
credit method, although the income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the
two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit
method focuses upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part
of the tax in the expectation that the tax given up for this particular investment is not taxed by the other
country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the
most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of
residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be
collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is the
allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the
limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may
impose one of three rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid
by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or
the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances
to a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax
rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties
in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean
that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United
States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed
to their German counterparts under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the
RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the
gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax
Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1) In accordance with the provisions and subject to the limitations of the law of
the United States (as it may be amended from time to time without changing
the general principle thereof), the United States shall allow to a citizen or
resident of the United States as a credit against the United States tax the
appropriate amount of taxes paid or accrued to the Philippines and, in the case
of a United States corporation owning at least 10 percent of the voting stock of
a Philippine corporation from which it receives dividends in any taxable year,
shall allow credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine corporation paying such dividends with respect to
the profits out of which such dividends are paid. Such appropriate amount shall
be based upon the amount of tax paid or accrued to the Philippines, but the
credit shall not exceed the limitations (for the purpose of limiting the credit to
the United States tax on income from sources within the Philippines or on
income from sources outside the United States) provided by United States law
for the taxable year. . . .
The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US
Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose
of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time
crediting against the domestic tax abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved
and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay
down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the
purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its
purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its
object and
purpose. 22
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the
Philippines — a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax
burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in
this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to
grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which
could have been collected by the Philippine government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of
residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e.,
increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty
earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues
to another country.
At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax
treaties in question should be considered in light of the purpose behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than
that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation
clause is intended to establish the principle of equality of international treatment by providing that the citizens or
subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored
nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted
in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-
quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate
by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind
the most grant equality of international treatment since the tax burden laid upon the income of the investor is not
the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the
enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20
percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private
respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that
there is no payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27 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. 28 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
Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of
Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
G.R. No. L-46029 June 23, 1988
N.V. REEDERIJ "AMSTERDAM" and ROYAL INTEROCEAN LINES, petitioners,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
GANCAYCO, J.:
The issue posed in this petition is the income tax liability of a foreign shipping corporation which called on Philippine
ports to load cargoes for foreign destination on two occasions in 1963 and 1964, respectively, and which collected
freight fees on these transactions.
From March 27 to April 30, 1963, M.V. Amstelmeer and from September 24 to October 28, 1964, MV "Amstelkroon,
" both of which are vessels of petitioner N.B. Reederij "AMSTERDAM," called on Philippine ports to load cargoes for
foreign destination. The freight fees for these transactions were paid abroad in the amount of US $98,175.00 in
1963 and US $137,193.00 in 1964. In these two instances, petitioner Royal Interocean Lines acted as husbanding
agent for a fee or commission on said vessels. No income tax appears to have been paid by petitioner N.V. Reederij
"AMSTERDAM" on the freight receipts.
Respondent Commissioner of Internal Revenue, through his examiners, filed the corresponding income tax returns
for and in behalf of the former under Section 15 of the National Internal Revenue Code. Applying the then prevailing
market conversion rate of P3.90 to the US $1.00, the gross receipts of petitioner N.V. Reederij "Amsterdam" for
1963 and 1964 amounted to P382,882.50 and P535,052.00, respectively. On June 30, 1967, respondent
Commissioner assessed said petitioner in the amounts of P193,973.20 and P262,904.94 as deficiency income tax for
1963 and 1964, respectively, as "a non-resident foreign corporation not engaged in trade or business in the
Philippines under Section 24 (b) (1) of the Tax Code.
On the assumption that the said petitioner is a foreign corporation engaged in trade or business in the Philippines,
on August 28, 1967, petitioner Royal Interocean Lines filed an income tax return of the aforementioned vessels
computed at the exchange rate of P2.00 to USs1.00 1 and paid the tax thereon in the amount of P1,835.52 and
P9,448.94, respectively, pursuant to Section 24 (b) (2) in relation to Section 37 (B) (e) of the National Internal
Revenue Code and Section 163 of Revenue Regulations No. 2. On the same two dates, petitioner Royal Interocean
Lines as the husbanding agent of petitioner N.V. Reederij "AMSTERDAM" filed a written protest against the
abovementioned assessment made by the respondent Commissioner which protest was denied by said respondent
in a letter dated March 3, 1969: On March 31, 1969, petitioners filed a petition for review with the respondent
Court of Tax Appeals praying for the cancellation of the subject assessment. After due hearing, the respondent
court, on December 1, 1976, rendered a decision modifying said assessments by eliminating the 50% fraud
compromise penalties imposed upon petitioners. Petitioners filed a motion for reconsideration of said decision but
this was denied by the respondent court.
Hence, this petition for review where petitioners raised the following issues:
A. WHETHER N.V. REEDERIJ "AMSTERDAM" NOT HAVING ANY OFFICE OR PLACE OF BUSINESS IN
THE PHILIPPINES, WHOSE VESSELS CALLED ON THE PHILIPPINE PORTS FOR THE PURPOSE OF
LOADING CARGOES ONLY TWICE-ONE IN 1963 AND ANOTHER IN 1964 — SHOULD BE TAXED AS A
FOREIGN CORPORATION NOT ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER
SECTION 24(b) (1) OF THE TAX CODE OR SHOULD BE TAXED AS A FOREIGN CORPORATION
ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES UNDER SECTION 24(b) (2) IN RELATION TO
SECTION 37 (e) OF THE SAME CODE; AND
B. WHETHER THE FOREIGN EXCHANGE RECEIPTS OF N.V. REEDERIJ "AMSTERDAM" SHOULD BE
CONVERTED INTO PHILI PINE PESOS AT THE OFFICIAL RATE OF P2.00 TO US $1.00, OR AT P3.90 TO
US $1.00.
Petitioners contend that respondent court erred in holding that petitioner N.V. Reederij "AMSTERDAM" is a non-
resident foreign corporation because it allegedly disregarded Section 163 of Revenue Regulations No. 2 (providing
for the determination of the net income of foreign corporations doing business in the Philippines) and in holding
that the foreign exchange ang e receipts of said petitioner for purposes of computing its income tax should be
converted into Philippine pesos at the rate of P3.90 to US $1.00 instead of P2.00 to US $1.00.
The petition is devoid of merit.
Petitioner N.V. Reederij "AMSTERDAM" is a foreign corporation not authorized or licensed to do business in the
Philippines. It does not have a branch office in the Philippines and it made only two calls in Philippine ports, one in
1963 and the other in 1964. In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous. A casual business activity in the Philippines by a foreign corporation, as in
the present case, does not amount to engaging in trade or business in the Philippines for income tax purposes.
The Court reproduces with approval the following disquisition of the respondent court —
A corporation is itself a taxpaying entity and speaking generally, for purposes of income tax,
corporations are classified into (a) domestic corporations and (b) foreign corporations. (Sec. 24(a)
and (b), Tax Code.) Foreign corporations are further classified into (1) resident foreign
corporations and (2) non-resident foreign corporations. (Sec. 24(b) (1) and (2). Tax Code.) A
resident foreign corporation is a foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein (Sec. 84(g), Tax Code) while a non-
resident foreign corporation is a foreign corporation not engaged in trade or business within the
Philippines and not having any office or place of business therein. (Sec. 84(h), Tax Code.)
A domestic corporation is taxed on its income from sources within and without the Philippines,
but a foreign corporation is taxed only on its income from sources within the Philippines. (Sec.
24(a), Tax Code; Sec. 16, Rev. Regs. No. 2.) However, while a foreign corporation doing business in
the Philippines is taxable on income solely from sources within the Philippines, it is permitted to
deductions from gross income but only to the extent connected with income earned in the
Philippines. (Secs. 24(b) (2) and 37, Tax Code.) On the other hand, foreign corporations not doing
business in the Philippines are taxable on income from all sources within the Philippines, as
interest, dividends, rents, salaries, wages, premiums, annuities Compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits and
income and capital gains" The tax is 30% (now 35%) of such gross income. (Sec. 24 (b) (1), Tax
Code.)
At the time material to this case, certain corporations were given special treatment, namely,
building and loan associations operating as such in accordance with Section 171 of the
Corporation Law, educational institutions, domestic life insurance companies and for" foreign life
insurance companies doing business in the Philippines. (Sec. 24(a) & (c), Tax Code.) It bears
emphasis, however, that foreign life insurance companies which were not doing business in the
Philippines were taxable as other foreign corporations not authorized to do business in the
Philippines. (Sec. 24(c) Tax Code.)
Now to the case at bar. Here, petitioner N.V. Reederij "Amsterdam" is a non-resident foreign
corporation, organized and existing under the laws of The Netherlands with principal office in
 Amsterdam and not licensed to do business in the Philippines. (pp. 8-81, CTA records.) As a non-
resident foreign corporation, it is thus a foreign corporation, not engaged in trade or business
within the Philippines and not having any office or place of business therein. (Sec. 84(h), Tax
Code.) As stated above, it is therefore taxable on income from all sources within the Philippines, as
interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations,
emoluments, or other fixed or determinable annual or periodical or casual gains, profits and
income and capital gains, and the tax is equal to thirty per centum of such amount, under Section
24(b) (1) of the Tax Code. The accent is on the words of--`such amount." Accordingly, petitioner N.
V. Reederij "Amsterdam" being a non-resident foreign corporation, its taxable income for
purposes of our income tax law consists of its gross income from all sources within the Philippines.
The law seems clear and specific. It thus calls for its application as worded as it leaves no leeway
for interpretation. The applicable provision imposes a tax on foreign corporations falling under the
classification of non-resident corporations without any exceptions or conditions, unlike in the case
of foreign corporations engaged in trade or business within the Philippines which contained (at
the time material to this case) an exception with respect to foreign life insurance companies.
Adherence to the provision of the law, which specifies and determines the taxable income of, and
the rate of income tax applicable to, non-resident foreign corporations, without mentioning any
exceptions, would therefore lead to the conclusion that petitioner N.V. Reederij "Amsterdam" is
subject to income tax on gross income from all sources within the Philippines.
A foreign corporation engaged in trade or business within the Philippines, or which has an office or place of business
therein, is taxed on its total net income received from all sources within the Philippines at the rate of 25% upon the
amount but which taxable net income does not exceed P100,000.00, and 35% upon the amount but which taxable
net income exceeds P100,000.00. 2 On the other hand, a foreign corporation not engaged in trade or business
within the Philippmes and which does not have any office or place of business therein is taxed on income received
from all sources within the Philippines at the rate of 35% of the gross income.3
Petitioner relies on Section 24 (b) (2) and Section 37 (B) (e) of the Tax Code and implementing Section 163 of the
Income Tax Regulations but these provisions refer to a foreign corporation engaged in trade or business in the
Philippines and not to a foreign corporation not engaged in trade or business in the Philippines like petitioner-ship-
owner herein. Thus, the respondent court aptly ruled:
It must be stressed, however, that Section 37 (e) of the Code, as implemented by Section 163 of
the Regulations, provides the rule of the determination of the net income taxable in the
Philippines of a foreign steamship company doing business in the Philippines. To assure that non-
resident foreign steamship companies not engaged in business in the Philippines and not having
any office or place of business herein are not covered therein, the regulations explicitly and clearly
provide that "the net income of a foreign steamship co company doing business in or from this
country is ascertained," under the formula contained therein, "for the purpose of the income tax.!
The reason is easily discernible. As stated above, the taxable income of non-resident foreign
corporations consists of its gross income from all sources within the Philippines. Accordingly, a
foreign steamgship corporation derives income partly from sources within and partly from sources
without the Philippines if it is carrying on a business of transportation service between points in
the Philippines and points outside the Philippines. (Vol. 3, 1965, Federal Taxes, Par. 16389.) Only
then does Section 37 (e) of the Tax Code, are implemented by Section 163 of the Regulations,
apply in computing net income subject to tax. There is no basis therefore for an assertion "that
Section 37 (e) does not distinguish between a foreign corporation engaged in business in the
Philippines and a foreign corporation not engaged in business in the Philippines."" (p. 84, CTA
records.) (Decision, pp. 11-12.)
The conversion rate of P2.00 to US $1.00 which petitioners claim should be applicable to the income of petitioners
for income tax purposes instead of P3.90 to s1.00 is likewise untenable. The transactions involved in this case are for
the taxable years 1963 and 1964. Under Rep. Act No. 2609, the monetary board was authorized to fix the legal
conversion rate for foreign exchange. The free market conversion rate during those years was P3.90 to US $1.00.
This conversion rate issue was definitely settled by this Court in the case of Commissioner of Internal Revenue vs.
Royal Interocean Lines and the Court of Tax Appeals 4 to wit:
 It should be noted that on July 1 6, 1959, the policy incorporated in Circular No. 20 and
implemented in subsequent circulars was relaxed with the enactment of Republic Act No. 2609
which directed the monetary authorities to take steps for the adoption of a four-year program of
gradual decontrol, during which the Monetary Board, with the approval of the President, could
and did fix the conversion rate of the Philippine peso to the US dollar at a ratio other than that
prescribed in Section 48 of Republic Act 265. During the period involved in the case at bar, the
free market conversion rate ranged from P3.47 to P3.65 to a US dollar at which rate the freight
fees in question were computed in the contested assessment. Inasmuch said frees were revenues
derived from foreign exchange transactions, it follows necessarily that the petitioner was fully
justified in computing the taxpayer's receipts at Id free market rates.
xxx xxx xxx
The case of the United States Lines, on which the appealed decision of the Court of Tax Appeals is
anchored, refers to transactions that took place before the approval of Republic Act 2609 on July
16, 1959 when the only legal rate of exchange obtaining in the Philippines was P2 to US $1, and all
foreign exchange had to be surrendered to the Central Bank subject to its disposition pursuant to
its own rules and regulations. Upon the other hand, the present case refers to transactions that
took place during the effectivity of Republic Act 2609 when there was, apart from the parity rate,
a legal free market conversion rate for foreign exchange transactions, which rate had been fixed in
open trading, such as those involved in the case at bar.
Indeed, in the course of the investigation conducted by the Commissioner on the accounting records of petitioner
Royal Interocean Lines, it was verified that when said petitioner paid its agency fees for services rendered as
husbanding agent of the said vessels, it used the conversion rate of P3.90 to US $1.00. 5 It is now estopped from
claiming otherwise in this case. WHEREFORE, the petition is DENIED with costs against petitioners. This decision is
immediately executory and no extension of time to file motion for reconsideration shall be entertained.
SO ORDERED.

G.R. No. L-66838 December 2, 1991

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PROCTER & GAMBLE PHILIPPINE MANUFACTURING CORPORATION and THE COURT OF TAX APPEALS, respondents.

T.A. Tejada & C.N. Lim for private respondent.

RESOLUTION

FELICIANO, J.:

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.

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
———
P35.00 — Paid to the BIR by P&G-Phil. as Philippine
corporate income tax.

P100.00
-35.00
———
P65.00 — Available for remittance as dividends to P&G-USA

P65.00 — Dividends remittable to P&G-USA

x 35% — Regular Philippine dividend tax rate under Section 24
——— (b) (1), NIRC
P22.75 — Regular dividend tax

P65.00 — Dividends remittable to P&G-USA

x 15% — Reduced dividend tax rate under Section 24 (b) (1), NIRC
———
P9.75 — Reduced dividend tax

P22.75 — Regular dividend tax under Section 24 (b) (1), NIRC

-9.75 — Reduced dividend tax under Section 24 (b) (1), NIRC
———
P13.00 — Amount of dividend tax waived by Philippine
===== government under Section 24 (b) (1), NIRC.

Thus, amount (a) above is P13.00 for every P100.00 of pre-tax net income earned by P&G-Phil. Amount (a) is also
the minimum amount of the "deemed paid" tax credit that US tax law shall allow if P&G-USA is to qualify for the
reduced or preferential dividend tax rate under Section 24 (b) (1), NIRC.

Amount (b) above, i.e., the amount of the "deemed paid" tax credit which US tax law allows under Section 902, Tax
Code, may be computed arithmetically as follows:

P65.00 — Dividends remittable to P&G-USA

- 9.75 — Dividend tax withheld at the reduced (15%) rate
———
P55.25 — Dividends actually remitted to P&G-USA

P35.00 — Philippine corporate income tax paid by P&G-Phil.

to the BIR

Dividends actually
remitted by P&G-Phil.
to P&G-USA P55.25
——————— = ——— x P35.00 = P29.75 10
Amount of accumulated P65.00 ======
profits earned by
P&G-Phil. in excess
of income tax

Thus, for every P55.25 of dividends actually remitted (after withholding at the rate of 15%) by P&G-Phil. to its US
parent P&G-USA, a tax credit of P29.75 is allowed by Section 902 US Tax Code for Philippine corporate income tax
"deemed paid" by the parent but actually paid by the wholly-owned subsidiary.

Since P29.75 is much higher than P13.00 (the amount of dividend tax waived by the Philippine government), Section
902, US Tax Code, specifically and clearly complies with the requirements of Section 24 (b) (1), NIRC.

3. It is important to note also that the foregoing reading of Sections 901 and 902 of the US Tax Code is identical with
the reading of the BIR of Sections 901 and 902 of the US Tax Code is identical with the reading of the BIR of Sections
901 and 902 as shown by administrative rulings issued by the BIR.
The first Ruling was issued in 1976, i.e., BIR Ruling No. 76004, rendered by then Acting Commissioner of Intemal
Revenue Efren I. Plana, later Associate Justice of this Court, the relevant portion of which stated:

However, after a restudy of the decision in the American Chicle Company case and the provisions of Section 901 and
902 of the U.S. Internal Revenue Code, we find merit in your contention that our computation of the credit which
the U.S. tax law allows in such cases is erroneous as the amount of tax "deemed paid" to the Philippine government
for purposes of credit against the U.S. tax by the recipient of dividends includes a portion of the amount of income
tax paid by the corporation declaring the dividend in addition to the tax withheld from the dividend remitted. In
other words, the U.S. government will allow a credit to the U.S. corporation or recipient of the dividend, in addition
to the amount of tax actually withheld, a portion of the income tax paid by the corporation declaring the dividend.
Thus, if a Philippine corporation wholly owned by a U.S. corporation has a net income of P100,000, it will pay
P25,000 Philippine income tax thereon in accordance with Section 24(a) of the Tax Code. The net income, after
income tax, which is P75,000, will then be declared as dividend to the U.S. corporation at 15% tax, or P11,250, will
be withheld therefrom. Under the aforementioned sections of the U.S. Internal Revenue Code, U.S. corporation
receiving the dividend can utilize as credit against its U.S. tax payable on said dividends the amount of P30,000
composed of:

(1) The tax "deemed paid" or indirectly paid on the dividend arrived at as follows:

P75,000 x P25,000 = P18,750

———
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.
———
P55.25 — Dividends actually remitted to P&G-USA

P55.25
x 46% — Maximum US corporate income tax rate
———
P25.415—US corporate tax payable by P&G-USA
without tax credits

P25.415
- 9.75 — US tax credit for RP dividend tax withheld by P&G-Phil.
at 15% (Section 901, US Tax Code)
———
P15.66 — US corporate income tax payable after Section 901
——— tax credit.

P55.25
- 15.66
———
P39.59 — Amount received by P&G-USA net of R.P. and U.S.
===== taxes without "deemed paid" tax credit.

P25.415
- 29.75 — "Deemed paid" tax credit under Section 902 US
——— Tax Code (please see page 18 above)

- 0 - — US corporate income tax payable on dividends

====== remitted by P&G-Phil. to P&G-USA after
Section 902 tax credit.

P55.25 — Amount received by P&G-USA net of RP and US

====== taxes after Section 902 tax credit.

It will be seen that the "deemed paid" tax credit allowed by Section 902, US Tax Code, could offset the US corporate
income tax payable on the dividends remitted by P&G-Phil. The result, in fine, could be that P&G-USA would after
US tax credits, still wind up with P55.25, the full amount of the dividends remitted to P&G-USA net of Philippine
taxes. In the calculation of the Philippine Government, this should encourage additional investment or re-
investment in the Philippines by P&G-USA.

3. It remains only to note that under the Philippines-United States Convention "With Respect to Taxes on Income,"
15 the Philippines, by a treaty commitment, reduced the regular rate of dividend tax to a maximum of twenty
percent (20%) of the gross amount of dividends paid to US parent corporations:

Art 11. — Dividends

xxx xxx xxx

(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that
Contracting State by a resident of the other Contracting State shall not exceed —

(a) 25 percent of the gross amount of the dividend; or

(b) When the recipient is a corporation, 20 percent of the gross amount of the dividend if during the part of the
paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its
prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation
was owned by the recipient corporation.

xxx xxx xxx

(Emphasis supplied)

The Tax Convention, at the same time, established a treaty obligation on the part of the United States that it "shall
allow" to a US parent corporation receiving dividends from its Philippine subsidiary "a [tax] credit for the appropriate
amount of taxes paid or accrued to the Philippines by the Philippine [subsidiary] —. 16 This is, of course, precisely
the "deemed paid" tax credit provided for in Section 902, US Tax Code, discussed above. Clearly, there is here on the
part of the Philippines a deliberate undertaking to reduce the regular dividend tax rate of twenty percent (20%) is a
maximum rate, there is still a differential or additional reduction of five (5) percentage points which compliance of
US law (Section 902) with the requirements of Section 24 (b) (1), NIRC, makes available in respect of dividends from
a Philippine subsidiary.

We conclude that private respondent P&G-Phil, is entitled to the tax refund or tax credit which it seeks.

WHEREFORE, for all the foregoing, the Court Resolved to GRANT private respondent's Motion for Reconsideration
dated 11 May 1988, to SET ASIDE the Decision of the and Division of the Court promulgated on 15 April 1988, and in
lieu thereof, to REINSTATE and AFFIRM the Decision of the Court of Tax Appeals in CTA Case No. 2883 dated 31
January 1984 and to DENY the Petition for Review for lack of merit. No pronouncement as to costs.
Narvasa, Gutierrez, Jr., Griño-Aquino, Medialdea and Romero, JJ., concur.
Fernan, C.J., is on leave.

Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24 (b) of our Tax Code is to attract foreign investors to this country by
reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to
their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective
tax "take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the
total taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend
tax only, both payable to the Philippines, with the US tax liability being offset wholly or substantially by the US
"deemed paid" tax credits.

Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate
income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden
of the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues
but it will be realized later, and in greater measure, in terms of a more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some
observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v. Wander
Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that
sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner
of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that
moreover, the government can never be in estoppel, especially in matters involving taxes. In a word, the dissenting
opinion insists that errors of its agents should not jeopardize the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose any
litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also one of fairness:
whether the government should be subject to the same stringent conditions applicable to an ordinary litigant. As
the Court had declared in Wander:

. . . 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
Court — which is supposed to review administrative determinations — would not review, but determine and decide
for the first time, a question not raised at the administrative forum. . . . (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless have
been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require
petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual
amount credited by the US government against the income tax due from P & G USA on the dividends received from
private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and
(3) to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid
in the Philippines.

I agree with the main opinion of my colleague, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid" credit
to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P &
G USA, is still unknown. Stated in other words, until dividends have actually been remitted to the US (which
presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax
authorities cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private
respondent to show documentary proof of its parent corporation having actually received the "deemed paid" tax
credit from the proper tax authorities, would be like putting the cart before the horse. The only way of cutting
through this (what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code
for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a
reasonable period, proof of the amount of "deemed paid" tax credit actually granted by the foreign tax authority.
Imposing such a resolutory condition should resolve the knotty problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax
exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and that
refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and
give effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax statute
reducing a certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied
without interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose
of Pres. Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal
Revenue Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more
inward foreign investment. The same dissenting opinion hastens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find
reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC.
Upon the other hand, where the law-making authority intended to impose a requirement of reciprocity as a
condition for grant of a privilege, the legislature does so expressly and clearly. For example, the gross estate of non-
citizens and non-residents of the Philippines normally includes intangible personal property situated in the
Philippines, for purposes of application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as
amended by P.D. 1457), no taxes will be collected by the Philippines in respect of such intangible personal property
if the law or the foreign country of which the decedent was a citizen and resident at the time of his death allows a
similar exemption from transfer or death taxes in respect of intangible personal property located in such foreign
country and owned by Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as a condition for grant of the reduced dividend tax rate of
15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the basic policy
underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the
inflow of foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the
U.S. grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiaries of Philippine
corporations, would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine
capital into the U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the
Philippines had surplus capital to export, it would not need to import foreign capital into the Philippines. In other
words, to require dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine
corporations to invest outside the Philippines, which would be inconsistent with the notion of attracting foreign
capital into the Philippines in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere
fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates that the BIR ruling cited in Wander
has been obviously discarded today by the BIR. Clearly, there has been a change of mind on the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax
Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the
"deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by
the BIR.

For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.

PARAS, J., dissenting:

I dissent.

The decision of the Second Division of this Court in the case of "Commissioner of Internal Revenue vs. Procter &
Gamble Philippine Manufacturing Corporation, et al.," G.R. No. 66838, promulgated on April 15, 1988 is sought to be
reviewed in the Motion for Reconsideration filed by private respondent. Procter & Gamble Philippines (PMC-Phils.,
for brevity) assails the Court's findings that:

(a) private respondent (PMC-Phils.) is not a proper party to claim the refund/tax credit;

(b) there is nothing in Section 902 or other provision of the US Tax Code that allows a credit against the U.S. tax due
from PMC-U.S.A. of taxes deemed to have been paid in the Phils. equivalent to 20% which represents the difference
between the regular tax of 35% on corporations and the tax of 15% on dividends;

(c) private respondent failed to meet certain conditions necessary in order that the dividends received by the non-
resident parent company in the U.S. may be subject to the preferential 15% tax instead of 35%. (pp. 200-201,
Motion for Reconsideration)

Private respondent's position is based principally on the decision rendered by the Third Division of this Court in the
case of "Commissioner of Internal Revenue vs. Wander Philippines, Inc. and the Court of Tax Appeals," G.R. No.
68375, promulgated likewise on April 15, 1988 which bears the same issues as in the case at bar, but held an
apparent contrary view. Private respondent advances the theory that since the Wander decision had already
become final and executory it should be a precedent in deciding similar issues as in this case at hand.

Yet, it must be noted that the Wander decision had become final and executory only by reason of the failure of the
petitioner therein to file its motion for reconsideration in due time. Petitioner received the notice of judgment on
April 22, 1988 but filed a Motion for Reconsideration only on June 6, 1988, or after the decision had already become
final and executory on May 9, 1988. Considering that entry of final judgment had already been made on May 9,
1988, the Third Division resolved to note without action the said Motion. Apparently therefore, the merits of the
motion for reconsideration were not passed upon by the Court.

The 1987 Constitution provides that a doctrine or principle of law previously laid down either en banc or in Division
may be modified or reversed by the court en banc. The case is now before this Court en banc and the decision that
will be handed down will put to rest the present controversy.

It is true that private respondent, as withholding agent, is obliged by law to withhold and to pay over to the
Philippine government the tax on the income of the taxpayer, PMC-U.S.A. (parent company). However, such fact
does not necessarily connote that private respondent is the real party in interest to claim reimbursement of the tax
alleged to have been overpaid. Payment of tax is an obligation physically passed off by law on the withholding agent,
if any, but the act of claiming tax refund is a right that, in a strict sense, belongs to the taxpayer which is private
respondent's parent company. The role or function of PMC-Phils., as the remitter or payor of the dividend income, is
merely to insure the collection of the dividend income taxes due to the Philippine government from the taxpayer,
"PMC-U.S.A.," the non-resident foreign corporation not engaged in trade or business in the Philippines, as "PMC-
U.S.A." is subject to tax equivalent to thirty five percent (35%) of the gross income received from "PMC-Phils." in the
Philippines "as . . . dividends . . ." (Sec. 24 [b], Phil. Tax Code). Being a mere withholding agent of the government
and the real party in interest being the parent company in the United States, private respondent cannot claim
refund of the alleged overpaid taxes. Such right properly belongs to PMC-U.S.A. It is therefore clear that as held by
the Supreme Court in a series of cases, the action in the Court of Tax Appeals as well as in this Court should have
been brought in the name of the parent company as petitioner and not in the name of the withholding agent. This is
because the action should be brought under the name of the real party in interest. (See Salonga v. Warner Barnes, &
Co., Ltd., 88 Phil. 125; Sutherland, Code Pleading, Practice, & Forms, p. 11; Ngo The Hua v. Chung Kiat Hua, L-17091,
Sept. 30, 1963, 9 SCRA 113; Gabutas v. Castellanes, L-17323, June 23, 1965, 14 SCRA 376; Rep. v. PNB, L-16485,
January 30, 1945).

Rule 3, Sec. 2 of the Rules of Court provides:

Sec. 2. Parties in interest. — Every action must be prosecuted and defended in the name of the real party in interest.
All persons having an interest in the subject of the action and in obtaining the relief demanded shall be joined as
plaintiffs. All persons who claim an interest in the controversy or the subject thereof adverse to the plaintiff, or who
are necessary to a complete determination or settlement of the questions involved therein shall be joined as
defendants.

It is true that under the Internal Revenue Code the withholding agent may be sued by itself if no remittance tax is
paid, or if what was paid is less than what is due. From this, Justice Feliciano claims that in case of an overpayment
(or claim for refund) the agent must be given the right to sue the Commissioner by itself (that is, the agent here is
also a real party in interest). He further claims that to deny this right would be unfair. This is not so. While payment
of the tax due is an OBLIGATION of the agent the obtaining of a refund is a RIGHT. While every obligation has a
corresponding right (and vice-versa), the obligation to pay the complete tax has the corresponding right of the
government to demand the deficiency; and the right of the agent to demand a refund corresponds to the
government's duty to refund. Certainly, the obligation of the withholding agent to pay in full does not correspond to
its right to claim for the refund. It is evident therefore that the real party in interest in this claim for reimbursement
is the principal (the mother corporation) and NOT the agent.
This suit therefore for refund must be DISMSSED.

In like manner, petitioner Commissioner of Internal Revenue's failure to raise before the Court of Tax Appeals the
issue relating to the real party in interest to claim the refund cannot, and should not, prejudice the government.
Such is merely a procedural defect. It is axiomatic that the government can never be in estoppel, particularly in
matters involving taxes. Thus, for example, the payment by the tax-payer of income taxes, pursuant to a BIR
assessment does not preclude the government from making further assessments. The errors or omissions of certain
administrative officers should never be allowed to jeopardize the government's financial position. (See: Phil. Long
Distance Tel. Co. v. Coll. of Internal Revenue, 90 Phil. 674; Lewin v. Galang, L-15253, Oct. 31, 1960; Coll. of Internal
Revenue v. Ellen Wood McGrath, L-12710, L-12721, Feb. 28, 1961; Perez v. Perez, L-14874, Sept, 30, 1960; Republic
v. Caballero, 79 SCRA 179; Favis v. Municipality of Sabongan, L-26522, Feb. 27, 1963).

As regards the issue of whether PMC-U.S.A. is entitled under the U.S. Tax Code to a United States Foreign Tax Credit
equivalent to at least 20 percentage paid portion spared or waived as otherwise deemed waived by the
government, We reiterate our ruling that while apparently, a tax-credit is given, there is actually nothing in Section
902 of the U.S. Internal Revenue Code, as amended by Public Law-87-834 that would justify tax return of the
disputed 15% to the private respondent. This is because the amount of tax credit purportedly being allowed is not
fixed or ascertained, hence we do not know whether or not the tax credit contemplated is within the limits set forth
in the law. While the mathematical computations in Justice Feliciano's separate opinion appear to be correct, the
computations suffer from a basic defect, that is we have no way of knowing or checking the figure used as premises.
In view of the ambiguity of Sec. 902 itself, we can conclude that no real tax credit was really intended. In the
interpretation of tax statutes, it is axiomatic that as between the interest of multinational corporations and the
interest of our own government, it would be far better, in the absence of definitive guidelines, to favor the national
interest. As correctly pointed out by the Solicitor General:

. . . the tax-sparing credit operates on dummy, fictional or phantom taxes, being considered as if paid by the foreign
taxing authority, the host country.

In the context of the case at bar, therefore, the thirty five (35%) percent on the dividend income of PMC-U.S.A.
would be reduced to fifteen (15%) percent if & only if reciprocally PMC-U.S.A's home country, the United States, not
only would allow against PMC-U.SA.'s U.S. income tax liability a foreign tax credit for the fifteen (15%) percentage-
point portion of the thirty five (35%) percent Phil. dividend tax actually paid or accrued but also would allow a
foreign tax "sparing" credit for the twenty (20%)' percentage-point portion spared, waived, forgiven or otherwise
deemed as if paid by the Phil. govt. by virtue of the "tax credit sparing" proviso of Sec. 24(b), Phil. Tax Code." (Reply
Brief, pp. 23-24; Rollo, pp. 239-240).

Evidently, the U.S. foreign tax credit system operates only on foreign taxes actually paid by U.S. corporate taxpayers,
whether directly or indirectly. Nowhere under a statute or under a tax treaty, does the U.S. government recognize
much less permit any foreign tax credit for spared or ghost taxes, as in reality the U.S. foreign-tax credit mechanism
under Sections 901-905 of the U.S. Intemal Revenue Code does not apply to phantom dividend taxes in the form of
dividend taxes waived, spared or otherwise considered "as if" paid by any foreign taxing authority, including that of
the Philippine government.

Beyond, that, the private respondent failed: (1) to show the actual amount credited by the U.S. government against
the income tax due from PMC-U.S.A. on the dividends received from private respondent; (2) to present the income
tax return of its parent company for 1975 when the dividends were received; and (3) to submit any duly
authenticated document showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

Tax refunds are in the nature of tax exemptions. As such, they are regarded 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 . . . and cannot be permitted to exist upon vague implications. (Asiatic Petroleum Co. v.
Llanes, 49 Phil. 466; Northern Phil Tobacco Corp. v. Mun. of Agoo, La Union, 31 SCRA 304; Rogan v. Commissioner,
30 SCRA 968; Asturias Sugar Central, Inc. v. Commissioner of Customs, 29 SCRA 617; Davao Light and Power Co. Inc.
v. Commissioner of Custom, 44 SCRA 122). Thus, when tax exemption is claimed, it must be shown indubitably to
exist, for every presumption is against it, and a well founded doubt is fatal to the claim (Farrington v. Tennessee &
Country Shelby, 95 U.S. 679, 686; Manila Electric Co. v. Vera, L-29987, Oct. 22, 1975; Manila Electric Co. v. Tabios, L-
23847, Oct. 22, 1975, 67 SCRA 451).

It will be remembered that the tax credit appertaining to remittances abroad of dividend earned here in the
Philippines was amplified in Presidential Decree No. 369 promulgated in 1975, the purpose of which was to
"encourage more capital investment for large projects." And its ultimate purpose is to decrease the tax liability of
the corporation concerned. But this granting of a preferential right is premised on reciprocity, without which there is
clearly a derogation of our country's financial sovereignty. No such reciprocity has been proved, nor does it actually
exist. At this juncture, it would be useful to bear in mind the following observations:

The continuing and ever-increasing transnational movement of goods and services, the emergence of multinational
corporations and the rise in foreign investments has brought about tremendous pressures on the tax system to
strengthen its competence and capability to deal effectively with issues arising from the foregoing phenomena.

International taxation refers to the operationalization of the tax system on an international level. As it is,
international taxation deals with the tax treatment of goods and services transferred on a global basis, multinational
corporations and foreign investments.

Since the guiding philosophy behind international trade is free flow of goods and services, it goes without saying
that the principal objective of international taxation is to see through this ideal by way of feasible taxation
arrangements which recognize each country's sovereignty in the matter of taxation, the need for revenue and the
attainment of certain policy objectives.

The institution of feasible taxation arrangements, however, is hard to come by. To begin with, international tax
subjects are obviously more complicated than their domestic counter-parts. Hence, the devise of taxation
arrangements to deal with such complications requires a welter of information and data build-up which generally
are not readily obtainable and available. Also, caution must be exercised so that whatever taxation arrangements
are set up, the same do not get in the way of free flow of goods and services, exchange of technology, movement of
capital and investment initiatives.

A cardinal principle adhered to in international taxation is the avoidance of double taxation. The phenomenon of
double taxation (i.e., taxing an item more than once) arises because of global movement of goods and services.
Double taxation also occurs because of overlaps in tax jurisdictions resulting in the taxation of taxable items by the
country of source or location (source or situs rule) and the taxation of the same items by the country of residence or
nationality of the taxpayer (domiciliary or nationality principle).

An item may, therefore, be taxed in full in the country of source because it originated there, and in another country
because the recipient is a resident or citizen of that country. If the taxes in both countries are substantial and no tax
relief is offered, the resulting double taxation would serve as a discouragement to the activity that gives rise to the
taxable item.

As a way out of double taxation, countries enter into tax treaties. A tax treaty 1 is a bilateral convention (but may be
made multilateral) entered into between sovereign states for purposes of eliminating double taxation on income
and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax
treatment to foreign residents or nationals. 2

A more general way of mitigating the impact of double taxation is to recognize the foreign tax either as a tax credit
or an item of deduction.
Whether the recipient resorts to tax credit or deduction is dependent on the tax advantage or savings that would be
derived therefrom.

A principal defect of the tax credit system is when low tax rates or special tax concessions are granted in a country
for the obvious reason of encouraging foreign investments. For instance, if the usual tax rate is 35 percent but a
concession rate accrues to the country of the investor rather than to the investor himself To obviate this, a tax
sparing provision may be stipulated. With tax sparing, taxes exempted or reduced are considered as having been
fully paid.

To illustrate:

"X" Foreign Corporation income 100

Tax rate (35%) 35
RP income 100
Tax rate (general, 35%
concession rate, 15%) 15

1. "X" Foreign Corp. Tax Liability without Tax Sparing

"X" Foreign Corporation income 100
RP income 100
Total Income 200
"X" tax payable 70
Less: RP tax 15
Net "X" tax payable 55

2. "X" Foreign Corp. Tax Liability with Tax Sparing

"X" Foreign Corp. income 100
RP income 100
Total income 200
"X" Foreign Corp. tax payable 70
Less: RP tax (35% of 100, the
difference of 20% between 35% and 15%,
deemed paid to RP)
Net "X" Foreign Corp.
tax payable 35

By way of resume, We may say that the Wander decision of the Third Division cannot, and should not result in the
reversal of the Procter & Gamble decision for the following reasons:

1) The Wander decision cannot serve as a precedent under the doctrine of stare decisis. It was promulgated on the
same day the decision of the Second Division was promulgated, and while Wander has attained finality this is simply
because no motion for reconsideration thereof was filed within a reasonable period. Thus, said Motion for
Reconsideration was theoretically never taken into account by said Third Division.

2) Assuming that stare decisis can apply, We reiterate what a former noted jurist Mr. Justice Sabino Padilla aptly
said: "More pregnant than anything else is that the court shall be right." We hereby cite settled doctrines from a
treatise on Civil Law:

We adhere in our country to the doctrine of stare decisis (let it stand, et non quieta movere) for reasons of stability
in the law. The doctrine, which is really "adherence to precedents," states that once a case has been decided one
way, then another case, involving exactly the same point at issue, should be decided in the same manner.
Of course, when a case has been decided erroneously such an error must not be perpetuated by blind obedience to
the doctrine of stare decisis. No matter how sound a doctrine may be, and no matter how long it has been followed
thru the years, still if found to be contrary to law, it must be abandoned. The principle of stare decisis does not and
should not apply when there is a conflict between the precedent and the law (Tan Chong v. Sec. of Labor, 79 Phil.
249).

While stability in the law is eminently to be desired, idolatrous reverence for precedent, simply, as precedent, no
longer rules. More pregnant than anything else is that the court shall be right (Phil. Trust Co. v. Mitchell, 59 Phil. 30).

3) Wander deals with tax relations between the Philippines and Switzerland, a country with which we have a
pending tax treaty; our Procter & Gamble case deals with relations between the Philippines and the United States, a
country with which we had no tax treaty, at the time the taxes herein were collected.

4) Wander cited as authority a BIR Ruling dated May 19, 1977, which requires a remittance tax of only 15%. The
mere fact that in this Procter and Gamble case the B.I.R. desires to charge 35% indicates that the B.I.R. Ruling cited
in Wander has been obviously discarded today by the B.I.R. Clearly, there has been a change of mind on the part of
the B.I.R.

5) Wander imposes a tax of 15% without stating whether or not reciprocity on the part of Switzerland exists. It is
evident that without reciprocity the desired consequences of the tax credit under P.D. No. 369 would be rendered
unattainable.

6) In the instant case, the amount of the tax credit deductible and other pertinent financial data have not been
presented, and therefore even were we inclined to grant the tax credit claimed, we find ourselves unable to
compute the proper amount thereof.

7) And finally, as stated at the very outset, Procter & Gamble Philippines or P.M.C. (Phils.) is not the proper party to
bring up the case.

ACCORDINGLY, the decision of the Court of Tax Appeals should be REVERSED and the motion for reconsideration of
our own decision should be DENIED.

Melencio-Herrera, Padilla, Regalado and Davide, Jr., JJ., concur.

# Separate Opinions

CRUZ, J., concurring:

I join Mr. Justice Feliciano in his excellent analysis of the difficult issues we are now asked to resolve.

As I understand it, the intention of Section 24(b) of our Tax Code is to attract foreign investors to this country by
reducing their 35% dividend tax rate to 15% if their own state allows them a deemed paid tax credit at least equal in
amount to the 20% waived by the Philippines. This tax credit would offset the tax payable by them on their profits to
their home state. In effect, both the Philippines and the home state of the foreign investors reduce their respective
tax "take" of those profits and the investors wind up with more left in their pockets. Under this arrangement, the
total taxes to be paid by the foreign investors may be confined to the 35% corporate income tax and 15% dividend
tax only, both payable to the Philippines, with the US tax hability being offset wholly or substantially by the Us
"deemed paid' tax credits.
Without this arrangement, the foreign investors will have to pay to the local state (in addition to the 35% corporate
income tax) a 35% dividend tax and another 35% or more to their home state or a total of 70% or more on the same
amount of dividends. In this circumstance, it is not likely that many such foreign investors, given the onerous burden
of the two-tier system, i.e., local state plus home state, will be encouraged to do business in the local state.

It is conceded that the law will "not trigger off an instant surge of revenue," as indeed the tax collectible by the
Republic from the foreign investor is considerably reduced. This may appear unacceptable to the superficial viewer.
But this reduction is in fact the price we have to offer to persuade the foreign company to invest in our country and
contribute to our economic development. The benefit to us may not be immediately available in instant revenues
but it will be realized later, and in greater measure, in terms of a more stable and robust economy.

BIDIN, J., concurring:

I agree with the opinion of my esteemed brother, Mr. Justice Florentino P. Feliciano. However, I wish to add some
observations of my own, since I happen to be the ponente in Commissioner of Internal Revenue v. Wander
Philippines, Inc. (160 SCRA 573 [1988]), a case which reached a conclusion that is diametrically opposite to that
sought to be reached in the instant Motion for Reconsideration.

1. In page 5 of his dissenting opinion, Mr. Justice Edgardo L. Paras argues that the failure of petitioner Commissioner
of Internal Revenue to raise before the Court of Tax Appeals the issue of who should be the real party in interest in
claiming a refund cannot prejudice the government, as such failure is merely a procedural defect; and that
moreover, the government can never in estoppel, especially in matters involving taxes. In a word, the dissenting
opinion insists that errors of its agents should not jeopardize the government's position.

The above rule should not be taken absolutely and literally; if it were, the government would never lose any
litigation which is clearly not true. The issue involved here is not merely one of procedure; it is also one of fairness:
whether the government should be subject to the same stringent conditions applicable to an ordinary litigant. As
the Court had declared in Wander:

. . . 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 Court — which is supposed
to review administrative determinations — would not review, but determine and decide for the first time, a
question not raised at the administrative forum. ... (160 SCRA at 566-577)

Had petitioner been forthright earlier and required from private respondent proof of authority from its parent
corporation, Procter and Gamble USA, to prosecute the claim for refund, private respondent would doubtless have
been able to show proof of such authority. By any account, it would be rank injustice not at this stage to require
petitioner to submit such proof.

2. In page 8 of his dissenting opinion, Paras, J., stressed that private respondent had failed: (1) to show the actual
amount credited by the US government against the income tax due from P & G USA on the dividends received from
private respondent; (2) to present the 1975 income tax return of P & G USA when the dividends were received; and
(3) to submit any duly authenticated document showing that the US government credited the 20% tax deemed paid
in the Philippines.

I agree with the main opinion of my colleagues, Feliciano J., specifically in page 23 et seq. thereof, which, as I
understand it, explains that the US tax authorities are unable to determine the amount of the "deemed paid" credit
to be given P & G USA so long as the numerator of the fraction, i.e., dividends actually remitted by P & G-Phil. to P &
G USA, is still unknown. Stated in other words, until dividends have actually been remitted to the US (which
presupposes an actual imposition and collection of the applicable Philippine dividend tax rate), the US tax
authorities cannot determine the "deemed paid" portion of the tax credit sought by P & G USA. To require private
respondent to show documentary proof of its parent corporation having actually received the "deemed paid" tax
credit from the proper tax authorities, would be like putting the cart before the horse. The only way of cutting
through this (what Feliciano, J., termed) "circularity" is for our BIR to issue rulings (as they have been doing) to the
effect that the tax laws of particular foreign jurisdictions, e.g., USA, comply with the requirements in our tax code
for applicability of the reduced 15% dividend tax rate. Thereafter, the taxpayer can be required to submit, within a
reasonable period, proof of the amount of "deemed paid" tax credit actually granted by the foreign tax authority.
Imposing such a resolutory condition should resolve the knotty problem of circularity.

3. Page 8 of the dissenting opinion of Paras, J., further declares that tax refunds, being in the nature of tax
exemptions, are to be construed strictissimi juris against the person or entity claiming the exemption; and that
refunds cannot be permitted to exist upon "vague implications."

Notwithstanding the foregoing canon of construction, the fundamental rule is still that a judge must ascertain and
give effect to the legislative intent embodied in a particular provision of law. If a statute (including a tax statute
reducing a certain tax rate) is clear, plain and free from ambiguity, it must be given its ordinary meaning and applied
without interpretation. In the instant case, the dissenting opinion of Paras, J., itself concedes that the basic purpose
of Pres. Decree No. 369, when it was promulgated in 1975 to amend Section 24(b), [11 of the National Internal
Revenue Code, was "to decrease the tax liability" of the foreign capital investor and thereby to promote more
inward foreign investment. The same dissenting opinion hastens to add, however, that the granting of a reduced
dividend tax rate "is premised on reciprocity."

4. Nowhere in the provisions of P.D. No. 369 or in the National Internal Revenue Code itself would one find
reciprocity specified as a condition for the granting of the reduced dividend tax rate in Section 24 (b), [1], NIRC.
Upon the other hand. where the law-making authority intended to impose a requirement of reciprocity as a
condition for grant of a privilege, the legislature does so expressly and clearly. For example, the gross estate of non-
citizens and non-residents of the Philippines normally includes intangible personal property situated in the
Philippines, for purposes of application of the estate tax and donor's tax. However, under Section 98 of the NIRC (as
amended by P.D. 1457), no taxes will be collected by the Philippines in respect of such intangible personal property
if the law or the foreign country of which the decedent was a citizen and resident at the time of his death allows a
similar exemption from transfer or death taxes in respect of intangible personal property located in such foreign
country and owned by Philippine citizens not residing in that foreign country.

There is no statutory requirement of reciprocity imposed as condition for grant of the reduced dividend tax rate of
15% Moreover, for the Court to impose such a requirement of reciprocity would be to contradict the basic policy
underlying P.D. 369 which amended Section 24(b), [1], NIRC, P.D. 369 was promulgated in the effort to promote the
inflow of foreign investment capital into the Philippines. A requirement of reciprocity, i.e., a requirement that the
U.S. grant a similar reduction of U.S. dividend taxes on remittances by the U.S. subsidiary of Philippine corporations,
would assume a desire on the part of the U.S. and of the Philippines to attract the flow of Philippine capital into the
U.S.. But the Philippines precisely is a capital importing, and not a capital exporting country. If the Philippines had
surplus capital to export, it would not need to import foreign capital into the Philippines. In other words, to require
dividend tax reciprocity from a foreign jurisdiction would be to actively encourage Philippine corporations to invest
outside the Philippines, which would be inconsistent with the notion of attracting foreign capital into the Philippines
in the first place.

5. Finally, in page 15 of his dissenting opinion, Paras, J., brings up the fact that:

Wander cited as authority a BIR ruling dated May 19, 1977, which requires a remittance tax of only 15%. The mere
fact that in this Procter and Gamble case, the BIR desires to charge 35% indicates that the BIR ruling cited in Wander
has been obviously discarded today by the BIR. Clearly, there has been a change of mind on the part of the BIR.

As pointed out by Feliciano, J., in his main opinion, even while the instant case was pending before the Court of Tax
Appeals and this Court, the administrative rulings issued by the BIR from 1976 until as late as 1987, recognized the
"deemed paid" credit referred to in Section 902 of the U.S. Tax Code. To date, no contrary ruling has been issued by
the BIR.
For all the foregoing reasons, private respondent's Motion for Reconsideration should be granted and I vote
accordingly.

epublic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 188550 August 19, 2013
DEUTSCHE BANK AG MANILA BRANCH, PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
SERENO, CJ.:
This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the 1997 Rules
of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 29 May 2009 and
Resolution3 dated 1 July 2009 in C.T.A. EB No. 456.
THE FACTS
In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997, petitioner withheld and
remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which represented the fifteen
percent (15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to
Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years.5
Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers Assessment and
Investigation Division on 4 October 2005 an administrative claim for refund or issuance of its tax credit certificate in
the total amount of PHP 22,562,851.17. On the same date, petitioner requested from the International Tax Affairs
Division (ITAD) a confirmation of its entitlement to the preferential tax rate of 10% under the RP-Germany Tax
Treaty.6
Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review7 with the CTA on 18
October 2005. Petitioner reiterated its claim for the refund or issuance of its tax credit certificate for the amount of
PHP 22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance to DB Germany.
THE CTA SECOND DIVISION RULING8
After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of PHP
67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for 2002 and prior
taxable years. Records also disclose that for the year 2003, petitioner remitted to DB Germany the amount of EURO
5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO), which is net of the 15% BPRT.
However, the claim of petitioner for a refund was denied on the ground that the application for a tax treaty relief
was not filed with ITAD prior to the payment by the former of its BPRT and actual remittance of its branch profits to
DB Germany, or prior to its availment of the preferential rate of ten percent (10%) under the RP-Germany Tax Treaty
provision. The court a quo held that petitioner violated the fifteen (15) day period mandated under Section III
paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000.
Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly Southern Energy
Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue9 (Mirant) where the CTA En Banc ruled
that before the benefits of the tax treaty may be extended to a foreign corporation wishing to avail itself thereof,
the latter should first invoke the provisions of the tax treaty and prove that they indeed apply to the corporation.
THE CTA EN BANC RULING10
The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and Resolution dated 14
January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must be secured prior to
the availment of a preferential tax rate under a tax treaty. Applying the principle of stare decisis et non quieta
movere, the CTA En Banc took into consideration that this Court had denied the Petition in G.R. No. 168531 filed by
Mirant for failure to sufficiently show any reversible error in the assailed judgment.11 The CTA En Banc ruled that
once a case has been decided in one way, any other case involving exactly the same point at issue should be decided
in the same manner.
The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 1-2000 cannot be
relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal Revenue.12 In that case,
the rule was relaxed and the claim for refund of excess final withholding taxes was partially granted. While it issued
a ruling to CBK Power Company Limited after the payment of withholding taxes, the ITAD did not issue any ruling to
petitioner even if it filed a request for confirmation on 4 October 2005 that the remittance of branch profits to DB
Germany is subject to a preferential tax rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty.
ISSUE
This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-2000 will
deprive persons or corporations of the benefit of a tax treaty.
THE COURT’S RULING
The Petition is meritorious.
Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15% based on
the total profits applied for or earmarked for remittance without any deduction of the tax component. However,
petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which provides that where a resident of
the Federal Republic of Germany has a branch in the Republic of the Philippines, this branch may be subjected to
the branch profits remittance tax withheld at source in accordance with Philippine law but shall not exceed 10% of
the gross amount of the profits remitted by that branch to the head office.
By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting to its head
office in Germany, the benefit of a preferential rate equivalent to 10% BPRT.
On the other hand, the BIR issued RMO No. 1-2000, which requires that any availment of the tax treaty relief must
be preceded by an application with ITAD at least 15 days before the transaction. The Order was issued to streamline
the processing of the application of tax treaty relief in order to improve efficiency and service to the taxpayers.
Further, it also aims to prevent the consequences of an erroneous interpretation and/or application of the treaty
provisions (i.e., filing a claim for a tax refund/credit for the overpayment of taxes or for deficiency tax liabilities for
underpayment).13
The crux of the controversy lies in the implementation of RMO No. 1-2000.
Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany Tax Treaty,
the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax treaty relief application is
not a condition precedent to the availment of a preferential tax rate. Further, petitioner posits that, contrary to the
ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for refund solely on the basis of
noncompliance with RMO No. 1-2000.
Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in character.
RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of Finance to promulgate rules
and regulations for the effective implementation of the NIRC. Thus, courts cannot ignore administrative issuances
which partakes the nature of a statute and have in their favor a presumption of legality.
The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this prerequisite is
fatal to the taxpayer’s availment of the preferential tax rate.
We disagree.
A minute resolution is not a binding precedent
At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court has clarified this matter
in Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue14 as follows:
It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits
of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our
ruling in that case has already become final. When a minute resolution denies or dismisses a petition for failure to
comply with formal and substantive requirements, the challenged decision, together with its findings of fact and
legal conclusions, are deemed sustained. But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata. However, if other parties or another subject matter (even with the same parties and issues) is involved, the
minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a previous case, CIR v.
Baier-Nickel involving the same parties and the same issues, was previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous
case "ha(d) no bearing" on the latter case because the two cases involved different subject matters as they were
concerned with the taxable income of different taxable years.
Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The
constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and
the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to
minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a
decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are
not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. Indeed,
as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision duly
signed by the members of the Court and certified by the Chief Justice. (Emphasis supplied)
Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court in cases of
a similar nature. There are differences in parties, taxes, taxable periods, and treaties involved; more importantly, the
disposition of that case was made only through a minute resolution.
Tax Treaty vs. RMO No. 1-2000
Our Constitution provides for adherence to the general principles of international law as part of the law of the
land.15 The time-honored international principle of pacta sunt servanda demands the performance in good faith of
treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the
parties, and obligations under the treaty must be performed by them in good faith.16 More importantly, treaties
have the force and effect of law in this jurisdiction.17
Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help
the taxpayer avoid simultaneous taxations in two different jurisdictions." 18 CIR v. S.C. Johnson and Son, Inc. further
clarifies that "tax conventions are drafted with a view towards the elimination of international juridical double
taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical periods. The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will
only thrive in a fairly predictable and reasonable international investment climate and the protection against double
taxation is crucial in creating such a climate."19
Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double
taxation, which is why they are also known as double tax treaty or double tax agreements.
"A state that has contracted valid international obligations is bound to make in its legislations those modifications
that may be necessary to ensure the fulfillment of the obligations undertaken." 20 Thus, laws and issuances must
ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not
impose additional requirements that would negate the availment of the reliefs provided for under international
agreements. More so, when the RP-Germany Tax Treaty does not provide for any pre-requisite for the availment of
the benefits under said agreement.
Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation of
entitlement to a tax treaty relief for failure to comply with the 15-day period. We recognize the clear intention of
the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly
comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the
benefits granted under tax treaties are enjoyed by duly entitled persons or corporations.
Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as
required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation
of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the
failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value
of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the
entitlement of the taxpayer to the relief.
The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-
2000.1âwphi1 Logically, noncompliance with tax treaties has negative implications on international relations, and
unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve
an administrative procedure, these may be remedied through other system management processes, e.g., the
imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for
failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.
Prior Application vs. Claim for Refund
Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of the treaty
provisions. The objective of the BIR is to forestall assessments against corporations who erroneously availed
themselves of the benefits of the tax treaty but are not legally entitled thereto, as well as to save such investors
from the tedious process of claims for a refund due to an inaccurate application of the tax treaty provisions.
However, as earlier discussed, noncompliance with the 15-day period for prior application should not operate to
automatically divest entitlement to the tax treaty relief especially in claims for refund.
The underlying principle of prior application with the BIR becomes moot in refund cases, such as the present case,
where the very basis of the claim is erroneous or there is excessive payment arising from non-availment of a tax
treaty relief at the first instance. In this case, petitioner should not be faulted for not complying with RMO No. 1-
2000 prior to the transaction. It could not have applied for a tax treaty relief within the period prescribed, or 15 days
prior to the payment of its BPRT, precisely because it erroneously paid the BPRT not on the basis of the preferential
tax rate under
the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior application
requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the RP-Germany Tax
Treaty when it requested for a confirmation from the ITAD before filing an administrative claim for a refund should
be deemed substantial compliance with RMO No. 1-2000.
Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when there has been
an erroneous payment of tax.1âwphi1 The outright denial of petitioner’s claim for a refund, on the sole ground of
failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat the purpose of Section 229.
Petitioner is entitled to a refund
It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in substantial
compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether petitioner was entitled to the
lower rate of 10% BPRT pursuant to the RP-Germany Tax Treaty.
Nevertheless, even without the BIR ruling, the CTA Second Division found as follows:
Based on the evidence presented, both documentary and testimonial, petitioner was able to establish the following
facts:
a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation organized and
existing under the laws of the Federal Republic of Germany;
b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes Withheld under
BIR Form No. 1601-F and remitted the amount of ₱67,688,553.51 as branch profits remittance tax with the
BIR; and
c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance, petitioner remitted
to Frankfurt Head Office the amount of EUR5,174,847.38 (or ₱330,175,961.88 at 63.804 Peso/Euro)
representing its 2002 profits remittance.22
The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net income, due for
remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior taxable years. 23
Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive period pursuant
to Section 229 of the NIRC.24
Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT in accordance
with the RP-Germany Tax Treaty.
Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to PHP
451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to grant petitioner a
refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total
of PHP 22,562,851.17.
WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax Appeals En Banc
Decision dated 29 May 2009 and Resolution dated 1 July 2009 are REVERSED and SET ASIDE. A new one is hereby
entered ordering respondent Commissioner of Internal Revenue to refund or issue a tax credit certificate in favor of
petitioner Deutsche Bank AG Manila Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO
THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine
currency, representing the erroneously paid BPRT for 2002 and prior taxable years.
SO ORDERED.
MARIA LOURDES P. A. SERENO
Chief Justice, Chairperson
WE CONCUR:
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
LUCAS P. BERSAMIN JOSE C. MENDOZA*
Associate Justice Associate Justice
BIENVENIDO L. REYES
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned, to the writer of the opinion of the Court's Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
* Designated additional member in lieu of Associate Justice Martin S. Villarama, Jr. per Special Order No.
1502.
1
Rollo, pp. 12-60.
2
Id. at 68-78; penned by Associate Justice Lovell R. Bautista and concurred in by then Presiding Justice
Ernesto D. Acosta, Associate Justices Juanito C. Castaneda Jr., Erlinda P. Uy, Caesar A. Casanova and Olga
Palanca-Enriquez.
3
Id. at 79-80.
4
SEC. 28. Rates of Income Tax on Foreign Corporations.-
(A) Tax on Resident Foreign Corporations.-
xxxx
(5) Tax on Branch Profits Remittances. - Any profit remitted by a branch to its head office shall be
subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof (except those
activities which are registered with the Philippine Economic Zone Authority). The tax shall be
collected and paid in the same manner as provided in Sections 57 and 58 of this Code: Provided,
That interests, dividends, rents, royalties, including remuneration for technical services, salaries,
wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be treated as branch profits unless
the same are effectively connected with the conduct of its trade or business in the Philippines.
5
Rollo, pp. 69-70.
6
Id. at 70.
7
Id. at 150-157.
8
Id. at 109-125; CTA Second Division Decision dated 29 August 2008, penned by Associate Justice Erlinda P.
Uy and concurred in by Associate Justices Juanito C. Castañeda, Jr. and Olga Palanca-Enriquez.
9
C.T.A. EB No. 40 (CTA Case No. 6382), 7 June 2005, penned by Associate Justice Erlinda P. Uy and
concurred in by then Presiding Justice Ernesto D. Acosta, and Associate Justices Juanito C. Castañeda Jr.,
Lovell R. Bautista, Caesar A. Casanova and Olga Palanca-Enriquez. The case was affirmed by the Supreme
Court in the Resolutions dated 12 November 2007 and 18 February 2008 in G.R. No. 168531; (visited 5 June
2013). Pertinent portion of Mirant provides:
"However, it must be remembered that a foreign corporation wishing to avail of the benefits of
the tax treaty should invoke the provisions of the tax treaty and prove that indeed the provisions
of the tax treaty applies to it, before the benefits may be extended to such corporation. In other
words, a resident or non-resident foreign corporation shall be taxed according to the provisions of
the National Internal Revenue Code, unless it is shown that the treaty provisions apply to the said
corporation, and that, in cases the same are applicable, the option to avail of the tax benefits
under the tax treaty has been successfully invoked.
 Under Revenue Memorandum Order 01-2000 of the Bureau of Internal Revenue, it is provided
that the availment of a tax treaty provision must be preceded by an application for a tax treaty
relief with its International Tax Affairs Division (ITAD). This is to prevent any erroneous
interpretation and/or application of the treaty provisions with which the Philippines is a signatory
to. The implementation of the said Revenue Memorandum Order is in harmony with the
objectives of the contracting state to ensure that the granting of the benefits under the tax
treaties are enjoyed by the persons or corporations duly entitled to the same."
10
Supra note 2.
11
SC Minute Resolutions dated 12 November 2007 and 18 February 2008.
12
CBK Power Company Limited v. Commissioner of Internal Revenue, C.T.A. Case Nos. 6699, 6884 & 7166,
12 February 1999, penned by Associate Justice Caesar A. Casanova and concurred in by then Presiding
Justice Ernesto D. Acosta and Associate Justice Lovell R. Bautista.
13
REVENUE MEMORANDUM ORDER NO. 01-00
SUBJECT : Procedures for Processing Tax Treaty Relief Application
TO : All Internal Revenue Officers and Others Concerned
I. Objectives:
This Order is issued to streamline the processing of the tax treaty relief application in order to
improve efficiency and service to the taxpayers.
Furthermore, it is to the best interest of both the taxpayer and the Bureau of Internal Revenue
that any availment of the tax treaty provisions be preceded by an application for treaty relief with
the International Tax Affairs Division (ITAD). In this way, the consequences of any erroneous
interpretation and/or application of the treaty provisions (i.e., claim for tax refund/credit for
overpayment of taxes, or deficiency tax liabilities for underpayment) can be averted before
proceeding with the transaction and or paying the tax liability covered by the tax treaty.
xxxx
III. Policies:
In order to achieve the above-mentioned objectives, the following policies shall be observed:
xxxx
2. Any availment of the tax treaty relief shall be preceded by an application by filing BIR Form No.
0901 (Application for Relief from Double Taxation) with ITAD at least 15 days before the
transaction i.e. payment of dividends, royalties, etc., accompanied by supporting documents
justifying the relief. Consequently, BIR Form Nos. TC 001 and TC 002 prescribed under RMO 10-92
are hereby declared obsolete.