DOMINIC ELOJA EMBODO

TAXATION CASE DIGEST REQUIREMENT

COMMISSIONER OF INTERNAL REVENUES, petitioner, vs.

V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.
G.R. Nos. L-18169, L-18262 & L-21434-July 31, 1964

FACTS:

The instant case stemmed from March 17, 1959 when spouses, V. E. Lednicky and
Maria Valero Lednicky (respondents), both American citizens residing in the Philippines, and
have derived all their income from Philippine sources, filed an amended income tax return for
1956. The amendment consists in a claimed deduction of P205, 939.24 paid in 1956 to the
United States government as federal income tax for 1956. Simultaneously with the filing of the
amended return, the respondents requested the refund of P112, 437.90.

When petitioner Commissioner of Internal Revenue failed to answer the claim for refund,
the respondents filed their petition with the Tax Court on 11 April 1959 as CTA Case No. 646,
which is now G. R. No. L-18286 in the Supreme Court.

The Tax Court

Held that they may be deducted because of the undenied fact that the respondent
spouses did not "signify" in their income tax return a desire to avail themselves of the
benefits of paragraph 3 (B) of the subsection, which reads:

Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer
signifies in his return his desire to have the benefits of this paragraph, the tax
imposed by this Title shall be credited with

(A) ...;

(B) Alien resident of the Philippines. In the case of an alien resident of

the Philippines, the amount of any such taxes paid or accrued during the
taxable year to any foreign country, if the foreign country of which such
alien resident is a citizen or subject, in imposing such taxes, allows a
similar credit to citizens of the Philippines residing in such country;

ISSUE:

Whether or not a citizen of the United States residing in the Philippines, who derives income
wholly from sources within the Republic of the Philippines, may deduct from his gross income
the income taxes he has paid to the United States government for the taxable year on the
strength of section 30 (C-1) of the Philippine Internal Revenue Code.
RULING:

NO. We agree with appellant Commissioner that the Construction and wording of Section 30
(c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct income
taxes paid to foreign government from the taxpayer's gross income is given only as an
alternative or substitute to his right to claim a tax credit for such foreign income taxes under
section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if
he so chooses, he is precluded from deducting the foreign income taxes from his gross income.

An alien resident who derives income wholly from sources within the Philippines may not
deduct from gross income the income taxes he paid to his home country for the taxable year.

Moreover petitioners stress double taxation. What respondents fail to observe is that
double taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of
the same governmental entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579; Manuf.
Life Ins. Co. vs. Meer, 89 Phil. 357). In the present case, while the taxpayers would have to pay
two taxes on the same income, the Philippine government only receives the proceeds of one
tax. As between the Philippines, where the income was earned and where the taxpayer is
domiciled, and the United States, where that income was not earned and where the taxpayer
did not reside, it is indisputable that justice and equity demand that the tax on the income should
accrue to the benefit of the Philippines.

IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals are reversed, and,
the disallowance of the refunds claimed by the respondents Lednicky is affirmed, with costs
against said respondents-appellees.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,

respondents.

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

FACTS:

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. Since they had no Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB) , 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.

The Commissioner of Internal Revenue (CIR) assessed deficiency income taxes against BOAC
in which the latter protested.

ISSUE:

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.

RULING:

YES. 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

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.

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)

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.

G.R. No. 160756. March 9, 2010

Chamber of Real Estate and Builders Associations, Inc., vs. The Hon. Executive Secretary
Alberto Romulo, et al

FACTS:

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance
Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT)

on corporations and creditable withholding tax (CWT) on sales of real properties classified as

ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is

implemented by RR 9-98. Petitioner argues that the MCIT violates the due process clause

because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR

2-98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and

procedures for the collection of CWT on the sale of real properties categorized as ordinary

assets. Petitioner contends that these revenue regulations are contrary to law for two

reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital

assets and second, respondent Secretary of Finance has no authority to collect CWT, much

less, to base the CWT on the gross selling price or fair market value of the real properties

classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations

violate the due process clause because, like the MCIT, the government collects income tax

even when the net income has not yet been determined. They contravene the equal protection

clause as well because the CWT is being levied upon real estate enterprises but not on other

business enterprises, more particularly those in the manufacturing sector.

THEORY OF FAVORABLE BUSINESS CLIMATE

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the

Philippine taxation system. It came about as a result of the perceived inadequacy of the self-

assessment system in capturing the true income of corporations.[21] It was devised as a

relatively simple and effective revenue-raising instrument compared to the normal income tax

which is more difficult to control and enforce. It is a means to ensure that everyone will make

some minimum contribution to the support of the public sector. The congressional deliberations

on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain
corporations of reporting constantly a loss in their operations to avoid the
payment of taxes, and thus avoid sharing in the cost of government. In this
regard, the Tax Reform Act introduces for the first time a new concept called the
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the
country and for administrative convenience. This will go a long way in ensuring
that corporations will pay their just share in supporting our public life and our
economic advancement.[22]
 Domestic corporations owe their corporate existence and their privilege to do business

to the government. They also benefit from the efforts of the government to improve the

financial market and to ensure a favorable business climate. It is therefore fair for the

government to require them to make a reasonable contribution to the public expenses.

INCOME CONCEPT

Petitioner is correct in saying that income is distinct from capital. [44] Income means all the

wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund or

property existing at one distinct point in time while income denotes a flow of wealth during a

definite period of time.[45] Income is gain derived and severed from capital.[46] For income to be

taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from

taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not

income. In other words, it is income, not capital, which is subject to income tax. However, the

MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent

by a corporation in the sale of its goods, i.e., the cost of goods[48] and other direct expenses

from gross sales. Clearly, the capital is not being taxed.

Absent any other valid objection, the assignment of gross income, instead of net income,

as the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not

constitutionally objectionable.
CHARACTERISTIC OF TAXABLE INCOME

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law

because the MCIT is being imposed and collected even when there is actually a loss, or a zero

or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of
[MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero

or negative taxable income, merely defines the coverage of Section 27(E). This means that

even if a corporation incurs a net loss in its business operations or reports zero income after

deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent

with the law which imposes the MCIT on gross income notwithstanding the amount of the net

income. But the law also states that the MCIT is to be paid only if it is greater than the normal

net income. Obviously, it may well be the case that the MCIT would be less than the net income

of the corporation which posts a zero or negative taxable income.

EXPANDED WITHHOLDING TAX

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to

promulgate the necessary rules and regulations for the effective enforcement of the provisions

of the law. Such authority is subject to the limitation that the rules and regulations must not

override, but must remain consistent and in harmony with, the law they seek to apply and

implement.[64] It is well-settled that an administrative agency cannot amend an act of

Congress.[65]

We have long recognized that the method of withholding tax at source is a procedure of

collecting income tax which is sanctioned by our tax laws.[66] The withholding tax system 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 governments cash flow.[67] 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.[68]

Respondent Secretary has the authority to require the withholding of a tax on items of

income payable to any person, national or juridical, residing in the Philippines. Such authority is

derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may,

upon the recommendation of the [CIR], require the withholding of a
tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be
credited against the income tax liability of the taxpayer for the
taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given

by Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32%

range; the withholding tax is imposed on the income payable and the tax is creditable against

the income tax liability of the taxpayer for the taxable year.

When a party questions the constitutionality of an income tax measure, it has to contend

not only with Einsteins observation but also with the vast and well-established jurisprudence in

support of the plenary powers of Congress to impose taxes. Petitioner has miserably failed to

discharge its burden of convincing the Court that the imposition of MCIT and CWT is

unconstitutional.

WHEREFORE, the petition is hereby DISMISSED. Costs against petitioner.SO

ORDERED.
 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.

BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,

respondents.

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

FACTS:

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. Since they had no Certificate of public convenience and
necessity to operate in the Philippines by the Civil Aeronautics Board (CAB) , 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.

The Commissioner of Internal Revenue (CIR) assessed deficiency income taxes against BOAC
in which the latter protested

ISSUE:

Whether or not the revenue derived by BOAC from ticket sales in the Philippines for air
transportation, while having no landing rights in the Philippines, constitute income of BOAC from
Philippine sources, and accordingly, taxable.

RULING:

YES. 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.

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.