tax cases digest 1st outline

8/13/2019 Tax Cases Digest 1st Outline

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CHAMBER OF REAL ESTATE ANDBUILDERS ASSOCIATION, INC. VS.EXECUTIVE SECRETARY- MINIMUMCORPORATE INCOME TAX

FACTS:

CREBA assails the imposition of the minimum corporate income tax (MCIT) as being violative of the

due process clause as it levies income tax even if there is no realized gain. They also question the

creditable withholding tax (CWT) on sales of real properties classified as ordinary assets stating that

(1) they ignore the different treatment of ordinary assets and capital assets; (2) the use of gross

selling price or fair market value as basis for the CWT and the collection of tax on a per transaction

basis (and not on the net income at the end of the year) are inconsistent with the tax on ordinary real

properties; (3) the government collects income tax even when the net income has not yet been

determined; and (4) the CWT is being levied upon real estate enterprises but not on other

enterprises, more particularly those in the manufacturing sector.

MCIT

Under the tax code a corporation can become subject to the mcit at the rate of 2% of

Gross income, beginning on the 4thyear immediately following the year in which it

commenced its business operations, when such mcit is greater that the normal

corporate income tax. If the regular income tax is higher than the mcit , the

corporation does not pay the mcit.

ISSUE:

Are the impositions of the MCIT on domestic corporations and CWT on income from sales of real

properties classified as ordinary assets unconstitutional?

HELD:

NO. MCIT does not tax capital but only taxes income as shown by the fact that the MCIT is arrived at

by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and

other direct expenses from gross sales. Besides, there are sufficient safeguards that exist for the

MCIT: (1) it is only imposed on the 4th year of operations; (2) the law allows the carry forward of any


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excess MCIT paid over the normal income tax; and (3) the Secretary of Finance can suspend the

imposition of MCIT in justifiable instances.

The regulations on CWT did not shift the tax base of a real estate business income tax from net

income to GSP or FMV of the property sold since the taxes withheld are in the nature of advance tax

payments and they are thus just installments on the annual tax which may be due at the end of the

taxable year. As such the tax base for the sale of real property classified as ordinary assets remains

to be the net taxable income and the use of the GSP or FMV is because these are the only factors

reasonably known to the buyer in connection with the performance of the duties as a withholding

agent.

Neither is there violation of equal protection even if the CWT is levied only on the real industry as the

real estate industry is, by itself, a class on its own and can be validly treated different from otherbusinesses.

PEPSI COLA VS MUNICIPALITY OF TANUAN

Pepsi Cola has a bottling plant in the Municipality of Tanauan, Leyte. In September 1962, the Municipality

approved Ordinance No. 23 which levies and collects from soft drinks producers and manufacturers a tai

of one-sixteenth (1/16) of a centavo for every bottle of soft drink corked.

In December 1962, the Municipality also approved Ordinance No. 27 which levies and collects on soft

drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of one centavo

P0.01) on each gallon of volume capacity. Pepsi Cola assailed the validity of the ordinances as it alleged that they constitute double taxation in two

instances: a) double taxation because Ordinance No. 27 covers the same subject matter and impose

practically the same tax rate as with Ordinance No. 23, b) double taxation because the two ordinances

impose percentage or specific taxes.

Pepsi Cola also questions the constitutionality of Republic Act 2264 which allows for the delegation of

taxing powers to local government units; that allowing local governments to tax companies like Pepsi

Cola is confiscatory and oppressive.

The Municipality assailed the arguments presented by Pepsi Cola. It argued, among others, that only

Ordinance No. 27 is being enforced and that the latter law is an amendment of Ordinance No. 23, hence

there is no double taxation.

ISSUE: Whether or not there is undue delegation of taxing powers. Whether or not there is doubletaxation.

HELD: No. There is no undue delegation. The Constitution even allows such delegation. Legislative

powers may be delegated to local governments in respect of matters of local concern. By necessary

implication, the legislative power to create political corporations for purposes of local self-government

carries with it the power to confer on such local governmental agencies the power to tax. Under the New

Constitution, local governments are granted the autonomous authority to create their own sources of

revenue and to levy taxes. Section 5, Article XI provides: Each local government unit shall have the


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power to create its sources of revenue and to levy taxes, subject to such limitations as may be provided

by law. Withal, it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the

sphere of the legislative power to enact and vest in local governments the power of local taxation.

There is no double taxation. The argument of the Municipality is well taken. Further, Pepsi Colas

assertion that the delegation of taxing power in itself constitutes double taxation cannot be merited. It

must be observed that the delegating authority specifies the limitations and enumerates the taxes overwhich local taxation may not be exercised. The reason is that the State has exclusively reserved the

same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental

law unlike in other jurisdictions. Double taxation becomes obnoxious only where the taxpayer is taxed

twice for the benefit of the same governmental entity or by the same jurisdiction for the same purpose, but

not in a case where one tax is imposed by the State and the other by the city or municipality.

QUEZON CITY VS. ABS-CBNBROADCASTING CORPORATION - LOCALFRANCHISE TAX

FACTS:

ABS-CBN was granted a franchise which provides that it shall pay a 3% franchise tax and the said

percentage tax shall be in lieu of all taxes on this franchise or earnings thereof. It thus filed a

complaint against the imposition of local franchise tax.

ISSUE:

Does the in lieu of all taxes provision in ABS-CBNs franchise exempt it from payment of the local

franchise tax?

HELD:

NO. The right to exemption from local franchise tax must be clearly established beyond reasonable

doubt and cannot be made out of inference or implications.

The uncertainty over whether the in lieu of all taxes provision pertains to exemption from local or

national taxes, or both, should be construed against Respondent who has the burden to prove that it

is in fact covered by the exemption claimed. Furthermore, the in lieu of all taxes clause in

Respondents franchise has become ineffective with the abolition of the franchise tax on

broadcasting companies with yearly gross receipts exceeding P10 million as they are now subject to

the VAT.


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COMMISSIONER v. ALGUE, INC.

GR No. L-28896, February 17, 1988

158 SCRA 9

FACTS: Private respondent corporation Algue Inc. filed its income tax returns for 1958 and 1959showing

deductions, for promotional fees paid, from their gross income, thus lowering their taxable income. The BIR

assessed Algue based on such deductions contending that the claimed deduction is disallowed because it was

not an ordinary, reasonable and necessary expense.

ISSUE: Should an uncommon business expense be disallowed as a proper deduction in computation of income

taxes, corollary to the doctrine that taxes are the lifeblood of the government?

HELD: No. Private respondent has proved that the payment of the fees was necessary and reasonable in the

light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an

xperimental enterprise and involve themselves in a new business requiring millions of pesos. This was nomean feat and should be, as it was, sufficiently recompensed.

It is well-settled that taxes are the lifeblood of the government and so should be collected without

unnecessary hindrance On the other hand, such collection should be made in accordance with law as any

arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the

apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which

is the promotion of the common good, may be achieved.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic

regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the

taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the

tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law

has not been observed.

PHIL. GUARANTY CO., INC. v. CIR

GR No. L-22074, April 30, 1965

13 SCRA 775

FACTS: The petitioner Philippine Guaranty Co., Inc., a domestic insurance company, entered into reinsurance

contracts with foreign insurance companies not doing business in the country, thereby ceding to foreign

reinsurers a portion of the premiums on insurance it has originally underwritten in the Philippines. Thepremiums

paid by such companies were excluded by the petitioner from its gross income when it file its income tax

returns

for 1953 and 1954. Furthermore, it did not withhold or pay tax on them. Consequently, the CIR assessed

against

the petitioner withholding taxes on the ceded reinsurance premiums to which the latter protested the

assessment on the ground that the premiums are not subject to tax for the premiums did not constitute income


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from sources within the Philippines because the foreign reinsurers did not engage in business in the

Philippines,

and CIR's previous rulings did not require insurance companies to withhold income tax due from foreign

companies.

ISSUE: Are insurance companies not required to withhold tax on reinsurance premiums ceded to foreigninsurance companies, which deprives the government from collecting the tax due from them?

HELD: No. The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is a

necessary burden to preserve the State's sovereignty and a means to give the citizenry an army to resist an

aggression, a navy to defend its shores from invasion, a corps of civil servants to serve, public improvement

designed for the enjoyment of the citizenry and those which come within the State's territory, and facilities and

protection which a government is supposed to provide. Considering that the reinsurance premiums in question

were afforded protection by the government and the recipient foreign reinsurers exercised rights and privileges

guaranteed by our laws, such reinsurance premiums and reinsurers should share the burden of maintaining the

state.

The petitioner's defense of reliance of good faith on rulings of the CIR requiring no withholding of tax due on

reinsurance premiums may free the taxpayer from the payment of surcharges or penalties imposed for failure

to

pay the corresponding withholding tax, but it certainly would not exculpate it from liability to pay such

withholding tax. The Government is not estopped from collecting taxes by the mistakes or errors of its agents.

FELS ENERGY INC. VS THE PROVINCE OF BATANGAS

On January 18, 1993, NPC entered into a lease contract with Polar Energy, Inc. over 3x30 MW

diesel engine power barges moored at Balayan Bay in Calaca, Batangas. The contract,

denominated as an Energy Conversion Agreement5

(Agreement), was for a period of five years.Article 10 reads:

10.1 RESPONSIBILITY. NAPOCOR shall be responsible for the payment of (a) all taxes, importduties, fees, charges and other levies imposed by the National Government of the Republic of thePhilippines or any agency or instrumentality thereof to which POLAR may be or become subject toor in relation to the performance of their obligations under this agreement (other than (i) taxesimposed or calculated on the basis of the net income of POLAR and Personal Income Taxes of itsemployees and (ii) construction permit fees, environmental permit fees and other similar fees andcharges) and (b) all real estate taxes and assessments, rates and other charges in respect of thePower Barges.6

Subsequently, Polar Energy, Inc. assigned its rights under the Agreement to FELS. The NPC initiallyopposed the assignment of rights, citing paragraph 17.2 of Article 17 of the Agreement.

On August 7, 1995, FELS received an assessment of real property taxes on the power barges fromProvincial Assessor Lauro C. Andaya of Batangas City. The assessed tax, which likewise coveredthose due for 1994, amounted to P56,184,088.40 per annum. FELS referred the matter to NPC,reminding it of its obligation under the Agreement to pay all real estate taxes. It then gave NPC thefull power and authority to represent it in any conference regarding the real property assessment ofthe Provincial Assessor.
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In a letter7dated September 7, 1995, NPC sought reconsideration of the Provincial Assessorsdecision to assess real property taxes on the power barges. However, the motion was denied onSeptember 22, 1995, and the Provincial Assessor advised NPC to pay the assessment .8Thisprompted NPC to file a petition with the Local Board of Assessment Appeals (LBAA) for the settingaside of the assessment and the declaration of the barges as non-taxable items; it also prayed thatshould LBAA find the barges to be taxable, the Provincial Assessor be directed to make the

necessary corrections.9

In its Answer to the petition, the Provincial Assessor averred that the barges were real property forpurposes of taxation under Section 199(c) of Republic Act (R.A.) No. 7160.

Before the case was decided by the LBAA, NPC filed a Manifestation, informing the LBAA that theDepartment of Finance (DOF) had rendered an opinion10dated May 20, 1996, where it is clearlystated that power barges are not real property subject to real property assessment.

On August 26, 1996, the LBAA rendered a Resolution11denying the petition.

Aggrieved, FELS appealed the LBAAs ruling to the Central Board of Assessment Appeals (CBAA).

On April 6, 2000, the CBAA rendered a Decision17finding the power barges exempt from realproperty tax.

The Provincial Assessor filed a motion for reconsideration, which was opposed by FELS and NPC.

In a complete volte face, the CBAA issued a Resolution 20on July 31, 2001 reversing its earlierdecision

Dissatisfied, FELS filed a petition for review before the CA

Twelfth Division of the appellate court rendered judgment in CA-G.R. SP No. 67490 denying the

petition on the ground of prescription.

On August 3, 2005, FELS filed the petition docketed as G.R. No. 168557 before this Court.

Issues:

II

THE COURT OF APPEALS GRAVELY ERRED IN NOT HOLDING THAT THE POWER BARGESARE NOT SUBJECT TO REAL PROPERTY TAXES.

Ruling:

Petitioners maintain nevertheless that the power barges are exempt from real estate tax underSection 234 (c) of R.A. No. 7160 because they are actually, directly and exclusively used bypetitioner NPC, a government- owned and controlled corporation engaged in the supply, generation,and transmission of electric power.

We affirm the findings of the LBAA and CBAA that the owner of the taxable properties is petitionerFELS, which in fine, is the entity being taxed by the local government. As stipulated under Section2.11, Article 2 of the Agreement:
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OWNERSHIP OF POWER BARGES. POLAR shall own the Power Barges and all the fixtures,fittings, machinery and equipment on the Site used in connection with the Power Barges which havebeen supplied by it at its own cost. POLAR shall operate, manage and maintain the Power Bargesfor the purpose of converting Fuel of NAPOCOR into electricity.52

OPERATION. POLAR undertakes that until the end of the Lease Period, subject to the supply of the

necessary Fuel pursuant to Article 6 and to the other provisions hereof, it will operate the PowerBarges to convert such Fuel into electricity in accordance with Part A of Article 7.53

It is a basic rule that obligations arising from a contract have the force of law between the parties.Not being contrary to law, morals, good customs, public order or public policy, the parties to thecontract are bound by its terms and conditions.54

Time and again, the Supreme Court has stated that taxation is the rule and exemption is theexception.55The law does not look with favor on tax exemptions and the entity that would seek to bethus privileged must justify it by words too plain to be mistaken and too categorical to bemisinterpreted.56Thus, applying the rule of strict construction of laws granting tax exemptions, andthe rule that doubts should be resolved in favor of provincial corporations, we hold that FELS is

considered a taxable entity.

The mere undertaking of petitioner NPC under Section 10.1 of the Agreement, that it shall beresponsible for the payment of all real estate taxes and assessments, does not justify the exemption.The privilege granted to petitioner NPC cannot be extended to FELS. The covenant is betweenFELS and NPC and does not bind a third person not privy thereto, in this case, the Province ofBatangas.

It must be pointed out that the protracted and circuitous litigation has seriously resulted in the localgovernments deprivation of revenues. The power to tax is an incident of sovereignty and is unlimitedin its magnitude, acknowledging in its very nature no perimeter so that security against its abuse isto be found only in the responsibility of the legislature which imposes the tax on the constituencywho are to pay for it.57The right of local government units to collect taxes due must always be

upheld to avoid severe tax erosion. This consideration is consistent with the State policy toguarantee the autonomy of local governments58and the objective of the Local Government Codethat they enjoy genuine and meaningful local autonomy to empower them to achieve their fullestdevelopment as self-reliant communities and make them effective partners in the attainment ofnational goals.59

In conclusion, we reiterate that the power to tax is the most potent instrument to raise the neededrevenues to finance and support myriad activities of the local government units for the delivery ofbasic services essential to the promotion of the general welfare and the enhancement of peace,progress, and prosperity of the people.60

WHEREFORE, the Petitions are DENIED and the assailed Decisions and Resolutions AFFIRMED.

Gerochi vs. DOE
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The taxing power may be used as an implement of policepower. The theory behind the exercise of the power to taxemanates from necessity; without taxes, government

cannot fulfill its mandate of promoting the general welfareand well-being of the people.

Caltex Philippines vs. COA

tax cases digest 1st outline

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