tax cases batch 1

7/25/2019 Tax Cases Batch 1

1/34

Exemption to Estate taxes

Republic of the Philippines

SUPREME COURT

Manila

EN BANC

G.R. No. L-22734 September 15, 1967

COMMSSONER O! NTERN"L RE#ENUE,petitioner,

vs.

M"NUEL $. PNE%", &' o(e o) t*e *e+r' o) ee&'e "T"N"SO PNE%",respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

$ENGON, /.P.,J.:

On Ma !", #$%& Atanasio Pineda died, survived b his 'ife, (elicisima Ba)tas, and #& children, the eldest of 'hom

is Manuel B. Pineda, a la'er. Estate proceedin)s 'ere had in the Court of (irst *nstance of Manila +Case No. ##!$-

'herein the survivin) 'ido' 'as appointed administratrix. he estate 'as divided amon) and a'arded to the heirsand the proceedin)s terminated on /une 0, #$%0. Manuel B. Pineda1s share amounted to about P!,&22.22.

After the estate proceedin)s 'ere closed, the Bureau of *nternal Revenue investi)ated the income tax liabilit of the

estate for the ears #$%&, #$%3, #$% and #$%0 and it found that the correspondin) income tax returns 'ere not filed.

hereupon, the representative of the Collector of *nternal Revenue filed said returns for the estate on the basis of

information and data obtained from the aforesaid estate proceedin)s and issued an assessment for the follo'in)4

#. 5eficienc income tax

#$%& P#"&.0"

#$%3 %"3.$&

#$% #,!23.$# P#,$.3$

Add4 &6 surchar)e 00.$0

#6 monthl interest

from November "2,

#$&" to April #&, #$& !2.

Compromise for late

filin) 02.22

Compromise for late

pament %2.22

otal amount due P!,2.%%

77777777777

!. Additional residence tax for#$%& P#%.&277777777777

". Real Estate dealer1s tax for the

fourth 8uarter of #$%3 and the

'hole ear of #$%

P!2.&2

77777777777

Manuel B. Pineda, 'ho received the assessment, contested the same. 9ubse8uentl, he appealed to the Court of ax

Appeals alle)in) that he 'as appealin) :onl that proportionate part or portion pertainin) to him as one of the heirs.:

After hearin) the parties, the Court of ax Appeals rendered ;ud)ment reversin) the decision of the Commissioner on

the )round that his ri)ht to assess and collect the tax has prescribed. he Commissioner appealed and this Court

affirmed the findin)s of the ax Court in respect to the assessment for income tax for the ear #$% but held that the


2/34

ri)ht to assess and collect the taxes for #$%& and #$%3 has not prescribed. (or #$%& and #$%3 the returns 'ere filed on

Au)ust !%, #$&"< assessments for both taxable ears 'ere made 'ithin five ears therefrom or on October #$, #$&"ltimatel, after its incorporation lar)el throu)h the

promotion of the said persons, this ne' corporation purchased the P9E5C properties.15(or this sale, Al)ue received as

a)ent a commission of P#!3,222.22, and it 'as from this commission that the P&,222.22 promotional fees 'ere paid to theaforenamed individuals.16

here is no dispute that the paees dul reported their respective shares of the fees in their income tax returns and paid

the correspondin) taxes thereon.17he Court of ax Appeals also found, after examinin) the evidence, that nodistribution of dividends 'as involved.10

he petitioner claims that these paments are fictitious because most of the paees are members of the same famil in

control of Al)ue. *t is ar)ued that no indication 'as made as to ho' such paments 'ere made, 'hether b chec or

in cash, and there is not enou)h substantiation of such paments. *n short, the petitioner su))ests a tax dod)e, an

attempt to evade a le)itimate assessment b involvin) an ima)inar deduction.

=e find that these suspicions 'ere ade8uatel met b the private respondent 'hen its President, Alberto uevara, and

the accountant, Cecilia G. de /esus, testified that the paments 'ere not made in one lump sum but periodicall and in

different amounts as each paee1s need arose. 19*t should be remembered that this 'as a famil corporation 'here strictbusiness procedures 'ere not applied and immediate issuance of receipts 'as not re8uired. Even so, at the end of the ear,

'hen the boos 'ere to be closed, each paee made an accountin) of all of the fees received b him or her, to mae up the

total of P&,222.22. 2Admittedl, everthin) seemed to be informal. his arran)ement 'as understandable, ho'ever, in

vie' of the close relationship amon) the persons in the famil corporation.

=e a)ree 'ith the respondent court that the amount of the promotional fees 'as not excessive. he total commission

paid b the Philippine 9u)ar Estate 5evelopment Co. to the private respondent 'as P#!&,222.22. 21After deductin) thesaid fees, Al)ue still had a balance of P&2,222.22 as clear profit from the transaction. he amount of P&,222.22 'as 326of the total commission. his 'as a reasonable proportion, considerin) that it 'as the paees 'ho did practicall

everthin), from the formation of the Ge)etable Oil *nvestment Corporation to the actual purchase b it of the 9u)ar Estate

properties. his findin) of the respondent court is in accord 'ith the follo'in) provision of the ax Code4

9EC. "2.$eductions from )ross income.*n computin) net income there shall be allo'ed as

deductions I

+a- Expenses4

+#-In )eneral.All the ordinar and necessar expenses paid or incurred durin) the taxable ear in

carrin) on an trade or business, includin) a reasonable allo'ance for salaries or othercompensation for personal services actuall rendered< ... 22

and Revenue Re)ulations No. !, 9ection 2 +#-, readin) as follo's4

9EC. 2. Compensation for personal services.Amon) the ordinar and necessar expenses paid or

incurred in carrin) on an trade or business ma be included a reasonable allo'ance for salaries or

other compensation for personal services actuall rendered. he test of deductibilit in the case of

compensation paments is 'hether the are reasonable and are, in fact, paments purel for service.

his test and deductibilit in the case of compensation paments is 'hether the are reasonable and

are, in fact, paments purel for service. his test and its practical application ma be further stated

and illustrated as follo's4

An amount paid in the form of compensation, but not in fact as the purchase price of services, is not

deductible. +a- An ostensible salar paid b a corporation ma be a distribution of a dividend onstoc. his is liel to occur in the case of a corporation havin) fe' stocholders, Practicall all of

'hom dra' salaries. *f in such a case the salaries are in excess of those ordinaril paid for similar

services, and the excessive pament correspond or bear a close relationship to the stocholdin)s of

the officers of emploees, it 'ould seem liel that the salaries are not paid 'holl for services

rendered, but the excessive paments are a distribution of earnin)s upon the stoc. . . . +Promul)ated

(eb. ##, #$"#, "2 O.. No. #0, "!&.-

*t is 'orth notin) at this point that most of the paees 'ere not in the re)ular emplo of Al)ue nor 'ere the its

controllin) stocholders. 23


6/34

he 9olicitor eneral is correct 'hen he sas that the burden is on the taxpaer to prove the validit of the claimed

deduction. *n the present case, ho'ever, 'e find that the onus has been dischar)ed satisfactoril. he private

respondent has proved that the pament of the fees 'as necessar and reasonable in the li)ht of the efforts exerted b

the paees in inducin) investors and prominent businessmen to venture in an experimental enterprise and involve

themselves in a ne' business re8uirin) millions of pesos. his 'as no mean feat and should be, as it 'as, sufficientl

recompensed.

*t is said that taxes are 'hat 'e pa for civiliHation societ. =ithout taxes, the )overnment 'ould be paralHed for

lac of the motive po'er to activate and operate it. ence, despite the natural reluctance to surrender part of one1shard earned income to the taxin) authorities, ever person 'ho is able to must contribute his share in the runnin) of

the )overnment. he )overnment for its part, is expected to respond in the form of tan)ible and intan)ible benefits

intended to improve the lives of the people and enhance their moral and material values. his smbiotic relationship is

the rationale of taxation and should dispel the erroneous notion that it is an arbitrar method of exaction b those in

the seat of po'er.

But even as 'e concede the inevitabilit and indispensabilit of taxation, it is a re8uirement in all democratic re)imes

that it be exercised reasonabl and in accordance 'ith the prescribed procedure. *f it is not, then the taxpaer has a

ri)ht to complain and the courts 'ill then come to his succor. (or all the a'esome po'er of the tax collector, he ma

still be stopped in his tracs if the taxpaer can demonstrate, as it has here, that the la' has not been observed.

=e hold that the appeal of the private respondent from the decision of the petitioner 'as filed on time 'ith the

respondent court in accordance 'ith Rep. Act No. ##!&. And 'e also find that the claimed deduction b the private

respondent 'as permitted under the *nternal Revenue Code and should therefore not have been disallo'ed b the

petitioner.

ACCOR5*NFJ, the appealed decision of the Court of ax Appeals is A((*RME5 in toto'ithout costs.

9O OR5ERE5.

+eehan&ee C.!. ,arvasa Gancayco and Gri-o(/uino !!. concur.

Necessit heor


SUPREME COURT

Manila

EN BANC

G.R. No. L-2274 "pr+ 3, 1965

TE PLPPNE GU"R"NT CO., NC.,petitioner,

vs.

TE COMMSSONER O! NTERN"L RE#ENUE &( TE COURT O! T" "PPE"LS,respondents.

!osue 0. Gustilo and "amire% and Orti)as for petitioner.

Office of the Solicitor General and (ttorney 1.G. Salda2ena for respondents.

$ENGON, /.P.,J.:


7/34

he Philippine uarant Co., *nc., a domestic insurance compan, entered into reinsurance contracts, on various

dates, 'ith forei)n insurance companies not doin) business in the Philippines namel4 *mperio CompaKia de 9e)uros,

Fa >nion El (enix EspaKol, Overseas Assurance Corp., Ftd., 9ocieded Anonima de Rease)uros AlianHa, oio

Marino L (ire *nsurance Co., Ftd., >nion Assurance 9ociet Ftd., 9'iss Reinsurance Compan and ariff

Reinsurance Fimited. Philippine uarant Co., *nc., thereb a)reed to cede to the forei)n reinsurers a portion of the

premiums on insurance it has ori)inall under'ritten in the Philippines, in consideration for the assumption b the

latter of liabilit on an e8uivalent portion of the riss insured. 9aid reinsurrance contracts 'ere si)ned b Philippine

uarant Co., *nc. in Manila and b the forei)n reinsurers outside the Philippines, except the contract 'ith 9'issReinsurance Compan, 'hich 'as si)ned b both parties in 9'itHerland.

he reinsurance contracts made the commencement of the reinsurers1 liabilit simultaneous 'ith that of Philippine

uarant Co., *nc. under the ori)inal insurance. Philippine uarant Co., *nc. 'as re8uired to eep a re)ister in

Manila 'here the riss ceded to the forei)n reinsurers 'here entered, and entr therein 'as bindin) upon the

reinsurers. A proportionate amount of taxes on insurance premiums not recovered from the ori)inal assured 'ere to be

paid for b the forei)n reinsurers. he forei)n reinsurers further a)reed, in consideration for mana)in) or

administerin) their affairs in the Philippines, to compensate the Philippine uarant Co., *nc., in an amount e8ual to

&6 of the reinsurance premiums. Conflicts andDor differences bet'een the parties under the reinsurance contracts

'ere to be arbitrated in Manila. Philippine uarant Co., *nc. and 9'iss Reinsurance Compan stipulated that their

contract shall be construed b the la's of the Philippines.

Pursuant to the aforesaid reinsurance contracts, Philippine uarant Co., *nc. ceded to the forei)n reinsurers the

follo'in) premiums4

#$&" . . . . . . . . . . . . . . . . . . . . . P0%!,%33.#

#$&% . . . . . . . . . . . . . . . . . . . . . !#,%#.0&

9aid premiums 'ere excluded b Philippine uarant Co., *nc. from its )ross income 'hen it file its income tax

returns for #$&" and #$&%. (urthermore, it did not 'ithhold or pa tax on them. Conse8uentl, per letter dated April

#", #$&$, the Commissioner of *nternal Revenue assessed a)ainst Philippine uarant Co., *nc. 'ithholdin) tax on

the ceded reinsurance premiums, thus4

#$&"

ross premium per investi)ation . . . . . . . . . . P30,&02.22

=ithholdin) tax due thereon at !%6 . . . . . . . . P#0%,%&$.22

!&6 surchar)e . . . . . . . . . . . . . . . . . . . . . . . . . . %3,##%.22

Compromise for nonfilin) of 'ithholdin)

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .#22.22

OAF AMO>N 5>E L COFFEC*BFE . . . . P!"2,3".22

7777777777

#$&%

ross premium per investi)ation . . . . . . . . . . P02.002.30

=ithholdin) tax due thereon at !%6 . . . . . . . . P#0%,%##.22

!&6 surchar)e . . . . . . . . . . . . . . . . . . . . . . . . . . P#0%,%##.22

Compromise for nonfilin) of 'ithholdin)

income tax return . . . . . . . . . . . . . . . . . . . . . . . . .#22.22

OAF AMO>N 5>E L COFFEC*BFE . . . .

P!"%,"3%.22


8/34

7777777777

Philippine uarant Co., *nc., protested the assessment on the )round that reinsurance premiums ceded to forei)n

reinsurers not doin) business in the Philippines are not sub;ect to 'ithholdin) tax. *ts protest 'as denied and it

appealed to the Court of ax Appeals.

On /ul 3, #$3", the Court of ax Appeals rendered ;ud)ment 'ith this dispositive portion4

*N G*E= O( E (OREO*N CON9*5ERA*ON9, petitioner Philippine uarant Co., *nc. is hereb

ordered to pa to the Commissioner of *nternal Revenue the respective sums of P!2!,#$!.22 and P#",#&".22or the total sum of P"&,"%&.22 as 'ithholdin) income taxes for the ears #$&" and #$&%, plus the statutor

delin8uenc penalties thereon. =ith costs a)ainst petitioner.

Philippine uarant Co, *nc. has appealed, 8uestionin) the le)alit of the Commissioner of *nternal Revenue1s

assessment for 'ithholdin) tax on the reinsurance premiums ceded in #$&" and #$&% to the forei)n reinsurers.

Petitioner maintain that the reinsurance premiums in 8uestion did not constitute income from sources 'ithin the

Philippines because the forei)n reinsurers did not en)a)e in business in the Philippines, nor did the have office here.

he reinsurance contracts, ho'ever, sho' that the transactions or activities that constituted the undertain) to reinsure

Philippine uarant Co., *nc. a)ainst loses arisin) from the ori)inal insurances in the Philippines 'ere performed in

the Philippines. he liabilit of the forei)n reinsurers commenced simultaneousl 'ith the liabilit of Philippine

uarant Co., *nc. under the ori)inal insurances. Philippine uarant Co., *nc. ept in Manila a re)ister of the riss

ceded to the forei)n reinsurers. Entries made in such re)ister bound the forei)n resinsurers, localiHin) in thePhilippines the actual cession of the riss and premiums and assumption of the reinsurance undertain) b the forei)n

reinsurers. axes on premiums imposed b 9ection !&$ of the ax Code for the privile)e of doin) insurance business

in the Philippines 'ere paable b the forei)n reinsurers 'hen the same 'ere not recoverable from the ori)inal

assured. he forei)n reinsurers paid Philippine uarant Co., *nc. an amount e8uivalent to &6 of the ceded premiums,

in consideration for administration and mana)ement b the latter of the affairs of the former in the Philippines in

re)ard to their reinsurance activities here. 5isputes and differences bet'een the parties 'ere sub;ect to arbitration in

the Cit of Manila. All the reinsurance contracts, except that 'ith 9'iss Reinsurance Compan, 'ere si)ned b

Philippine uarant Co., *nc. in the Philippines and later si)ned b the forei)n reinsurers abroad. Althou)h the

contract bet'een Philippine uarant Co., *nc. and 9'iss Reinsurance Compan 'as si)ned b both parties in

9'itHerland, the same specificall provided that its provision shall be construed accordin) to the la's of the

Philippines, thereb manifestin) a clear intention of the parties to sub;ect themselves to Philippine la'.

9ection !% of the ax Code sub;ects forei)n corporations to tax on their income from sources 'ithin the Philippines.he 'ord :sources: has been interpreted as the activit, propert or service )ivin) rise to the income.#he

reinsurance premiums 'ere income created from the undertain) of the forei)n reinsurance companies to reinsure

Philippine uarant Co., *nc., a)ainst liabilit for loss under ori)inal insurances. 9uch undertain), as explained

above, too place in the Philippines. hese insurance premiums, therefore, came from sources 'ithin the Philippines

and, hence, are sub;ect to corporate income tax.

he forei)n insurers1 place of business should not be confused 'ith their place of activit.Business should not be

continuit and pro)ression of transactions!'hile activit ma consist of onl a sin)le transaction. An activit ma

occur outside the place of business. 9ection !% of the ax Code does not re8uire a forei)n corporation to en)a)e in

business in the Philippines in sub;ectin) its income to tax. *t suffices that the activit creatin) the income is performed

or done in the Philippines. =hat is controllin), therefore, is not the place of businessbut the place ofactivity that

created an income.

Petitioner further contends that the reinsurance premiums are not income from sources 'ithin the Philippines becausethe are not specificall mentioned in 9ection " of the ax Code. 9ection " is not an allinclusive enumeration, for

it merel directs that the inds of income mentioned therein should be treated as income from sources 'ithin the

Philippines but it does not re8uire that other inds of income should not be considered lie'ise.#'ph#.Kt

he po'er to tax is an attribute of soverei)nt. *t is a po'er emanatin) from necessit. *t is a necessar burden to

preserve the 9tate1s soverei)nt and a means to )ive the citiHenr an arm to resist an a))ression, a nav to defend its

shores from invasion, a corps of civil servants to serve, public improvement desi)ned for the en;oment of the

citiHenr and those 'hich come 'ithin the 9tate1s territor, and facilities and protection 'hich a )overnment is

supposed to provide. Considerin) that the reinsurance premiums in 8uestion 'ere afforded protection b the


9/34

)overnment and the recipient forei)n reinsurers exercised ri)hts and privile)es )uaranteed b our la's, such

reinsurance premiums and reinsurers should share the burden of maintainin) the state.

Petitioner 'ould 'ish to stress that its reliance in )ood faith on the rulin)s of the Commissioner of *nternal Revenue

re8uirin) no 'ithholdin) of the tax due on the reinsurance premiums in 8uestion relieved it of the dut to pa the

correspondin) 'ithholdin) tax thereon. his defense of petitioner ma free if from the pament of surchar)es or

penalties imposed for failure to pa the correspondin) 'ithholdin) tax, but it certainl 'ould not exculpate if from

liabilit to pa such 'ithholdin) tax he overnment is not estopped from collectin) taxes b the mistaes or errors

of its a)ents."

*n respect to the 8uestion of 'hether or not reinsurance premiums ceded to forei)n reinsurers not doin) business in the

Philippines are sub;ect to 'ithholdin) tax under 9ection &" and &% of the ax Code, suffice it to state that this 8uestion

has alread been ans'ered in the affirmative in(lexander 0owden 3 Co. #td. vs. Collector of Internal "evenue, F

#$"$", April #%, #$3&.

(inall, petitioner contends that the 'ithholdin) tax should be computed from the amount actuall remitted to the

forei)n reinsurers instead of from the total amount ceded. And since it did not remit an amount to its forei)n insurers

in #$&" and #$&%, no 'ithholdin) tax 'as due.

he pertinent section of the ax Code 9tates4

9ec. &%.Payment of corporation income tax at source. I *n the case of forei)n corporations sub;ect to

taxation under this itle not en)a)ed in trade or business 'ithin the Philippines and not havin) an office or

place of business therein, there shall be deducted and 'ithheld at the source in the same manner and upon the

same items as is provided in 9ection fiftthree a tax e8ual to t'entfour per centum thereof, and such tax

shall be returned and paid in the same manner and sub;ect to the same conditions as provided in that section.

he applicable portion of 9ection &" provides4

+b-,onresident aliens. I All persons, corporations and )eneral copartnerships +compaKias colectivas-, in

'hat ever capacit actin), includin) lessees or mort)a)ors of real or personal propert, trustees actin) in an

trust capacit, executors, administrators, receivers, conservators, fiduciaries, emploers, and all officers and

emploees of the overnment of the Philippines havin) the control, receipt, custod, disposal, or pament of

interest, dividends, rents, salaries, 'a)es, premiums, annuities, compensation, remunerations, emoluments, or

other fixed or determinable annual or periodical )ains, profits, and income of an nonresident alien

individual, not en)a)ed in trade or business 'ithin the Philippines and not havin) an office or place of

business therein, shall +except in the case provided for in subsection aQ of this section- deduct and 'ithholdfrom such annual or periodical )ains, profits, and income a tax e8ual to t'elveper

centum thereof4Provided hat no deductions or 'ithholdin) shall be re8uired in the case of dividends paid b

a forei)n corporation unless +#- such corporation is en)a)ed in trade or business 'ithin the Philippines or has

an office or place of business therein, and +!- more than ei)htfiveper centum of the )ross income of such

corporation for the threeear period endin) 'ith the close of its taxable ear precedin) the declaration of

such dividends +or for such part of such period as the corporation has been in existence-'as derived from

sources 'ithin the Philippines as determined under the provisions of section thirtseven4Provided,further,

hat the Collector of *nternal Revenue ma authoriHe such tax to be deducted and 'ithheld from the interest

upon an securities the o'ners of 'hich are not no'n to the 'ithholdin) a)ent.

he above8uoted provisions allo' no deduction from the income therein enumerated in determinin) the amount to be

'ithheld. Accordin), in computin) the 'ithholdin) tax due on the reinsurance premium in 8uestion, no deduction

shall be reco)niHed.=ERE(ORE, in affirmin) the decision appealed from, the Philippine uarant Co., *nc. is hereb ordered to pa to

the Commissioner of *nternal Revenue the sums of P!2!,#$!.22 and P#",#&".22, or a total amount of P"&,"%&.22,

as 'ithholdin) tax for the ears #$&" and #$&%, respectivel. *f the amount of P"&,"%&.22 is not paid 'ithin "2 das

from the date this ;ud)ement becomes final, there shall be collected a surchar)ed of &6 on the amount unpaid, plus

interest at the rate of #6 a month from the date of delin8uenc to the date of pament, provided that the maximum

amount that ma be collected as interest shall not exceed the amount correspondin) to a period of three +"- ears.

=ith costs a)ainsts petitioner.

Ben)%on C.!. Bautista (n)elo Concepcion "eyes !.B.#. Barrera Paredes $i%on and "e)ala !!. concur.

Ma&alintal and 'aldivar !!. too& no part.


10/34

5ouble taxation


SUPREME COURT

Manila

EN BANC

G.R. No. L-26521 %eember 20, 1960

EUSE$O #LL"NUE#", ET "L., plaintiffappellee,

vs.

CT O! LOLO,defendantsappellants.

Pelae% !alandoni and !amir for plaintiffappellees.

(ssistant City *iscal 1icente P. Gen)os for defendantappellant.

C"STRO,J.:

Appeal b the defendant Cit of *loilo from the decision of the Court of (irst *nstance of *loilo declarin) ille)al

Ordinance ##, series of #$32, entitled, :An Ordinance *mposin) Municipal Ficense ax On Persons En)a)ed *n he

Business Of Operatin) enement ouses,: and orderin) the Cit to refund to the plaintiffsappellees the sums of

collected from them under the said ordinance.

On 9eptember "2, #$%3 the municipal board of *loilo Cit enacted Ordinance 03, imposin) license tax fees as follo's4

+#- tenement house +casa de vecindad-, P!&.22 annuall< +!- tenement house, partl or 'holl en)a)ed in or dedicated

to business in the streets of /.M. Basa, *Hnart and Alde)uer, P!%.22 per apartment< +"- tenement house, partl or

'holl en)a)ed in business in an other streets, P#!.22 per apartment. he validit and constitutionalit of this

ordinance 'ere challen)ed b the spouses Eusebio Gillanueva and Remedies 9ian Gillanueva, o'ners of four

tenement houses containin) "% apartments. his Court, in City of Iloilo vs. "emedios Sian 1illanueva and 4usebio

1illanueva, F#!3$&, March !", #$&$, declared the ordinance ultra vires, :it not appearin) that the po'er to tax

o'ners of tenement houses is one amon) those clearl and expressl )ranted to the Cit of *loilo b its Charter.:


11/34

On /anuar #&, #$32 the municipal board of *loilo Cit, believin), obviousl, that 'ith the passa)e of Republic Act

!!3%, other'ise no'n as the Focal Autonom Act, it had ac8uired the authorit or po'er to enact an ordinance

similar to that previousl declared b this Court as ultra vires, enacted Ordinance ##, series of #$32, hereunder 8uoted

in full4

AN OR5*NANCE *MPO9*N M>N*C*PAF F*CEN9E A ON PER9ON9 ENAE5 *N E

B>9*NE99 O( OPERA*N ENEMEN O>9E9

Be it ordained b the Municipal Board of the Cit of *loilo, pursuant to the provisions of Republic Act No.!!3%, other'ise no'n as the Autonom Fa' of Focal overnment, that4

9ection #. I A municipal license tax is hereb imposed on tenement houses in accordance 'ith the schedule

of pament herein provided.

9ection !. I enement house as contemplated in this ordinance shall mean an buildin) or d'ellin) for

rentin) space divided into separate apartments or accessorias.

9ection ". I he municipal license tax provided in 9ection # hereof shall be as follo's4

*. enement houses4

+a- Apartment house made of stron) materials P!2.22 per door p.a.

+b- Apartment house made of mixed materials P#2.22 per door p.a.

** Roomin) house of stron) materials P#2.22 per door p.a.

Roomin) house of mixed materials P&.22 per door p.a.

***. enement house partl or 'holl en)a)ed in or dedicated to business

in the follo'in) streets4 /.M. Basa, *Hnart, Alde)uer, uanco andFedesma from PlaHoleto a to Galeria. 9t. P"2.22 per door p.a.

*G. enement house partl or 'holl en)a)ed in or dedicated to business

in an other street P#!.22 per door p.a.

G. enement houses at the streets surroundin) the super maret as soon

as said place is declared commercial P!%.22 per door p.a.

9ection %. I All ordinances or parts thereof inconsistent here'ith are hereb amended.

9ection &. I An person found violatin) this ordinance shall be punished 'ith a fine note exceedin) 'o

undred Pesos +P!22.22- or an imprisonment of not more than six +3- months or both at the discretion of the

Court.

9ection 3 I his ordinance shall tae effect upon approval.

ENACE5, /anuar #&, #$32.

*n *loilo Cit, the appellees Eusebio Gillanueva and Remedios 9. Gillanueva are o'ners of five tenement houses,

a))re)atel containin) %" apartments, 'hile the other appellees and the same Remedios 9. Gillanueva are o'ners of

ten apartments. Each of the appellees1 apartments has a door leadin) to a street and is rented b either a (ilipino or

Chinese merchant. he first floor is utiliHed as a store, 'hile the second floor is used as a d'ellin) of the o'ner of the


12/34

store. Eusebio Gillanueva o'ns, lie'ise, apartment buildin)s for rent in Bacolod, 5uma)uete Cit, Ba)uio Cit and

SueHon Cit, 'hich cities, accordin) to him, do not impose tenement or apartment taxes.

B virtue of the ordinance in 8uestion, the appellant Cit collected from spouses Eusebio Gillanueva and Remedios 9.

Gillanueva, for the ears #$32#$3%, the sum of P&,0!%."2, and from the appellees Pio 9ian MelliHa, eresita 9.

opacio, and Remedios 9. Gillanueva, for the ears #$32#$3%, the sum of P#,"#.22. Eusebio Gillanueva has

lie'ise been pain) real estate taxes on his propert.

On /ul ##, #$3! and April !%, #$3%, the plaintiffsappellees filed a complaint, and an amended complaint,respectivel, a)ainst the Cit of *loilo, in the aforementioned court, prain) that Ordinance ##, series of #$32, be

declared :invalid for bein) beond the po'ers of the Municipal Council of the Cit of *loilo to enact, and

unconstitutional for bein) violative of the rule as to uniformit of taxation and for deprivin) said plaintiffs of the

e8ual protection clause of the Constitution,: and that the Cit be ordered to refund the amounts collected from them

under the said ordinance.

On March "2, #$33,#the lo'er court rendered ;ud)ment declarin) the ordinance ille)al on the )rounds that +a-

:Republic Act !!3% does not empo'er cities to impose apartment taxes,: +b- the same is :oppressive and

unreasonable,: for the reason that it penaliHes o'ners of tenement houses 'ho fail to pa the tax, +c- it constitutes not

onl double taxation, but treble at that and +d- it violates the rule of uniformit of taxation.

he issues posed in this appeal are4

#. *s Ordinance ##, series of #$32, of the Cit of *loilo, ille)al because it imposes double taxationT

!. *s the Cit of *loilo empo'ered b the Focal Autonom Act to impose tenement taxesT

". *s Ordinance ##, series of #$32, oppressive and unreasonable because it carries a penal clauseT

%. 5oes Ordinance ##, series of #$32, violate the rule of uniformit of taxationT

#. he pertinent provisions of the Focal Autonom Act are hereunder 8uoted4

9EC. !. An provision of la' to the contrar not'ithstandin), all chartered cities, municipalities and

municipal districts shall have authorit to impose municipal license taxes or fees upon persons en)a)ed in an

occupation or business, or exercisin) privile)es in chartered cities, municipalities or municipal districts b

re8uirin) them to secure licences at rates fixed b the municipal board or cit council of the cit, the

municipal council of the municipalit, or the municipal district council of the municipal district< to collect

fees and char)es for services rendered b the cit, municipalit or municipal district< to re)ulate and impose

reasonable fees for services rendered in connection 'ith an business, profession or occupation bein)conducted 'ithin the cit, municipalit or municipal district and other'ise to lev for public purposes, ;ust

and uniform taxes, licenses or fees


13/34

+i- Customs duties re)istration, 'harfa)e dues on 'harves o'ned b the national )overnment, tonna)e, and

all other inds of customs fees, char)es and duties * O N

!ELC"NO,J.:p

(or the taxable ear #$% endin) on "2 /une #$%, and the taxable ear #$& endin) "2 /une #$&, private respondent

Procter and amble Philippine Manufacturin) Corporation +:PLPhil.:- declared dividends paable to its parent

compan and sole stocholder, Procter and amble Co., *nc. +>9A- +:PL>9A:-, amountin) to P!%,#3%,$%3."2,

from 'hich dividends the amount of P0,%&,"#.!# representin) the thirtfive percent +"&6- 'ithholdin) tax at

source 'as deducted.

On & /anuar #$, private respondent PLPhil. filed 'ith petitioner Commissioner of *nternal Revenue a claim forrefund or tax credit in the amount of P%,0"!,$0$.!3 claimin), amon) other thin)s, that pursuant to 9ection !% +b- +#-

of the National *nternal Revenue Code +:N*C:-, 1as amended b Presidential 5ecree No. "3$, the applicable rate of 'ithholdin) tax on the dividendsremitted 'as onl fifteen percent +#&6- +and not thirtfive percent "&6Q- of the dividends.

here bein) no responsive action on the part of the Commissioner, PLPhil., on #" /ul #$, filed a petition for

revie' 'ith public respondent Court of ax Appeals +:CA:- doceted as CA Case No. !00". On "# /anuar #$0%,

the CA rendered a decision orderin) petitioner Commissioner to refund or )rant the tax credit in the amount of

P%,0"!,$0$.22.

On appeal b the Commissioner, the Court throu)h its 9econd 5ivision reversed the decision of the CA and held

that4

+a- PL>9A, and not private respondent PLPhil., 'as the proper part to claim

the refund or tax credit here involved9 ax Code that

allo's a credit a)ainst the >9 tax due from PL>9A of taxes deemed to have been

paid in the Philippines e8uivalent to t'ent percent +!26- 'hich represents the

difference bet'een the re)ular tax of thirtfive percent +"&6- on corporations and

the tax of fifteen percent +#&6- on dividends< and

+c- private respondent PLPhil. failed to meet certain conditions necessar in order

that :the dividends received b its nonresident parent compan in the >9 +PL

>9A- ma be sub;ect to the preferential tax rate of #&6 instead of "&6.:


18/34

hese holdin)s 'ere 8uestioned in PLPhil.1s Motion for Reconsideration and 'e 'ill deal 'ith them seriatimin

this Resolution resolvin) that Motion.

*

#. here are certain preliminar aspects of the 8uestion of the capacit of PLPhil. to brin) the present claim for

refund or tax credit, 'hich need to be examined. his 8uestion 'as raised for the first time on appeal, i.e., in the

proceedin)s before this Court on the Petition for Revie' filed b the Commissioner of *nternal Revenue. he 8uestion

'as notraised b the Commissioner on the administrative level, and neither 'as it raised b him before the CA.=e believe that the Bureau of *nternal Revenue +:B*R:- should not be allo'ed to defeat an other'ise valid claim for

refund b raisin) this 8uestion of alle)ed incapacit for the first time on appeal before this Court. his is clearl a

matter of procedure. Petitioner does not pretend that PLPhil., should it succeed in the claim for refund, is liel to

run a'a, as it 'ere, 'ith the refund instead of transmittin) such refund or tax credit to its parent and sole stocholder.

*t is commonplace that in the absence of explicit statutor provisions to the contrar, the )overnment must follo' the

same rules of procedure 'hich bind private parties. *t is, for instance, clear that the )overnment is held to compliance

'ith the provisions of Circular No. #00 of this Court in exactl the same 'a that private liti)ants are held to such

compliance, save onl in respect of the matter of filin) fees from 'hich the Republic of the Philippines is exempt b

the Rules of Court.

More importantl, there arises here a 8uestion of fairness should the B*R, unlie an other liti)ant, be allo'ed to raise

for the first time on appeal 8uestions 'hich had not been liti)ated either in the lo'er court or on the administrative

level. (or, if petitioner had at the earliest possible opportunit, i.e., at the administrative level, demanded that PLPhil. produce an express authoriHation from its parent corporation to brin) the claim for refund, then PLPhil. 'ould

have been able forth'ith to secure and produce such authoriHation before filin) the action in the instant case. he

action here 'as commenced ;ust before expiration of the t'o +!-ear prescriptive period.

!. he 8uestion of the capacit of PLPhil. to brin) the claim for refund has substantive dimensions as 'ell 'hich,

as 'ill be seen belo', also ultimatel relate to fairness.

>nder 9ection "23 of the N*RC, a claim for refund or tax credit filed 'ith the Commissioner of *nternal Revenue is

essential for maintenance of a suit for recover of taxes alle)edl erroneousl or ille)all assessed or collected4

9ec. "23. "ecovery of tax erroneously or ille)ally collected. I,o suit or proceedin) shall be

maintained in any courtfor the recover of an national internal revenue tax hereafter alle)ed to

have been erroneousl or ille)all assessed or collected, or of an penalt claimed to have been

collected 'ithout authorit, or of an sum alle)ed to have been excessive or in an manner'ron)full collected, until a claim for refund or credit has been duly filed with the Commissioner of

Internal "evenue< but such suit or proceedin) ma be maintained, 'hether or not such tax, penalt, or

sum has been paid under protest or duress. *n an case, no such suit or proceedin) shall be be)un

after the expiration of t'o ears from the date of pament of the tax or penalt re)ardless of an

supervenin) cause that ma arise after pament4 . . . +Emphasis supplied-

9ection "2$ +"- of the N*RC, in turn, provides4

9ec. "2$.(uthority of Commissioner to +a&e Compromises and to "efund +axes.I

he Commissioner ma4

xxx xxx xxx

+"- credit or refund taxes erroneousl or ille)all received, . . .,o credit or refund of taxes or

penaltiesshall be allowed unless the taxpayer files in writin) 'ith the Commissioner a claim forcredit or refund 'ithin t'o +!- ears after the pament of the tax or penalt. +As amended b P.5.

No. 3$- +Emphasis supplied-

9ince the claim for refund 'as filed b PLPhil., the 8uestion 'hich arises is4 is PLPhil. a 5taxpayer5 under

9ection "2$ +"- of the N*RCT he term :taxpayer: is defined in our N*RC as referrin) to :any person sub2ect to

taximposed b the itle on ax on *ncomeQ.: 2*t thus becomes important to note that under 9ection &" +c- of the N*RC, the 'ithholdin) a)ent 'ho is:re8uired to deduct and 'ithhold an tax: is made : personally liable for such tax: and indeed is indemnified a)ainst an claims and demands 'hich the stocholder mi)ht 'ish

to mae in 8uestionin) the amount of paments effected b the 'ithholdin) a)ent in accordance 'ith the provisions of the N*RC. he 'ithholdin) a)ent, PLPhil., is directly

and independently liable3for the correct amount of the tax that should be 'ithheld from the dividend remittances. he 'ithholdin) a)ent is, moreover, sub;ect to and liable for

deficienc assessments, surchar)es and penalties should the amount of the tax 'ithheld be finall found to be less than the amount that should have been 'ithheld under la'.


19/34

A :person liable for tax: has been held to be a :person sub;ect to tax: and properl considered a :taxpaer.: 4he termsliable for tax: and :sub;ect to tax: both connote le)al obli)ation or dut to pa a tax. *t is ver difficult, indeed conceptuall impossible, to consider a person 'ho is statutoril

made :liable for tax: as not:sub;ect to tax.: B an reasonable standard, such a person should be re)arded as a part in interest, or as a person havin) sufficient le)al interest, to

brin) a suit for refund of taxes he believes 'ere ille)all collected from him.

*nPhilippine Guaranty Company Inc. v. Commissioner of Internal "evenue, 5this Court pointed out that a 'ithholdin) a)ent is in factthe a)ent both of the )overnment and of the taxpaer, and that the 'ithholdin) a)ent is not an ordinar )overnment a)ent4

+he law sets no condition for the personal liability of the withholdin) a)ent to attach . he reason is

to compel the 'ithholdin) a)ent to 'ithhold the tax under all circumstances. *n effect, the

responsibilit for the collection of the tax as 'ell as the pament thereof is concentrated upon theperson over 'hom the overnment has ;urisdiction. hus, the withholdin) a)ent is constituted the

a)ent of both the Government and the taxpayer. =ith respect to the collection andDor 'ithholdin) of

the tax, he is the overnment1s a)ent.In re)ard to the filin) of the necessary income tax return and

the payment of the tax to the Government he is the a)ent of the taxpayer. +he withholdin) a)ent

therefore is no ordinary )overnment a)ent especially because under Section 67 8c9 he is held

personally liable for the tax he is duty bound to withhold< whereas the Commissioner and his

deputies are not made liable by law.6+Emphasis supplied-

*f, as pointed out inPhilippine Guaranty, the 'ithholdin) a)ent is also an a)ent of the beneficial o'ner of the

dividends 'ith respect to the filin) of the necessar income tax return and 'ith respect to actual pament of the tax to

the )overnment, such authorit ma reasonabl be held to include the authorit to file a claim for refund and to brin)

an action for recover of such claim. his implied authorit is especiall 'arranted 'here, is in the instant case, the

'ithholdin) a)ent is the wholly owned subsidiary of the parentstoc&holder and therefore at all times under theeffective control of such parentstoc&holder.*n the circumstances of this case, it seems particularl unreal to den the

implied authorit of PLPhil. to claim a refund and to commence an action for such refund.

=e believe that, even no', there is nothin) to preclude the B*R from re8uirin) PLPhil. to sho' some 'ritten or

telexed confirmation b PL>9A of the subsidiar1s authorit to claim the refund or tax credit and to remit the

proceeds of the refund., or to appl the tax credit to some Philippine tax obli)ation of, PL>9A, before actual

payment of the refund or issuance of a tax credit certificate . =hat appears to be vitiated b basic unfairness is

petitioner1s position that, althou)h PLPhil. is directl and personall liable to the overnment for the taxes and an

deficienc assessments to be collected, the overnment is not le)all liable for a refund simpl because it did not

demand a 'ritten confirmation of PLPhil.1s implied authorit from the ver be)innin). A soverei)n )overnment

should act honorabl and fairl at all times, even visavis taxpaers.

=e believe and so hold that, under the circumstances of this case, PLPhil. is properl re)arded as a :taxpaer:

'ithin the meanin) of 9ection "2$, N*RC, and as impliedl authoriHed to file the claim for refund and the suit to

recover such claim.

**

#. =e turn to the principal substantive 8uestion before us4 the applicabilit to the dividend remittances b PLPhil.

to PL>9A of the fifteen percent +#&6- tax rate provided for in the follo'in) portion of 9ection !% +b- +#- of the

N*RC4

+b- +ax on forei)n corporations.I

+#- ,onresident corporation.I A forei)n corporation not en)a)ed in trade and

business in the Philippines, . . ., shall pa a tax e8ual to "&6 of the )ross income

receipt durin) its taxable ear from all sources 'ithin the Philippines, as . . .

dividends . . .Providedstill further, that on dividends received from a domesticcorporation liable to tax under this Chapter, the tax shall be #&6 of the dividends,

'hich shall be collected and paid as provided in 9ection &" +d- of this Code, sub;ect

to the condition that the countr in 'hich the nonresident forei)n corporation, is

domiciled shall allo' a credit a)ainst the tax due from the nonresident forei)n

corporation, taxes deemed to have been paid in the Philippines e8uivalent to !26

'hich represents the difference bet'een the re)ular tax +"&6- on corporations and

the tax +#&6- on dividends as provided in this 9ection . . .

he ordinar thirtfive percent +"&6- tax rate applicable to dividend remittances to nonresident corporate

stocholders of a Philippine corporation, )oes do'n to fifteen percent +#&6- if the countr of domicile of the forei)n


20/34

stocholder corporation :shall allo': such forei)n corporation a tax credit for :taxes deemed paid in the Philippines,:

applicable a)ainst the tax paable to the domiciliar countr b the forei)n stocholder corporation. *n other 'ords, in

the instant case, the reduced fifteen percent +#&6- dividend tax rate is applicable if the >9A :shall allo': to PL

>9A a tax credit for :taxes deemed paid in the Philippines: applicable a)ainst the >9 taxes of PL>9A. he N*RC

specifies that such tax credit for :taxes deemed paid in the Philippines: must, as a minimum, reach an amount

e8uivalent to t'ent +!2- percenta)e points 'hich represents the difference bet'een the re)ular thirtfive percent

+"&6- dividend tax rate and the preferred fifteen percent +#&6- dividend tax rate.

*t is important to note that 9ection !% +b- +#-, N*RC, does not re8uire that the >9 must )ive a :deemed paid5 tax creditfor the dividend tax 8:; percenta)e points9 waived by the Philippinesin main) applicable the preferred divided tax

rate of fifteen percent +#&6-. *n other 'ords, our N*RC does not re8uire that the >9 tax la' deem the parent

corporation to have paid the twenty 8:;9 percenta)e points of dividend tax waivedb the Philippines. he N*RC onl

re8uires that the >9 :shall allo': PL>9A a :deemed paid: tax credit in an amount e/uivalent to the twenty 8:;9

percenta)e points'aived b the Philippines.

!. he 8uestion arises4 5id the >9 la' compl 'ith the above re8uirementT he relevant provisions of the >9 *ntemal

Revenue Code +:ax Code:- are the follo'in)4

9ec. $2# I +axes of forei)n countries and possessions of nited 9tates< and

xxx xxx xxx

9ec. $2!. I Credit for corporate stoc&holders in forei)n corporation.

+A- +reatment of +axes Paid by *orei)n Corporation. I (or purposes of this

sub;ect, a domestic corporation'hich o'ns at least #2 percent of the votin) stoc

of a forei)n corporation from 'hich it receives dividends in any taxable year shall

>

xxx xxx xxx

+!- to the extent such dividends are paid by such forei)n

corporation out of accumulated profits as defined in subsection +c-

+#- +b-Q of a ear for 'hich such forei)n corporation is a less

developed countr corporation, be deemed to have paid the same

proportion of any income'ar profits, or excess profits taxes

paid or deemed to be paid by such forei)n corporation to any

forei)n countryor to an possession of the >nited 9tates onor with


21/34

respect to such accumulated profits which the amount of such

dividends bears to the amount of such accumulated profits.

xxx xxx xxx

+c- Applicable Rules

+#- (ccumulated profits defined. I (or purposes of this section, the term

:accumulated profits: means 'ith respect to an forei)n corporation,

+A- for purposes of subsections +a- +#- and +b- +#-, the amount of its

)ains, profits, or income computed 'ithout reduction b the amount

of the income, 'ar profits, and excess profits taxes imposed on or

'ith respect to such profits or income b an forei)n countr. . . .9A a tax credit for the amount of

the dividend tax actuallypaid +i.e., withheld- from the dividend remittances to PL

>9A9 la' +9ection $2!, >9 ax Code- )rants to PL>9A a :deemed paid1 tax

credit0fora proportionate part of the corporate income tax actually paid to the Philippines b PLPhil.

he parentcorporation PL>9A is :deemed to have paid: a portion of thePhilippine corporate income taxalthou)h

that tax 'as actuall paid b its Philippine subsidiar, PLPhil., not b PL>9A. his :deemed paid: conceptmerel reflects economic realit, since the Philippine corporate income tax 'as in fact paid and deducted from

revenues earned in the Philippines, thus reducin) the amount remittable as dividends to PL>9A. *n other 'ords,

>9 tax la' treats the Philippine corporate income tax as if it came out of the pocet, as it 'ere, of PL>9A as a part

of the economic cost of carrin) on business operations in the Philippines throu)h the medium of PLPhil. and here

earnin) profits. ?hat isunder >9 la', deemed paid by P3G 9 con)ressional desire to avoid or reduce double taxation of the same income stream. 9

*n order to determine 'hether >9 tax la' complies 'ith the re8uirements for applicabilit of the reduced orpreferential fifteen percent +#&6- dividend tax rate under 9ection !% +b- +#-, N*RC, it is necessar4

a. to determine the amountof the !2 percenta)e points dividend tax 'aived b the

Philippine )overnment under 9ection !% +b- +#-, N*RC, and 'hich hence )oes to

PL>9A9 la' is

at least e8ual to the amountof the dividend tax 'aived b the Philippine

overnment.

Amount +a-, i.e., the amount of the dividend tax 'aived b the Philippine )overnment is arithmeticall determined in

the follo'in) manner4

P#22.22 I Pretax net corporate income earned b PLPhil.

x "&6 I Re)ular Philippine corporate income tax rateIII

P"&.22 I Paid to the B*R b PLPhil. as Philippine

corporate income tax.

P#22.22

"&.22

III

P3&.22 I Available for remittance as dividends to PL>9A

P3&.22 I 5ividends remittable to PL>9A

x "&6 I Re)ular Philippine dividend tax rate under 9ection !%

III +b- +#-, N*RC

P!!.& I Re)ular dividend tax


x #&6 I Reduced dividend tax rate under 9ection !% +b- +#-, N*RC

III

P$.& I Reduced dividend tax

P!!.& I Re)ular dividend tax under 9ection !% +b- +#-, N*RC

$.& I Reduced dividend tax under 9ection !% +b- +#-, N*RC

III

P#".22 I Amount of dividend tax 'aived b Philippine

77777 )overnment under 9ection !% +b- +#-, N*RC.

hus, amount +a- above is P#".22 for ever P#22.22 of pretax net income earned b PLPhil. Amount +a- is also

the minimumamount of the :deemed paid: tax credit that >9 tax la' shall allo' if PL>9A is to 8ualif for the

reduced or preferential dividend tax rate under 9ection !% +b- +#-, N*RC.Amount +b- above, i.e., the amount of the :deemed paid: tax credit 'hich >9 tax la' allo's under 9ection $2!, ax

Code, ma be computed arithmeticall as follo's4


$.& I 5ividend tax 'ithheld at the reduced +#&6- rate

III

P&&.!& I 5ividends actuall remitted to PL>9A

P"&.22 I Philippine corporate income tax paid b PLPhil.

to the B*R

5ividends actuall

remitted b PLPhil.

to PL>9A P&&.!&IIIIIII 7 III x P"&.22 7 P!$.& 1Amount of accumulated P3&.22 777777

profits earned b

PLPhil. in excess

of income tax

hus,for every P66.:6 of dividends actually remitted +after 'ithholdin) at the rate of #&6- b PLPhil. to its >9

parent PL>9A, a tax creditof P:=.@6is allo'ed b 9ection $2! >9 ax Code for Philippine corporate income tax

:deemed paid: b the parent but actuall paid b the 'hollo'ned subsidiar.


23/34

9ince P!$.& is much hi)her than P#".22 +the amount of dividend tax 'aived b the Philippine )overnment-, 9ection

$2!, >9 ax Code, specificall and clearl complies 'ith the re8uirements of 9ection !% +b- +#-, N*RC.

". *t is important to note also that the fore)oin) readin) of 9ections $2# and $2! of the >9 ax Code is identical 'ith

the readin) of the B*R of 9ections $2# and $2! of the >9 ax Code is identical 'ith the readin) of the B*R of

9ections $2# and $2! as sho'n b administrative rulin)s issued b the B*R.

he first Rulin) 'as issued in #$3, i.e., B*R Rulin) No. 322%, rendered b then Actin) Commissioner of *ntemal

Revenue Efren *. Plana, later Associate /ustice of this Court, the relevant portion of 'hich stated4o'ever, after a restud of the decision in the American Chicle Compan case and the provisions of

9ection $2# and $2! of the >.9. *nternal Revenue Code, 'e find merit in our contention that our

computation of the credit 'hich the >.9. tax la' allo's in such cases is erroneous as the amount of

tax :deemed paid: to the Philippine )overnment for purposes of credit a)ainst the >.9. tax b the

recipient of dividends includes a portion of the amount of income tax paid by the corporation

declarin) the dividend in addition to the tax withheld from the dividend remitted. *n other 'ords the

.9.

(ederal ax Code, 'hich are the bases of the rulin), are not revoed, amended and modified, the

effect of 'hich 'ill reduce the percenta)e of tax deemed paid and creditable a)ainst the >.9. tax on

dividends remitted b a forei)n corporation to a >.9. corporation. +Emphasis supplied-

he #$3 Rulin) 'as reiterated in, e.)., B*R Rulin) dated !! /ul #$0# addressed to Basic (oods Corporation and

B*R Rulin) dated !2 October #$0 addressed to Castillo, Faman, an and Associates. *n other 'ords, the #$3 Rulin)

of on. Efren *. Plana 'as reiterated b the B*R even as the case at bar 'as pendin) before the CA and this Court.

%. =e should not overloo the fact that the concept of :deemed paid: tax credit, 'hich is embodied in 9ection $2!, >9

ax Code, is exactly the same 5deemed paid5 tax credit found in ourN*RC and 'hich Philippine tax la' allo's to

Philippine corporations 'hich have operations abroad +sa, in the >nited 9tates- and 'hich, therefore, pa income

taxes to the >9 )overnment.

9ection "2 +c- +"- and +0-, N*RC, provides4


24/34

+d- 9ec. "2.$eductions from Gross Income.I*n computin) net income, there shall

be allo'ed as deductions I . . .

+c- +axes. I . . .

xxx xxx xxx

+"- Credits a)ainst tax for taxes of forei)n countries. I *f the

taxpaer si)nifies in his return his desire to have the benefits of this

para)raphs, the tax imposed b this itle shall be credited 'ith . . .

+a- Citi%en and $omestic Corporation. I *n the case of a citiHen of

the Philippines and of domestic corporation the amount of net

income'ar profits or excess profits, taxes paid or accrued durin)

the taxable ear to any forei)n country. +Emphasis supplied-

>nder 9ection "2 +c- +"- +a-, N*RC, above, the B*R must )ive a tax credit to a Philippine corporation for taxes actuall

paid b it to the >9 )overnmentIe.)., for taxes collected b the >9 )overnment on dividend remittances to the

Philippine corporation. his 9ection of the N*RC is the e8uivalent of 9ection $2# of the >9 ax Code.

9ection "2 +c- +0-, N*RC, is practicall identical 'ith 9ection $2! of the >9 ax Code, and provides as follo's4

+0- +axes of forei)n subsidiary. I (or the purposes of this subsection a domestic corporation which

owns a ma2ority of the votin) stoc& of a forei)n corporation from 'hich it receives dividends in an

taxable ear shall be deemed to have paid the same proportion of any income, 'arprofits, or excess

profits taxes paid by such forei)n corporation to any forei)n country , upon or with respect to the

accumulated profits of such forei)n corporation from 'hich such dividends 'ere paid, which the

amount of such dividends bears to the amount of such accumulated profits 4Provided, hat the

amount of tax deemed to have been paid under this subsection shall in no case exceed the same

proportion of the tax a)ainst 'hich credit is taen 'hich the amount of such dividends bears to the

amount of the entire net income of the domestic corporation in 'hich such dividends are

included.+he term :accumulated profits: 'hen used in this subsection reference to a forei)n

corporation, means the amount of its )ains, profits, or income in excess of the income, 'arprofits,

and excessprofits taxes imposed upon or 'ith respect tosuchprofits or income< and the

Commissioner of *nternal Revenue shall have full po'er to determine from the accumulated profits

of 'hat ear or ears such dividends 'ere paid< treatin) dividends paid in the first sixt das of an

ear as havin) been paid from the accumulated profits of the precedin) ear or ears +unless to hissatisfaction sho'n other'ise-, and in other respects treatin) dividends as havin) been paid from the

most recentl accumulated )ains, profits, or earnin)s. *n the case of a forei)n corporation, the

income, 'arprofits, and excessprofits taxes of 'hich are determined on the basis of an accountin)

period of less than one ear, the 'ord :ear: as used in this subsection shall be construed to mean

such accountin) period. +Emphasis supplied-

>nder the above 8uoted 9ection "2 +c- +0-, N*RC, the B*R must )ive a tax credit to a Philippine parent

corporation for taxes :deemed paid: b it, that is, e.)., for taxes paid to the >9 b the >9 subsidiar of a

Philippineparent corporation. hePhilippine parent or corporate stocholder is :deemed: under our N*RCto

have paid a proportionate part of the 9A, is the same :deemed paid: tax credit that Philippine la' allo's to a Philippine corporation 'ith a 'holl orma;orito'ned subsidiar in +for instance- the >9. he :deemed paid: tax credit allo'ed in 9ection $2!, >9 ax

Code, is no more a credit for :phantom taxes: than is the :deemed paid: tax credit )ranted in 9ection "2 +c- +0-,

N*RC.

***

#. he 9econd 5ivision of the Court, in holdin) that the applicable dividend tax rate in the instant case 'as the re)ular

thirtfive percent +"&6- rate rather than the reduced rate of fifteen percent +#&6-, held that PLPhil. had failed to

prove that its parent, PL>9A, had in fact been )iven b the >9 tax authorities a :deemed paid: tax credit in the

amount re8uired b 9ection !% +b- +#-, N*RC.


25/34

=e believe, in the first place, that 'e must distin)uish bet'een the le)al 8uestion before this Court from 8uestions of

administrative implementation arisin) after the le)al 8uestion has been ans'ered. he basic le)al issue is of course,

this4 'hich is the applicable dividend tax rate in the instant case4 the re)ular thirtfive percent +"&6- rate or the

reduced fifteen percent +#&6- rateT he 8uestion of 'hether or not PL>9A is in fact )iven b the >9 tax

authorities a :deemed paid: tax credit in the re8uired amount, relates to the administrative implementation of the

applicable reduced tax rate.

*n the second place, 9ection !% +b- +#-, N*RC, does notin fact re8uire that the :deemed paid: tax credit shall have

actuall been )ranted beforethe applicable dividend tax rate )oes do'n from thirtfive percent +"&6- to fifteenpercent +#&6-. As noted several times earlier, 9ection !% +b- +#-, N*RC, merel re8uires, in the case at bar, that the

>9A :shall allow a credit a)ainst the

tax due from PL>9A forQ taxes deemed to have been paid in the Philippines . . .: here is neither statutor

provision nor revenue re)ulation issued b the 9ecretar of (inance re8uirin) the actual )rant of the :deemed paid:

tax credit b the >9 *nternal Revenue 9ervice to PL>9A before the preferential fifteen percent +#&6- dividend rate

becomes applicable. 9ection !% +b- +#-, N*RC, does not create a tax exemption nor does it provide a tax credit< it is a

provision which specifies when a particular 8reduced9 tax rate is le)ally applicable.

*n the third place, the position ori)inall taen b the 9econd 5ivision results in a severe practical problem of

administrative circularit. he 9econd 5ivision in effect held that the reduced dividend tax rate is not applicable until

the >9 tax credit for :deemed paid: taxes is actuall )iven in the re8uired minimum amount b the >9 *nternal

Revenue 9ervice to PL>9A. But, the >9 :deemed paid: tax credit cannotbe )iven b the >9 tax authorities unless

dividends have actuall been remitted to the >9, 'hich means that the Philippine dividend tax, at the rate hereapplicable, 'as actuall imposed and collected. 11*t is this practical or operatin) circularit that is in fact avoided b our B*R 'hen it issues rulin)s thatthe tax la's of particular forei)n ;urisdictions +e.)., Republic of Ganuatu 12on)on), 135enmar, 14etc.- compl 'ith the re8uirements set out in 9ection !% +b- +#-, N*RC,

for applicabilit of the fifteen percent +#&6- tax rate. Once such a rulin) is rendered, the Philippine subsidiar be)ins to 'ithhold at the reduced dividend tax rate.

A re8uirement relatin) to administrative implementation is not properl imposed as a condition for

the applicability,as a matter of lawof a particular tax rate. >pon the other hand, upon the determination or

reco)nition of the applicabilit of the reduced tax rate, there is nothin) to prevent the B*R from issuin) implementin)

re)ulations that 'ould re8uire PL Phil., or an Philippine corporation similarl situated, to certif to the B*R the

amount of the :deemed paid: tax credit actuall subse8uentl )ranted b the >9 tax authorities to PL>9A or a >9

parent corporation for the taxable ear involved. 9ince the >9 tax la's can and do chan)e, such implementin)

re)ulations could also provide that failure of PLPhil. to submit such certification 'ithin a certain period of time,

'ould result in the imposition of a deficienc assessment for the t'ent +!2- percenta)e points differential. he tas

of this Court is to settle 'hich tax rate is applicable, considerin) the state of >9 la' at a )iven time. =e should leave

details relatin) to administrative implementation 'here the properl belon) I 'ith the B*R.

!. An interpretation of a tax statute that produces a revenue flo' for the )overnment is not, for that reason alone,

necessaril the correct readin) of the statute. here are man tax statutes or provisions 'hich are desi)ned, not to

tri))er off an instant sur)e of revenues, but rather to achieve lon)erterm and broader)au)e fiscal and economic

ob;ectives. he tas of our Court is to )ive effect to the le)islative desi)n and ob;ectives as the are 'ritten into the

statute even if, as in the case at bar, some revenues have to be fore)one in that process.

he economic ob;ectives sou)ht to be achieved b the Philippine overnment b reducin) the thirtfive percent

+"&6- dividend rate to fifteen percent +#&6- are set out in the preambular clauses of P.5. No. "3$ 'hich amended

9ection !% +b- +#-, N*RC, into its present form4

=EREA9, it is imperative to adopt measures responsive to the re/uirements of a developin)

economyforemost of 'hich is thefinancin) of economic development pro)rams9A +please

see pa)e "$! above

$.& I Reduced R.P. dividend tax 'ithheld b PLPhil.

III

P&&.!& I 5ividends actuall remitted to PL>9A

P&&.!&

x %36 I Maximum >9 corporate income tax rate

III

P!&.%#&I>9 corporate tax paable b PL>9A

'ithout tax credits

P!&.%#&

$.& I >9 tax credit for RP dividend tax 'ithheld b PLPhil.

at #&6 +9ection $2#, >9 ax Code-

III

P#&.33 I >9 corporate income tax paable after 9ection $2#

III tax credit.

P&&.!&

#&.33

III

P"$.&$ I Amount received b PL>9A net of R.P. and >.9.

77777 taxes without:deemed paid: tax credit.P!&.%#&

!$.& I :5eemed paid: tax credit under 9ection $2! >9

III ax Code +please see pa)e #0 above-

2 I >9 corporate income tax paable on dividends

777777 remitted b PLPhil. to PL>9A after

9ection $2! tax credit.

P&&.!& I Amount received b PL>9A net of RP and >9

777777 taxes after9ection $2! tax credit.

*t 'ill be seen that the :deemed paid: tax credit allo'ed b 9ection $2!, >9 ax Code, could offset the >9 corporate

income tax paable on the dividends remitted b PLPhil. he result, in fine, could be that PL>9A 'ould after

>9 tax credits, still 'ind up 'ith P&&.!&, the full amount of the dividends remitted to PL>9A net of Philippinetaxes. *n the calculation of the Philippine overnment, this should encoura)e additional investment or reinvestment

in the Philippines b PL>9A.

". *t remains onl to note that under the Philippines>nited 9tates Convention :=ith Respect to axes on

*ncome,:15the Philippines, by a treaty commitmentreduced the re)ular rate of dividend tax to a maximum of t'ent percent +!26- of the )ross amount of dividends paidto >9 parent corporations4

Art ##. I$ividends

xxx xxx xxx


27/34

+!- he rate of tax imposed b one of the Contractin) 9tates on dividends derived

from sources 'ithin that Contractin) 9tate b a resident of the other Contractin)

9tate shall not exceed I

+a- !& percent of the )ross amount of the dividend< or

+b- ?hen the recipient is a corporation :; percent of the )ross amount of the

dividend ifdurin) the part of the pain) corporation1s taxable ear 'hich precedes

the date of pament of the dividend and durin) the 'hole of its prior taxable ear +ifan-, at least A; percent of the outstandin) shares of the votin) stoc& of the payin)

corporation was owned by the recipient corporation.

xxx xxx xxx

+Emphasis supplied-

he ax Convention, at the same time, established a treat obli)ation on the part of the >nited 9tates that it :shall

allo': to a >9 parent corporation receivin) dividends from its Philippine subsidiar :a taxQ credit for the appropriate

amount of taxes paid or accrued to the Philippines b the Philippine subsidiarQ I.16his is, of course, precisel the :deemed paid:tax credit provided for in 9ection $2!, >9 ax Code, discussed above. Clearl, there is here on the part of the Philippines a deliberate undertain) to reduce the re)ular dividend

tax rate of t'ent percent +!26- is a maximumrate, there is still a differential or additional reduction of five +&- percenta)e points 'hich compliance of >9 la' +9ection $2!-

'ith the re8uirements of 9ection !% +b- +#-, N*RC, maes available in respect of dividends from a Philippine subsidiar.

=e conclude that private respondent PLPhil, is entitled to the tax refund or tax credit 'hich it sees.

=ERE(ORE, for all the fore)oin), the Court Resolved to RAN private respondent1s Motion for Reconsideration

dated ## Ma #$00, to 9E A9*5E the 5ecision of the and 5ivision of the Court promul)ated on #& April #$00, and

in lieu thereof, to RE*N9AE and A((*RM the 5ecision of the Court of ax Appeals in CA Case No. !00" dated

"# /anuar #$0% and to 5ENJ the Petition for Revie' for lac of merit. No pronouncement as to costs.

,arvasa Gutierre% !r. Gri-o(/uino Medialdea and "omero !!. concur.

*ernan C.!. is on leave.

Sep&r&te Op+(+o('

CRU,J., concurrin)4

* ;oin Mr. /ustice (eliciano in his excellent analsis of the difficult issues 'e are no' ased to resolve.

As * understand it, the intention of 9ection !% +b- of our ax Code is to attract forei)n investors to this countr b

reducin) their "&6 dividend tax rate to #&6 if their o'n state allo's them a deemed paid tax credit at least e8ual in

amount to the !26 'aived b the Philippines. his tax credit 'ould offset the tax paable b them on their profits to

their home state. *n effect, both the Philippines and the home state of the forei)n investors reduce their respective tax

:tae: of those profits and the investors 'ind up 'ith more left in their pocets. >nder this arran)ement, the total

taxes to be paid b the forei)n investors ma be confined to the "&6 corporate income tax and #&6 dividend tax onl,

both paable to the Philippines, 'ith the >9 tax liabilit bein) offset 'holl or substantiall b the >9 :deemed paid:

tax credits.

=ithout this arran)ement, the forei)n investors 'ill have to pa to the local state +in addition to the "&6 corporate

income tax- a "&6 dividend tax and another "&6 or more to their home state or a total of 26 or more on the same

amount of dividends. *n this circumstance, it is not liel that man such forei)n investors, )iven the onerous burden

of the t'otier sstem, i.e., local state plus home state, 'ill be encoura)ed to do business in the local state.

*t is conceded that the la' 'ill :not tri))er off an instant sur)e of revenue,: as indeed the tax collectible b the

Republic from the forei)n investor is considerabl reduced. his ma appear unacceptable to the superficial vie'er.

But this reduction is in fact the price 'e have to offer to persuade the forei)n compan to invest in our countr and

contribute to our economic development. he benefit to us ma not be immediatel available in instant revenues but it

'ill be realiHed later, and in )reater measure, in terms of a more stable and robust econom.


28/34

$%N,J., concurrin)4

* a)ree 'ith the opinion of m esteemed brother, Mr. /ustice (lorentino P. (eliciano. o'ever, * 'ish to add some

observations of m o'n, since * happen to be theponente in Commissioner of Internal "evenue v. ?ander

Philippines Inc. +#32 9CRA &" #$00Q-, a case 'hich reached a conclusion that is diametricall opposite to that

sou)ht to be reached in the instant Motion for Reconsideration.

#. *n pa)e & of his dissentin) opinion, Mr. /ustice Ed)ardo F. Paras ar)ues that the failure of petitioner Commissionerof *nternal Revenue to raise before the Court of ax Appeals the issue of 'ho should be the real part in interest in

claimin) a refund cannot pre;udice the )overnment, as such failure is merel a procedural defect< and that moreover,

the )overnment can never be in estoppel, especiall in matters involvin) taxes. *n a 'ord, the dissentin) opinion

insists that errors of its a)ents should not ;eopardiHe the )overnment1s position.

he above rule should not be taen absolutel and literall< if it 'ere, the )overnment 'ould never lose an liti)ation

'hich is clearl not true. he issue involved here is not merel one of procedure< it is also one of fairness4 'hether the

)overnment should be sub;ect to the same strin)ent conditions applicable to an ordinar liti)ant. As the Court had

declared in =ander4

. . . o allo' a liti)ant to assume a different posture 'hen he comes before the court and challen)e

the position he had accepted at the administrative level, 'ould be to sanction a procedure 'hereb

theCourt I 'hich is supposed to revie' administrative determinations I 'ould not revie', but

determine and decide for the first time, a 8uestion not raised at the administrative forum. . . . +#32

9CRA at &33&-

ad petitioner been forthri)ht earlier and re8uired from private respondent proof of authorit from its parent

corporation, Procter and amble >9A, to prosecute the claim for refund, private respondent 'ould doubtless have

been able to sho' proof of such authorit. B an account, it 'ould be ran in;ustice not at this sta)e to re8uire

petitioner to submit such proof.

!. *n pa)e 0 of his dissentin) opinion, Paras, /., stressed that private respondent had failed4 +#- to sho' the actual

amount credited b the >9 )overnment a)ainst the income tax due from P L >9A on the dividends received from

private respondent< +!- to present the #$& income tax return of P L >9A 'hen the dividends 'ere received< and

+"- to submit an dul authenticated document sho'in) that the >9 )overnment credited the !26 tax deemed paid in

the Philippines.

* a)ree 'ith the main opinion of m collea)ue, (eliciano!. specificall in pa)e !" et se/. thereof, 'hich, as *

understand it, explains that the >9 tax authorities are unable to determine the amount of the :deemed paid: credit to

be )iven P L >9A so lon) as the numerator of the fraction, i.e., dividends actuall remitted b P L Phil. to P L

>9A, is still unno'n. 9tated in other 'ords, until dividends have actuall been remitted to the >9 +'hich

presupposes an actual imposition and collection of the applicable Philippine dividend tax rate-, the >9 tax authorities

cannot determine the :deemed paid: portion of the tax credit sou)ht b P L >9A. o re8uire private respondent to

sho' documentar proof of its parent corporation havin) actuall received the :deemed paid: tax credit from the

proper tax authorities, 'ould be lie puttin) the cart before the horse. he onl 'a of cuttin) throu)h this +'hat

(eliciano, /., termed- :circularit: is for our B*R to issue rulin)s +as the have been doin)- to the effect that the tax

la's of particular forei)n ;urisdictions, e.)., >9A, compl 'ith the re8uirements in our tax code for applicabilit of

the reduced #&6 dividend tax rate. hereafter, the taxpaer can be re8uired to submit, 'ithin a reasonable period,

proof of the amount of :deemed paid: tax credit actuall )ranted b the forei)n tax authorit. *mposin) such aresolutor condition should resolve the nott problem of circularit.

". Pa)e 0 of the dissentin) opinion of Paras,!., further declares that tax refunds, bein) in the nature of tax exemptions,

are to be construedstrictissimi 2urisa)ainst the person or entit claimin) the exemption< and that refunds cannot be

permitted to exist upon :va)ue implications.:

Not'ithstandin) the fore)oin) canon of construction, the fundamental rule is still that a ;ud)e must ascertain and )ive

effect to the le)islative intent embodied in a particular provision of la'. *f a statute +includin) a tax statute reducin) a

certain tax rate- is clear, plain and free from ambi)uit, it must be )iven its ordinar meanin) and applied 'ithout

interpretation. *n the instant case, the dissentin) opinion of Paras, !., itself concedes that the basic purpose of Pres.


29/34

5ecree No. "3$, 'hen it 'as promul)ated in #$& to amend 9ection !%+b-, ## of the National *nternal Revenue

Code, 'as :to decrease the tax liabilit: of the forei)n capital investor and thereb to promote more in'ard forei)n

investment. he same dissentin) opinion hastens to add, ho'ever, that the )rantin) of a reduced dividend tax rate :is

premised on reciprocit.:

%. No'here in the provisions of P.5. No. "3$ or in the National *nternal Revenue Code itself 'ould one find

reciprocit specified as a condition for the )rantin) of the reduced dividend tax rate in 9ection !% +b-, #Q, N*RC.

>pon the other hand, 'here the la'main) authorit intended to impose a re8uirement of reciprocit as a condition

for )rant of a privile)e, the le)islature does so expressly and clearly.(or example, the )ross estate of noncitiHens andnonresidents of the Philippines normall includes intan)ible personal propert situated in the Philippines, for

purposes of application of the estate tax and donor1s tax. o'ever, under 9ection $0 of the N*RC +as amended b P.5.

#%&-, no taxes 'ill be collected b the Philippines in respect of such intan)ible personal propert if the la' or the

forei)n countr of 'hich the decedent 'as a citiHen and resident at the time of his death allo's a similar exemption

from transfer or death taxes in respect of intan)ible personal propert located in such forei)n countr and o'ned b

Philippine citiHens not residin) in that forei)n countr.

here is no statutor re8uirement of reciprocit imposed as a condition for )rant of the reduced dividend tax rate of

#&6 Moreover, for the Court to impose such a re8uirement of reciprocit 'ould be to contradict the basic polic

underlin) P.5. "3$ 'hich amended 9ection !%+b-, #Q, N*RC, P.5. "3$ 'as promul)ated in the effort to promote the

inflo' of forei)n investment capital into the Philippines. A re8uirement of reciprocit, i.e., a re8uirement that the >.9.

)rant a similar reduction of >.9. dividend taxes on remittances b the >.9. subsidiaries of Philippine corporations,

'ould assume a desire on the part of the >.9. and of the Philippines to attract the flo' of Philippine capital into the


30/34

ax Avoidance


SUPREME COURT

Manila

*R5 5*G*9*ON

G.R. No. L-69259 /&(&r 26, 1900

%ELPER TR"%ES CORPOR"TON, &( %ELPN P"CECO,petitioners,

vs.

NTERME%"TE "PPELL"TE COURT &( %RO PPES PLPPNES, NC., respondents.

GUTERRE, /R.,J.:

he petitioners 8uestion the decision of the *ntermediate Appellate Court 'hich sustained the private respondent1s

contention that the deed of exchan)e 'hereb 5elfin Pacheco and Pela)ia Pacheco conveed a parcel of land to

5elpher rades Corporation in exchan)e for !,&22 shares of stoc 'as actuall a deed of sale 'hich violated a ri)ht of

first refusal under a lease contract.

Briefl, the facts of the case are summariHed as follo's4

*n #$%, 5elfin Pacheco and his sister, Pela)ia Pacheco, 'ere the o'ners of !,#3$ s8uare meters of

real estate *dentified as Fot. No. #2$&, Malinta Estate, in the Municipalit of Polo +no' GalenHuela-,

Province of Bulacan +no' Metro Manila- 'hich is covered b ransfer Certificate of itle No.

%!%2 of the Bulacan land re)istr.

On April ", #$%, the said coo'ners leased to Construction Components *nternational *nc. the same

propert and providin) that durin) the existence or after the term of this lease the lessor should he

decide to sell the propert leased shall first offer the same to the lessee and the letter has the priorit

to bu under similar conditions +Exhibits A to A&-

On Au)ust ", #$%, lessee Construction Components *nternational, *nc. assi)ned its ri)hts and

obli)ations under the contract of lease in favor of dro Pipes Philippines, *nc. 'ith the si)ned

conformit and consent of lessors 5elfin Pacheco and Pela)ia Pacheco +Exhs. B to B3 inclusive-


31/34

he contract of lease, as 'ell as the assi)nment of lease 'ere annotated at he bac of the title, as per

stipulation of the parties +Exhs. A to 5" inclusive-

On /anuar ", #$3, a deed of exchan)e 'as executed bet'een lessors 5elfin and Pela)ia Pacheco

and defendant 5elpher rades Corporation 'hereb the former conveed to the latter the leased

propert +C No.%!%2- to)ether 'ith another parcel of land also located in Malinta Estate,

GalenHuela, Metro Manila +C No. %!"- for !,&22 shares of stoc of defendant corporation 'ith a

total value of P#,&22,222.22 +Exhs. C to C&, inclusive- +pp. %%%&, Rollo-

On the )round that it 'as not )iven the first option to bu the leased propert pursuant to the proviso in the lease

a)reement, respondent dro Pipes Philippines, *nc., filed an amended complaint for reconveance of Fot. No. #2$&

in its favor under conditions similar to those 'hereb 5elpher rades Corporation ac8uired the propert from Pela)ia

Pacheco and 5elphin Pacheco.

After trial, the Court of (irst *nstance of Bulacan ruled in favor of the plaintiff. he dispositive portion of the decision

reads4

ACCOR5*NFJ, the ;ud)ment is hereb rendered declarin) the valid existence of the plaintiffs

preferential ri)ht to ac8uire the sub;ect propert +ri)ht of first refusal- and orderin) the defendants

and all persons derivin) ri)hts therefrom to conve the said propert to plaintiff 'ho ma offer to

ac8uire the same at the rate of P#%.22 per s8uare meter, more or less, for Fot #2$& 'hose area is

!,#3$ s8uare meters onl. =ithout pronouncement as to attorne1s fees and costs. +Appendix *< Rec.,

pp. !%3 !%-. +Appellant1s Brief, pp. #!< p. #"%, Rollo-

he lo'er court1s decision 'as affirmed on appeal b the *ntermediate Appellate Court.

he defendantsappellants, no' the petitioners, filed a petition for certiorari to revie' the appellate court1s decision.

=e initiall denied the petition but upon motion for reconsideration, 'e set aside the resolution denin) the petition

and )ave it due course.

he petitioners alle)e that4

he denial of the petition 'ill 'or )reat in;ustice to the petitioners, in that4

#. Respondent dro Pipes Philippines, *nc, +:private respondent:- 'ill ac8uire from petitioners a

parcel of industrial land consistin) of !,#3$ s8uare meters or !. hectares +located ri)ht after the

GalenHuela, Bulacan exit of the toll express'a- for onl PADEs/. meter, or a total ofP7;7FF,

althou)h the prevailin) value thereof is approximatel P"22Ds8. meter or P0.# Millionnson, % Phil, 3%$, citin) Bole v. (ulton

#$#!Q, !"" Pa., 32$-. *n the case at bar, in exchan)e for their properties, the Pachecos ac8uired !,&22 ori)inal

unissued no par value shares of stocs of the 5elpher rades Corporation. Conse8uentl, the Pachecos became

stocholders of the corporation b subscription :he essence of the stoc subscription is an a)reement to tae and pa

for ori)inal unissued shares of a corporation, formed or to be formed.: +Rohrlich !%", cited in A)baani,

Commentaries and /urisprudence on the Commercial Fa's of the Philippines, Gol. ***, #$02 Edition, p. %"2- *t is

si)nificant that the Pachecos too no par value shares in exchan)e for their properties.

A nopar value share does not purport to represent an stated proportionate interest in the capitalstoc measured b value, but onl an ali8uot part of the 'hole number of such shares of the issuin)

corporation. he holder of nopar shares ma see from the certificate itself that he is onl an ali8uot

sharer in the assets of the corporation. But this character of proportionate interest is not hidden

beneath a false appearance of a )iven sum in mone, as in the case of par value shares. he capital

stoc of a corporation issuin) onl nopar value shares is not set forth b a stated amount of mone,

but instead is expressed to be divided into a stated number of shares, such as, #,222 shares. his

indicates that a shareholder of #22 such shares is an ali8uot sharer in the assets of the corporation, no

matter 'hat value the ma have, to the extent of #22D#,222 or #D#2. hus, b removin) the par value

of shares, the attention of persons interested in the financial condition of a corporation is focused

upon the value of assets and the amount of its debts. +A)baani, Commentaries and /urisprudence on

the Commercial Fa's of the Philippines, Gol. ***, #$02 Edition, p. #2-.

Moreover, there 'as no attempt to state the true or current maret value of the real estate. Fand valued at P"22.22 as8uare meter 'as turned over to the famil1s corporation for onl P#%.22 a s8uare meter.

*t is to be stressed that b their o'nership of the !,&22 no par shares of stoc, the Pachecos have control of the

corporation. heir e8uit capital is &&6 as a)ainst %&6 of the other stocholders, 'ho also belon) to the same famil

)roup.

*n effect, the 5elpher rades Corporation is a business conduit of the Pachecos. =hat the reall did 'as to invest

their properties and chan)e the nature of their o'nership from unincorporated to incorporated form b or)aniHin)

5elpher rades Corporation to tae control of their properties and at the same time save on inheritance taxes.

As explained b Eduardo Neria4


33/34

xxx xxx xxx

AJ. F*N9ANAN4

S Mr. Neria, from the point of vie' of taxation, is there an benefit to the spouses

ernandeH and Pacheco in connection 'ith their execution of a deed of exchan)e on

the properties for no par value shares of the defendant corporationT

A Jes, sir.

CO>R4

S =hat do ou mean b :point of vie':T

A o tae advanta)e for both spouses and corporation in enterin) in the deed of

exchan)e.

AJ. F*N9ANAN4

S +=hat do ou mean b :point of vie':T- =hat are these benefits to the spouses of

this deed of exchan)eT

A Continuous control of the propert, tax exemption benefits, and other inherent

benefits in a corporation.

S =hat are these advanta)es to the said spouses from the point of vie' of taxationin enterin) in the deed of exchan)eT

A avin) fulfilled the conditions in the income tax la', providin) for tax free

exchan)e of propert, the 'ere able to execute the deed of exchan)e free from

income tax and ac8uire a corporation.

S =hat provision in the income tax la' are ou referrin) toT

A * refer to 9ection "& of the National *nternal Revenue Code under par. Csubpar.

+!- Exceptions re)ardin) the provision 'hich * 8uote4 :No )ain or loss shall also be

reco)niHed if a person exchan)es his propert for stoc in a corporation of 'hich as

a result of such exchan)e said person alone or to)ether 'ith others not exceedin)

four persons )ains control of said corporation.:

S 5id ou explain to the spouses this benefit at the time ou executed the deed ofexchan)eT

A Jes, sir

S Jou also, testified durin) the last hearin) that the decision to have no par value

share in the defendant corporation 'as for the purpose of flexibilit. Can ou

explain flexibilit in connection 'ith the o'nership of the propert in 8uestionT

A here is flexibilit in usin) no par value shares as the value is determined b the

board of directors in increasin) capitaliHation. he board can fix the value of the

shares e8uivalent to the capital re8uirements of the corporation.

S No' also from the point of taxation, is there an flexibilit in the holdin) b the

corporation of the propert in 8uestionTA Jes, since a corporation does not die it can continue to hold on to the propert

indefinitel for a period of at least &2 ears. On the other hand, if the propert is

held b the spouse the propert 'ill be tied up in succession proceedin)s and the

conse8uential paments of estate and inheritance taxes 'hen an o'ner dies.

S No' 'hat advanta)e is this continuit in relation to o'nership b a particular

person of certain properties in respect to taxationT

A he propert is not sub;ected to taxes on succession as the corporation does not

die.

tax cases batch 1

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