March 2011 Philippine Supreme Court Decisions on Tax Law

Here are selected March 2011 rulings of the Supreme Court of the Philippines on tax law:

National Internal Revenue Code; irrevocability of option to carry-over excess income tax payments; utilization of excess income tax payments. In the previous decision, the Court denied taxpayer’s claim for refund because it has earlier opted to carry over its 1997 excess income tax payments by marking the tax credit option box in its 1997 income tax return. However, while taxpayer may no longer file a claim for refund, it properly carried over its 1997 excess income tax payments by applying portions thereof to its 1998 and 1999 minimum corporate income tax. Taxpayer may apply the unutilized excess income tax payments as a tax credit to the succeeding taxable years until fully utilized. Belle Corporation vs. Commissioner of Internal Revenue, G.R. No. 181298, March 2, 2011.

Rules of Court; motion to withdraw petition before Supreme Court; effect on Court of Tax Appeals decision. Under Section 1, Rule 13 of the Internal Rules of the Supreme Court a case is deemed submitted for decision or resolution upon the filing of the last pleasing, brief or memorandum that the Court or its Rules require. In this case, the Court required petitioner taxpayer to file a reply; however, petitioner taxpayer opted to file a motion to withdraw. Clearly, by requiring petitioner taxpayer to file its reply, the Court has not yet deemed the case submitted for decision or resolution. The Court granted petitioner taxpayer’s motion to withdraw. By withdrawing the appeal, petitioner taxpayer is deemed to have accepted the decision of the Court of Tax Appeals (CTA). And since the CTA had already denied petitioner taxpayer’s request for the issuance of a tax credit certificate for insufficiency of evidence, it may no longer be included in petitioner taxpayer’s future claims. Petitioner taxpayer cannot be allowed to circumvent the denial of its request for a tax credit by abandoning its appeal and filing a new claim. As stated in a previous case, n appellant who withdraws his appeal must face the consequences of his withdrawal, such as the decision of the court a quo becoming final and executory. Central Luzon Drug Corporation vs. Commissioner of Internal Revenue, G.R. No. 181371, March 2, 2011.

National Internal Revenue Code; withdrawal of PAGCOR income tax exemption; equal protection of the laws. Under Section 1 of Republic Act (RA) No. 9337, amending Section 27(c) of the National Internal Revenue Code of 1997, Philippine Amusement and Gaming Corporation (PAGCOR) is no longer exempt from corporate income tax as it has been omitted from the list of the government owned and controlled corporations (GOCCs) that are exempt from it. PAGCOR argues that such omission is unconstitutional as it violates the right to equal protection under the Constitution. A perusal of the legislative records of the Bicameral Conference Meeting of the Committee on Ways and Means dated October 27, 1997 would show that the exemption of PAGCOR from the payment of corporate income tax was due to the acquiescence of Committee on Ways and Means to the request of PAGCOR that it be exempt from such tax. Thus, the previous exemption of PAGCOR from paying corporate income tax was not based on a classification showing substantial distinctions which make for real differences but was granted upon PAGCOR’s request. With the subsequent enactment of RA No. 9337, PAGCOR has been excluded from the enumeration of GOCCs that are exempt from paying corporate income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555, show that it is the legislative intent that PAGCOR be subject to the payment of corporate income tax. The express mention of the GOCCs exempted from payment of corporate income tax excludes all others. Not being excepted, PAGCOR must be regarded as coming within the purview of the general rule that GOCCs shall pay corporate income tax, expressed in the maxim- exceptio firmat regulam in casibus non exceptis. PAGCOR cannot find support in the equal protection clause of the Constitution, as the legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the Committee on Ways and Means, show that PAGCOR’s previous exemption from payment of corporate income tax  was not made pursuant to a valid classification based on substantial distinctions and the other requirements of a reasonable classification by legislative bodies, so that the law may operate only on some, and not all, without violating the equal protection clause but was made upon PAGCOR’s own request to be exempted.  Philippine Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, G.R. No. 172087, March 15, 2011.

National Internal Revenue Code; withdrawal of PAGCOR income tax exemption; non-impairment of contracts.PAGCOR contends that Section 1 (c) of Republic Act (RA) No. 9337 is null and void ab initio for violating the non-impairment clause of the Constitution. PAGCOR avers that laws form part of, and is read into, the contract even without the parties expressly saying so. PAGCOR states that the private parties/investors transacting with it considered the tax exemptions, which inure to their benefit, as the main consideration and indumenta for their decision to transact or invest with it. PAGCOR argues that the withdrawal of its exemption from corporate income tax by RA No. 9337 has the effect of changing the main consideration and inducement for the transactions of private parties with it and thus violative of the non-impairment clause. This contention lacks merit. The non-impairment clause, which provides that no law impairing the obligations of contracts shall be passed, is limited in application to laws that derogate from prior acts or contracts by enlarging, abridging or in any manner changing the intention of the parties. There is impairment of a subsequent law changes the terms of a contract between the parties, imposes new conditions, dispenses with those agreed upon or withdraws remedies for the enforcement of the rights of the parties. As regards franchises, Section 11, Article XII of the Constitution provides that no franchise or right shall be granted except under the condition that it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. In the case of Manila Electric Company vs Province of Laguna, the Court held that a franchise partakes the nature of a grant, which is beyond the purview of the non-impairment clause of the Constitution. In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos, clubs and other recreation or amusement places, sports, gaming pools, i.e., basketball, football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the Republic of the Philippines. Under Section 11, Article XII of the Constitution, PAGCOR’s franchise is subject to amendment, alteration or repeal by Congress such as the amendment under Section 1 of RA No. 9377. Hence, the provision in said section withdrawing the exemption of PAGCOR from corporate income tax, which may affect any benefits to PAGCOR’s transactions with private parties, is not violative of the non-impairment clause of the Constitution. Philippine Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, , G.R. No. 172087, March 15, 2011.

National Internal Revenue Code; PAGCOR value added tax exemption; Revenue Regulation No. 16-2005. The provision in Revenue Regulation (RR) No. 16-2005 subjecting PAGCOR to 10% value-added tax (VAT) is invalid for being contrary to Republic Act (RA) No. 9337. Nowhere in RA No. 9337 is it provided that PAGCOR can be subjected to VAT. RA No. 9337 is clear only as to the removal of PAGCOR’s exemption from the payment of corporate income tax. RA No. 9337 itself exempts PAGCOR from VAT pursuant to Section 7 (k) thereof which provides among the transaction exempt from VAT, transactions which are exempt under special laws. PAGCOR’s charter, Presidential Decree No. 1869, is a special law that grants it exemption from taxes. Moreover, PAGCOR’s exemption from VAT is supported by Section 6 of RA No. 9337, which retained Section 108 (B)(3) of RA No. 8424. Under this Section 108 (B)(3), among transactions subject to zero percent (0%) rate are services rendered to persons or entities whose exemption under special laws effectively subject the supply of such services of zero percent (0%) rate. PAGCOR’s exemption from VAT has been discussed in the case of Commissioner of Internal Revenue vs Acesite (Philippines) Hotel Corporation,  where the Court held that  Section 13 of PAGCOR’s charter clearly gives PAGCOR a blanket exemption to taxes with no distinction on whether the taxes are direct or indirect. Philippine Amusement and Gaming Corporation (PAGCOR) vs The Bureau of Internal Revenue, G.R. No. 172087, March 15, 2011.

National Internal Revenue Code; documentary stamp tax; nature.Documentary stamp tax (DST) is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. It is in the nature of an excise tax because it is imposed upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business distinct and separate from the business itself. DST is levied on the exercise of certain privileges granted by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Examples of these privileges, the exercise of which are subject to DST, are leases of lands, mortgages, pledges, trusts and conveyances of real property. DST is thus imposed on the exercise of these privileges through the execution of specific instruments, independently of the legal status of the transactions giving rise thereto. The DST must be paid upon the issuance of these instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or unenforceable. Accordingly, DST on insurance policies, though imposed on the document itself, is actually levied on the privilege to conduct insurance business. Under Section 173 of the National Internal Revenue Code (NIRC), the DST becomes due and payable at the time the insurance policy is issued, with the tax based on the amount insured by the policy as provided for in Section 183 of the NIRC. Commissioner of Internal Revenue vs Manila Bankers’ Life Insurance Corporation, G.R. No. 169103, March 16, 2011.

National Internal Revenue Code; documentary stamp tax; life insurance policy; guaranteed continuity clause; renewal or extension.The “guaranteed continuity” clause of the taxpayer’s Money Plus Plan life insurance policy of the taxpayer provides in part that “[a]t the end of each twenty-year period, and provided that you have not attained age 55, you may renew your Policy for a further twenty-year period.”  The only things guaranteed in the continuity clause were: the continuity of the policy until the stated expiry date as long as the premiums were paid within the allowed time; the non-change in premiums for the duration of the 20-year policy term; and the option to continue such policy after the 20-year period, subject to certain requirements. In fact, even the continuity of the policy after its term was not guaranteed as the decision to renew it belonged to the insured, subject to certain conditions. Any increase in the sum assured, as a result of the clause, had to survive a new agreement between the taxpayer and the insured. The increase in the life insurance coverage was only corollary to the new premium rate imposed based upon the insured’s age at the time the continuity clause was availed of. It was not automatic, was never guaranteed, and was certainly neither definite nor determinable at the time the policy was issued. Therefore, the increases in the sum assured brought about by the guaranteed continuity clause cannot be subject to documentary stamp tax under Section 183 of the National Internal Revenue Code as insurance made upon the lives of the insured. However, it is clear from the text of the guaranteed continuity clause that what the taxpayer was actually offering in its Money Plus Plan was the option to renew the policy, after the expiration of its original term. Consequently, the acceptance of this offer would give rise to the renewal of the original policy. To argue that there was no new legal relationship created by the availment of the guaranteed continuity clause would mean that any option to renew, integrated in the original agreement or contract, would not in reality be a renewal but only a discharge of a pre-existing obligation. The truth of the matter is that the guaranteed continuity clause only gave the insured the right to renew his life insurance policy which had a fixed term of 20 years. And although the policy would still continue with essentially the same terms and conditions, the fact is, its maturity date, coverage, and premium rate would have changed. The Court does not agree with the holding of the Court of Tax Appeals that “the renewal, is in effect treated as an increase in the sum assured since no new insurance policy was issued.” The renewal was not meant to restore the original terms of an old agreement, but instead it was meant to extend the life of an existing agreement, with some of the contract’s terms modified. The renewal was still subject to the acceptance and to the conditions of both the insured and the taxpayer. This is entirely different from a simple mutual agreement between the insurer and the insured, to increase the coverage of an existing and effective life insurance policy. It is clear that the availment of the option in the guaranteed continuity clause will effectively renew the Money Plus Plan policy, which is indisputably subject to the imposition of documentary stamp tax under Section 183 as an insurance renewed upon the life of the insured.  Commissioner of Internal Revenue vs Manila Bankers’ Life Insurance Corporation, G.R. No. 169103, March 16, 2011.

National Internal Revenue Code; documentary stamp tax; life insurance policy; group life insurance; additional members. When a group insurance plan is taken out, a group master policy is issued with the coverage and premium rate based on the number of members covered at that time. In the case of a company group insurance plan, the premiums paid on the issuance of the master policy over only those employees enrolled at the time such master policy was issued. When the employer hires additional employees during the life of the policy, the additional employees may be covered by the same group insurance already taken out without any need for the issuance of a new policy. The taxpayer claims that since the additional premiums represented the additional members of the same existing group insurance policy, then under our tax laws, no additional documentary stamp tax (DST) should be imposed since the appropriate documentary stamp tax, by its nature, is paid at the time of the issuance of the policy. The taxpayer assets that since the DST, by its nature, is paid at the time of the policy, “then there can be no other imposition on the same, regardless of any change in the number of employees covered by the existing group insurance. Section 183 of the National Internal Revenue Code covers all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon life or lives. The phrase “other instruments” as also found in the earlier version of Section 183, i.e., Section 1449(j) of the Administrative Code of 1917, was explained in Regulations No. 26 to include “any instrument by whatever name the same is called whereby insurance is made or renewed, i.e., by which the relationship of insurer and insured is created or evidenced.” Whenever a master policy admits of another member, another life is insured and covered. This means that the taxpayer, by approving the addition of another member to its existing master policy, is once more exercising its privilege to conduct the business of insurance, because it is yet again insuring a life. It does not matter that it did not issue another policy to effect this change, the fact remains that insurance on another life is made and the relationship of insurer and insured is created between the taxpayer and the additional member of that master policy. In the taxpayer’s case, its group insurance plan is embodied in a contract which includes not only the master policy, but all documents subsequently attached to the master policy. Among these documents are the Enrollment Cads accomplished by the employees when they applied for membership in the group insurance plan. Once registered in the Schedule of Benefits and attached to the master policy, the Enrollment Card of a new employee becomes evidence of such employee’s membership in the group insurance plan, and his right to receive the benefits therein. Every time, the taxpayer registers and attaches an Enrollment Card to an existing master policy, it exercises its privilege to conduct its business of insurance and this is patently subject to a DST as an insurance made upon a life under Section 183.  Commissioner of Internal Revenue vs Manila Bankers’ Life Insurance Corporation, G.R. No. 169103, March 16, 2011.

Tariff and Customs Code; Bureau of Customs; liability for lost shipment. The owner is entitled to recover the value of its lost shipment based on the acquisition cost at the time of payment. In the case of C.F. Sharp and Co., Inc. vs Northwest Airlines, Inc., the Court ruled that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of payment. In said case, the Court cited the case of Zagala vs. Jimenez and said that under Republic Act No. 529, as amended by RA No. 4100, stipulations on the satisfaction of obligations in foreign currency are void. Thus payments of monetary obligations, subject to certain exceptions, must be discharged in the currency which is the legal tender in the Philippines. However, since RA No. 529 does not provide for the rate of exchange for the payment of foreign currency obligations incurred after its enactment, the Court held in a number of cases that the rate of exchange for the conversion in the peso equivalent should be the prevailing rate at the time of payment. Also, in the case of Republic of the Philippines represented by the Bureau of Customs vs UNIMEX Micro-Electronics GmBH, which involved the seizure and detention of a shipment of computer game items which disappeared while in the custody of the Bureau of Customs, the Court upheld the decision of the Court of Appeals holding that the petitioner’s liability may be paid in Philippine currency, computed at the exchange rate prevailing at the time of actual payment. Commissioner of Customs vs AGHFA Incorporated, G.R. No. 187425, March 28, 2011.

Bureau of Customs; liability for lost shipment; state immunity. Regarding the state immunity doctrine, the Commissioner of Customs cannot escape liability for the lost shipment for goods. As discussed in the case of Republic of the Philippines represented by the Bureau of Customs vs UNIMEX Micro-Electronics GmBH, “the Court cannot turn a blind eye to [the Bureau of Custom’s] ineptitude and gross negligence in the safekeeping of respondent’s goods. [The Court is] not likewise unaware of its lackadaisical attitude in failing to provide a cogent explanation on the goods’ disappearance, considering that they were in its custody and that they were in fact the subject of litigation. The situation does not allow [the Court] to reject respondent’s claim on the mere invocation of the doctrine of state immunity. Succinctly, the doctrine must be fairly observed and the State should not avail itself of this prerogative to take undue advantage of parties that may have legitimate claims against it.  Commissioner of Customs vs AGHFA Incorporated, G.R. No. 187425, March 28, 2011.

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