4 Taxation Law Justice Del Castillo Digests

DE LA SALLE UNIVERSITY COLLEGE OF LAW Lasallian Commission on Bar Operations 2018

TAXATION LAW Justice Del Castillo Castillo Digests

Chel Sy LCBO Chairperson Nico Garcia LCBO Vice Chair for Internals Steph Griar LCBO Vice Chair for Externals Pat Costales LCBO Executive Secretary Ces Naga LCBO Executive Treasurer

Tet Valeza Academic Affairs Chairperson

Lourd Manataring Miguel Ocampo Taxation Law Chairpersons

Janine Tutanes Rod Zantua Academic Affairs Deputy Chairpersons

Clark Otocan Taxation Law Deputy Chairperon Lara Pioquinto Tax I Subject Head Kristine Magsanay Tax II Subject Head

Tazation Law

Justice Del Castillo Digests

GENERAL PRINCIPLES OF TAXATION BIR v. MANILA HOME TEXTILE, INC., THELMA LEE AND SAMUEL LEE G.R. No. 203057 | 6 June 2016 Construction and Interpretation of Tax Exemptions and Exclusions DOCTRINE: Taxation is the rule and tax exemption the exception. Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be misunderstood. FACTS: A tax evasion and perjury case were filed by the BIR against respondents Manila Home Textile, Inc. (MHI), its President Thelma Lee, and VP Samuel Lee, with having violated Secs. 254, 255, 257, and 267 of the NIRC. Investigation of the MHI's importations documents revealed that for the taxable years 2001 and 2002, it made several importations of PVC (or polyvinyl chloride) materials, woven fabrics, PVC leather and other raw materials used in the manufacture of its end-products. On Jan. 14, 2005 BIR issued a LOA to MHI advising it that BIR agents had been authorized to examine its books of accounts and other accounting records for all internal revenue taxes for taxable years 1997-2002 and unverified prior years. Several attempts to serve the LOA were made by the BIR. It’s alleged that MHI understated its importations and/or purchases which information is contrary to the data provided by the BIR’s amended information covering MHI’s Importers Detailed Report. Thus, in conclusion, it’s alleged that "MHI, through its corporate officers, directors and/or employees, willfully under-declared the amount of its purchases and/or importations for taxable, years 2001 and 2002 by as much as P428,408,634 and P554,802,368, respectively. This underdeclaration resulted in estimated Deficiency Income Taxes in the amount of P43,716,161,84 for taxable year 2001, and P34,561,975,40 for taxable year 2002, both inclusive of interests and increments. Thelma and Samuel allegedly argued that MHI, in the year 2001 and 2002, merely received various consignments of raw materials worth P431,764,487 and P555,778, 491, respectively, imported taxfree. These were processed at its customs bonded warehouse and eventually re-exported as finished handbags or unused materials. MHI did not declare as purchases the foregoing importations of raw materials because it did not buy them. It processed them into finished products for its foreign customers. The rest it returned as excess raw materials. Investigating prosecutor dismisses the informations. DOJ dismissed BIR’s appeal. CA affirms. •

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ISSUE: Whether or not the CA erred in dismissing the BIR’s certiorari petition. HELD: Yes, CA’s ruling is reversed and set aside. DOJ’s resolution revoked and nullified. Prosecutor is directed to file the appropriate informations. In the course of this inquiry, data gathered by BIR from certified copies of MHI’s ITR, the VAT, and other returns indicated that MHI might have understated its purchases/importations for the years 2001 and 2002. MHI declared in its audited financial statements purchases/importations to the tune of P976,123 for 2002 and P3,355,853 for 2001. In contrast, data from the BIR showed that MHI’s importations and/or purchases were P555,778,491 for 2002, and P431,764,487 for 2001, which indicates that the MHI and its President, Thelma and VP Samuel, deliberately understated the amounts of importations and/or purchases by as much as £428,408,634 for 2001, and P554,802,368 for 2002. This explains why MHI and its responsible corporate officers are being charged with violations of Secs 254, 255, 257 and 267 vis-a-vis Secs 52(A), 105 and 114(A) of the NIRC. •

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BIR has clearly made out a prima facie case or shown probable cause to indict respondents for tax evasion under the pertinent sections of the NTRC. The annexes appended to the records of this case, Annexes "A" to "M", submitted in support of BIR's affidavit-complaint do already provide viable support to its plea for the indictment of the said respondents for tax evasion. In contrast, respondents' argument is the untenable claim of "consignment" with an alleged taxfree guaranty. They have not produced even a slip of paper purporting to prove that the raw materials valued at hundreds of millions of pesos were delivered to them on "consignment." It must be borne in mind that tax exemptions, which respondents obviously want or desire to avail of in this case, are strictissimi juris. Taxation is the rule and tax exemption the exception. Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be misunderstood. This case is only a determination of probable cause to file such informations.

COMMISSIONER OF INTERNAL REVENUE v. ST. LUKE’S MEDICAL CENTER G.R. No. 203514 | 13 February 2017 Exemptions from Taxation DOCTRINE: For an institution to be completely exempt from income tax, it is required that the institution should operate exclusively for charitable or social welfare purpose. In case such institution earns income from its for-profit activities, it will not lose its tax exemption. However, its income from for profit activities will be subject to income tax at the preferential 10% rate pursuant to Sec. 27(B) of the NIRC. FACTS: The respondent received from the Large Taxpayers Service-Documents Processing and Quality Assurance Division of the Bureau of Internal Revenue (BIR) an audit ass essment assessing for deficiency income tax under Section 27 (B) of the NIRC. The respondent filed with petitioner an administrative protest assailing the ass essments and claimed that as a nonstick, nonprofit charitable and social welfare organization under Section 30 (E) and (G) of the NIRC, it is exempt from paying income tax. However, the same was denied by the petitioner. Aggrieved, the respondent elevated the matter to the Court of Tax Appeals (CTA) and rendered a decision finding that the respondent is not liable for deficiency income tax since it is exempt from paying such. The CTA En Banc affirmed the cancellation and setting aside of the audit assessment issued against the respondent. •

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ISSUE: Whether or not the respondent is liable to pay income tax under Section 27 (B) of the NIRC insofar as its revenues from paying patients are concerned HELD: Yes, the respondent is subject to 10% income tax insofar as its revenues from paying patients are concerned. The respondent failed to meet the requirements under Section 30(E) and (G) of the NlRC to be completely tax exempt from all its income. However, it remains a proprietary nonprofit hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary nonprofit hospital, is entitled to the preferential tax rate of 10% on its net income from its forprofit activities. To be clear, for an institution to be completely exempt from income tax, Section 30(E) and (G) of the 1997 NIRC requires said institution to operate exclusively for charitable or social welfare •

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purpose. But in case an exempt institution under Section 30(E) or (G) of the said Code earns income from its for-profit activities, it will not lose its tax exemption. However, its income from for profit activities will be subject to income tax at the preferential 10% rate pursuant to Section 27(B) thereof.

ISSUE: Whether or not the respondent is liable to pay compromise penalty under Section 248 (A) of the NIRC for the alleged failure to file its quarterly income tax returns HELD: No, the imposition of surcharges and interest under Sections 248 and 249 of the NIRC were deleted on the basis of good faith and honest belief on the part of the respondent that it is not subject to tax. Thus, following the ruling of the Court in the case of CIR v. SLMC (G.R Nos. 195909 and 195960), the respondent is not liable to pay compromise penalty under Section 248(A) of the NIRC.

NATIONAL TAXATION CIR v. SM PRIME HOLDINGS G.R. No. 183505 | 26 February 2010 Value – Added Tax DOCTRINE: Legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT. FACTS:

Respondents SM Prime Holdings and First Asia Realty Dev’t Corporation are domestic corporations engaged in the business of operating cinema houses. This case involves 4 cases of protests against the Preliminary Assessment Notice (PAN) issued by the BIR against SM Prime Holdings and First Asia Realty Development Corporation. The PAN was issued for the collection of VAT deficiencies. In all cases, the Commissioner of Internal Revenue denied the protest filed by the respondents. CIR stated in its decision that the business of operating of cinema houses is subject to VAT. o All of the cases were appealed to the Court of Tax Appeals. SM filed a motion to consolidate all cases because it stated that it is also a majority shareholder of First Asia Realty. CTA division ruled in favor of the respondents and stated that “ the activity of showing cinematographic films is not a service covered by the NIRC, but an activity subject to amusement tax under the Local Government Code.” CTA en banc affirmed CTA division. On appeal, the petitioner CIR raised the ff. arguments That the list provided by law is not exhaustive because it covers all sales of services unless exempted o by law. o CTA erred in ruling because the provisions are clear and unambiguous. On appeal, the respondent raised the ff. arguments: o That a plain reading of Sec. 108 provides that gross receipts of operators of cinemas and theaters derived from public admission are not among the services subject to VAT. ISSUE: Whether or not the gross receipts of cinema houses is subject to Value Added Tax (VAT). •

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HELD: No, They are subject to amusement tax under the Local Government Code. Historical facts: •

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Historically, the activity of showing motion pictures, films or movies by cinema/theater operators or proprietors has always been considered as a form of entertainment subject to amusement tax. 2. Prior to the Local Tax Code, all forms of amusement tax were imposed by the national government. 3. When the Local Tax Code was enacted, amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements were transferred to the local government. 4. Under the NIRC of 1977, the national government imposed amusement tax only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race tracks. 5. The VAT law was enacted to replace the tax on original and subsequent sales tax and percentage tax on certain services. 6. When the VAT law was implemented, it exempted persons subject to amusement tax under the NIRC from the coverage of VAT. 7. When the Local Tax Code was repealed by the LGC of 1991, the local government continued to impose amusement tax on admission tickets from theaters, cinematographs, concert halls, circuses and other places of amusements 8. Amendments to the VAT law have been consistent in exempting persons subject to amusement tax under the NIRC from the coverage of VAT. 9. Only lessors or distributors of cinematographic films are included in the coverage of VAT. The historical antecedents of the laws reveal the legislative intent not to impose VAT on persons already covered by the amusement tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely because the VAT law was intended to replace the percentage tax on certain services. The mere fact that they are taxed by the local government unit and not by the national government is immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater operators or proprietor from admission tickets to the local government, did not intend to treat cinema/theater houses as a separate class. No distinction must, therefore, be made between the places of amusement taxed by the national government and those taxed by the local government. To hold otherwise would impose an unreasonable burden on cinema/theater houses operators or proprietors, who would be paying an additional 10% VAT on top of the 30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law must be rejected if it will operate unjustly or lead to absurd results. Thus, we are convinced that the legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT.

ISSUE: Whether or not the enumeration of subject services in Sec. 108 of the NIRC is exclusive. HELD: No, they are not exclusive. A cursory reading of the foregoing provision clearly shows that the enumeration of the "sale or exchange of services" subject to VAT is not exhaustive. The words, "including," "similar services," and "shall likewise include," indicate that the enumeration is by way of example only. Among those included in the enumeration is the "lease of motion picture films, films, tapes and discs." This, however, is not the same as the showing or exhibition of motion pictures or films. As pointed out by the CTA En Banc: "Exhibition" in Black's Law Dictionary is defined as "To show or display. x x x To produce anything in public so that it may be taken into possession" (6th ed., p. 573). While the word "lease" is defined as "a contract by which one owning such property grants to another the right to possess, use and enjoy it on specified period of time in •

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exchange for periodic payment of a stipulated price, referred to as rent (Black's Law Dictionary, 6th ed., p. 889). Since the activity of showing motion pictures, films or movies by cinema/ theater operators or proprietors is not included in the enumeration, it is incumbent upon the court to the determine whether such activity falls under the phrase "similar services." The intent of the legislature must therefore be ascertained.

J.R.A PHILIPPINES, INC. v. CIR G.R. No. 177127 |11 October 2010 Value – Added Tax DOCTRINE: The absence of the word "zero-rated" on the invoices/receipts is fatal to a claim for credit/refund of input VAT FACTS: •

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Petitioner J.R.A. Philippines, Inc., a domestic corporation, is engaged in the manufacture and wholesale export of jackets, pants, trousers, overalls, shirts, polo shirts, ladies' wear, dresses and other wearing apparel It is registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer and as an Ecozone Export Enterprise with the Philippine Economic Zone Authority (PEZA). On separate dates, petitioner filed with the Revenue District Office (RDO) No. 54 of the BIR, Trece Martires City, applications for tax credit/refund of unutilized input VAT on its zerorated sales for the taxable quarters of 2000 in the total amount of P8,228,276.34. The claim for credit/refund, however, remained unacted by the respondent. Hence, petitioner was constrained to file a petition before the CTA. On April 16, 2002, petitioner filed a Petition for Review with the CTA for the refund/credit of the same input VAT. o CIR contended the ff. in its answer: Petitioner's alleged claim for refund is subject to administrative routinary investigation/examination by the Bureau. Being allegedly registered with the Philippine Economic Zone Authority as an export enterprise, petitioner's business is not subject to VAT pursuant to Section 24 of R.A. No. 7916 in relation to Section 109 (q) of the Tax Code. Hence, it is not entitled to tax credit of input taxes pursuant to Section 4.103-1 of Revenue Regulations No. 7-95. The amount of P8,228,276.34 being claimed by petitioner as alleged unutilized VAT input taxes for the year 2000 was not properly documented. In an action for refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to [do so] is fatal to the claim for refund/ credit. Petitioner must show that it has complied with the provisions of Section 204 (c) and 229 of the Tax Code on the prescriptive period for claiming tax refund/credit. Claims for refund are construed strictly against the claimant for the same partake the nature of exemption from taxation. ▪

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CTA division denied the petition. MR also denied. CTA en banc affirmed division’s ruling

ISSUE: Whether the failure to print the word "zero-rated" on the invoices/receipts is fatal to a claim for credit/ refund of input VAT on zero-rated sales.

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HELD: Yes, the absence of the word "zero-rated" on the invoices/receipts is fatal to a claim for credit/refund of input VAT. This was resolved in Panasonic Communications Imaging Corporation of the Philippines (formerly Matsushita Business Machine Corporation of the Philippines) v. Commissioner of Internal Revenue where the Court said that the denial of petitioner's claim for tax credit/refund for non-compliance with Sec. 4.108-1 of R.R. No. 7-95, which requires the word "zero rated" to be printed on the invoices/receipts covering zero-rated sales. Zero-rated transactions generally refer to the export sale of goods and services. The tax rate in this case is set at zero. When applied to the tax base or the selling price of the goods or services sold, such zero rate results in no tax chargeable against the foreign buyer or customer. But, although the seller in such transactions charges no output tax, he can claim a refund of the VAT that his suppliers charged him. The seller thus enjoys automatic zero rating, which allows him to recover the input taxes he paid relating to the export sales, making him internationally competitive. Petitioner Panasonic points out that Secs. 113 and 237 did not require the inclusion of the word "zero-rated" for zero-rated sales covered by its receipts or invoices. The BIR incorporated this requirement only after the enactment of R.A. 9337 on Nov. 1, 2005, a law that did not yet exist at the time it issued its invoices. But when petitioner Panasonic made the export sales subject of this case, i.e., from April 1998 to March 1999, the rule that applied was Sec. 4.108-1 of RR 7-95, otherwise known as the Consolidated Value-Added Tax Regulations, which the Secretary of Finance issued on Dec. 9, 1995 and which took effect on January 1, 1996. It already required the printing of the word "zero-rated" on the invoices covering zero-rated sales. When R.A. 9337 amended the 1997 NIRC on November 1, 2005, it made this particular revenue regulation a part of the tax code. Sec. 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of Finance under Section 245 of the 1977 NIRC (P. D. 1158) for the efficient enforcement of the Tax code and its amendments. The requirement is reasonable and is in accord with the efficient collection of VAT from the covered sales of goods and services. As explained by the CTA's First Division, the appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent such word, a successful claim for input VAT is made, the government would be refunding money it did not collect. Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to 10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the proper invoices, petitioner Panasonic has been unable to substantiate its claim for refund. Consistent with jurisprudence, petitioner's claim for credit/ refund of input VAT for the taxable quarters of 2000 must be denied. Failure to print the word "zero-rated" on the invoices/receipts is fatal to a claim for credit/ refund of input VAT on zero-rated sales. •

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FORT BONIFACTIO DEV’T CORP. v. CIR G.R. No. 173425 | 4 September 2012 Value – Added Tax DOCTRINE: Prior payment of taxes is not required for a taxpayer to avail of the 8% transitional input tax credit FACTS: Petitioner Fort Bonifacio Development Corporation (FBDC) is a duly registered domestic corporation engaged in the development and sale of real property. On February 8, 1995, by virtue of RA 7227 and Executive Order No. 40, dated December 8, 1992, •

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petitioner purchased from the national government a portion of the Fort Bonifacio reservation, now known as the Fort Bonifacio Global City (Global City). On January 1, 1996, RA 7716 restructured the Value-Added Tax (VAT) system by amending certain provisions of the old National Internal Revenue Code (NIRC). RA 7716 extended the coverage of VAT to real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business. On September 19, 1996, petitioner submitted to the Bureau of Internal Revenue (BIR) Revenue District No. 44, Taguig and Pateros, an inventory of all its real properties, the book value of which aggregated P71,227,503,200.10 Based on this value, petitioner claimed that it is entitled to a transitional input tax credit of P5,698,200,256, pursuant to Section 105 of the old NIRC. In October 1996, petitioner started selling Global City lots to interested buyers. For the first quarter of 1997, petitioner generated a total amount of P3,685,356,539.50 from its sales and lease of lots, on which the output VAT payable was P368,535,653.95. Petitioner paid the output VAT by making cash payments to the BIR totalling P359,652,009.47 and crediting its unutilized input tax credit on purchases of goods and services of P8,883,644.48. Realizing that its transitional input tax credit was not applied in computing its output VAT for the first quarter of 1997, petitioner on November 17, 1998 filed with the BIR a claim for refund of the amount of P359,652,009.47 erroneously paid as output VAT for the said period. On February 24, 1999, due to the inaction of the respondent Commissioner of Internal Revenue (CIR), petitioner elevated the matter to the Court of Tax Appeals (CTA) via a Petition for Review. On October 12, 2000, the CTA denied petitioner’s claim for refund. o According to the CTA, “the benefit of transitional input tax credit comes with the condition that business taxes should have been paid first.” o In this case, since petitioner acquired the Global City property under a VAT-free sale transaction, it cannot avail of the transitional input tax credit. The CTA likewise pointed out that under Revenue Regulations No. (RR) 7-95, o implementing Section 105 of the old NIRC, the 8% transitional input tax credit should be based on the value of the improvements on land such as buildings, roads, drainage system and other similar structures, constructed on or after January 1, 1998, and not on the book value of the real property.

ISSUE: Whether or not petitioner is entitled to a refund of P359,652,009.47 erroneously paid as output VAT for the first quarter of 1997. HELD: Yes, it is entitled. Prior payment of taxes is not required for a taxpayer to avail of the 8% transitional input tax credit Section 105 of the old NIRC reads: SEC. 105. Transitional input tax credits. – A person who becomes liable to value-added tax o or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory as prescribed by regulations, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to 8% of the value of such inventory or the actual value- added tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable against the output tax. Contrary to the view of the CTA and the CA, there is nothing in the above- quoted provision to indicate that prior payment of taxes is necessary for the availment of the 8% transitional input tax credit. Obviously, all that is required is for the taxpayer to file a beginning inventory with the BIR. Clearly, limiting the value of the beginning inventory only to goods, materials, and supplies, where prior taxes were paid, was not the intention of the law. Otherwise, it would have specifically stated that the beginning inventory excludes goods, materials, and supplies where no taxes were pai d. Moreover, prior payment of taxes is not required to avail of the transitional input tax credit because it is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax refund. Tax refund • •

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is defined as the money that a taxpayer overpaid and is thus returned by the tax ing authority. Tax credit, on the other hand, is an amount subtracted directly from one’s total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage investment. Thus, unlike a tax refund, prior payment of taxes is not a prerequisite to avail of a tax credit. It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayer's income by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a stage when the person is yet unable to credit input VAT payments. The Court found petitioner entitled to the 8% transitional input tax credit provided in Section 105 of the old NIRC. The fact that it acquired the Global City property under a tax-free transaction makes no difference as prior payment of taxes is not a pre-requisite. As to the scope of the 8% transitional input tax, the Court ruled that RR 7-95 is void because it went beyond the ambit of what Sec. 105 of the NIRC stated. It is clear that the law includes: o SEC. 100. Value-added tax on sale of goods or properties. – (a) Rate and base of tax. – There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to 10% of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. o The term “goods or properties” shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: o Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; x x x As the Court sees it then, the 8% transitional input tax credit should not be limited to the value of the improvements on the real properties but should include the value of the real properties as well.

FORT BONIFACIO DEVELOPMENT CORPORATION v. CIR (RESOLUTION) G.R. No. 173425 | 22 January 2013 Value – Added Tax DOCTRINE: Prior payment of taxes is not required before a taxpayer could avail of transitional input tax credit FACTS: Refer to the previous case as this is only a resolution of the motion for reconsideration. In this motion, respondents argue that: o Prior payment of tax is inherent in the nature and payment of the 8% transitio nal input tax; o R.R. No. 7-95 providing for 8% transitional input tax based on the value of the improvements on the real properties is a valid legislative rule; For failure to clearly prove its entitlement to the transitional input tax credit, petitioner's claim o for tax refund must fail in light of the basic doctrine that tax refund partakes of the nature of a tax exemption which should be construed strictissimi juris against the taxpayer." • •

ISSUE: Whether or not the motion should be granted.

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HELD: No, as for the 1 st argument - Prior payment of taxes is not necessary before a taxpayer could avail of the 8% transitional input tax credit: o Sec. 105 of the old NIRC clearly provides that for a taxpayer to avail of the 8% transitional input tax credit, all that is required from the taxpayer is to file a beginning inventory with the BIR. It was never mentioned in Sec. 105 that prior payment of taxes is required. Otherwise, it would tantamount to judicial legislation; o A transitional input tax credit is not a tax refund per se but a tax credit. As SC said, "tax credit is not synonymous to tax refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned by the taxing authority. Tax credit, on the other hand, is an amount subtracted directly from one’s total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an incentive to encourage investment."; o While a tax liability is essential to the availment or use of any tax credit, prior tax payments are not. On the contrary, for the existence or grant solely of such credit, neither a tax liability nor a prior tax payment is needed. The NIRC is full of provisions granting or allowing tax credits, even though no taxes have been previously paid. In sum, prior tax payments are not indispensable to the availment of a tax credit. o As for the 2nd and 3rd arguments – It’s inaccurate to say that the NIRC doesn’t allow a cash refund, only a tax credit: o Sec. 112 of the NIRC speaks of zero-rated or effectively zero-rated sales. Notably, the transaction involved in this case is not zero-rated or effectively zero-rated sales; o Sec. 112 would show that it allows either a cash refund or a tax credit for input VAT on zerorated or effectively zero-rated sales; Sec. 112 does not prohibit cash refund or tax credit of transitional input tax in the case of zeroo rated or effectively zero-rated VAT registered taxpayers, who do not have any output VAT. The phrase "except transitional input tax" in Sec. 112 was inserted to distinguish creditable input tax from transitional input tax credit. Transitional input tax credits are input taxes on a taxpayer’s beginning inventory of goods, o materials, and supplies equivalent to 8% (then 2%) or the actual VAT paid on such goods, materials and supplies, whichever is higher. It may only be availed of once by first-time VAT taxpayers. Creditable input taxes, on the other hand, are input taxes of VAT taxpayers in the course of their trade or business, which should be applied within 2 years after the close of the taxable quarter when the sales were made; As regards Sec. 110, while the law only provides for a tax credit, a taxpayer who erroneously o or excessively pays his output tax is still entitled to recover the payments he made either as a tax credit or a tax refund; o Clearly, the CIR has the option to return the amount claimed either in the form of tax credit or refund. •

CIR v. TOLEDO POWER COMPANY G.R. No. 196451 | 2 December 2015 Value – Added Tax DOCTRINE: A taxpayer has 2 years from the close of the taxable quarter when the zero-rated sales were made within which to file with the CIR an administrative claim for refund or credit of unutilized input VAT attributable to such sales. FACTS: On Dec. 22, 2003, resp. Toledo Power Corporation (TPC) filed with the BIR RDO an administrative claim for refund/credit of its unutilized input VAT for taxable year 2002 amounting to •

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P14,254,013.27 under RA 9136 or the Electric Power Industry Reform Act of 2001 (EPIRA) and the NIRC. On April 22, 2004, due to the inaction of the CIR, TPC filed with the CTA-Division a petition for review. CIR argued that TPC failed to prove its entitlement to a tax refund/credit. On Nov. 11, 2009, CTA-Division partially granted TPC’s claim in the amount of P7,598,279.29. Since NAPOCOR is exempt from the payment all taxes, including VAT, the CTA-Division allowed TPC to claim a refund or credit of its unutilized input VAT attributable to its zero-rated sales of electricity to NAPOCOR for 2002. The CTA Division, however, denied the claim attributable to TPC's sales of electricity to CEBECO, ACMDC and AFC due to the failure of TPC to prove that it is a generation company under the EPIRA. It did not consider the said sales as valid zero-rated sales because TPC did not submit a Certificate of Compliance (COC) from the Energy Regulatory Commission (ERC). Although TPC filed an application for a COC on June 20, 2002 with the ERC, the CTA-Division found this insufficient to prove that TPC is a generation company under the EPIRA. TPC - Moved for partial reconsideration, arguing that, as an existing generation company, it wasn’t required to obtain a COC from the ERC as a prerequisite for its operations, and that the issue of whether it’s a generation company was never raised during the trial. I n any case, it attached photocopies of its application for a COC dated June 20, 2002 and its COC dated June 23, 2004. CIR – Also sought the same, arguing that, the administrative claim was merely pro forma since TPC failed to submit the complete documents required under RMO No. 53-98, which were necessary to ascertain the correct amount to be refunded in the administrative claim. On Nov. 22, 2010, the CTA En Banc dismissed both petitions and affirmed the CTA- Division’s ruling. It sustained that findings of the CTA-Division that both the administrative and judicial claims were timely filed and that TPC’s non -compliance with the RMO No. 53-98 was not fatal to its claim. Also, since TPC was not yet issued a COC in 2002, CTA En banc agreed with the CTA-Divisin that TPC’s sales of electricity for 2002 couldn’t qualify for a VAT zero -rating under the EPIRA. It also noted that, contrary to TPC’s claim, there’s no stipulation in the Joint Stipulation of Facts and Issues (JSFI) that TPC is a generation company under the EPIRA.

ISSUES: Whether or not the administrative and judicial claims for tax refund/credit were timely and validly filed; and effectively entitles TPC to the full amount of its claim for tax refund/credit. HELD: •

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As to whether the claims were timely and validly filed, yes, a taxpayer has 2 years from the close of the taxable quarter when the zero-rated sales were made within which to file with the CIR an administrative claim for refund or credit of unutilized input VAT attributable to such sales. In the present case, TPC applied for a claim for refund/credit of its unutilized input VAT for the taxable year 2002 on Dec. 22, 2003. Since the CIR didn’t act on its application within the 120 -day period, TPC appealed the inaction on April 22, 2004. Both the administrative and the judicial claims were filed within the prescribed period provided in Section 112 of the NIRC. Also, the administrative claim was not pro forma as TPC submitted documents to support its claim for refund and even manifested its willingness to submit additional documents if necessary. The CIR, however, never requested TPC to submit additional documents. Thus, CIR cannot now raise the issue that TPC failed to submit the complete documents. Hence, TPC’s administrative and judicial claim were timely and validly filed. As to the amount, no, TPC is not entitled to the whole amount. TPC is not entitled to a refund/credit of unutilized input VAT attributable to its sales of electricity to CEBECO, ACMDC, and AFC. To be entitled to a refund/credit of unutilized input VAT attributable to the sale of electricity under the EPIRA, a taxpayer must establish: (1) that it is a generation company, and (2) that it derived sales from power generation.

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In the present case, TPC failed to present a COC from the ERC during the trial. On partial reconsideration, TPC argued that there was no need for it to present a COC because the parties already stipulated in the JSFI that TPC is a generation company and that it became entitled to the rights under the EPIRA when it filed its application with the ERC on June 20, 2002. But the Court ruled that there’s nothing in the JSFI that would show that the parties agreed that TPC is a generation company under the EPIRA. They only stipulated that TPC is engaged in the business of power generation and that it filed an application with the ERC on June 20, 2002. Being engaged in the business of power generation does not make T PC a generation company under the EPIRA. Neither did TPC's filing of an application for COC with the ERC automatically entitle TPC to the rights of a generation company under the EPIRA. Under the EPIRA, all new generation companies and existing generation facilities are required to obtain a COC from the ERC. New generation companies must show that they have complied with the requirements, standards, and guidelines of the ERC b efore they can operate. As for existing generation facilities, they must submit to the ERC an application for a COC together with the required documents within 90 days from the effectivity of the EPIRA Rules and Regulations. Based on the documents submitted, the ERC will determine whether the applicant has complied with the standards and requirements for operating a generation company. If the applicant is found compliant, only then will the ERC issue a COC. Here, when the EPIRA took effect in 2001, TPC was an existing generation facility. And at the time the sales of electricity were made in 2002, TPC was not yet a generation company under EPIRA. Although it filed an application for a COC on June 20, 2002, it did not automatically become a generation company. It was only on June 23,2005, when the ERC issued a COC in favor of TPC, that it became a generation company under EPIRA. Consequently, TPC's sales of electricity to CEBECO, ACMDC, and AFC cannot qualify for VAT zero-rating under the EPIRA. Hence, the CTA En Banc’s ruling is affirmed. Only entitled to P7,598,279.29, representing unutilized input taxes attributable to zero-rated sales for 2002.

PRUDENTIAL BANK v. COMMISSIONER OF INTERNAL REVENUE G.R. No. 180390 | 27 July 2011 Documentary Stamp Tax DOCTRINE: A certificate of deposit need not be in a specific form. Thus, a passbook of an interest-earning deposit account issued by a bank is a certificate of deposit drawing interest that is subject to documentary stamp tax. FACTS: •

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Petitioner Prudential Bank is a banking corporation organized and existing under Philippine law. On July 23, 1999, Prudential Bank received from the respondent Commissioner of Internal Revenue (CIR) a Final Assessment Notice No. ST-DST-95-0042-99 and a Demand Letter for deficiency Documentary Stamp Tax (DST) for the taxable year 1995 on its Repurchase Agreement with the Bangko Sentral ng Pilipinas [BSP], Purchase of Treasury Bills from the BSP, and on its Savings Account Plus [SAP] product, in the amount of P18,982,734.38. Prudential Bank protested the assessment on the ground that the documents subject matter of the assessment is not subject to DST. However, CIR denied the protest. Thus, Prudential Bank filed a Petition for Review before the CTA. CTA affirmed the assessment for deficiency DST insofar as the SAP is concerned, but cancelled and set aside the assessment on Prudential Bank’s repurchase agreement and purchase of trea sury bills with the BSP. Prudential Bank is ordered to pay CIR the reduced amount plus 20% delinquency interest. Prudential Bank’s motion for partial consideration was denied, hence, its appeal to the CTA En Banc. Then again, this latter court denied the appeal.

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Prudential Bank sought reconsideration but later moved to withdraw the same in view of its availment of the Improved Voluntary Assessment Program (IVAP) pursuant to Revenue Regulation (RR) No. 18-2006 in relation to RR No. 15-2006 and Revenue Memorandum Order (RMO) No. 23-2006. CTA En Banc denied their motion to withdraw for non-compliance with the requirements for abatement. It found that the amount paid for purposes of the abatement program was not in accordance with Revenue Memorandum Circular (RMC) No. 66-2006, which provides that the amount to be paid should be based on the original assessment or the court’s decision, whichever is higher. It also noted that it failed to comply with RMO No. 23-2006, specifically with the requirement to submit the letter of termination and authority to cancel assessment signed by the CIR.

ISSUE: Whether or not a passbook of an interest-earning deposit account issued by a bank is subject to DST? HELD: Yes, petitioners Savings Account Plus (SAP) is subject to Documentary Stamp Tax. The DST is imposed on certificates of deposit bearing interest pursuant to Section 180 of the old NIRC, as amended, to wit:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand . . . x x x . . .or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes, whether negotiable or nonnegotiable, . . x x x . . , there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory note x x x. •

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A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. InChina Banking Corporation v. Commissioner of Internal Revenue, we held that the Savings Plus Deposit Account, which has the following features: Amount deposited is withdrawable anytime; o o The same is evidenced by a passbook; o The rate of interest offered is the prevailing market rate, provided the depositor would maintain his minimum balance in thirty (30) days at the minimum, and should he withdraw before the period, his deposit would earn the regular savings deposit rate; Similarly, in this case, although the money deposited in a SAP is payable anytime, the withdrawal of the money before the expiration of 30 days results in the reduction of the interest rate. In the same way, a time deposit withdrawn before its maturity results to a lower interest rate and payment of bank charges or penalties. The fact that the SAP is evidenced by a passbook likewise cannot remove its coverage from Section 180 of the old NIRC, as amended. A document to be considered a certificate of deposit need not be in a specific form. Thus, a passbook issued by a bank qualifies as a certificate of deposit drawing interest because it is considered a written acknowledgement by a bank that it has accepted a deposit of a sum of money from a depositor. To avail of the IVAP, a taxpayer must pay the 100% basic tax of the original assessment of the BIR or the CTA Decision, whichever is higher and submit the letter of termination and authority to cancel assessment signed by the respondent. In this case, petitioner failed to submit the letter of termination and authority to cancel

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assessment as CIR found the payment of P5,084,272.50 not in accordance with RMC No. 66-2006. Hence, we find no error on the part of the CTA En Banc in denying Prudential Bank’s motion to withdraw. Prudential Bank’s payment of P5,084,272.50, without the supporting documents, cannot be deemed substantial compliance as tax amnesty must be construed strictly against the taxpayer and liberally in favor of the taxing authority. Nevertheless, the amount of P5,084,272.50 paid by Prudential Bank to the BIR must be considered as partial payment of petitioner’s tax liability.

COMMISSIONER OF INTERNAL REVENUE v. LA TONDENA DISTILLERS, INC. G.R. No. 175188 | 15 July 2015 Documentary Stamp Tax DOCTRINE: Transfer of real property to a surviving corporation pursuant to a merger is not subject to Documentary Stamp Tax (DST). FACTS: Respondent La Tondeña Distillers, Inc. entered into a Plan of Merger with three other beverage and bottling companies. As a result of the merger, the assets and liabilities of the absorbed corporations were transferred to respondent, the surviving corporation. Respondent later changed its corporate name to Ginebra San Miguel, Inc. (GSMI). Respondent requested for a confirmation of the tax -free nature of the said merger from the Bureau of Internal Revenue (BIR) which later issued a ruling stating that pursuant to Section 40(C)(2) and (6)(b) of the 1997 National Internal Revenue Code (NIRC), “No gain or loss shall be recognized by the absorbed corporations as transferors of all assets and liabilities”. However, the transfer of assets, such as real properties, shall be subject to DST imposed under Section 196 of the NIRC. October 31, 2001 - Paid the BIR P14.14 Million in DST. October 14, 2003 - Claiming its exemption from paying DST, respondent filed with petitioner Commissioner of Internal Revenue (CIR) an administrative claim for tax refund or tax of the P14.14 Million paid representing the DST it allegedly erroneously paid on the occasion of the merger. CTA 2ND DIVISION – Declared the respondent entitled to its claim for tax refund Section 196 of the NIRC does not apply because there is no purchaser or buyer in the case of a merger. CTA EN BANC – Affirmed the Division’s ruling. •

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ISSUE: Whether or not the respondent exempted from payment of DST? HELD: Yes, petition dismissed. In a merger, the real properties are not deemed "sold" to the surviving corporation and the latter could not be considered as "purchaser" of realty since the r eal properties subject of the merger were merely absorbed by the surviving corporation by operation of law and these properties are deemed automatically transferred to and vested in the surviving corporation without further act or deed. Therefore, the transfer of real properties to the surviving corporation in pursuance of a merger is not subject to documentary stamp tax. •

ALLIED BANKING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE G.R. No. 175097 | 5 February 2010 Taxpayer’s Remedies

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DOCTRINE: The Commissioner of Internal Revenue (CIR) as well as his duly authorized representative must indicate clearly and unequivocally to the taxpayer whether an action constitutes a final determination on a disputed assessment. It will determine whether the taxpayer should exhaust administrative remedies before the CIR or file an appeal to the CTA. FACTS: On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) to petitioner Allied Banking Corporation (Allied) for deficiency Documentary Stamp Tax (DST) in the amount of P12,050,595.60 and Gross Receipts Tax (GRT) in the amount of P38,995,296.76 on industry issue for the taxable year 2001. Allied received the PAN on May 18, 2004 and filed a protest against it on May 27, 2004. On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment Notices to Allied, and was received by the latter on August 30, 2004. The demand letter stated: “It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you may appeal the final decision within thirty (30) days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.” On September 29, 2004, Allied filed a Petition for Review with the CTA. After CIR filed its answer, it filed a Motion to Dismiss on the ground that Allied failed to file an administrative protest on the Formal Letter of Demand with Assessment Notices. Allied opposed the Motion to Dismiss. The CTA granted the CIR’s Motion to Dismiss and ruled that: “neither the assessment nor the formal demand letter itself is appealable to this Court. It is the decision of the CIR on the disputed assessment that can be appealed to this Court. A disputed assessment is one wherein the taxpayer or his duly authorized representative filed an administrative protest against the formal letter of demand and assessment notice within thirty (30) days from date [of] receipt thereof. In this case, petitioner failed to file an administrative protest on the formal letter of demand with the corresponding assessment notices. Hence, the assessments did not become disputed assessments as subject to the Courts review under Republic Act No. 9282. Allied’s MR was denied by the first division of the CTA, hence, the case was decided by the CTA en banc. This latter court affirmed the decision of the former. It emphasized that an administrative protest is an integral part of the remedies given to a taxpayer in challenging the legality or validity of an assessment. Although there are exceptions to the doctrine of exhaustion of administrative remedies, this case does not fall in any of the exceptions. •

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ISSUE: Whether or not the Formal Letter of Demand can be construed as a final decision of the CIR appealable to the CTA under RA 9282? HELD: Yes, sec. 7 of RA 9282 expressly provides that the CTA exercises exclusive appellate jurisdiction to review by appeal decisions of the CIR in cases involving disputed assessments. The word “decisions” in the provision of RA 9282 has been interpreted to mean the decisions of the CIR on the protest of the taxpayer against the assessments. A careful reading of the Formal Letter of Demand with Assessment Notices led the Court to agree with Allied that this is an exception to the rule on exhaustion of administrative remedies. It found the CIR estopped from claiming that the filing of the Petition for Review was premature because Allied failed to exhaust all administrative remedies. The Formal Letter of Demand with Assessment Notices reads: “It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency. This is our final decision based on investigation. If you disagree, you may appeal this final decision within thirty (30) days from receipt hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.” •

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It appears from the demand letter that the CIR has already made a final decision on the matter and that the remedy of Allied is to appeal the final decision within 30 days. Records show that Allied disputed the PAN but not the Formal Letter of Demand with Assessment Notices. Nevertheless, the Court cannot blame Allied for not filing a protest against the Formal Letter of Demand with Assessment Notices since the language used and the tenor of the demand letter indicate that it is the final decision of the CIR. The CIR should indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes his final determination thereon in order for the taxpayer concerned to determine when his or her right to appeal to the tax court accrues. Moreover, CIR used the word “appeal” instead of protest, reinvestigation, or reconsideration. Although there was no direct reference for Allied to bring the matter directly to the CTA, it cannot be denied that the word “appeal” under prevailing tax laws refers to the filing of a Petition for Review with the CTA. As aptly pointed out by petitioner, under Section 228 of the NIRC, the terms “protest, reinvestigation and reconsideration” refer to the administrative remedies a taxpayer may take before the CIR, while the term “appeal” refers to the remedy available to the taxpayer before the CTA. The Court is not disregarding the rules of procedure, but in this particular case, it is saying that the Formal Letter of Demand can be considered a final decision of the CIR appealable to the CTA because the words used, specifically the words “final decision” and “appeal”, taken together led petitioner to believe that the Formal Letter of Demand with Assessment Notices was in fact the final decision of the CIR on the letterprotest it filed and that the available remedy was to appeal the same to the CTA.

CIR v. FAR EAST BANK & TRUST COMPANY (BPI) G.R. No. 173854 |15 March 2010 Taxpayer’s Remedies DOCTRINE: Since tax refunds partake of the nature of tax exemptions, which are construed strictissimi juris against the taxpayer, evidence in support of a claim must likewise be strictissimi scrutinized and duly proven. FACTS: •

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On April 10, 1995, respondent filed 2 Corporate ITRs, one for its Corporate Banking Unit (CBU), and one for its Foreign Currency Deposit Unit (FCDU), for taxable year Dec. 31, 1994. The return for the CBU consolidated the respondent’s overall income tax liability for 1994, which reflected a refundable income tax of P12,682,864. Pursuant to Sec. 69 of the old NIRC, the amount stated was carried over and applied against its income tax liability for taxable year Dec. 31, 1995. On April 15, 1996, respondent filed its 1995 ITR which showed a total overpaid income tax of P17,443,133. Out of such amount, only P13,645,109 was sought to be refunded by respondent. As to the remaining P3,798,024, respondent opted to carry it over to the next taxable year. On May 17, 1996, respondent filed a claim for refund of the amount of P13,645,109 with the BIR. Due CIR’s inaction, respondent was compelled to bring the matter to the CTA on April 8, 1997 via a Petition for Review. To prove its entitlement to a refund, respondent presented several documents which consisted of ITRs, certificates of creditable. CTA – Denied respondent’s refund claim because the latter failed to show that the income derived from rentals and sale of real property from which the taxes were withheld were reflected in its 1994 ITR. CA – Reversed CTA ruling. Respondent duly proved that the income derived from rentals and sale of real property upon which the taxes were withheld were included in the return as part of the gross income.

ISSUE: Whether or not respondent proved its entitlement to the refund.

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HELD: No, A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply with the following requisites: (1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax (Sec. 229, NIRC); (2) It must be shown on the return that the income received was declared as part of the gross income (Sec. 10 of RR No. 6-85); and (3) The fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld (Sec. 10 of RR No. 6-85). Respondent only complied with the 1 st requirement but not the 2 nd and 3rd requirements. To establish the fact of withholding, respondent submitted Certificates of Creditable Tax Withheld at Source and Monthly Remittance Returns of Income Taxes Withheld, which pertain to rentals and sales of real property, respectively. However, its 1994 ITR shows that the gross income was derived solely from sales of services. The phrase “NOT APPLICABLE” was printed on the schedules pertaining to rent, sale of real property, and trust income. Thus, based on the ITR, the income derived from rentals and sales of real property upon which the creditable taxes were withheld were not included in respondent’s gross income as reflected in its ITR. Since no income was reported, no tax was withheld. It’s incumbent upon the taxpayer to reflect in his ITR the income upon which any creditable tax is required to be withheld at the source. Respondents explanation that its income derived from rentals and sales of real properties were included in the gross income but were classified as Other Earnings in its Schedule of Income attached to the return is not supported by the evidence. •

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COMMISSIONER OF INTERNAL REVENUE v. KUDOS METAL CORPORATION G.R. No. 178087 | 5 May 2010 Taxpayer’s Remedies DOCTRINE: The prescriptive period on when to assess taxes benefits both the government and the taxpayer. Exceptions extending the period to assess must, therefore, be strictly construed. FACTS: On April 15, 1999, the respondent filed its Annual Income Tax Return (ITR) for the taxable year 1998. Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of Internal Revenue (BIR) served upon respondent three Notices of Presentation of Records which the latter failed to comply and led to the issuance of the Subpoena Duces Tecum dated September 21, 2006, receipt of which was acknowledged by respondent’s President, Mr. Chan Ching Bio, in a letter dated October 20, 2000. A review and audit of respondent’s records then ensued. On December 10, 2001, Nelia Pasco, respondent’s accountant, executed a Waiver of the Defense of Prescription, which was notarized on January 22, 2002, received by the BIR Enforcement Service on January 31, 2002 and by the BIR Tax Fraud Division on February 4, 2002, and accepted by the Assistant Commissioner of the Enforcement Service, Percival T. Salazar. This was followed by a second Waiver of Defense of Prescription executed by the respondent’s accountant on February 18, 2003, notarized on February 19, 2003, received by the BIR Tax Fraud Division on February 28, 2003 and accepted by Assistant Commissioner Salazar. On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the taxable year 1998 against the respondent which was followed by a Formal Letter of Demand with Assessment Notices for taxable year 1998, dated September 26, 2003 which was received by respondent on November 12, 2003. •

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Believing that the government’s right to assess taxes had prescribed, respondent filed a Petition for Review with the Court of Tax Appeals (CTA). The CTA Second Division issued a Resolution cancelling the assessment notices issued against respondent for having been issued beyond the prescriptive period and found that th e first Waiver of the Statute of Limitations incomplete and defective for failure to comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90. On appeal, the CTA En Banc affirmed the cancellation of the assessment notices. Although it ruled that the Assistant Commissioner was authorized to sign the waiver pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it found that the first waiver was still invalid based on the second and third grounds stated by the CTA Second Division (i.e., the waiver failed to indicate the date of acceptance and the fact of receipt by the taxpayer of his file copy was not indicated on the original copy. Thus, this petition for review on certiorari seeks to set aside the decision of the CTA affirming the cancellation of the assessment notices for having been issued beyond the prescriptive period and the resolution denying the motion for consideration.

ISSUE: Whether or not the government’s right to assess unpaid taxes of respondent prescribed HELD: Yes, Sec. 203 of the NIRC mandates the government to assess internal revenue taxes within 3 years from the last day prescribed by law for the filing of the tax r eturn or the actual date of filing of such return, whichever comes later. Hence, an assessment notice issued after the three -year prescriptive period is no longer valid and effective subject to exceptions provided under Section 222 of the Tax Code, as amended. Sec. 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO No. 20-90 issued on April 4, 1990 and RDAO No. 05-01 issued on August 2, 2001 lay down the procedure for the proper execution of the waiver, to wit: o The phrase “but not after ______ 19 ___”, which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription, should be filled up. The waiver must be signed by the taxpayer himself or his duly authorized representative. o In the case of a corporation, by any of its responsible officials. In case the authority is delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized. o The waiver should be duly notarized. The CIR or the revenue official authorized by him must sign the waiver indicating that o the BIR has accepted and agreed to the waiver. The date of such acc eptance by the BIR should be indicated. However, before signing the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized representative. Both the date of execution by the taxpayer and date of acceptance by the Bureau should o be before the expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed. o The waiver must be executed in 3 copies, the original copy to be attached to the docket of the case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the BIR and the perfection of the agreement. A perusal of the waivers executed by respondent’s accountant reveals the following infirmities: •

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The waivers were executed without the notarized written authority of the respondent’s accountant to sign the waiver in behalf of respondent; o The waivers failed to indicate the date of acceptance; and o The fact of receipt by the respondent of its file copy was not indicated in the original copies of the waivers. Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the assessments were issued by the BIR beyond the t hree-year period and are void. o

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CIR v. SMART COMMUNICATIONS G.R. No. 179045-46| 25 August 2010 Taxpayer’s Remedies DOCTRINE: The withholding agent has authority to file a claim for refund on behalf of the principal taxpayer because the withholding agent is considered the statutory taxpayer, and he is an agent of the principal taxpayer. FACTS: Smart entered into an agreement with Malaysian company Prism, where Prism will provide programming and installation services to Smart for the latter’s services such as Smart Money, etc. Initially thinking that Smart’s payments to Prism constitute royalties, Smart withheld a 25% royalty tax that was provided under RP-Malaysia Tax Treaty. This was remitted to BIR. Later, Smart filed a claim for refund on the ground that it erroneously withheld from Prism, when the payments were actually business profits, hence, not subject to royalty tax. o Under the treaty, royalties are payments for the right to use the patent, trade mark, etc. Under the treaty, business profits of an enterprise in a contracting state are taxable only in o that State, unless it has a permanent establishment in the other contracting state. CIR questions the validity of the claim for refund, and the authority of Smart to file the claim despite being merely a withholding agent. •

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ISSUE: Whether Smart, as the withholding agent of Prism, can file a claim for refund. HELD: Yes, Smart has the authority, based on the case of CIR v P&G. The withholding agent may file the claim for refund because it is considered as the statutory taxpayer. Under the Tax Code, the person entitled to claim the refund is the taxpayer, and the taxpayer is the person subject to the tax imposed. Similarly, the withholding agent is held personally liable for the tax withheld, and ensures that the same is remitted to BIR. As such, the withholding agent is considered the statutory taxpayer. The withholding agent is an agent of the principal taxpayer. As agent, he is authorized to file the necessary return, and pay the tax to the government; such authority may reasonably be held to include the authority to file a claim for refund, and to bring action for recovery of the same. Corollary thereto, the refund claimed belongs to the principal and therefore, must be returned to him. a. There is nothing in that case that requires that in order for the withholding agent to have the authority to file the claim, the taxpayer and agent must be related parties, i.e., wholly owned subsidiary of the taxpayer. •

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ISSUE: Whether the claim for refund is valid on the ground that the payment was not royalties but business profits.

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HELD: Yes, it is valid claim for refund because some of the payments are royalties, while others were business profits; hence, there can be a refund with respect to the business profits erroneously treated as royalties. Some of the services to be installed by Prism are intellectual properties of Prism while others were intellectual property of Smart. Payments for the installation of those belonging to Prism are royalties, the rest are business profits.

COMMISSIONER OF INTERNAL REVENUE v. AICHI FORGING COMPANY OF ASIA, INC. G.R. No. 184823 | 6 October 2010 Taxpayer’s Remedies DOCTRINE: A taxpayer must prove not only his entitlement to a refund but also his compliance with the procedural due process as non-observance of the prescriptive periods within which to file the administrative and the judicial claims would result in the denial of his claim. FACTS: Respondent Aichi Forging Company of Asia (Aichi) is a VAT-registered enterprise engaged in the manufacturing, producing, and processing of steel. On September 30, 2004, respondent filed a claim for refund/credit of input VAT for the period July 1, 2002 to September 30, 2002 in the total amount of ₱3,891,123.82 with the petitioner CIR through DOF. Respondent filed a Petition for Review 7with petitioner CTA for the refund/credit of input VAT. o It alleged that for the period July 1, 2002 to September 30, 2002: It generated and recorded zero-rated sales in the amount of ₱131,791,399.00 which it paid; It incurred and paid input VAT amounting to ₱3,912,088.14 from purchases and importation attributable to its zero-rated sales; In its application for refund/credit filed with the DOF One-Stop Shop InterAgency Tax Credit and Duty Drawback Center, it only claimed the amount of ₱3,891,123.82.11. Petitioner argues that Respondent must prove first that it paid VAT input taxes for the period in question CTA – Granted Aichi's refund. The CTA found that the first three requirements enumerated in Section 112 (A) of the NIRC have been complied with by the respondent and that it has sufficiently proved that it is entitled to a refund or issuance of a tax credit certificate representing unutilized excess input VAT payments for the period July 1, 2002 to September 30, 2002, which are attributable to its zero-rated sales for the same period, but in the reduced amount of ₱3,239,119.25 CTA EN BANC – Affirmed the award for refund but dismissed the petition for review on the ground that Aichi filed its VAT return beyond the reckoning period. That the reckoning date starts from payment of tax not from the close of the taxable quarter when the sales were made. Applying Section 114 of the 1997 NIRC, respondent had until October 25, 2002 to file its quarterly return for its gross sales or receipts [with] which it complied when it filed its VAT Quarterly Return on October 20, 2002. •

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ISSUE: Whether or not the reckoning date begins from the payment of tax? HELD: No, the right to claim the refund must be reckoned from the “close of the taxable quarter when the sales were made” – in this case September 30, 2004. The Court added that the rules under Sections 204 (C) and 229 as cross-referred to Section 114 do not apply as they only cover erroneous payments or illegal

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collections of taxes which is not the case for refund of unutilized input VAT. Thus, the claim was filed on time even if 2004 was a leap year since the sanctioned method of counting is the number of months. ISSUE: Whether or not the case was filed prematurely HELD: Yes, the court dismissed the case for being premature. Section 112 mandates that the taxpayer filing the refund must either wait for the decision of the CIR or the lapse of the 120 -day period provided therein before filing its judicial claim. Failure to observe this rule is fatal to a claim. Thus, Section 112 (A) was interpreted to refer only to claims filed with the CIR and not appeals to the CTA given that the word used is “application”. Finally, the Court said that applying the 2 -year period even to judicial claims would render nugatory Section 112 (D) which already provides for a specific period to appeal to the CTA --- i.e., (a) within 30 days after a decision within the 120-day period and (b) upon expiry of the 120-day without a decision.

BELLE CORPORATION v. CIR G.R. No. 181298 | 10 January 2011 Taxpayer’s Remedies DOCTRINE: Once the option to carry-over excess income tax payments to the succeeding years has been made, it becomes irrevocable. FACTS: On May 30, 1997, petitioner filed its ITR of 1 st Qtr. of 1997, showing a gross income of P741,607,495, a deduction of P65,381,054, a next taxable income of P676,226,441, and an income tax due of P236,679,254, which petitioner paid on even date through PCI Bank. On Aug. 14, 1997, petitioner filed its 2 nd Qtr. ITR, declaring an overpayment of income taxes amounting to P66,634,290. Because of this, no taxes were paid for the 2 nd and 3 rd Qtrs. of 1997. Petitioner’s ITR for the taxable year ending Dec. 31, 1997 thereby reflected an overpayment of income taxes totaling P132,043,528. Instead of claiming the amount as a tax refund, petitioner decided to apply it as a tax credit to the succeeding taxable year by marking the tax credit option box in its 1997 ITR. For 1998, petitioner amended its ITR showing an overpayment of P106,447,318. On April 12, 2000, petitioner filed its administrative claim for refund for the excess payment for 1997 totaling P106,447,318. Notwithstanding the filing of the administrative claim for refund, petitioner carried over the amount of P106,447,318 to the taxable year 1999 and applied a portion thereof to its 1999 MCIT liability, as evidenced by its 1999 ITR. On April 14, 2000, due to the CIR’s inaction, petitioner appealed its refund claim with the CTA. T o prove entitlement, it submitted its ITR for the 1 st Qtr. of 1997, tentative ITRs for the rest of the Qtrs. and 1998, its final ITRs for 1997-1999, its letter-claim for refund, and official receipt issued by PCI Bank. CTA denies the refund claim. CA affirms CTA ruling. •

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ISSUE: Whether or not respondent is entitled to the refund. HELD: No, applying Sec. 76 of the NIRC, remedies are refund or carry-over the excess to the succeeding years. Availment of one precludes the other. But the option to carry-over is irrevocable. Hence, unutilized excess income tax payments may no longer be refunded. Since petitioner already carried over its 1997 excess income tax paymen ts to 1998, it may no longer file a refund claim of unutilized tax credits for 1997. •

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Once the option to carry-over excess income tax payments to the succeeding years has been made, it becomes irrevocable. Thus, applications for refund of the unutilized excess income tax payments may no longer be allowed.

SILICON PHILIPPINES, INC. v. COMMISSIONER OF INTERNAL REVENUE G.R. No. 172378 | 17 January 2011 Taxpayer’s Remedies DOCTRINE: The burden of proving entitlement to a refund lies with the claimant. FACTS: On May 21, 1999, petitioner filed with the respondent, through the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF), an application for credit/refund of unutilized input VAT for the period October 1, 1998 to December 31, 1998 in the amount of P31,902,507.50. Due to the inaction of the respondent, petitioner filed a Petition for Review with the Court of Tax Appeals (CTA) alleging that for the 4 th quarter of 1998, it generated and recorded zero-rated export sales in the amount of P3,027,880,818.42, paid to petitioner in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; and that for the said period, petitioner paid input VAT in the total amount of P31,902,507.50, which have not been applied to any output VAT. The CTA rendered a decision partially granting petitioner’s claim for refund of unutilized input VAT on capital goods as the portion of the related purchases (e.g., training materials, office supplies, posters, banners, t-shirts, books, and other similar items) were not considered capital goods under Section 4.106-1 (b) of Revenue Regulations (RR) No. 7-95 (Consolidated ValueAdded Tax Regulations). With regard to petitioner’s claim for credit / refund of input VAT attributable to its zero-rated export sales, the CTA denied the same since the petitioner failed to present an Authority to Print (ATP) from the BIR, neither did it print on its export sales invoices the ATP and the word “zero-rated”. The petitioner elevated the case to the CTA EN Banc via a Petition for Review which was denied for lack of merit. •

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ISSUE: Whether the CTA En Banc erred in denying petitioner’s claim for credit/refund of input VAT attributable to its zero-rated sales due to its failure: (1) To show that it secured an ATP from the BIR and to indicate the same in its export sales invoices; and (2) to print the word “zero-rated” in its export sales invoices HELD: No, because the failure to indicate the word “zero-rated” in the sales invoices or receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales. The failure to indicate the ATP in the sales invoices or receipts, on the other hand, is not. The Supreme Court discussed two types of input VAT credits: (1) One is a credit/refund of input VAT attributable to zero-rated sales under Section 112 (A) of the NIRC; and (2) The other is a credit/refund of input VAT on capital goods pursuant to Section 112 (B) of the same Code. In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A) of the NIRC lays down four requisites, to wit: 1) the taxpayer must be VAT-registered; 2) the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated; 3) the claim must be filed within two years after the close of the taxable quarter when such sales were made; and 4) the creditable input tax due or paid must be attributable to such sales, except the transitional input tax, to the extent that such input tax has not been applied against the output tax. •

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With respect to a claim for refund of input VAT on capital goods, Section 112 (B) of the NIRC requires that: 1. the claimant must be a VAT registered person; 2. the input taxes claimed must have been paid on capital goods; 3. the input taxes must not have been applied against any output tax liability; and 4. the administrative claim for refund must have been filed within two (2) years after the close of the taxable quarter when the importation or purchase was made. Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows: “Capital goods or properties” refer to goods or properties with estimated useful life greater that one year and which are treated as depreciable assets under Section 29 (f), used directly or indirectly in the production or sale of taxable goods or services. The disallowed input VAT on certain purchases cannot be classified as input VAT paid on capital goods.

BUREAU OF INTERNAL REVENUE v. COURT OF APPEALS G.R. No. 197590 | 24 November 2014 Government Remedies DOCTRINE: The government is allowed to resort to all evidence or resources available to determine a taxpayer’s income and to use methods to reconstruct his income . FACTS: The revenue officers executed a Joint Affidavit alleging that, despite the respondent Antonio’s modest income based on his reported or declared annual income for taxable years 1998 -2003, respondent spouses were able to purchase in cash several properties. Since respondent spouses failed to show the source of their cash purchases, the revenue officers concluded that respondent Antonio’s Income Tax Returns (ITRs) for taxable years 2000, 2001, and 2003 were underdeclared. And since the underdeclaration exceeded 30% of the reported or declared income, it was considered a prima facie evidence of fraud with intent to evade the payment of proper taxes due to the government. The revenue officers, thus, recommended the filing of criminal cases against respondent spouses for failing to supply correct and accurate information in their ITRs for the years 2000, 2001, and 2003. The State Prosecutor recommended the filing of criminal charges against respondent spouses. On appeal to the Secretary of Justice via a Petition for Review, Acting Justice Secretary reversed the resolution of State Prosecutor finding no willful failure to pay or attempt to evade or defeat the tax on the part of respondent spouses as petitioner allegedly failed to specify the amount of tax due and the likely source of income from which the same was based and the failure to issue a deficiency tax assessment against respondent spouses which is a prerequisite to the filing of a criminal case for tax evasion. The petitioner filed a Petition for Certiorari with the Court of Appeals (CA) but was dismissed stating that, although it disagreed that an assessment is a condition sine qua non in filing a criminal case for tax evasion, there was no probable cause to charge respondent spouses as petitioner allegedly failed to state their exact tax liability and to show sufficient proof of their likely source of income. •

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ISSUE: Whether or not the CA committed grave abuse of discretion amounting to lack or excess of jurisdiction in holding that: (1) The exact amount of tax due from the private respondent should be specifically alleged and since the BIR failed to make such findings, they consequently failed to build a case for tax evasion against respondent spouses; and (2) The BIR failed to show sufficient proof of a likely source of respondent spouses income

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HELD: Yes, in Ungab v. Judge Cusi, Jr., the Supreme Court ruled that tax evasion is deemed complete when the violator has knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax. An assessment of the tax deficiency is not required in a criminal prosecution for tax evasion. However, in Commissioner of Internal Revenue v. Court of Appeals, it was clarified that although a deficiency assessment is not necessary, the fact that a tax is due must first be proved before one can be prosecuted for tax evasion. In the case of income, for it to be taxable, there must be a gain realized or received by the taxpayer, which is not excluded by law or treaty from taxation. The government is allowed to resort to all evidence or resources available to determine a t axpayer’s income and to use methods to reconstruct his income. The expenditure method is used by the government, which is a method of reconstructing a taxpayer’s income by deducting the aggregate yearly expenditures from the declared yearly income. The theory of this method is that when the amount of the money that a taxpayer spends during a given year exceeds his reported or declared income and the source of such money is unexplained, it may be inferred that such expenditures represent unreported or undeclared income. Respondent spouses’ defense that they had sufficient savings to purchase the properties remains self-serving as they do not have any evidence to support such claim. As such, it is safe to assume that that money is income or a flow of wealth other than a mere return on capital. Income denotes a flow of wealth during a definite period of time, while capital is a fund or property existing at one distinct point in time. Moreover, by just looking at the tables presented by petitioner, it is obvious that respondent spouses had underdeclared their income. The huge disparity between respondent Antonio’s reported or declared annual income for the past several years and respondent spouses’ cash acquisitions for the years 2000, 2001, and 2003 cannot be ignored. •

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LOCAL TAXATION CE CASECAN WATER AND ENERGY COM. v NUEVA ECIJA G.R. No. 196278| 17 June 2015 Real Property Taxation DOCTRINE: It is the CTA that has the power to determine whether the RTC committed grave abuse of discretion in issuing an interlocutory order in a local tax case. Local tax cases include cases involving RPT because RPT is a local tax. FACTS: CE Company entered into a Build-operate-transfer with NIA wherein NIA will reimburse CE for any real prop tax (RPT) that the latter will be made to pay. CE was assessed with RPT by Nueva Ecija Provincial Assessor, which CE assailed before Local Board of Assessment Appeals (LBAA). LBAA dismissed the case, so CE filed an appeal before Central Board of Assessment Appeals. During pendency of appeal, CE was made to pay under protest current RPT and its arrearages. CE made another appeal on the assessed arrearages before the LBAA. Without waiting for the LBAA and CBAA, CE filed a complaint for injunction and damages before RTC to restrain the collection of RPT. RTC dismissed, while CA dismissed the Pet for Certiorari for lack of jurisdiction. •

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ISSUE: Whether CA properly dismissed on the ground of lack of jurisdiction.

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HELD: Yes, the dismissal is proper because appellate jurisdiction over local tax cases is with CTA. It is the CTA which has the power to rule on the Pet for Certiorari assailing an interlocutory order of the RTC relating to a local tax case. This is based on jurisprudence which provides that CTA has jurisdiction to determine o whether RTC committed grave abuse of discretion in issuing an interlocutory order in cases falling within the CTA ’s exclusive appellate jurisdiction. o In tax cases, CTA is the tribunal with the specialized competence over tax and tariff matters. Furthermore, law expressly confers upon the CTA the role of judicial review over local tax cases without mention of any other court that may exercise such power. The injunction case is clearly a local tax case because in praying to restrain the collection of RPT, CE also implicitly questions the propriety of the assessment of such RPT. Hence, in ruling as to whether to restrain the collection, the RTC must first necessarily rule on the propriety of the assessment. CE was indirectly challenging the validity of the assessment. Moreover, it has been previously held that RPT is a local tax. •

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JUDICIAL REMEDIES ASIA TRUST DEVELOPMENT BANK, INC. v. CIR G.R. No. 201530, 201680-81| 19 April 2017 Judicial Procedures DOCTRINE: An appeal to the CTA En Banc must be preceded by the timely filing of a motion for reconsideration or new trial with the CTA Division; amended decisions are considered different decisions, hence, a separate MR or MNT must be filed assailing the same. FACTS: In 2000, BIR issued assessment notice to Asiatrust for several deficiency taxes from 1996- 1998. Asiatrust protested, but due to CIR’s inaction, it filed a PetRev before CTA raising the defense of prescription and that it availed of Tax Abatement Program, and the Tax Amnesty Law. CTA Division cancelled the assessment made outside the prescriptive period of 3 years; but it sustained validity of other assessment because Asiatrust failed to prove that it availed of the Tax Abatement Program and Tax Amnesty Law because it failed to present the letter of termination supposedly issued by BIR granting the application to avail of the programs. o On CTA Division’s first decision, CIR was able to file an MR, albeit, denied; but not on the Amended decision that CTA Division later issued. Upon appeal, CTA En Banc affirmed the ruling as to Asiatrust, but denied CIR’s appeal on the ground that it didn’t file an MR on the Amended Decision of CTA Division. • •

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ISSUE: Whether letter of intention is required to show that Asiatrust’s application for the programs were granted.

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HELD: Yes, letter of intention is required. Application for tax abatement is considered approved only upon issuance of the letter of termination. Based on the relevant rules, it is clear that he last step in the tax abatement process is the issuance of the termination letter. Its presentation is essential as it proves that the taxpayer's application for tax abatement has been approved; and without which, a tax ass essment cannot be considered closed and terminated. Even if Asiatrust shows that it had paid the basic tax as part of the tax abatement program, it still does not show that the application was granted; it only shows that Asiatrust paid the basic tax. •

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ISSUE: Whether MR before CTA Division is required before CIR can appeal before CTA En Banc. HELD: Yes, MR is required. An appeal to the CTA En Banc must be preceded by the filing of a timely motion for reconsideration or new trial with the CTA Division. Under the Rules of CTA, in order for the CTA En Banc to take cognizance of an appeal via a petition for review, a timely motion for reconsideration or new trial must first be filed with the CTA Division that issued the assailed decision or resolution. Failure to do so is a ground for the dismissal of the appeal as the word "must" indicates that the filing of a prior motion is mandatory, and not merely directory. The same rule applies in amended decisions because an amended decision is a different decision, and thus, is a· proper subject of a motion for reconsideration. An amended decision is defined as "any action modifying or reversing a decision of the Court en banc or in Division." For failure to do so, the CTA Division’s Amended decision has attained finality insofar as CIR is concerned and therefore, may no longer question the merits of the case. •

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4 Taxation Law Justice Del Castillo Digests

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