September 2013 Philippine Supreme Court Decisions on Tax Law

Here are select September 2013 rulings of the Supreme Court of the Philippines on tax law:

National Internal Revenue Code; tax refund. If the Bureau of Internal Revenue, or other government taxing agencies for that matter, expects taxpayers to observe fairness, honesty, transparency and accountability in paying their taxes, it must hold itself against the same standard in refunding excess payments or illegal exactions. As a necessary corollary, when the taxpayer’s entitlement to a refund stands undisputed, the State should not misuse technicalities and legalisms, however exalted, to keep money not belonging to it. The government is not exempt from the application of solutio indebiti, a basic postulate proscribing one, including the State, from enriching himself or herself at the expense of another. Commissioner of Internal Revenue v. Fortune Tobacco Corporation, Fortune Tobacco Corporation v. Commissioner of Internal Revenue, G.R. Nos. 167274-75/G.R. No. 192576, September 11, 2013.

Procedure; execution of judgment; fallo prevails over the body of the opinion; exceptions. It is established jurisprudence that “the only portion of the decision which becomes the subject of execution and determines what is ordained is the dispositive part, the body of the decision being considered as the reasons or conclusions of the Court, rather than its adjudication.” However, there are two (2) exceptions to this rule: [1] where there is ambiguity or uncertainty, the body of the opinion may be referred to for purposes of construing the judgment because the dispositive part of a decision must find support from the decision’s ratio decidendi; and [2] where extensive and explicit discussion and settlement of the issue is found in the body of the decision. Both exceptions apply in this case. There is an ambiguity in the fallo of the July 21, 2008 decision in G.R. Nos. 167274-75 considering that the propriety of the Court of Appeals holding in CA-G.R. SP No. 83165 formed part of the core issues raised in G.R. Case Nos. 167274-75 but was left out in the decretal portion of the judgment. The fallo of the Court’s July 21, 2008 decision should, therefore, be corresponding corrected.  Commissioner of Internal Revenue v. Fortune Tobacco Corporation, Fortune Tobacco Corporation v. Commissioner of Internal Revenue,  G.R. Nos. 167274-75/G.R. No. 192576, September 11, 2013.

National Internal Revenue Code; income taxation. As a general rule, a domestic corporation must pay whichever is higher of (1) the income tax under Section 27(A) of the National Internal Revenue Code (NIRC), computed by applying the tax rate to the taxable income of the corporation, or (2) the minimum corporate income tax under Section 27(E) of the NIRC equivalent to 2% of the gross income of the corporation. Commissioner of Internal Revenue v. Philippine Airlines, Inc. (PAL),G.R. No. 179259, September 25, 2013.

National Internal Revenue Code; Presidential Decree No. 1590; minimum corporate income tax. Under Philippine Air Lines, Inc.’s (PAL) charter, Presidential Decree No. 1590, however, PAL cannot be subjected to MCIT as finally settled and categorically enunciated in Commissioner of Internal Revenue v. Philippine Airlines, Inc. for the following reasons:

(1)    Basic corporate income tax” under Section 13(a) of PAL’s charter refers to the tax rate under Section 27(A) of the National Internal Revenue Code of 1997 (NIRC). There is nothing in that provision which says that PAL is subject to the entire Title II of the NIRC, entitled “Tax on Income.”

(2)   Section 13(a) of PAL’s charter further provides that the basic corporate income tax of PAL shall be based on its annual net taxable income. Taxable income is defined under Section 31 of the NIRC as the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income by the NIRC or other special laws. PAL’s charter may be considered as one of such special laws authorizing PAL, in computing its annual net taxable income, on which its basic corporate income tax shall be based, to deduct from its gross income the following: (1) depreciation of assets at twice the normal rate; and (2) net loss carry-over up to five years following the year of such loss.

In comparison, inclusions in and exclusions/deductions from gross income for MCIT purposes are limited to those directly arising from the conduct of the taxpayer’s business as provided under Section 27(E) of the NIRC. It is, thus, more limited than the gross income used in the computation of basic corporate income tax. In light of the foregoing, there is an apparent distinction under the NIRC between taxable income, which is the basis for basic corporate income tax under Section 27(A); and gross income, which is the basis for the MCIT under Section 27(E). The two terms have their respective technical meanings, and cannot be used interchangeably.

(3)   Even if the basic corporate income tax and the MCIT are both income taxes under Section 27 of the NIRC, and one is paid in place of the other, the two are distinct and separate taxes. The MCIT is different from the basic corporate income tax, not just in the rates, but also in the bases for their computation. Not being covered by Section 13(a) of PAL’s charter, which makes PAL liable only for basic corporate income tax, then MCIT is included in “all other taxes” from which PAL is exempted.

(4)   The evident intent of Section 13 of PAL’s charter is to extend to PAL tax concessions not ordinarily available to other domestic corporations. Section 13 of PAL’s charter permits PAL to pay whichever is lower of the basic corporate income tax or the franchise tax; and the tax so paid shall be in lieu of all other taxes, except only real property tax. Hence, under its franchise, PAL is to pay the least amount of tax possible.

(5)   A careful reading of Section 13 rebuts the argument that the “in lieu of all other taxes” proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PAL’s charter is intended to give respondent two options of paying taxes as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative which results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.

(6)    PAL’s charter explicitly allows PAL, in computing its basic corporate income tax, to carry over as deduction any net loss incurred in any year, up to five years following the year of such loss. Therefore, PAL’s charter does not only consider the possibility that, at the end of a taxable period, PAL shall end up with zero annual net taxable income (when its deductions exactly equal its gross income), but also the likelihood that PAL shall incur net loss (when its deductions exceed its gross income). If PAL is subjected to MCIT, the provision in PAL’s Charter on net loss carry-over will be rendered nugatory. Net loss carry-over is material only in computing the annual net taxable income to be used as basis for the basic corporate income tax of PAL; but PAL will never be able to avail itself of the basic corporate income tax option when it is in a net loss position, because it will always then be compelled to pay the necessarily higher MCIT. Commissioner of Internal Revenue v. Philippine Airlines, Inc. (PAL),G.R. No. 179259, September 25, 2013.

(Caren thanks Grace Lazaro for assisting in the preparation of this post.) 

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