TAX Week 6 Digests

7/28/2019 TAX Week 6 Digests

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T A X A T I O N 1 L A F O R T E Z A W E E K 6 : d 2 0 1 4

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2. Sources of Tax Laws

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i. Revenue rules and regulations/Administrative rulings and opinion

MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., vs.

DEPARTMENT OF FINANCE SECRETARY, COMMISSIONER OF THE BUREAU OFINTERNAL REVENUE (BIR), AND REVENUE DISTRICT OFFICER, BIR MISAMIS

ORIENTAL,

(November 10, 1994)

DOCTRINE:As the government agency charged with the enforcement of the law, theopinion of the Commissioner of Internal Revenue, in the absence of any showing that it isplainly wrong, is entitled to great weight. Indeed, the ruling was made by theCommissioner of Internal Revenue in the exercise of his power under 245 of the NIRCto "make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of articles for sales tax and similar purposes ."

PONENTE:MENDOZA, J.

NATURE: Petition for prohibition and injunction seeking to nullify RevenueMemorandum Circular No. 47-91 and enjoin the collection by respondent revenueofficials of the Value Added Tax (VAT) on the sale of copra by members of petitionerorganization.

FACTS:

1. Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domesticcorporation whose members are engaged in the buying and selling of copra inMisamis Oriental.

2. The petitioner alleges that prior to the issuance of Revenue MemorandumCircular 47-91 on June 11, 1991, which implemented VAT Ruling 190-90, coprawas classified as agricultural food product under $ 103(b) of the NationalInternal Revenue Code and, therefore, exempt from VAT at all stages of production or distribution.

3. Respondents represent departments of the executive branch of government charged with the generation of funds and the assessment, levy and collection of taxes and other imposts.

4. The pertinent provision of the NIRC states:

Sec. 103. Exempt Transactions . The following shall be exempt fromthe value-added tax:

(a) Sale of nonfood agricultural, marine and forest products in theiroriginal state by the primary producer or the owner of the landwhere the same are produced;

(b) Sale or importation in their original state of agricultural andmarine food products, livestock and poultry of a kind generallyused as, or yielding or producing foods for human consumption,and breeding stock and genetic material therefor;

5. Under 103(a), as above quoted, the sale of agricultural non-food products intheir original state is exempt from VAT only if the sale is made by theprimary producer or owner of the land from which the same are produced.The sale made by any other person or entity, like a trader or dealer, is not exempt from the tax. On the other hand, under 103(b) the sale of agricultural food products in their original state is exempt from VAT at allstages of production or distribution regardless of who the seller is.

6. On June 11, 1991, respondent CIR issued the circular in question, classifyingcopra as an agricultural non-food product and declaring it "exempt from VATonly if the sale is made by the primary producer pursuant to Section 103(a)

7. The reclassification had the effect of denying to the petitioner the exemptionit previously enjoyed when copra was classified as an agricultural foodproduct under 103(b) of the NIRC.

8. Petitioner challenges RMC No. 47-91 on various grounds which are theissues in this case.

ISSUES:

W/N: The CIR is competent to classify Copra as an agricultural non food product? Yes

W/N: It was denied due process? No.

W/N: It is violative of the equal protection clause? No

W/N: It is counterproductive because traders and dealers would be forced to buycopra from coconut farmers who are exempt from the VAT and that to the extent that prices are reduced the government would lose revenues as the 10% tax base iscorrespondingly diminished.? No.

RATIO:

1. Petitioner contends that the Bureau of Food and Drug of the Department of Health and not the BIR is the competent government agency to determinethe proper classification of food products. Petitioner cites the opinion of Dr.Quintin Kintanar of the Bureau of Food and Drug to the effect that coprashould be considered "food" because it is produced from coconut which isfood and 80% of coconut products are edible.


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Respondents argue that the opinion of the BIR, as the government agencycharged with the implementation and interpretation of the tax laws, is entitledto great respect.

We agree with respondents. In interpreting 103(a) and (b) of the NIRC, theCommissioner of Internal Revenue gave it a strict construction consistent withthe rule that tax exemptions must be strictly construed against the taxpayerand liberally in favor of the state. Indeed, even Dr. Kintanar said that hisclassification of copra as food was based on "the broader definition of foodwhich includes agricultural commodities and other components used in themanufacture/processing of food."

Moreover, as the government agency charged with the enforcement of the law,the opinion of the Commissioner of Internal Revenue, in the absence of anyshowing that it is plainly wrong, is entitled to great weight. Indeed, the rulingwas made by the Commissioner of Internal Revenue in the exercise of hispower under 245 of the NIRC to "make rulings or opinions in connection withthe implementation of the provisions of internal revenue laws, including rulingson the classification of articles for sales tax and similar purposes ."

2. Second . Petitioner complains that it was denied due process because it was not

heard before the ruling was made. There is a distinction in administrative lawbetween legislative rules and interpretative rules. There would be force inpetitioner's argument if the circular in question were in the nature of alegislative rule. But it is not. It is a mere interpretative rule.

The reason for this distinction is that a legislative rule is in the nature of subordinate legislation, designed to implement a primary legislation byproviding the details thereof. In the same way that laws must have the benefit of public hearing, it is generally required that before a legislative rule isadopted there must be hearing. In this connection, the Administrative Code of 1987 provides:

Public Participation . If not otherwise required by law, an agencyshall, as far as practicable, publish or circulate notices of proposedrules and afford interested parties the opportunity to submit theirviews prior to the adoption of any rule.

(2) In the fixing of rates, no rule or final order shall be valid unless theproposed rates shall have been published in a newspaper of generalcirculation at least two (2) weeks before the first hearing thereon.

(3) In case of opposition, the rules on contested cases shall beobserved.

In addition such rule must be published. On the other hand, interpretative rules

are designed to provide guidelines to the law which the administrative agencyis in charge of enforcing.

Accordingly, in considering a legislative rule a court is free to make threeinquiries: (i) whether the rule is within the delegated authority of theadministrative agency; (ii) whether it is reasonable; and (iii) whether it wasissued pursuant to proper procedure. But the court is not free to substituteits judgment as to the desirability or wisdom of the rule for the legislativebody, by its delegation of administrative judgment, has committed thosequestions to administrative judgments and not to judicial judgments. In thecase of an interpretative rule, the inquiry is not into the validity but into thecorrectness 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 tothe rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)give some intermediate degree of authoritative weight to the interpretativerule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra as an "agricultural foodproduct" within the meaning of 103(b) of the NIRC. As the Solicitor Generalcontends, "copra per se is not food, that is, it is not intended for humanconsumption. Simply stated, nobody eats copra for food." That previousCommissioners considered it so, is not reason for holding that the present interpretation is wrong. The Commissioner of Internal Revenue is not boundby the ruling of his predecessors. To the contrary, the overruling of decisions

is inherent in the interpretation of laws.

3. Petitioner likewise claims that RMC No. 47-91 is discriminatory and violativeof the equal protection clause of the Constitution because while coconut farmers and copra producers are exempt, traders and dealers are not,although both sell copra in its original state. Petitioners add that oil millersdo not enjoy tax credit out of the VAT payment of traders and dealers.

The argument has no merit. There is a material or substantial differencebetween coconut farmers and copra producers, on the one hand, and copratraders and dealers, on the other. The former produce and sell copra, thelatter merely sell copra. The Constitution does not forbid the differentialtreatment of persons so long as there is a reasonable basis for classifyingthem differently. 8

It is not true that oil millers are exempt from VAT. Pursuant to 102 of theNIRC, they are subject to 10% VAT on the sale of services. Under 104 of theTax Code, they are allowed to credit the input tax on the sale of copra bytraders and dealers, but there is no tax credit if the sale is made directly bythe copra producer as the sale is VAT exempt. In the same manner, copratraders and dealers are allowed to credit the input tax on the sale of copra byother traders and dealers, but there is no tax credit if the sale is made by theproducer.

4. It is finally argued that RMC No. 47-91 is counterproductive because traders

and dealers would be forced to buy copra from coconut farmers who areexempt from the VAT and that to the extent that prices are reduced the


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government would lose revenues as the 10% tax base is correspondinglydiminished.

This is not so. The sale of agricultural non-food products is exempt from VATonly when made by the primary producer or owner of the land from which thesame is produced, but in the case of agricultural food products their sale intheir original state is exempt at all stages of production or distribution. At anyrate, the argument that the classification of copra as agricultural non-foodproduct is counterproductive is a question of wisdom or policy which should beaddressed to respondent officials and to Congress.

DISPOSITIVE: WHEREFORE, the petition is DISMISSED.

SO ORDERED.

VOTE: Narvasa, C.J., Regalado and Puno, JJ., concur.

-Jamie

i. Validity of revenue rules and regulations

TAN v. DEL ROSARIO(October 3, 1994)

DOCTRINE:The law(and then consequent revenue regulations) is understood, as it should be, as only forming part of, and subject to, the whole income tax concept andprecepts long obtaining under the National Internal Revenue Code

NATURE:Two consolidated special civil actions for prohibitionPONENTE:Vitug, J.

FACTS/HELD (for non-tax issues)

G.R. No. 109289Petitioners, claiming to be taxpayers adversely affected by the continued implementationof the amendatory legislations, seek a declaration of unconstitutionality of RA7496 (alsoknown as Simplified Net Income Taxation) due to violation of the followingconstitutional provision:

1. Article VI, Section 26(1) Every bill passed by the Congress shall embraceonly one subject which shall be expressed in the title thereof.

a. PET: They argue that it is a misnomer or, at least, deficient for beingmerely entitled, "Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged in the Practice of theirProfession" The amendatory law should be considered as having nowadopted a gross income, instead of as having still retained the net income, taxation scheme.

b. SC HELD: The allowance for deductible items may have significantlybeen reduced by the questioned law in comparison with prior law;limiting, however, allowable deductions from gross income isneither discordant with, nor opposed to, the net income taxconcept. Various deductions, which are by no meansinconsequential, continue to be well provided under the new law.The objectives of the constitution in preventing logrolling andsurprises to the legislator have been sufficiently met.

2. Article VI, Section 28(1) The rule of taxation shall be uniform andequitable. The Congress shall evolve a progressive system of taxation.

a. Republic Act No. 7496 desecrates the constitutional requirement that taxation "shall be uniform and equitable" in that the law wouldnow attempt to tax single proprietorships and professionalsdifferently from the manner it imposes the tax on corporations andpartnerships.

b. SC HELD: Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly situated, are to be treated alike both inprivileges and liabilities .

What may instead be perceived to be apparent from theamendatory law is the legislative intent to increasingly shift theincome tax system towards the schedular approach in the incometaxation of individual taxpayers and to maintain, by and large, thepresent global treatment on taxable corporations. We certainly donot view this classification to be arbitrary and inappropriate.

3. Article III, Section 1 No person shall be deprived of . . . property without due process of law, nor shall any person be denied the equal protection of the laws

a. PET: Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process, what he believes to be animbalance between the tax liabilities of those covered by theamendatory law and those who are not.

b. SC HELD: The discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation lies with the legislation. The courts can only strike it downwhen it is unconscionable and/or confiscatory. No suchtransgression is evident to us.

G.R. No. 109446The several propositions advanced by petitioners revolve around the question of whether or not public respondents have exceeded their authority in promulgatingSection 6, Revenue Regulations No. 2-93, to carry out Republic Act No. 7496.

a. PET: The real objection of petitioners is focused on the administrativeinterpretation of public respondents that would apply SNIT to partners ingeneral professional partnerships.


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The questioned regulation reads:

Sec. 6. General Professional Partnership The general professionalpartnership (GPP) and the partners comprising the GPP are covered by R. A. No.7496. Thus, in determining the net profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also,the expenses paid or incurred by partners in their individual capacities in thepractice of their profession which are not reimbursed or paid by the

partnership but are not considered as direct cost, are not deductible from hisgross income.

b. SC HELD: The Court, first of all, should like to correct the apparent misconception that general professional partnerships are subject to thepayment of income tax or that there is a difference in the tax treatment between individuals engaged in business or in the practice of their respectiveprofessions and partners in general professional partnerships. A generalprofessional partnership is not itself an income taxpayer. Income tax isimposed not on the partnership (which is tax exempt), but on the partnersthemselves in their individual capacity computed on their distributive shares of partnership profits.

There is no distinction in income tax liability between a person who practiceshis profession alone and one who does it through partnership with others inthe exercise of a common profession. In the case, SNIT is not envisioned by theCongress to cover corporations or partnerships which are independentlysubject to the payment of income tax.

Under the present income tax system, all individuals deriving income from anysource whatsoever are treated in almost invariably the same manner and undera common set of rules.

Although the general professional partnership is exempt from the payment of taxes (but it still has an obligation to file an income tax return mainly foradministration and data), the partners themselves are liable for the payment of income tax in their individual capacity computed on their respective anddistributive shares of profits.

There is, then and now, no distinction in income tax liability between a personwho practices his profession alone or individually and one who does it throughpartnership (whether registered or not) with others in the exercise of acommon profession. Indeed, outside of the gross compensation income tax andthe final tax on passive investment income, under the present income taxsystem all individuals deriving income from any source whatsoever are treatedin almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps wewere to consider Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation . The view can easily becomemyopic, however, when the law is understood, as it should be, as onlyforming part of, and subject to, the whole income tax concept and

precepts long obtaining under the National Internal Revenue Code. Toelaborate a little, the phrase "income taxpayers" is an all embracing termused in the Tax Code, and it practically covers all persons who derive taxableincome.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merelyconfirmed, the above standing rule as now so modified by Republic Act No. 7496 on basically the extent of allowable deductions applicable toall individual income taxpayers on their non-compensation income.

There is no evident intention of the law, either before or after theamendatory legislation, to place in an unequal footing or in significant variance the income tax treatment of professionals who practice theirrespective professions individually and of those who do it through ageneral professional partnership.

DISPOSITIVE:WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

VOTING:Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo,Quiason, Puno, Kapunan and Mendoza, JJ., concur. Padilla and Bidin, JJ., are on leave.

-Jenin

Commissioner of Internal Revenue v CA & Court of Tax Appeals

(Mar 10, 1995 | G.R. No. 104151)

DOCTRINE:The Court emphasizes in this case the oft-repeated rule that tax statutesare to receive a reasonable construction with a view to carrying out their purposesand intent. They should not be construed as to permit the taxpayer to easily evade thepayment of the tax. In this case: The allowance by the tax court of smelting and refiningcharges as deductions is not contrary to the particular provisions of the tax codewhich ostensibly prohibit any form of deduction except freight and insurance charges.On the ad valorem: An ad valorem tax is a tax not on the minerals, but upon theprivilege of severing or extracting the same from the earth, the government's right toexact the said impost springing from the Regalian theory of State ownership of itsnatural resources.

NATURE:Petition for review on certiorari filed by both parties.

PONENTE:Regalado, J.

FACTS:

Atlas Consolidated Mining and Development Corporation (herein also referred to asACMDC) is a domestic corporation which owns and operates a mining concession at Toledo City, Cebu, the products of which are exported to Japan and other foreigncountries. On April 9, 1980, the Commissioner of Internal Revenue (alsoCommissioner, for brevity), acting on the basis of the report of the examiners of theBureau of Internal Revenue (BIR), caused the service of an assessment notice anddemand for payment of the amount of P12,391,070.51 representing deficiency ad

valorem percentage and fixed taxes, including increments, for the taxable year 1975against ACMDC. Also, on the basis. of the BIR examiner's report in another


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investigation separately conducted, the Commissioner had another assessment notice,with a demand for payment of the amount of P13,531,466.80 representing the 1976deficiency ad valorem and business taxes with P5,000.00 compromise penalty, served onACMDC on September 23, 1980.

ACMDC protested both assessments but the. same were denied, hence it filed twoseparate petitions for review in the Court of Tax Appeals (also, tax court) where theywere docketed as C.T.A. Cases Nos. 3467 and 3825. These two cases, being substantiallyidentical in most respects except for the taxable periods and the amounts involved, wereeventually consolidated.

However, the tax court held ACMDC liable for the amount of P1,572,637.48, exclusive of interest, consisting of 25% surcharge for late payment of the ad valorem tax and latefiling of notice of removal of silver, gold and pyrite extracted during certain periods, andfor alleged deficiency manufacturer's sales tax and contractor's tax.

As a consequence, both parties elevated their respective contentions to respondent Court of Appeals in two separate petitions for review. The petition filed by the Commissioner,which was docketed as CA-G.R. SP No. 25945, questioned the portion of the judgment of the tax court deleting the ad valorem tax on copper and silver, while the appeal filed byACMDC and docketed as CA-G.R. SP No. 26087 assailed that part of the decision orderingit to pay P1,572,637.48 representing alleged deficiency assessment.

CIR: The actual market value of the mineral products should be the gross sales realized

from copper concentrates, deducting there from mining, milling, refining, transporting,handling, marketing or any other expenses.

ACMDC: The actual market value of the mineral products should be price which the same before or without undergoing a process of manufacture would command in theordinary course of business.

ISSUES/HELD:

WON cost of production should be deducted to the manufactured products price in thecalculation of ad valorem? Yes

WON ACMDC is liable for manufacturers tax? No

RATIO/RULING:

The relevant provisions of the NIRC are Sec. 243 and 246.Sec. 243. Ad valorem taxes on output of mineral lands not covered by lease. There ishereby imposed on the actual market value of the annual gross output of the mineralsmineral products extracted or produced from all mineral lands not covered by lease, anadvalorem tax in the amount of two per centum of the value of the output except goldwhich shall pay one and one-half per centum .

Before the minerals or mineral products are removed from the mines, the Commissionerof Internal Revenue or his representatives shall first be notified of such removal on aform prescribed for the purpose. (As amended by Rep. Act No. 6110.)

Sec. 246. Definitions of the terms "gross output," "minerals" and "mineral products." Disposition of royalties and ad valorem taxes. The term "gross output" shall be

interpreted as the actual market value of minerals or mineral products, or of bullionfrom each mine or mineral lands operated as a separate entity without any deduction

from mining, milling, refining, transporting, handling, marketing, or any otherexpenses: Provided, however , That if the minerals or mineral products are sold orconsigned. abroad by the lessee or owner of the mine under C.I.F. terms, the actualcost of ocean freight and insurance shall be deducted. The output of any group of contiguous mining claim shall not be subdivided. The word "minerals" shall mean allinorganic substances found in nature whether in solid, liquid, gaseous, or anyintermediate state. The term "mineral products" shall mean things produced by thelessee, concessionaire or owner of mineral lands, at least eighty per cent of whichthings must be minerals extracted by such lessee, concessionaire, or owner of mineral

lands. Ten per centum of the royalties and ad valorem taxes herein provided shallaccrue to the municipality and ten per centum to the province where the-mines aresituated, and eighty per centum to the National Treasury."

To rephrase, under the aforequoted provisions, the ad valorem tax of 2% is imposedon the actual market value of the annual gross output of the minerals or mineralproducts extracted or produced from all mineral lands not covered by lease. Incomputing the tax, the term "gross output" shall be the actual market value of minerals or mineral products, or of bullion from each mine or mineral lands operatedas a separate entity, without any deduction for mining, milling, refining, transporting,handling, marketing or any other expenses. If the minerals or mineral products aresold or consigned abroad by the lessee or owner of the mine under C.I.F. terms, theactual cost of ocean freight and insurance shall be deducted.

In other words, the assessment shall be based, not upon the cost of productionor extraction of said minerals or mineral products, but on the price which thesame before or without undergoing a process of manufacture wouldcommand in the ordinary course of business.

The allowance by the tax court of smelting and refining charges as deductions isnot contrary to the above-mentioned provisions of the tax code which ostensiblyprohibit any form of deduction except freight and insurance charges. Thecharges for smelting and refining were assessed not on the basis of the price of the copper extracted at the mine site which is prohibited by law, but on the basisof the actual market value of the manufactured copper which in this case is theprice quoted for copper wire bar by the London Metal Exchange.

AD VALOREM TAX

The issue of whether the ad valorem tax should be based upon the value of the finishedproduct, or the value upon extraction of the raw materials or minerals used in themanufacture of said finished products, has been passed upon by us in several caseswherein we held that the ad valorem tax is to be computed on the basis of the market value of the mineral in its condition at the time of such removal and before it undergoes a chemical change through manufacturing process, as distinguished from apurely physical process which does not necessarily involve the change ortransformation of the raw material into a composite distinct product.

An ad valorem tax is a tax not on the minerals, but upon the privilege of severingor extracting the same from the earth, the government's right to exact the saidimpost springing from the Regalian theory of State ownership of its naturalresources.

Therefore, the imposable ad valorem tax should be based on the selling price of thequarried minerals, which is its actual market value, and not on the price of the


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manufactured product. If the market value chosen for the reckoning is the value of themanufactured or finished product, as in the case at bar, then all expenses of processingor manufacturing should be deducted in order to approximate as closely as is humanlypossible the actual market value of the raw mineral at the mine site.

The Court based their decision on an old CTA case. They go on to stress that as a matterof practice and principle, the Supreme Court will not setaside the conclusion reached byan agency such as the Court of Tax Appeals, which is, by the very nature of its function,dedicated exclusively to the study and consideration of tax problems and has necessarilydeveloped an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part.

Manufacturers Tax

Sections 186 and 191 fall under Title V of the tax code, entitled "Privilege Taxes onBusiness and Occupation." These "privilege taxes on business" are taxes imposed uponthe privilege of engaging in business. They are essentially excise taxes.

"To engage" is to embark on a business or to employ oneself therein. The word"engaged" connotes more than a single act or a single transaction; it involves somecontinuity of action.

A manufacturer, in order to be subjected to the necessity of paying the percentage taximposed by Section 186 of the tax code, must be 'engaged' in the sale, barter or exchangeof; personal property. Under a statute which imposes a tax on persons engaged in thesale, barter or exchange of merchandise, a person must be occupied or employed in thesale, barter or exchange of personal property. A person can hardly be considered asoccupied or employed in the sale, barter or exchange of personal property when he hasmade one purchase and sale only.

In the case at bar, ACMDC claims exemptions from the payment of manufacturer's tax. It asserts that it is not engaged in the business of selling grinding steel balls, but it onlyproduces grinding steel balls solely for its own use or consumption, However, it admitshaving lent its grinding steel balls to other entities but only in very isolated cases.

After a careful review of the records and on the basis of the legal concept of "engaging inbusiness" hereinbefore discussed, we are inclined to agree with ACMDC that it shouldnot and cannot be held liable for the payment of the manufacturer's tax.

DISPOSITION:WHEREFORE, the impugned judgment of respondent Court of Appeals in CA-G.R. SP No.25945, subject of the present petition in G.R. No. 104151 is hereby AFFIRMED; and itsassailed judgment in CA-G.R SP No. 26087 is hereby MODIFIED by exempting AtlasConsolidated Mining and Development Corporation, petitioner in G.R. No. 105563 of thisCourt, from the payment of manufacturer's sales tax, surcharge and interest during thetaxable year 1975.

VOTE:2nd Division. Narvasa, C.J., Bidin, Puno and Mendoza, JJ., concur.

CONCURRING/DISSENTING OPINION:None

ADDITIONAL NOTES:Already discussed by Miggy during his last recit. Used his digest,modified a little bit.

-JP

PPC v. Municipality of Pililla, Rizal

Philippine Petroleum Corporation, petitioner, vs. Municipality of Pililla, Rizal,represented by Mayor Nicomedes Patenia, respondents.

(June 3, 1991)

NOTES: Kind of tax: tax on business; storage fees, mayors permit and sanitary inspection

fee.

DOCTRINE:Well-settled is the rule that administrative regulations must be inharmony with the provisions of the law. In case of discrepancy between the basic lawand an implementing rule or regulation, the former prevails.

NATURE:petition for certiorari seeking to annul and set aside: (a) the March 17, 1989decision of the Regional Trial Court, Branch 80, Tanay, Rizal in Civil Case No. 057-Tupholding the legality of the taxes, fees and charges being imposed in Pililla underMunicipal Tax Ordinance No. 1 and directing the herein petitioner to pay the amount of said taxes, fees and charges due the respondent: and (b) the November 2, 1989resolution of the same court denying petitioner's motion for reconsideration of thesaid decision.

PONENTE:Paras

FACTS:1. 1. Petitioner, Philippine Petroleum Corporation (PPC for short) is a businessenterprise engaged in the manufacture of lubricated oil basestock which is apetroleum product, with its refinery plant situated at Malaya, Pililla, Rizal, conductingits business activities within the territorial jurisdiction of the Municipality of Pililla,Rizal.

2. Under Section 142 of the National Internal Revenue Code of 1939, manufacturedoils and other fuels are subject to specific tax.

3. Later, Presidential Decree No. 231, otherwise known as the Local Tax Code wasissued by former President Ferdinand E. Marcos governing the exercise by provinces,cities, municipalities and barrios of their taxing and other revenue-raising powers.Sections 19 and 19 (a) thereof, provide among others, that the municipality may impose taxes on business , except on those for which fixed taxes are provided onmanufacturers, importers or producers of any article of commerce of whatever kind or nature , including brewers, distillers, rectifiers, repackers, and compounders of liquors,distilled spirits and/or wines in accordance with the schedule listed therein.

4. The Secretary of Finance issued a Circular directed to all provincial, city andmunicipal treasurers to refrain from collecting any local tax imposed in old or new taxordinances in the business of manufacturing, wholesaling, retailing, or dealing inpetroleum products subject to the specific tax under the National Internal RevenueCode.

5. Likewise, another Circular was issued by the Secretary of Finance instructing all CityTreasurers to refrain from collecting any local tax imposed in tax ordinances enactedbefore or after the effectivity of the Local Tax Code on the businesses of


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manufacturing , wholesaling, retailing, or dealing in, petroleum products subject to thespecific tax under the National Internal Revenue Code.

6. Meanwhile, Respondent Municipality of Pililla enacted Municipal Tax Ordinance No. 1otherwise known as "The Pililla Tax Code of 1974". Sections 9 and 10 of the saidordinance imposed a tax on business, except for those for which fixed taxes are providedin the Local Tax Code.

7. P.D . 436 was promulgated increasing the specific tax on lubricating oils, gasoline,bunker fuel oil, diesel fuel oil and other similar petroleum products levied under Sections

142, 144 and 145 of the National Internal Revenue Code, as amended, and grantingprovinces, cities and municipalities certain shares in the specific tax on such products inlieu of local taxes imposed on petroleum products .

8. Provincial Circular No. 6-77 was also issued directing all city and municipal treasurersto refrain from collecting the so-called storage fee on flammable or combustiblematerials imposed under the local tax ordinance of their respective locality, said feepartaking of the nature of a strictly revenue measure or service charge.

9. P.D. 1158 otherwise known as the National Internal Revenue Code of 1977 wasenacted, Section 153 of which specifically imposes specific tax on refined andmanufactured mineral oils and motor fuels.

10. Enforcing the provisions of the above-mentioned ordinance, the respondent filed acomplaint on April 4, 1986 docketed as Civil Case No. 057-T against PPC for thecollection of the business tax from 1979 to 1986; storage permit fees from 1975 to 1986;mayor's permit and sanitary inspection fees from 1975 to 1984. PPC, however, havealready paid the last-named fees starting 1985 ( Rollo, p. 74).

11. The trial court rendered a decision against the petitioner. Hence, the instant petition.

Issue:Whether petitioner PPC whose oil products are subject to specific tax under the NIRC, isstill liable to pay (a) tax on business and (b) storage fees, considering Provincial CircularNo. 6-77; and mayor's permit and sanitary inspection fee unto the respondent Municipality of Pililla, Rizal, based on Municipal Ordinance No. 1.

Held/Ruling:Yes to tax on business (except those which have prescribed); No to storage fees and yesto both permit and sanitary inspection fees.

Petitioner PPC contends that: (a) Provincial Circular No. 2673 declared as contrary tonational economic policy the imposition of local taxes on the manufacture of petroleumproducts as they are already subject to specific tax under the National Internal RevenueCode; (b) the above declaration covers not only old tax ordinances but new ones, as wellas those which may be enacted in the future; (c) both Provincial Circulars (PC) 26-73 and26 A-73 are still effective, hence, unless and until revoked, any effort on the part of therespondent to collect the suspended tax on business from the petitioner would be illegaland unauthorized; and (d) Section 2 of P.D. 436 prohibits the imposition of local taxes onpetroleum products.

Court:There is no question that Pililla's Municipal Tax Ordinance No. 1 imposing the assailedtaxes, fees and charges is valid as it conforms with the mandate of law.

But P.D. No. 426 amending the Local Tax Code is deemed to have repealed ProvincialCirculars issued by the Secretary of Finance when Sections 19 and 19 (a), were carriedover into P.D. No. 426 and no exemptions were given to manufacturers, wholesalers,retailers, or dealers in petroleum products.Well-settled is the rule that administrative regulations must be in harmony withthe provisions of the law. In case of discrepancy between the basic law and animplementing rule or regulation, the former prevails.Furthermore, while Section 2 of P.D. 436 prohibits the imposition of local taxes onpetroleum products, said decree did not amend Sections 19 and 19 (a) of P.D. 231 as

amended by P.D. 426, wherein the municipality is granted the right to levy taxes onbusiness of manufacturers, importers, producers of any article of commerce of whatever kind or nature. A tax on business is distinct from a tax on the article itself.Thus, if the imposition of tax on business of manufacturers, etc. in petroleum productscontravenes a declared national policy, it should have been expressly stated in P.D. No.436.The exercise by local governments of the power to tax is ordained by the present Constitution. To allow the continuous effectivity of the prohibition set forth in PC No.26-73 (1) would be tantamount to restricting their power to tax by mereadministrative issuances. Under Section 5, Article X of the 1987 Constitution, onlyguidelines and limitations that may be established by Congress can define and limit such power of local governments.Thus: Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitationsas the Congress may provide, consistent with the basic policy of local autonomy . . .Provincial Circular No. 6-77 enjoining all city and municipal treasurers to refrain fromcollecting the so-called storage fee on flammable or combustible materials imposed inthe local tax ordinance of their respective locality frees petitioner PPC from thepayment of storage permit fee.The storage permit fee being imposed by Pililla's tax ordinance is a fee for theinstallation and keeping in storage of any flammable, combustible or explosivesubstances. Inasmuch as said storage makes use of tanks owned not by themunicipality of Pililla, but by petitioner PPC, same is obviously not a charge for anyservice rendered by the municipality as what is envisioned in Section 37 of the sameCode.Section 10 (z) (13) of Pililla's Municipal Tax Ordinance No. 1 prescribing a permit feeis a permit fee allowed under Section 36 of the amended Code.As to the authority of the mayor to waive payment of the mayor's permit and sanitaryinspection fees, the trial court did not err in holding that "since the power to taxincludes the power to exempt thereof which is essentially a legislative prerogative, it follows that a municipal mayor who is an executive officer may not unilaterallywithdraw such an expression of a policy thru the enactment of a tax." The waiverpartakes of the nature of an exemption. It is an ancient rule that exemptions fromtaxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Tax exemptions are looked upon with disfavor. Thus, in theabsence of a clear and express exemption from the payment of said fees, the waivercannot be recognized. As already stated, it is the law-making body, and not anexecutive like the mayor, who can make an exemption. Under Section 36 of the Code, apermit fee like the mayor's permit, shall be required before any individual or juridicalentity shall engage in any business or occupation under the provisions of the Code.However, since the Local Tax Code does not provide the prescriptive period forcollection of local taxes, Article 1143 of the Civil Code applies. Said law provides that


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an action upon an obligation created by law prescribes within ten (10) years from thetime the right of action accrues. The Municipality of Pililla can therefore enforce thecollection of the tax on business of petitioner PPC due from 1976 to 1986, and NOT thetax that had accrued prior to 1976.

DISPOSITION:with the MODIFICATION that business taxes accruing PRIOR to 1976 arenot to be paid by PPC (because the same have prescribed) and that storage fees are not also to be paid by PPC (for the storage tanks are owned by PPC and not by themunicipality, and therefore cannot be a charge for service by the municipality), the

assailed DECISION is hereby AFFIRMED.VOTE:Second Division , Melencio-Herrera, Padilla and Regalado, JJ., concur.

- Ann (for Raffy)

UMALI vs. ESTANISLAOMay 29, 1992

DOCTRINE:(Not stated in the case, but inferred from how the court decided- caveat lector, guys)1. Revenue rules and regulations cannot contradict or go against the law it seeks toimplement.

2. When the law itself is clear with regard to its application, the courts noradministrative agencies should not interpret the law in a manner contrary to what thelaw provides.

NATURE:Consolidated case seeking for the application of RA 7167 regarding income taxexceptionsPONENTE:Padilla, J

FACTS: Congress enacted RA 7167, AN ACT ADJUSTING THE BASIC PERSONAL AND

ADDITIONAL EXEMPTIONS ALLOWABLE TO INDIVIDUALS FOR INCOME TAXPURPOSES TO THE POVERTY THRESHOLD LEVEL

o Provided income tax exceptions: for single individual or married individual judicially decreed as

legally separated with no qualified dependents: P9,000 For head of a family: P12,000 For married individual: P18,000

Provided, That husband and wife electing to computetheir income tax separately shall be entitled to apersonal exemption of P9,000 each.

A married individual or a head of family shall be allowed anadditional exemption of P5,000;

o The said Act was signed and approved by the President on 19 December1991 and published on 14 January 1992 in "Malaya"; a newspaper of general circulation.

On 26 December 1991, respondents promulgated Revenue Regulations No. 1-92,which provide that those seeking to obtain exceptions in RA 7167, are allowed to

claim the following amount of exemption with respect to compensation paid onor after January 1, 1992.

Petitioners now seek:o to compel the Commissioner of Internal Revenue to implement the

mandate of Rep. Act 7167 adjusting the personal and additionalexemptions allowable to individuals for income tax purposes in regardto income earned or received in 1991, and

o to enjoin the respondents from implementing Revenue Regulations No.1-92;

ISSUES:1. When did Rep. Act 7167 take effect; upon its approval by the President on 19December 1991 or on 30 January 1992, after fifteen [15] days following its publicationon 14 January 1992 in the "Malaya" newspaper? After 15 days from publication,January 30, 1992.

2. [RELEVANT] Does the said law covers or applies to compensation income earned orreceived during calendar year 1991. YES.

RATIO:1. In the case of Tanada vs. Tuvera we construed Article 2 of the Civil Code and laiddown the rule:

The clause "unless it is otherwise provided" refers to the date of effectivityand not to the requirement of publication itself, which cannot in any event beomitted. This clause does not mean that the legislator may make the laweffective immediately upon approval, or on any other date without itsprevious publication.

Publication is indispensable in every case, but the legislature may in itsdiscretion provide that the usual fifteen-day period shall be shortened orextended.

2. A perusal of the sponsorship r emarks of Congressman Hernando B. Perez, Chairmanof the House Committee on Ways and Means, on House Bill 28970, provides anindication of the intent of Congress in enacting Rep. Act 7167.

The Bill provides for increased personal additional exemptions to individualsin view of the higher standard of living. It also limits the amount of income of individuals subject to income tax to enable them to spend for basicnecessities and have more disposable income.

Inflation has raised the basic necessities and that it had been three yearssince the last exemption adjustment in 1986.

INTENT OF THE LAW The Court can not lose sight of the fact that these personal and additional

exemptions are fixed amounts to which an individual taxpayer is entitled, asa means to cushion the devastating effects of high prices and a depreciatedpurchasing power of the currency.

In the end, it is the lower-income and the middle-income groups of taxpayers[not the high-income taxpayers] who stand to benefit most from the increaseof personal and additional exemptions provided for by Rep. Act 7167.


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To that extent, the Act is a social legislation intended to alleviate in part thepresent economic plight of the lower income taxpayers. It is intended toremedy the inadequacy of the heretofore existing personal and additionalexemptions for individual taxpayers.

EFFECTIVITY OF THE LAW Rep. Act 7167 says that the increased personal exemptions that it

provides for shall be available thenceforth, that is, after Rep. Act 7167shall have become effective.

o The increased exemptions are thus literally available upon the filing of personal income tax returns which is, under the National InternalRevenue Code, done not later than the 15th day of April.

o DOES NOT APPLY TO 1990 TAX:The personal exemptions asincreased by Rep. Act 7167 cannot be regarded as available in respect of compensation income received during the 1990 calendar year; thetax due in respect of said income had already accrued.

To make Rep. Act 7167 refer back to income receivedduring 1990 would require language explicitlyretroactive in purport and effect

APPLIES TO TAX 1991 AND ONWARD [RELEVANT] The exceptions do not limit themselves to the years 1992 and onward, but also

apply to the taxes imposed in 1991. o The implementing regulations collide frontally with Section 3 of Rep. Act 7167 which states that the statute "shall take effect uponits approval."

o To construe otherwise would result in Revenue Regulation No. 1-92postponing the availability of the increased exemptions to 1 January-15 April 1993, and thus, literally defer the effectivity of Rep. Act 7167to 1 January 1993.

The objective of the Secretary of Finance and theCommissioner of Internal Revenue in postponing throughRevenue Regulations No. 1-92,the legal effectivity of Rep. Act 7167 is entirely understandable (loss of tax revenue)

HOWEVER, the law-making authority has spoken andthe Court cannot refuse to apply the lawmaker's words.

DISPOSITIVE:Sections 1, 3 and 5 of Revenue Regulations No. 1-92 which provide that the regulationsshall take effect on compensation income earned or received from 1 January 1992 arehereby set aside. They should take effect on compensation income earned orreceived from 1 January 1991.

The individual taxpayers entitled to the increased exemptions on compensation incomeearned during calendar year 1991 who may have filed their income tax returns on orbefore 15 April 1992 [later extended to 24 April 1992] without the benefit of suchincreased exemptions, are entitled to the corresponding tax refunds and/or credits .

-Ice

LA SUERTE V CTA(Jan 17, 1985)

Facts: Commissioner of Internal Revenue issued Memorandum Circular No. 30-

67 requiring the inspection of:o all locally produced leaf tobacco and partially manufactured

tobacco intended for domestic sale, for factory use or for export;o all manufactured products of tobacco contemplated in Sec. 194(m)

of the Tax Code intended for domestic sale; ando all imported foreign leaf tobacco and partially manufacturedtobacco for domestic sale or factory use, and the collection of thecorresponding inspection fees.

Petitioners in two separate cases, sought the refund of the aforementionedinspection fees collected from them CTA Case No. 2031 was submitted bypetitioners for summary judgment. In a decision dated November 28, 1970,CTA denied the claim for the refund.

Petitioners moved for a reconsideration thereby praying that in case of adenial, CTA Case No. 2031 be reopened for the reception of evidence insupport of their argument that there was no inspection made by the BIR

The CTA granted petitioners' motion to reopen but denied the motion forreconsideration. Said court likewise ordered that CTA Cases Nos. 2048 and

2031 be heard jointly. After hearing, the CTA on December 15, 1972 denied both claims.

Issues/ Held:WON the amendatory portions in Sec 6(c), Act 2613, include cigars andcigarettes for domestic sale or consumption. Yes

WON RMC 30-67 is a valid regulation issued by the Sec of Financenotwithstanding its non-publication in the Official Gazette. Yes.

Ratio: Section 6(c) of Act 2613 (Tobacco Inspection Law), before its amendment by

Republic Act No. 3 1, provides:Sec. 6. The Commissioner of Internal Revenue shall have the power

and it shall be his duty: ...xxx xxx xxx(c) To require, whenever it shall be deemed expedient, theinspection of and affixture of inspection labels to tobacco removedfrom the province before such removal or to tobacco for domesticsale or factory use.

As amended, (by RA 31) said Section 6, Republic Act No. 31 (October 1,1946) now reads:

Sec. 6. The Commissioner of Internal Revenue shall have the powerand it shall be his duty:xxx xxx xxx(c) To require, whenever it shall be deemed expedient, theinspection of and affixture of inspection labels to tobacco removedfrom province of its origin to another or other provinces before


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such removal or to tobacco for domestic sale or factory use.(Emphasis supplied)

The amendatory bill (House Bill No. 735) which later on became Republic Act No. 31, carried the following explanatory note:

Section 1 of the attached bill seeks to extend this regulatory power of the Collector of Internal Revenue to leaf tobacco intended for factoryuse.

Prior to the amendment of said Act, Sec. 6 and 7 thereof, already covered theinspection of leaf tobacco, partially manufactured tobacco or local sale and leaf

tobacco and its products for export. If the intention of Congress was to apply the amendment to those items alreadycovered by Act 2613, then the word "leaf" should have been easily included tomodify the term "tobacco".

The omission of the word "leaf" is a clear indication that Congress intended toinclude within the purview of the law a new item; namely, manufacturedtobacco products for domestic sale and imported tobacco for factory use.

when General Circular No. V-27 dated October 29, 1946 was issued by thenCollector of Internal Revenue Bibiano L. Meer to implement the provisions of Sections 6, 7 and 14 of Act 2613 (Tobacco Inspection Law), the word "leaf" waserroneously included therein, causing damage to the financial stability of theGovernment as the inspection fees due on cigars and cigarettes for domesticsale and imported leaf and partially manufactured tobacco for factory use were

not collected for more than twenty (20) years. Such error was only discovered when an Assistant Chief of the TobaccoInspection Service of the BIR appeared in a public hearing of the Joint Legislative-Executive Tax Commission.

As a result thereof, the Philippine Tobacco Board, a policy making body of theNational Government on Tobacco Authority, adopted Resolution No. 2-67interpreting the phrase "tobacco for domestic sale" as referring to wholesaledisposal of tobacco products by cigar and cigarettes factories to its dealerswhile the phrase "tobacco for factory use" meant "imported leaf tobacco"intended for use by cigar and cigarette factories in the manufacture of tobaccoproducts.

The approval of this Resolution on May 31, 1967 prompted respondent Commissioner to promulgate Memorandum Circular No. 30-67 which was

approved by then Secretary of Finance Eduardo Z. Romualdez and theeffectivity of which is specifically dated September 1, 1967 and not contingent on its publication in the Official Gazette.

Thus, the assailed Revenue Memorandum Circular was issued to rectify theerror in General Circular No. V-27 and to interpret the phrase "tobacco fordomestic sale or factory use" with the view of arresting huge losses of tobaccoinspection fees which were not collected since the said Circular (No. V-27.

Furthermore, the questioned Revenue Memorandum Circular was also issuedto apprise those concerned of the construction and interpretation which shouldbe accorded to Act No. 2613, as amended, and which respondent is duty boundto enforce. It is an opinion on how the law should be construed and there wasno attempt whatsoever to enlarge or restrict the meaning of the law.

Since it was further admitted by petitioners that said Memorandum is but a

"Memorandum Circular for purposes of the internal administration of the BIRand not a regulation within the contemplation of Sections 4 and 338 of the NIRC

and Section 79(b) of the Revised Administrative Code", said circular needsno publication in the Official Gazette

When an administrative agency renders an opinion by means of a circular orMemorandum, it merely interprets a pre-existing law, and no publication isnecessary for its validity. Construction by an executive branch of government of a particular law although not binding upon courts must be given weight asthe construction come from the branch of the government called upon toimplement the law.

The promulgation of Revenue Memorandum Circular No. 30-67 being in

accordance with the Revised Administrative Code, having been issued by theCommissioner of Internal Revenue with the approval of the Secretary (nowMinister) of Finance for the implementation of the Tobacco Inspection Law,has therefore the force and effect of law.

It is within the power and duty of the Commissioner to collect the same, evenwithout inspection, should tobacco products be removed clandestinely orsurreptitiously from the establishment of the wholesaler, manufacturer orredrying plant and from the customs custody in case of imported leaf tobacco

From the testimonies of other witnesses for petitioners, it was shown that revenue agents and tobacco inspectors "saw to it that an raw materials foruse in the manufacture of the finished products were duly recorded; and inthe process of manufacture, all tobacco products found unfit for sales weresegregated by the factory employees thru the supervision of the revenue

agents." The CTA held that the foregoing belie petitioners' assertions that no actualinspection was conducted to justify the collection of the tobacco inspectionfees. The findings of the Tax Court are duly supported by evidence. We findno cogent reason to disturb the same. They are therefore binding on thisCourt.

-Ivan

Commissioner of Internal Revenue vs Seagate Technology Philippines(11 February 2005)

Ponente : Panganiban, J . (THANK ALL THAT IS HOLY AND MIGHTY that this guy is the

ponente of the friggin case. Haaaaaay.) Nature : Petition for review on certiorari of a decision of the Court of Appeals

DOCTRINE: ON VALIDITY OF REVENUE RULES AND REGULATIONSThe contemporaneous construction of our tax laws by BIR authorities who arecalled upon to execute or administer such laws will have to be adopted.

The BIR regulations additionally requiring an approved prior applicationfor effective zero rating cannot prevail over the clear VAT nature of respondents transactions. The scope of such regulations is not within thestatutory authority x x x granted by the legislature.

1. A mere administrative issuance, like a BIR regulation, cannot amend

the law; the former cannot purport to do any more than interpret the


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latter . The courts will not countenance one that overrides the statute it seeksto apply and implement.

Other than the general registration of a taxpayer the VAT status of whichis aptly determined, no provision under our VAT law requires anadditional application to be made for such taxpayers transactions to beconsidered effectively zero-rated. An effectively zero-rated transactiondoes not and cannot become exempt simply because an application thereforwas not made or, if made, was denied. To allow the additional requirement isto give unfettered discretion to those officials or agents who, without fluidconsideration, are bent on denying a valid application. Moreover, the State cannever be estopped by the omissions, mistakes or errors of its officials oragents.

2. Grantia argumenti that such an application is required by law, there is stillthe presumption of regularity in the performance of official duty .Respondents registration carries with it the presumption that, in the absenceof contradictory evidence, an application for effective zero rating was also filedand approval thereof given. Besides , it is also presumed that the law hasbeen obeyed by both the administrative officials and the applicant.

3. Even though such an application was not made , all the special laws we havetackled exempt respondent not only from internal revenue laws but alsofrom the regulations issued pursuant thereto. Leniency in theimplementation of the VAT in ecozones is an imperative, precisely to spureconomic growth in the country and attain global competitiveness asenvisioned in those laws.

FACTS: Seagate Technology Philippines is a resident foreign corporation duly

registered with SEC to do business in the Philippines. Principal office address:Cebu Township One, Special Economic Zone , Brgy Cantao-an, Naga, Cebu.

Seagate is registered on 6 June 1997 with the Phil Export Zone Authority(PEZA) to engage in manufacture of recording components used in computersfor export

Seagate is a VAT-registered entity; it filed its VAT returns for the period of 1Apr 1998 to 30 June 1999

04 October 1999 Seagate filed an administrative claim for refund of VAT input taxes but it received no final action from the CIR regarding the claim forrefund

CIRs defences: o Seagates claim is subject to administrative routinary investigation; o Seagate has burden of proof that the taxes sought to be refunded were

erroneously/illegally collected;o It is incumbent upon Seagate to prove that it is indeed entitled to the

refund/credit sought. Failure on the part of the [respondent] to provethe same is fatal to its claim for tax credit. He who claims exemptionmust be able to justify his claim by the clearest grant of organic orstatutory law. An exemption from the common burden cannot bepermitted to exist upon vague implications;

o Granting, without admitting, that Seagate is a Philippine EconomicZone Authority (PEZA) registered Ecozone Enterprise , then its

business is not subject to VAT pursuant to Section 24 of RepublicAct No. ([RA]) 7916 in relation to Section 103 of the Tax Code, asamended. As Seagates business is not subject to VAT, the capitalgoods and services it alleged to have purchased are considerednot used in VAT taxable business . Seagate is not entitled torefund of input taxes on such capital goods pursuant to Section4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxeson services pursuant to Section 4.103 of said regulations.

o Seagate must also show that they complied with provisions on filing

a written claim for refund within two years from the payment of the tax, CA ruled to grant the claim for refund/issuance of tax credit certificate

(TCC). Such amount represented the unutilized but substantiated input VATpaid on capital goods purchased for the specified period.-Reasoning of the CA: Seagate availed itself of ONLY the incentives underEO 226, and not of PD 66 and RA 7916. Company is, therefore, consideredexempt only from the payment of income tax when it opted for theincome tax holiday in lieu of the 5 percent preferential tax on grossincome earned . As a VAT-registered entity, though, it was still subject tothe payment of other national internal revenue taxes, like the VAT. Seagatealso correctly filed its administrative claim for refund/TCC.

ISSUE/S:(As submitted by the petitioner) WoN Seagate is entitled to the refund or issuance of Tax Credit Certificate for the alleged unutilized input VAT paid on capital goodspurchased for the period April 1, 1998 to June 30, 1999.

HELD:YES, SEAGATE is entitled to the refund/issuance of Tax Credit Certificate.

As a PEZA-registered enterprise within a special economic zone (aka ECOZONE, aselected area with highly-developed or which has the potential to be developed into,agro-industrial, industrial, tourist-recreational, commercial, banking, investment andfinancial centers. RA 7916, The Special Economic Zone Act of 1995.), respondent isentitled to the fiscal incentives and benefits provided for by EITHER PD 66 (lawcreating the Export Processing Zone Authority- EPZA) or EO 226 (OmnibusInvestments Code).

It shall also enjoy all the privileges, benefits, advantages, or exemptions under RA7227 (Bases Conversion and Development Act of 1992) and RA 7844 (Export Development Act of 1994).

RATIO:Preferential Tax Treatment Under Special Laws

If Seagate avails itself of:

PD 66 Seagate shall not be subject to internal revenue laws and regulations forraw materials, supplies, articles, equipment, machineries, spare parts and wares,except those prohibited by law, brought into the zone to be stored, broken up,repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,manipulated, manufactured, mixed or used directly or indirectly in such activities.


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It shall enjoy a net-operating loss carry over; accelerated depreciation; foreign exchangeand financial assistance; and exemption from export taxes, local taxes, and licenses.

EO 226 Seagate shall be exempt from same internal revenue laws and regulations.Under this law, Seagate shall further be entitled to an income tax holiday; additionaldeduction for labor expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing warehouse system; privilegesfor foreign nationals employed; tax credits on domestic capital equipment, as well as for

taxes and duties on raw materials; and exemption from contractors taxes, wharfagedues, taxes and duties on imported capital equipment and spare parts, export taxes,duties, imposts and fees, local taxes and licenses, and real property taxes.

It can be seen from the following laws that Seagate (respondent) enjoys preferential taxtreatment. It is not subject to internal revenue laws and regulations, and is even entitledto tax credits.

Nature of VAT and the Tax Credit Method

VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied onevery importation of goods, whether or not in the course of trade or business, orimposed on each sale, barter, exchange or lease of goods or properties or on eachrendition of services in the course of trade or business as they pass along the productionand distribution chain, the tax being limited only to the value added to such goods,properties or services by the seller, transferor or lessor.

It is an indirect tax that may be shifted or passed on to the buyer, transfereeor lessee of the goods, properties or services .

It should be understood not in the context of the person or entity that isprimarily, directly and legally liable for its payment, but in terms of its nature as atax on consumption. In either case, though, the same conclusion is arrived at.

Under the present method that relies on invoices, an entity can credit against orsubtract from the VAT charged on its sales or outputs the VAT paid on itspurchases , inputs and imports.

If at the end of a taxable quarter the OUTPUT taxes (charged by the seller) areequal to thw INPUT taxes (passed on by suppliers), NO PAYMENT IS REQUIRED.

BUT when the OUTPUT taxes EXCEED the INPUT taxes , the excess has to be paid.

If the INPUT taxes exceed the output taxes, the excess shall be carried over tothe succeeding quarter/s.

If the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods , any excess over the output taxes shallinstead be refunded to the taxpayer or credited against other internal revenue taxes .

Zero-Rated vs Effectively Zero-Rated TransactionsDifference between ZERO-RATED TRANSACTIONS and EFFECTIVELY ZERO-RATEDTRANSACTIONS:SOURCE.

Zero-rated transactions : refer generally to EXPORT SALE of goods and supply of service . Tax rate is set at zero, which when applied to the tax base, obviously re sultingin no tax chargeable against the purchaser. The seller charges NO OUTPUT TAX, but can claim a refund of/a tax credit certificate for the VAT previously charged bysuppliers.

Effectively zero-rated transactions : sale of goods/supply of services to persons orentities whose exemption under special laws/international agreements towhich the Philippines is a signatory effectively subjects such transactions to a

zero rate . As applied to a tax base, the rate does not yield any tax chargeable against the purchaser. The seller who charges ZERO OUTPUT TAX on such transactions canalso claim a refund of/ a tax credit certificate for the VAT previously charged bysuppliers.

Zero Rating and ExemptionFor VAT computation, zero rating and exemption are the same but the EXTENT of RELIEF is not the same.

Applying the destination principle (that goods and services are taxed only in thecountry where these are CONSUMED. Exports are zero-rated but imports are taxed) tothe exportation of goods:

Automatic zero-rating Effective zero-rating-intended to be enjoyed by the seller who is directly and legally liable for theVAT-makes the seller internationallycompetitive by allowing therefund/credit of input taxes attributableto export sales

-benefits the purchaser who is not directly and legally liable for the payment of VAT but will ultimately bear theburden of tax shifted by the suppliers

For both instances of zero -rating: TOTAL RELIEF for the purchaser from the burden of tax.

For exemption: PARTIAL RELIEF only, because the purchaser is not allowed any taxrefund/credit for input taxes paid.

Exempt Transaction vs Exempt Party Object of exemption from VAT: either the TRANSACTION itself or the PARTIES to thetransaction

Exempt Transaction Exempt Party/Entity-involves goods or services which, bytheir nature, are specifically listed asexpressly exempted from VAT in the TaxCode-this is without regard to the tax status of the party to the transaction-transaction is not subject to VAT but theseller is not allowed any taxrefund/credit for any input taxes paid

-person/entity granted VAT exemptionunder the Tax Code, a special law, orinternational agreement to which thePhilippines is a signatory, and by virtue of which its taxable transactions becomeexempt from VAT.-such party is also not subject to VAT, but may be allowed refund/credit, dependingon its registration as a VAT or non-VATtaxpayer


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VAT is a tax on consumption. While the LIABILITY is imposed on one person, theBURDEN may be passed on to another. If a special law exempts a party as seller from itsdirect LIABILITY for VAT but does not relieve the same party as a PURCHASER from itsINDIRECT burden of VAT as shifted by its VAT-registered suppliers, the PURCHASETRANSACTION ISNOT EXEMPT. Applied to this case, the purchase transactions enteredinto by Seagate are NOT exempt.

Special laws may exempt certain transactions from VAT but the Tax Code provides that

those under PD 66 are not. Purchase transactions entered into are not VAT-exempt.These are not subject to VAT; Seagate is required to register.

Sales transactions: zero-rated/taxed under 10%, depending on application of destinationprinciple.

Since purchases of Seagate are not exempt from VAT, rate applied is zero. Its exemptionunder PD 66 and RA 7916 subjects transactions to zero rate, since the ecozone withinwhich it is registered is managed by PEZA as a SEPARATE CUSTOMS TERRITORY (thereis a legal fiction of foreign territory).

Under the cross-border principle (which is not clearly defined by any law oradministrative issuance SO I REALLY DONT UNDERSTAND WHY THE COURT USEDTHIS), no VAT shall be imposed to form part of the cost of goods destined forconsumption outside of the territorial border of the taxing authority.

If exports of goods and services from the Philippines to a foreign country are free of theVAT, then the same rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone.

Sales made by a VAT-registered person in the customs territory to a PEZA-registeredentity are considered exports to a foreign country. Sales by a PEZA-registered entity toa VAT-registered person in the customs territory are deemed imports from a foreigncountry.

Ecozone is considered foreign soil. If respondent is located in an export processing zonewithin that ecozone, sales to the export processing zone, even without being actuallyexported, shall in fact be viewed as constructively exported under EO 226. Considered asexport sales, such purchase transactions by respondent would indeed be subject to azero rate.

Tax Exemptions: Broad and ExpressApplying the special laws mentioned, Seagate is an exempt entity from internal revenuelaws and regulations. Such exemption covers BOTH INDIRECT and DIRECT taxes,stemming from the nature of VAT as a tax on consumption, for which liability is imposedon one but the burden is passed on to another.

More proof of express exemption of Seagate from taxes:1. RA 7916 states that no taxes, local and national, shall be imposed on business

establishments operating within the ecozone. Law does not exclude VAT fromprohibition so it is deemed included.

2. RA 7846 amended RA 7916, same prohibition applied except real propertytaxes.

3. PD 66 provides for same prohibition. This exemption puts the govt at aninitial disadvantage but the reduced tax collection redounds to the nationaleconomy by enticing business investments and creating more jobopportunities

4. Rules implementing the PEZA reiterate that merchandise shall not be subject to internal revenue laws and regulations

5. Export processing zone enterprises registered patently enjoy exemptionfrom national internal revenue taxes on imported capital equipment needed

6. RA 7227: exemptions from local and national taxes are ipso facto accorded to

ecozones7. RA 7844; Tax credits granted by this law shall be continuously enjoyed byexporters within the ecozone.

Tax Refund as Tax ExemptionTax exemptions are construed strictissimi juris against the taxpayer and liberally infavour of the taxing authority.

Tax refunds are in the nature of such exemptions. The claimants of such refunds bearthe burden of proving the factual basis of their claims. In this case, all the cited legalprovisions CLEARLY grant tax exemptions to Seagate.

Seagate is an exempt entity, but its transactions are not exempt. The end result,though, is the same: IT IS NOT SUBJECT TO VAT.

1. The contemporaneous construction of our tax laws by BIR authoritieswho are called upon to execute or administer such laws will have to beadopted. Their prior tax issuances have held inconsistent positionsbrought about by their probable failure to comprehend and fullyappreciate the nature of the VAT as a tax on consumption and theapplication of the destination principle.

Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly andcorrectly provides that any VAT- registered suppliers sale of goods,property or services from the customs territory to any registeredenterprise operating in the ecozone -- regardless of the class or type of thelatters PEZA registration -- is legally entitled to a zero rate .

2. Policies of the law should prevail. PD 66, RA 7916, RA 8748, EO 226, RA 7227 3. RA 7844: The State is able to drive home the point that exporting is indeed

the key to national survival and the means through which the economic goalsof increased employment and enhanced incomes can most expeditiously beachieved.

VAT Registration, Not Application, for Effective Zero-rating,Indispensable to VAT Refund

(NOTE: LOOK AT THIS PART CLOSELY BECAUSE THIS IS THE PART RELATEDTO THE TOPIC ON PUR SYLLABUS. YES, AFTER ALL THE VAT SHIZZZZ, ITO LANGTALAGA.)

The BIR regulations additionally requiring an approved prior applicationfor effective zero rating cannot prevail over the clear VAT nature of


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respondents transactions. The scope of such regulations is not within the statutoryauthority x x x granted by the legislature.

1. A mere administrative issuance, like a BIR regulation, cannot amend thelaw; the former cannot purport to do any more than interpret thelatter . The courts will not countenance one that overrides the statute it seeksto apply and implement.

Other than the general registration of a taxpayer the VAT status of whichis aptly determined, no provision under our VAT law requires anadditional application to be made for such taxpayers transactions to beconsidered effectively zero-rated. An effectively zero-rated transactiondoes not and cannot become exempt simply because an application thereforwas not made or, if made, was denied. To allow the additional requirement isto give unfettered discretion to those officials or agents who, without fluidconsideration, are bent on denying a valid application. Moreover, the State cannever be estopped by the omissions, mistakes or errors of its officials oragents.

2. Grantia argumenti that such an application is required by law, there is stillthe presumption of regularity in the performance of official duty .Respondents registration carries with it the presumption that, in the absenceof contradictory evidence, an application for effective zero rating was also filedand approval thereof given. Besides , it is also presumed that the law hasbeen obeyed by both the administrative officials and the applicant.

3. Even though such an application was not made , all the special laws we havetackled exempt respondent not only from internal revenue laws but alsofrom the regulations issued pursuant thereto. Leniency in theimplementation of the VAT in ecozones is an imperative, precisely to spureconomic growth in the country and attain global competitiveness asenvisioned in those laws.

A VAT-registered status, as well as compliance with the invoicing requirements, issufficient for the effective zero rating of the transactions of a taxpayer. The nature of itsbusiness and transactions can easily be perused from, as already clearly indicatedin, its VAT registration papers and photocopied documents attached

thereto. Hence, its transactions cannot be exempted by its mere failure to apply fortheir effective zero rating. Otherwise, their VAT exemption would be determined, not bytheir nature, but by the taxpayers negligence -- a result not at allcontemplated. Administrative convenience cannot thwart legislative mandate.

Tax Refund or Credit in Order Seagates purchase transactions are subject to a zero VAT rate; tax refund/credit is inorder. It opted for the income tax holiday regime instead of the 5% preferential taxregime.

The VAT is a tax imposed on consumption, not on business. Although respondent as anentity is exempt, the transactions it enters into are not necessarily so. The VATpayments made in excess of the zero rate that is imposable may certainly be refunded orcredited.

Compliance with all the requisites for VAT Refund or Credit

Seagate complied with all the requisites of claiming a VAT refund/credit.1. Seagate is a VAT registered entity.2. Input taxes paid on capital goods of Seagate are duly supported by VAT

invoices and have not been offset against any input taxes.3. There is not question as to either the filing of such claims within the

prescriptive period/validity of the VAT returns have been raised. The taxexemption under all special laws mentioned is broad enough to cover eventhe enforcement of internal revenue laws.

There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but also to grant them taxcredits.

Dispositive : WHEREFORE, the Petition is DENIED and the Decision is AFFIRMED. Nopronouncement as to costs.

Concurring/Dissenting Opinions : None.

Vote : Sandoval-Gutierrez, Corona, Carpio-Morales, Garcia, JJ. , concur.

Additional Notes : Sorry for the length of the digest. Sabi nga ng Aerosmith, I dont wanna miss a thing. (haha that hurt to type, SORRY NAAAA)

-Kriszanne

3. Interpretation/Construction of Tax Laws

Hilado v. CIREmilio Hilado, petitioner, vs. Collector of Internal Revenue and the Court of Tax

Appeals, respondents.(October 31, 1956)

NOTES: Kind of tax: income tax

DOCTRINE:It is well known that our internal revenue laws are not political in nature

and as such were continued in force during the period of enemy occupation and ineffect were actually enforced by the occupation government. As a matter of fact,income tax returns were filed during that period and income tax payment wereeffected and considered valid and legal. Such tax laws are deemed to be the laws of theoccupied territory and not o f the occupying enemy.

NATURE:Appeal from CTA decision disallowing deduction

PONENTE:Bautista Angelo

FACTS:1. On March 31, 1952, Petitioner filed his income tax return for 1951 with treasurer

of Bacolod City wherein he claimed P12,837.65 as a deductible item from hisgross income pursuant to General Circular No. V-123 issued by the Collector of Internal Revenue.


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2. This circular was issued pursuant to certain rules laid down by the Secretary of Finance. On the basis of said return, an assessment notice demanding payment of P9,419 was sent to Hilado, who paid the tax in monthly installments, last installment being paid on January 2, 1953.

3. Meanwhile on Aug 2, 1952, Sec of Finance, through Collector of Internal Revenue,issued Gen. Circular No. V-139 which not only revoked and declared void theprevious circular but laid down the rule that losses of property which occurredduring World War II from fires, storms, shipwreck or other casualty, or fromrobbery, theft or embezzlement are deductible in the year of actual loss or

destruction of property.4. As a result, amount of P12,837.65 was disallowed as deduction from gross income of Hilado for 1951, and the Collector demanded from him the payment of P3,546 asdeficiency income tax for said year.

5. Hilado filed MR which was denied. He file a petition for review with CTA whichaffirmed the assessment of Collector of Internal Revenue. Hence this appeal.

Petitioners contentions (Note that the numbers in the ruling correspond to Courtsanswers to Petitioners contentions):

1. He claimed in his 1951 income tax return the deduction of the sum of P12,837.65 as aloss consisting in a portion of his war damage claim which had been duly approved bythe Philippine War Damage Commission under the Philippine Rehabilitation Act of 1946but which was not paid and never has been paid pursuant to a notice served upon him bysaid Commission that said part of his claim will not be paid until the United StatesCongress should make further appropriation. He claims that said amount of P12,837.65represents a business asset within the meaning of said Act which he is entitled todeduct as a loss in his return for 1951.

2. during the last war and as a consequence of enemy occupation in the Philippinesthere was no taxable year within the meaning of our internal revenue laws becauseduring that period they were unenforceable, is without merit.

3. Only courts may pass upon validity of laws so Sec. of Finance had no authority torevoke V-123.

4. Gen. Circular V-139 cannot be given retroactive effect.

Issues: WON his claimed deduction was proper?

Held: No. This claim is untenable.

1. To begin with, assuming that said amount represents a portion of the 75% of his wardamage claim which was not paid, the same would not be deductible as a loss in 1951because, according to Hilado, the last installment he received from the War DamageCommission (WDC), together with the notice that no further payment would be made onhis claim, was in 1950. In the circumstance, said amount would at most be a properdeduction from his 1950 gross income.

In the second place, said amount cannot be considered as a business as set which can bededucted as a loss in contemplation of law because its collection is not enforceable as amatter of right, but is dependent merely upon the generosity and magnanimity of the U.S. government. Note that, as of the end of 1945, there was absolutely no law under which Hilado could claim compensation for the destruction of his properties during the battlefor the liberation of the Philippines. And under the Philippine Rehabilitation Act of 1946,the payments of claims by the WDC merely depended upon its discretion to be exercised

in the manner it may see fit, but the non-payment of which cannot give rise to anyenforceable right, for, under said Act, All findings of the Commission concerning theamount of loss or damage sustained, the cause of such loss or damage, the persons towhom compensation pursuant to this title is payable, and the value of the propertylost or damaged, shall be conclusive and shall not be reviewable by any court.(section 113).

Its true Sec. of Finance issued Gen. Cir cular No. V-123 under which P12.837.65 wasallowed to be deducted in the year the last installment was received with notice that no further payment would be made until the US Congress makes further appropriationtherefor but it was later found to be wron g so was revoked. Upon advice of Sec. of Justice who opined that while property owners might argue that they have not initiallyincluded the losses as deductions in the year they were incurred because there wasthe Act wherein WDC will compensate their losses, such argument cannot be givenweight because the Act was actually passed much later after the war and so theproperty owners neither expected the compensation nor failed to file their losses asdeduction because of this legislation. Because of this, Secretary of Finance issued V-139 which not only revoked V-123 but also laid down the rule that losses of propertywhich occurred during World War II from fires, storms, etc. are deductible for incometax purposes in the year of actual loss.

We can hardly argue against this opinion. Since we have already stated that theamount claimed does not represent a business asset that may be deducted as a lossin 1951, it is clear that the loss of the corresponding asset or property could only bededucted in the year it was actually sustained. This is in line with section 30 (d) of theNational Internal Revenue Code which prescribes that losses sustained are allowableas deduction only within the corresponding taxable year.

2. As to Hilados contention that during the last war and as a consequence of enemy occupation in the Philippines there was no taxable year within themeaning of our internal revenue laws because during that period they wereunenforceable, it is without merit. It is well known that our internal revenuelaws are not political in nature and as such were continued in force during theperiod of enemy occupation and in effect were actually enforced by theoccupation government. As a matter of fact, income tax returns were filedduring that period and income tax payment were effected and considered validand legal. Such tax laws are deemed to be the laws of the occupied territory and

not of the occupying enemy. Furthermore, it is a legal maxim, that excepting that of a political nature, Lawonce established continues until changed by some competent legislative power.It is not changed merely by change of sovereignty. As the same author says, inhis Treatise on the Conflict of Laws, There can be no break or interregnun inlaw. From the time the law comes into existence with the first-felt corporatenessof a primitive people it must last until the final disappearance of human society.Once created, it persists until a change takes place, and when changed it continues in such changed condition until the next change and so forever.Conquest or colonization is impotent to bring law to an end; inspite of change of constitution, the law continues unchanged until the new sovereign by legislativeact creates a change. (Co Kim Chan vs. Valdes Tan Keh and Dizo n)

3. It cannot be denied that the Secretary of Finance is vested with authority to revoke,repeal or abrogate the acts or previous rulings of his predecessor in office because the


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construction of a statute by those administering it is not binding on their successors if thereafter the latter become satisfied that a different construction should be given.

When the Commissioner determined in 1937 that the Petitioner was not exempt andnever had been, it was his duty to determine, assess and collect the tax due for all yearsnot barred by the statutes of limitation. The conclusion reached and announced by hispredecessor in 1924 was not binding upon him. It did not exempt the Petitioner from tax.

4. With reg

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