July 2011 Philippine Supreme Court Decisions on Tax Law

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

National Internal Revenue Code; income tax; advances to affiliates; ; imputation of interest income; power of Commissioner of Internal Revenue. Section 43 [now Section 50] of the 1993 National Internal Revenue Code (NIRC) provides that. “(i)n case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines) owned or controlled directly or indirectly by the same interests, the Commissioner of Internal Revenue [(CIR)] is authorized to distribute, apportion or allocate gross income or deductions between or among such organization, trade of business, if he determines that such distribution, apportionment or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organization, trade or business,” Section 179 of Revenue Regulations No. 2 provides in part that “(i)n determining the true net income of a controlled taxpayer, the [CIR] is not restricted to the case of improper accounting, to the case of a fraudulent, colorable, or sham transaction, or to the case of a device designed to reduce of avoid tax by shifting or distorting income or deductions. The authority to determine true net income extends to any case in which either by inadvertence or design the taxable net income in whole or in part, of a controlled taxpayer, is other than it would have been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer.” Despite the broad parameters provided, however, the CIR’s power of distribution, apportionment or allocation of gross income and deductions under the NIRC and Revenue Regulations No. 2 do not include the power to impute “theoretical interests” to the taxpayer’s transactions.  Pursuant to Section 28 [now Section 32] of the NIRC, the term “gross income” is understood to mean all income from whatever source derived, including, but not limited to certain items. While it has been held that the phrase “from whatever source derived” indicates a legislative policy to include all income not expressly exempted within the class of taxable income under Philippine laws, the term “income” has been variously interpreted to mean “cash received or its equivalent,” the amount of money coming to a person within a specific time” or something distinct from principal or capital.” Otherwise stated, there must be proof of the actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed, apportioned or allocated by the CIR. In this case, there is no evidence of actual or possible showing that the advances taxpayer extended to its affiliates had resulted to interests subsequently assessed by the CIR. Even if the Court were to accord credulity to the CIR’s assertion that taxpayer had deducted substantial interest expense from its gross income, there would still be no factual basis for the imputation of theoretical interests on the subject advances and assess deficiency income taxes thereon. Further, pursuant to Article 1959 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; documentary stamp tax; advances to affiliates. Loan agreements and promissory notes are taxed under Section 180 of the 1993 National Internal Revenue Code (NIRC) [they are now taxed under Section 179 as “evidence of indebtedness]. When read in conjunction with Section 173 of the NIRC, Section 180 concededly applies to “[a]ll loan agreements, whether made or signed in the Philippines, or abroad when the obligation or right arises from Philippine sources or the property or object of the contract is located or used in the Philippines.” Section 3 (b) of Revenue Regulations No. 9-94 provides in part that the term “loan agreement” shall include “credit facilities, which may be evidenced by credit memo, advice or drawings.”  Section 6 of the same revenue regulations further provides that “[i]n cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of check or withdrawal slip…” Applying the foregoing to the case, the instructional letters as well as the journal and cash vouchers evidencing the advances taxpayer extended to its affiliates in 1996 and 1997 qualified as loan agreements upon which documentary stamp taxes may be imposed.  Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; non-retroactivity of modification of rulings, circulars, rules and regulations; who is entitled to the benefit of such rule. Any revocation, modification or reversal of a Bureau of Internal Revenue (BIR) ruling shall not be applied retroactively if to so apply it would be prejudicial to the taxpayer. This rule does not apply: (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. The foregoing principle of non-retroactivity of BIR may be invoked by the taxpayer who, in the first place, sought the ruling from the Commissioner of Internal Revenue.  Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; income tax; tax-free exchange; acquisition of control. The requisites for the non-recognition of gain or loss under section 34 (c) (2) [now Section 40 (c) (2)] of the 1993 National Internal Revenue Code (NIRC) are the following: (a) the transferee is a corporation; (b) the transferee exchanges its shares of stock for property/ies of the transferor; (c) the transfer is made by a person, acting alone or together with others, not exceeding four persons; and (d) as a result of the exchange the transferor, alone or together with others, not exceeding four, gains control of the transferee.  [Prior to the exchange, transferor already had a controlling interest in the transferee.  The taxpayer, together with another affiliate which was not an existing stockholder of the transferor prior to the exchange, exchanged property for shares of stock in the transferee. The taxpayer’s controlling interest went down from 67.42% prior to the exchange to 61.03% after the exchange. The affiliate acquired 9.96% of the transferee as a result of the exchange.]The Commissioner of Internal Revenue (CIR) argues that taxable gain should be recognized for the exchange considering that the taxpayer’s controlling interest in the transferee was decreased as a result of the transfer while the affiliate acquired only 9.96% of the transferee. Rather than isolating the same as proposed by the CIR, the taxpayer’s 61.03% control of transferee should be appreciated in combination with the 9.96% which as issued to its affiliate. Since, the term “control” is clearly defined as “ownership of stocks in a corporation possessing at least fifty-one percent of the total voting power of classes of stock entitled to vote,” the exchange of property for stocks between taxpayer, the affiliate and the transferee clearly qualify as a tax free exchange under the NIRC. Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; income tax; gross income. No deficiency tax can be assessed on the gain on the supposed dilution and/or increase in the value of taxpayer’s shareholdings in the transferee which the Commissioner of Internal Revenue (CIR), at any rate, failed to establish. Bearing in mind the meaning of “gross income,” it cannot be gainsaid that a mere increase or appreciation in the value of the shares cannot be considered income for taxation purposes. Since “a mere advance in the value of the property of a person or corporation in no sense constitute the ‘income’ specified in the revenue law,” it has been held in the early case of Fisher vs. Trinidad that it “constitutes and can be treated merely as an increase of capital.”  Hence, the CIR has no factual and legal basis in assessing income tax on the increase in the value of the taxpayer’s shareholdings in the transferee until the same is actually sold. Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 163653, July 19, 2011; Commissioner of Internal Revenue vs. Filinvest Development Corporation, G.R. No. 167689, July 19, 2011.

National Internal Revenue Code; value-added tax; toll fees as gross receipts derived from sale of services. Section 108 of the National Internal Revenue Code (NIRC) imposes value added tax on “all kinds of service” rendered in the Philippines for a fee, including those specified in the list. The enumeration of affected services is not exclusive. By qualifying services with the words “all kinds,” Congress has given the term “services” an all-encompassing meaning. Thus, every activity that can be imagined as a form of “service” rendered for a fee should be deemed included unless some provision of law especially excludes it. When a tollway operator takes a toll fee from a motorist, the fee is in effect for the latter’s use of the tollway facilities over which the operator enjoys private proprietary rights that its contract and the law recognize. In this sense, the tollway operator is no different from those enumerated under Section 108 of the NIRC who allow others to use their properties or facilities for a fee.  Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011.

National Internal Revenue Code; value-added tax; tollway operators as franchise grantees. Section 108 of the National Internal Revenue Code (NIRC) also imposes value added tax (VAT) on “all other franchise grantees” other than those under Section 119 of the NIRC. Tollway operators are franchise grantees and they do not belong to the exceptions (the low-income radio and/or television broadcasting companies with gross annual incomes of less than PhP 10 million and gas and water utilities) that Section 119 spares from VAT. The word “franchise” broadly covers government grants of a special right to do an act or series of acts of public concern. It has been broadly construed as referring, not only to authorization that Congress directly issues in the form of a special law, but also to those granted by administrative agencies to which the power to grant franchises has been delegated by Congress. Tollway operators are, owning to the nature and object of their business, “franchise grantees.” The construction, operation, and maintenance of toll facilities on public improvements are activities of public consequence that necessarily require a special grant of authority from the state. Apart from Congress, tollway franchise may also be granted by the Toll Regulatory Board, pursuant to the exercise of its delegated powers under Presidential Decree No. 1112. The franchise in this case is evidence by a “Toll Operation Certificate.” Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011.

National Internal Revenue Code; value-added tax; toll fee is not a user’s tax. Petitioners argue that toll fee is a user’s tax and to impose value-added tax on toll fees is tantamount to taxing a tax. Fees paid by the public to tollway operators for use of the tollways, are not taxes in any sense. A tax is imposed  under the taxing power of the government principally for the purpose of raising revenues to fund public expenditures. Toll fees, on the other hand, are collected by private tollway operators as reimbursement for the costs and expenses incurred in the construction, maintenance and operation of the tollways, as well as to assure them a reasonable margin of income. Although toll fees are charged for the use of public facilities, they are not government exactions that can be properly treated as tax. Taxes may be imposed only by the government under its sovereign authority, toll fees may be demanded by either the government or private individuals or entities, as an attribute of ownership. Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011.

National Internal Revenue Code; value-added tax (VAT); even if toll fee is a user’s tax, VAT is not a tax on tax. Even if toll fees were deemed as a “user’s tax,” value-added tax (VAT) on tollway operations cannot be a tax on tax. VAT is assessed against the tollway operator’s gross receipts and not necessarily on the toll fees. Although the tollway operator may shift the VAT burden to the tollway user, it will not make the latter directly liable for the VAT. The shifted VAT simply becomes part of the toll fees that one has to pay in order to use the tollways. Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011.

Taxation; impairment of obligation of contracts.  Petitioner Timbol has no personality to invoke the non-impairment of contract clause on behalf of private investors in the tollway projects. She will neither be prejudiced by nor be affected by the alleged diminution of return of investments that may result from the value-added tax imposition. She has no interest at all in the profits to be earned under the toll operating agreements. The interest in and right to recover investments solely belongs to private investors. Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011.

Taxation; administrative feasibility.  Administrative feasibility is one of the canons of a sound tax system. It simply means that the tax system should be capable of being effectively administered and enforced with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a tax imposition invalid “except to the extent that specific constitutional or statutory limitations are impaired. Thus, even if the imposition of value-added tax on tollway operations may seem burdensome to implement, it is not necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. Renato V. Diaz and Aurora Ma. F. Timbol vs. the Secretary of Finance and the Commissioner of Internal Revenue, G.R. No. 193007; July 19, 2011.

Republic Act No. 7432 or “An Act to Maximize the Contribution of Senior Citizens to Nation Building, Grant Benefits and Special Privileges and For Other Purposes”; tax credit; cost of the 20% senior citizens’ discount. Prior to its amendment, Section 4 of Republic Act No. 7432, allows the 20% senior citizens’ discount to be claimed by the private establishment as a tax credit and not merely as a tax deduction from gross sales or gross income. [Note that currently the law treats the discount as a tax deduction instead of as a tax credit.] The law is however is silent as to how the “cost of discount” as a tax credit should be construed. Following other cases on this issue, the term “cost” is the amount of the 20% discount extended by a private establishment to senior citizens . Mercury Drug Corporation vs. Commissioner of Internal Revenue, G.R. No. 164050; July 20, 2011.

National Internal Revenue Code; documentary stamp tax; savings account plus product. The savings account plus (SAP) product is subject to documentary stamp tax (DST) under Section 180 [now 179] of the National Internal Revenue Code where, although the money is payable anytime, the withdrawal of the money before the expiration of the term results in the reduction of the interest rate. The fact that the SAP is evidence by a passbook does not remove it from the coverage of Section 180. A document to be considered a certificate of deposit need not be in a specific form. Thus, a passport issued by a bank qualifies as a certificate of deposit drawing interest because it is considered a written acknowledgment by a bank that it has accepted a deposit of a sum of money from a depositor.  Prudential Bank vs. Commissioner of Internal Revenue, G.R. No. 180390; July 27, 2011.

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