cases for review

8/10/2019 Cases for Review

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TAX 2 MONTERO | Y. Sanchez A2012

CASE LIST IN TAX 1

Lorenzo v. Posadas Thomas Hanley died in 1922 in Zamboanga leaving a will w/c provided that:

o Any money left be given to nephew Matthewo All real estate shall not be sold or disposed of 10 years after his

death. It shall be managed by the executors. The proceeds shallbe given to nephew Matthew in Ireland to be used only for theeducation of Hanleys brother's children and their descendants.

o 10 years after Thomas death, his property be given to Matthewto be disposed of in the way he thinks most advantageous

In 1924, the CFI appointed an administrator, Moore, eventually replaced byLorenzo (after Moore resigned).

CIR assessed the estate inheritance taxes from the time of Thomas deathincluding penalties for deliquency in payment (P2k+).

CIR filed a motion before the CFI praying that the Lorenzo be ordered topay the said amount. The motion was granted. Lorenzo paid under protestand asked for a refund. CIR refused to refund.

I: (a) When does the inheritance tax accrue and when must it be

satisfied? UPON DEATH Lorenzo asserts that article 657 of the Civil Code (the rights to the

succession of a person are transmitted from the moment of his death)operates only in so far as forced heirs are concerned.

HOWEVER, there is no distinction between different classes of heirs. TheAdministrative Code imposes the tax upon the transmission of property of adecedent, made effective by his death. An excise or privilege tax imposedon the right to succeed to, receive, or take property by or under a will orthe intestacy law, or deed, grant, or gift to become operative at or afterdeath. The property belongs to the heirs at the moment of the death of theancestor as completely as if the ancestor had executed and delivered tothem a deed for the same before his death.

Since Thomas Hanley died on May 27, 1922, the inheritance tax accrued asof the date.

However, it does not follow that the obligation to pay the tax arose as ofthe date. The time for the payment on inheritance tax is fixed by theRevised Administrative Code w/c provides that the payment must be madebefore entrance into possession of the property of the fideicommissary orcestui que trust. Thus, the tax should have been paid before the delivery ofthe properties to Moore as trustee in 1924.

(b) Should the inheritance tax be computed on the basis of thevalue of the estate at the time of the testator's death, or on itsvalue ten years later? AT THE TIME OF DEATH

Plaintiff contends that the estate of Thomas Hanley could not legally pass to Matthewuntil after the expiration of 10 years from the death of the testator in 1922 and theinheritance tax should be based on the value of the estate in 1932.Upon the death of the decedent, succession takes place and the right of the estate totax vests instantly. The tax should be measured by the value of the estate as it stoodat the time of the decedent's death, regardless of any subsequent contingency valueof any subsequent increase or decrease in value, or the postponement of the actualpossession or enjoyment of the estate by the beneficiary.(c) In determining the net value of the estate subject to tax, is it proper todeduct the compensation due to trustees? NOA trustee, no doubt, is entitled to receive a fair compensation for his services.However, it does not follow that the compensation due him may lawfully be deductedin arriving at the net value of the estate subject to tax. First, There is no statuterequiring trustees' commissions to be deducted in determining the net value of theestate subject to inheritance tax. Second, though a testamentary trust has beencreated, the testator intended that the duties of his executors and trustees should beseparated.(d) What law governs the case at bar? Should the provisions of Act No.3606 favorable to the tax-payer be given retroactive effect? NO

The law at the time was section 1544 of the Revised Administrative Code, asamended by Act No. 3031, which took effect on March 9, 1922. Inheritance taxationis governed by the statute in force at the time of the death of the decedent . Astatute should be considered as prospective in its operation, whether it enacts,amends, or repeals an inheritance tax, unless the language of the statute clearlydemands or expresses that it shall have a retroactive effect.

CIR v Fisher Walter G. Stevenson was born in the Philippines of British parents, married

in Manila to another British subject, Beatrice. He died in 1951 in Californiawhere he and his wife moved to.

In his will, he instituted Beatrice as his sole heiress to certain real andpersonal properties, among which are 210,000 shares of stocks in MindanaoMother Lode Mines (Mines).

Ian Murray Statt (Statt), the appointed ancillary administrator of his estatefiled an estate and inheritance tax return. He made a preliminary return tosecure the waiver of the CIR on the inheritance of the Mines shares ofstock.

In 1952, Beatrice assigned all her rights and interests in the estate to thespouses Fisher.

Statt filed an amended estate and inheritance tax return claimingADDITIOANL EXEMPTIONS, one of which is the estate and inheritance taxon the Mines shares of stock pursuant to a reciprocity proviso in theNIRC, hence, warranting a refund from what he initially paid. The collectordenied the claim. He then filed in the CFI of Manila for the said amount.


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CFI ruled that (a) the share of Beatrice should be deducted from the netestate of Walter, (b) the intangible personal property belonging to theestate of Walter is exempt from inheritance tax pursuant to the reciprocityproviso in NIRC.

I: W/N the estate can avail itself of the reciprocity proviso in the NIRCgranting exemption from the payment of taxes for the Mines shares of stock

R: No. Reciprocity must be total. If any of the two states collects or imposes or

does not exempt any transfer, death, legacy or succession tax of anycharacter, the reciprocity does not work.

In the Philippines, upon the death of any citizen or resident, or non-residentwith properties, there are imposed upon his estate, both an estate and aninheritancetax.

But, under the laws of California, only inheritance tax is imposed. Also,although the Federal Internal Revenue Code imposes an estate tax, it doesnot grant exemption on the basis of reciprocity. Thus, a Filipino citizen shallalways be at a disadvantage. This is not what the legislators intended.

SPECIFICALLY: Section122 of the NIRCprovides that No tax shall be collected under this

Title in respect of intangible personal propertyo (a) if the decedent at the time of his death was a resident of a

foreign country which at the time of his death did not impose atransfer of tax or death tax of any character in respect ofintangible personal property of citizens of the Philippines notresiding in that foreign country, or

o (b) if the laws of the foreign country of which the decedent was aresident at the time of his death allow a similar exemption fromtransfer taxes or death taxes of every character in respect ofintangible personal property owned by citizens of the Philippinesnot residing in that foreign country."

On the other hand, Section 13851 of the CaliforniaInheritance Tax Law provides that intangible personalproperty is exempt from tax if the decedent at the time of

his death was a resident of a territory or another State ofthe United States or of a foreign state or country which thenimposed a legacy, succession, or death tax in respect tointangible personal property of its own residents, but either:.

(a) Did not impose a legacy, succession, or death tax ofany character in respect to intangible personalproperty of residents of this State, or

(b) Had in its laws a reciprocal provision under whichintangible personal property of a non-resident wasexempt from legacy, succession, or death taxes of

every character if the Territory or other State of theUnited States or foreign state or country in whichthe nonresident resided allowed a similar exemptionin respect to intangible personal property ofresidents of the Territory or State of the UnitedStates or foreign state or country of residence ofthe decedent."

CIR v Campos Rueda Maria Cerdeira was a Spanish national by reason of her marriage to a Spanish

national. She resided in Tangier, Morocco until she died. She left some intangible

properties in the Philippines. The Commissioner of Internal Revenue (CIR) then held the administrator of her

estate, Campos Rueda, to be liable for deficiency estate and inheritance taxesafter the transfer of Marias intangible properties in the Philippines.

Campos Rueda countered this by saying that Section 122 (now sec 104) of theNIRC provided for reciprocityand that in the laws of Tangier, Morocco, "the

transfers by reason of death of movable properties, corporeal or incorporeal,including furniture and personal effects as well as of securities, bonds, shares,..., were not subject, on that date and in said zone, to the payment of any deathtax, whatever might have been the nationality of the deceased or his heirs andlegatees."

Thus, Campos Rueda claimed an exemption in the amount that the CIR wasclaiming as a deficiency.

The CIR on the other hand claimed that the reciprocity clause could not applysince Tangier Morocco is not a foreign country as required in sec 122.

I: W/N Tangier, Morocco is a Foreign country within the meaning of section122 (now sec 104) of the NIRC

R: YES, Tangier is a foreign country

The expression "foreign country", used in the last proviso of Section 122 of theNational Internal Revenue Code, refers to a government of that foreign power

which, although not an international person in the sense of international law,does not impose transfer or death taxes upon intangible personal properties. It is, therefore, not necessary that Tangier should have been recognized by our

Government order to entitle the petitioner to the exemption benefits of theproviso of Section 122 of our Tax. Code.

Court also cited previous cases:o CIR v. De Lara: State of California was considered a Foreign

country within the meaning of sec 122.o Kiene v. CIR: Liechtenstein was considered a foreign country

within the meaning of sec 122.


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Consequently, Posadas collected the sums of P3, 809.76 and P6, 653.64from both the petitioners as inheritance tax upon the gifts inter vivos madeto them against their opposition and protest.

They filed their protest and the judgment was that the defendant mustreturn the amount claimed by the plaintiff. Posadas appealed and arguedthat the collection of these amounts as inheritance tax is authorized by thelaw.

I: W/n Posadas was correct in collecting inheritance tax R: YES. Section 1536 of the Administrative Code provides that every transmission by

virtue of inheritance, devise, bequest, gift mortis causa, or advance inanticipation of inheritance, devise, or bequest shall be subject to tax.

Section 1540 then provides that after deductions have been made, thereshall be added to the resulting amount the value of all gifts or advancesmade by the predecessor to any of those who, after his death, shallprove to be his heirs, devisees, legatees, or donees mortis causa.

When the law say all gifts, it doubtless refers to gifts inter vivos, and notmortis causa. Both the letter and the spirit of the law leave no room for anyother interpretation.

The language refers to donation that took effect before the donor's death,and not to mortis causa donations, which can only be made with theformalities of a will, and can only take effect after the donor's death.

In this case, it appears that the Tuazons, after the death of Espereanza,were found to be legatees under her will. Thus, the donation inter vivos shehad made to them in 1922 and 1923, must be added to the net amountthat is to be taxed.

If the donee inter vivos was found to be legatees, heirs, deviseesOR donees mortis causa of the decedent, then they would have topay the inheritance tax.

The reason for this is because the donation inter vivos is deemedto be a transfer in anticipation of inheritance/death, meaning thatit is a scheme to evade payment of taxes.

Dizon v Posadas Dizon was assessed to pay P2k+ as inheritance tax from the properties he

received from his father prior to his fathers death through a deed of giftinter vivos.

Dizon alleged that the tax was illegally collected because he received theproperty prior to the death of his father, through a deed of gift inter vivoswhich was duly accepted and registered before the death of his fathermaking the property not an inheritance.

He further states that he was not trying to evade the inheritance tax that isimposed on heirs when his father donated all his properties to him. Thus,

no inheritance tax under Act No. 2601 (Chapter 40 of the AdministrativeCode), being the inheritance tax statute, should be imposed upon the saidproperties.

The Court, however, ruled in favor of Posadas, hence, this appeal. I:W/N the inheritance tax was correctly imposed upon the properties

transferred through donation inter vivos R: YES. Section 1540 of the Administrative Code states that after deductions have

been made, there shall be added to the resulting amount the value of allgifts or advances made by the predecessor to any of those who, after hisdeath, shall prove to be his heirs, devises, legatees, or donees mortis causa

In this case facts conveyance was made by the donor five days before hisdeath and accepted by the donee one day before the donor's death.Obviously, this was fraudulently made for the purpose of evading theinheritance tax.

As to Dizons contention that the he is not an heir because there is noproperty to inherit anymore because he already received the properties ofthe father through a donation inter vivos, SC said that even if they dontknow w/n the father left a will, Dizon should NOT be deprived of his share

of the inheritance because the Civil Code confers upon him the status of aforced heir.

Thus, an advance made by the decedent to Dizon is subject to tax. As to Dizonscontention that Section 1540 is unconstitutional in taxing gifts

or donations because the act would then embrace two subjects, the Courtstates that: When the law says all gifts, it doubtless refers to gifts intervivos, and not mortis causa. Both the letter and the spirit of the law leaveno room for any other interpretation. Such, clearly, is the tenor of thelanguage which refers to donations that took effect before the donor'sdeath, and not to mortis causa donations, which can only be made with theformalities of a will, and can only take effect after the donor's death.

The law presumes that such gifts have been made in ancitipationof inheritance in order to EVADE tax. Thus, to prevent this, theyare added to the resulting amount."

Vidal de Roces v Posadas Esperanza Tuazon by public document donated parcels of land situated in Manila

to plaintiffs Vidal de Roces, etc. with their respective husbands, accepted them inthe same public documents, which were duly recorded in the registry of deeds.

The plaintiffs took possession of the said lands, received the fruits and obtainedTCTs.

The donor then died w/o any forced heir and in her will, she bequeathed to eachof the donees the sum of P5,000.


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Felix Guzman died and was survived by eight children. One of the properties he left was a residential house located in the

poblacion. In conformity with his last will, that house and the lot on which it stands

were adjudicated to his eight children, each being given a one-eighthproindiviso.

The administrator submitted four accounting reports for the period fromJune 16, 1964 to September, 1967.

Three of the heirs Crispina de Guzmans-Carillo Honorata de Guzman-Mendiola and Arsenio de Guzman interposed objections to theadministrator's disbursements in the total sum of P13,610.48.

I: W/n expenses incurred by the administrator are deductible R: YES. (Deductible) 1. Expenses for the renovation and improvement of

the family residenceP10,399.59. These expenses consisted ofdisbursements for the repair of the terrace and interior of the family home,the renovation of the bathroom, and the construction of a fence. Theprobate court allowed those expenses because an administrator has theduty to "maintain in tenantable repair the houses and other structures and

fences belonging to the estate, and deliver the same in such repair to theheirs or devises" when directed to do so by the court (Sec. 2, Rule 84, Rulesof Court).

(Non-deductible) 2.Expenses incurred by Librada de Guzman asoccupant of the family residence without paying rent These werePERSONAL expenses of Librada de Guzman, inuring to her benefit. Thoseexpenses, not being reasonable administration expenses incurred by theadministrator, should not be charged against the income of the estate.Librada de Guzman, as an heir, is entitled to share in the net income of theestate. She occupied the house without paying rent. She should use herincome for her living expenses while occupying the family residence.

The STENOGRAPHIC NOTES, REPRESENTATION EXPENSES andEXPENSES DURING THE CELEBRATION OF THE 1STDEATH

ANNIVERSARY OF THE DECEASED should be disallowed. They have

no connection with the care, management and settlement of thedecedent's estate(Nicolas vs. Nicolas 63 Phil 332). The other expenses, namely, P19.30 for the lawyer's subsistence

and P144 as the cost of the gift to the physician who attended tothe testator during his last s are allowable expenses.

(Deductible) 4. Irrigation feewas properly allowed as a legitimateexpense of administration.

Dizon in his capacity as Administrator of the deceased Fernandez v CIR

Justice Arsenio Dizon and petitioner Atty. Dizon were appointed as Specialand Assistant Special Administrator, respectively, of the Estate of JoseFernandez.

Justice Dizon authorized Atty. Gonzales to sign and file the required estatetax return.

Atty. Gonzales filed the estate tax return with the BIR Regional Office ofSan Pablo City, showing a NIL estate tax liability (no tax liability- in thiscase, because the deductions exceed the gross estate).

Ten days after, the BIR Regional Director issued Certifications stating thatthe taxes due on the transfer of real and personal properties of Jose hadbeen fully paid and said properties may be transferred to his heirs.

Justice Dizon died thus the probate court appointed petitioner as theadministrator of the Estate.

Atty. Dizon requested the probate courts authority to sell several propertiesof the Estate to pay its creditors. HOWEVER, BIR issued a notice demandingthe payment of P66k+ deficiency estate tax.

Atty. Gonzales moved for a reconsideration of the Assessment but the CIRdenied the request and reiterated the Estates liability. A petition for Reviewwas filed with the CTA.

I: W/n deficiency estate tax must be imposed against the Estate R: No. Claims existing at time of death should be allowed as deductions to the

gross estate. Even in the United States, there is some dispute as to whether the

deductible amount for a claim against the estate is fixed as of thedecedent's death which is the general rule, or the same should be adjustedto reflect post-death developments, such as where a settlement betweenthe parties results in the reduction of the amount actually paid. On onehand, the U.S. court ruled that the appropriate deduction is the "value" thatthe claim had at the date of the decedent's death.

On the other hand, the Internal Revenue Service (IRS) opines that post-death settlement should be taken into consideration and the claim shouldbe allowed as a deduction only to the extent of the amount actually paid.

SC agreed w/ date-of-death valuation rule. First, there is no law, nor any legislative intent in our tax laws, which

disregards the date-of-death valuation principle and particularly providesthat post-death developments must be considered in determiningthe net value of the estate. It bears emphasis that tax burdens are notto be imposed, nor presumed to be imposed, beyond what the statuteexpressly and clearly imports, tax statutes being construed strictissimi jurisagainst the government. Any doubt on whether a person, article or activityis taxable is generally resolved against taxation.

Second. Such construction finds relevance and consistency in our Rules onSpecial Proceedings wherein the term "claims" required to be presented


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for tax collection, applies. He is obligated to make a return or amend onealready filed based on his own knowledge & information obtained throughtestimony or otherwise, & subsequently to assess taxes due.

On MR filed by Lilia: Lilia insists that since she administers only 1/3 of the estate ofher father, she should not be liable for the whole tax. And she suggests that theintestate estate of Matias Yusay should be liable for the said taxes, 1/3 to be paid byLilia and 2/3 to be paid by Florencia (wife of deceased Jose).Ruling of the Court: Estate and inheritance taxes are satisfied from the estate and areto be paid by the executor or administrator. Where there are 2 or more executors, allof them are severally liable for the payment of the estate tax. The inheritance tax,although charged against the account of each beneficiary, should be paid by theexecutor or administrator.Failure to pay the estate and the inheritance taxes before distribution of the estatewould subject the executor or administrator to criminal liability. It is immaterial thatLilia administers only 1/3 of the estate & will receive as her share only said portion,for her right to the estate comes after taxes. As an administratrix, she is liable for theentire estate tax. As an heir, she is liable for the entire inheritance tax although herliability would not exceed the amount of her share in the estate.

DONORS TAX

Tang Ho v. CIR Li Seng Giap, his wife Tang Ho and their 13 children were stockholders of two

close family corporations. BIR examiners made an examination of the books of the two corporations and

found that each of Li Seng Giaps children had a total investment there ofapproximately P63k+ in shares issued to them by their father (who was themanager and controlling stockholder of the two corporations)


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CIR regarded these transfers as undeclared gifts made in the respective years,and assessed against Li Seng Giap and his children donor's and donee's taxesdue to delayed payment (P76k+).

They thus paid the sum of P53k+ representing the amount of the basic taxes,and put up a surety bond to guarantee payment of the balance demanded.

Sometime later, they requested the CIR for a revision of their tax assessments,and submitted donor's and donee's gift tax returns showing that the childrenreceived gifts inter vivos and proper nuptias.

o each child received by way of gift inter vivos, every year from1939 to 1950 (except in 1947 and 1948) P4,000 in cash;

o each of the eight children who married during the periodaforesaid, were given an additional P20,000 as dowry or giftpropter nuptias;

o unmarried children received roughly an equivalent amount in1949, also by way of gifts inter vivos, so that the total donationsmade to each and every child, as of 1950, stood at P63,190.

They contended that since the cash donated came from the conjugalfunds, they are be considered as donations by BOTH spouses, for whichtwo separate TAX exemptions may be claimed in each instance, one for

each spouse. I: W/n the donations made by Li Seng Giap to his children from the conjugal

property should be taxed against husband and wife R: No. A donation of property belonging to the conjugal partnership, made

during its existence, by the husband alone in favor of the common children, istaxable to him exclusively as sole donor.

To be a donation by bothspouses, taxable to both, the wife must expresslyjointhe husband in making the gift. Her participation cannot be implied.

THUS, in this case, ONLY ONE exemption or deduction can be claimed for everysuch gift, and not two, as claimed by petitioners.

Speculation on the Tang Ho case: Why were they insisting that the dowry wasmade in cash? Does the law say that for a dowry to be considered asexemption, it has to be in cash? No. The reason why they were insisting that itwas made in cash and then this cash was used to buy stock so that it can fall

within the time period that the dowry should be given before celebration orwithin 1 year thereafter.

Gibbs v. CIR Allison and Esther Gibbs executed documents entitled Deed of Sale and

Declaration of Trust whereby they transferred 53, 000 Lepanto ConsolidatedMines shares of stock to their 5 children, in consideration of the sum of P26,227.70 to be paid on or before December 1950.

The instituted trustee was Allisons brother, Finley Gibb. Spouses Gibb sent a letter to the CIR asking for a ruling on whether or not gift

taxes should be paid.

CIR initially assessed the spouses a donee gift tax of P75 on each of thebeneficiaries or a total of about P750. These assessments were based upon theDIFFERENCE between said market value of the shares of stock and the stipulatedconsideration for transfer thereof.

Subsequently, CIR revised the assessment by INCREASING them. The spouses paid within the per iod fixed by law but SOUGHT a refund. Their demand was denied. Trustee Finley Gibb appealed to the Secretary of Finance and instituted a civil

suit in the CFI for recovery of the amount. Spouses Gibb again executed 10 additional and separate trusts containing the

same stipulations and conditions. These additional deeds of trust impelled CIR to assess donor gift taxes. CIR held

that the gift taxes are available on the FULL MARKET VALUE of all the shares ofstock thus placed in trustinstead of upon the difference between said marketvalue and the stipulated considerations. CTA agreed.

I: W/n CTA was correct in ruling that the gift taxes on the transfer of the sharesof stock should be based on the full market value of shares of stock (NOT diffbetween market value and stipulated consideration)

R: YES, CTA was correct, tax should be based on full MV.

CTA was correct in finding that the agreements made by the parties were meredevises to avoid and evade the paymentof the corresponding gift taxes:

o If the trustors were earnestly concerned in providing ample fundsto assure the support, maintenance, care, health, highereducation and travel of their children and the launching of theircareer after they had become of age, the trustors would not havereally meant to require them to pay the consideration stipulatedin the trust agreements.

o If the intent was really that the stipulated interest be paid, thetrustee could have authorized the trustors to sell, mortgage,hypothecate or otherwise dispose of the stocks to raise thenecessary funds.

o The compromise agreements were made with knowledge of thefact that the CIR was already investigating whether the stipulated

consideration was real or fictitious. There being no real consideration for the transfer, gift taxes should bebased on the full market value of the shares of stock at the time of therespective transfer, and not merely on the difference between the saidmarket value and the consideration stipulated in the trust agreements.

PIROVANO vs. CIR

Enrico Pirovano was the father Carla Pirovano.


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De la Rama Steamship Co. insured the life of said Enrico Pirovano (then itsPresident and General Manager) with various Philippine and American insurancecompanies for 1M, designating itself as the beneficiary.

Enrico Pirovano died during the World War II. The BOD of De la Rama Steamship Co. adopted a resolution granting the

proceeds expected to be collected on Enricos life insurance policies w/c wasP400k for equal division among his 4 minor children, to be convertible into 4kshares of stock (1k shares / child0.

The Company received the total sum of P643K as proceeds of the said lifeinsurance policies obtained from American insurers.

The BOD modified their resolution by renouncing all its rights title, and interestto the said amount of P643k in favor of the minor children of the deceased,subject to the express condition that said amount should be retained by theCompany in the nature of a loanto it, drawing interest at the rate of 5% perannum, and payable to the Pirovano children after the Company shall have firstsettled its bonded indebtedness of 5M.

This resolution was allowed by the childrens guardian. BOD again modified their resolution by providing that the Company shall pay the

proceeds of said life insurance policies to the heirs after the Company shall have

settled in full the balance of its present remaining bonded indebtedness, but theannual interests accruing on the principal shall be paid to the heirs of Pirovanowhenever the Company is in a position to meet said obligation.

The mother of the children ACCEPTED this resolution with a PUBLIC DOCUMENT. The SH of the Company ratified the resolutions with certain clarifying

modificationsthat the payment of the donation shall not be effecteduntil suchtime as the Company shall have first duly liquidated its present bondedindebtedness (P3.2M) with the Natl Devt Company and that any and all taxes,legal fees, and expenses in any way connected with the above transaction shallbe chargeable and deducted from the proceeds of the life insurance policies.

HOWEVER, the majority stockholders of the Company voted to revoke thedonation.

As a consequence of this revocation and refusal of the Company to pay thebalance of the donation amounting to P564K despite demands, the PIROVANOSbrought an action for the recovery of said amount.

The RTC ordered that the donation was valid. Thus, the CIR assessed theamount of P60K as donees' gift tax against each of the heir, and a donor's gifttax in the total amount of P34K assessed against De la Rama Steamship Co.,which the latter paid.

The PIROVANOS contested CIRs assessment and imposition of the donees' gifttaxes and donor's gift tax and also made a claim for refund of the donor's gift taxso collected.

I: W/n the PRIVANOS are obliged to pay donees' gift taxes as well as theimposition of surcharge and interest on the amount of donees' gift taxes

R: YES.

A donation made by the corporation to the heirs of a deceased officer out ofgratitudefor the officer's past services is considered a donation and is subjectto donee's gift tax.

Art. 726 of the CivCode states that When a person gives to another a thing ...on account of the latter's merits or of the services rendered by him to the donor,

provided they do not constitute a demandable debt, ..., there is also a donation. The fact that his services contributed in a large measure to the success

of the company did not give rise to a recoverable debt, and theconveyances made by the company to his heirs remain a gift ordonation.

ALSO, the value of such services which do not constitute a recoverable debt isNOT deductible from the donation.

The actual consideration for the cession of the policies was theCompany's gratitude to Pirovano. Gratitude has no economic value and isnot "consideration" in the sense that the word is used under the Tax Code.

OTHERS: Sec111 [where property is transferred for less than adequate consideration, amt

exceeding consideration deemed a gift] is NOT applicable). Whether remuneratory or simple, the conveyance remained a gift.

The definition of CONSIDERATION is anything that is bargained for by thepromisor and given by the promisee in exchange for the promise

Pirovano's successful activities as officer of the De la Rama Steamship Co. cannotbe deemed such consideration for the gift to his heirs, since the services wererendered long before the Company ceded the value of the life policies to saidheirs; cession and services were not the result of one bargain or of a mutualexchange of promises.

A subsequent promise to pay for past services is a nudum pactum i.e., one thatis unenforceable in view of the common law rule that consideration must consistin a legal benefit to the promisee or some legal detriment to the promisor.

SPS. Gestopa vs. CA ad Mercedes Danlag Diego and Catalina Danlag were owners of 6 parcels of unregistered lands. They executed 3 deeds of donation mortis causain favor of Mercedes

Danlag-Pilapil covering 4 parcels. All deeds contained the reservation of rights ofdonors to amend / revoke the donation during their lifetime AND to sell,mortgage / encumber the properties if necessary.

Diego w/ the consent of Catalina then executed a deed of donation intervivoscovering the aforementioned lots plus 2 other parcels again in favor ofrespondent Mercedes.

This contained two conditionso (1) that Danlag spouses shall continue to enjoy the fruits of land

during their lifetimeo (2) the donee cannot sell or dispose of the land during the

lifetime of the said spouses w/o their consent.


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The Danlags sold parcels 3 and 4 to petitioners Gestopa and executed a deed ofrevocation recovering 6 parcels of land subject to deed of donation inter vivos.

Mecedes filed with RTC against the Gestopas and the Danlags for quieting of titleover the parcels of land.

She alleged that she was an illegitimate daughter of Diego Danlag that she lived

and rendered incalculable beneficial services to Diego and his mother Maura,when she was still alive.

In recognition of her services, Diego executed Deed of Donation conveying toher 6 parcels of land.

She accepted the donation in the same instrument, openly and publicly exercisedrights of ownership over the donated properties, and caused the transfer of thetax declarations in her name.

Through the machination, intimidation and undue influence, Diego persuaded thehusband of Mercedes, Eulalio Pilapil to buy 2 of the 6 parcels covered by thedeed of donation. The inter vivos donation was coupled with conditions shecomplied with. She alleges she had not been guilty of any act of ingratitude andthat the revocation had no legal basis.

Gestopas and Danlags opposed by saying that the deed of donation was null andvoid because it was obtained by Mercedes through machination and undue

influence. Even assuming it was validly executed, the intention was for thedonation to take effect upon death of donor. Further, the donation was void for itleft the donor Diego w/o any property at all.

I: W/n the donation was inter vivos or mortis causainter vivos W/n the revocation was validNO, it was not. R: The donation is INTER VIVOS. Revocation was not proper. (ruling in favor of

Mercedes) Crucial in resolving whether the donation was inter vivos or mortis causa is the

determination of whether the donor intended to transfer ownership over theproperties upon the execution of the deed.

In ascertaining the intention of the donor, all the deeds provisions must be readtogether:

o IRST, the granting clause shows that Diego donated theproperties out of love and affection for Mercedes. This is a markof a donation inter vivos.

o SECOND, the reservation of lifetime usufruct indicates that thedonor intended to transfer the naked ownership of the properties.As correctly posed by the CA, what was the need for suchreservation if the donor and his spouse remained the owners ofthe properties?

o THIRD, the donor reserved sufficient properties for hismaintenance w/ his standing in society, indicating that the donorintended to part w/ 6 parcels.

o Lastly the donee accepted the donation.

Alejandro vs. Geraldez: An acceptance clauseis a mark that the donationis inter vivos. Acceptance is a requirement for donations inter vivos.

Donations mortis causa, being in a form of a will, are not required to beaccepted by the donees during the donors lifetime.

THUS, the right to dispose the properties belonged to Mercedes. Diegos

right to give consent was merely intended to protect his usufructuaryinterests.

The limitation on the right to sell during the donors lifetime implied thatownership had passed to the donees and donation was effective during thedonors lifetime.

Circumstances show that the intention of the donor was to transferownership to Mercedes. Prior to the donation inter vivos, the Danlagspouses already executed 3 donations mortis causa.

The Danlag spouses were aware of the difference between the twodonations. If they did not intend to donate inter vivos, they would not againdonate the four lots already donated mortis causa.

Was the revocation valid?A valid donation, once accepted, becomesirrevocable, EXCEPT on account of inofficiousness, failure by donee tocomply with charges imposed in donation, or ingratitude.

The Danlag spouses did NOT invoke any of these. Finally, the records donot show that the donor-spouses instituted any act ion to revoke thedonation in accordance w/ Art. 769. The revocation has no legal effect.

ACCRA v. CIR During the 1987 national elections, petitioners, who are partners ACCRA law

firm contributed about P882k+ each to the campaign funds of SenatorAngara, then running for the Senate.

BIR assessed each of the petitioners donors tax for their contributions. Petitioners questioned the assessment through a letter to the BIR. They

claimed that political or electoral contributions are NOT considered giftsunder the NIRC and that, therefore, they are not liable for donors tax.

The claim for exemption was denied by the Commissioner. I: W/n political contributions can be considered a donation and w/n

petitioners are liable for Donors tax R: YES, political contributions ARE donations and petitioners ARE liable for

donors tax. A donation has the following elements:

o (a) the reduction of the patrimony of the donor;o (b) the increase in the patrimony of the donee; and,o (c) the intent to do an act of liberality / animus donandi

The present case falls squarely within the definition of a donation . Petitioners, each contributed to the campaign funds of Senator Edgardo

Angara, without any material consideration.


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All three elements of a donation are present. The patrimony of the fourpetitioners were reduced by P882k+, while Senator Edgardo Angaraspatrimony correspondingly increased.

There was intent to do an act of liberality / animus donandi waspresent since each of the petitioners gave their contributions

without any consideration. 2) Petitioners attempt is strained. The fact that petitioners will

somehow in the future benefit from the election of the candidateto whom they contribute, in no way amounts to a valuablematerial consideration so as to remove political contributions fromthe purview of a donation.

Senator Angara was under no obligation to benefit the petitioners. Theproper performance of his duties as a legislator is his obligation as anelected public servant of the Filipino people and not a consideration for thepolitical contributions he received.

In fact, as a public servant, he may even be called to enact laws that arecontrary to the interests of his benefactors, for the benefit of the greatergood.

In fine, the purpose for which the sums of money were given,

which was to fund the campaign of Senator Angara in his bid for asenatorial seat, cannot be considered as a material considerationso as to negate a donation.

Finally, this Court takes note of the fact that subsequent to the donationsinvolved in this case, Congress approved Republic Act No. 7166 onNovember 25, 1991, providing in Section 13 thereof that political/electoralcontributions, duly reported to the Commission on Elections, are NOTsubject to the payment of any gift tax. This all the more shows that thepolitical contributions herein made are subject to the payment of gift taxes,since the same were made PRIOR to the exempting legislation, andRepublic Act No. 7166 provides no retroactive effect on this point.

VAT

Commissioner of Internal Revenue v. Mirant Pagbilao CorporationMitsubishi MPCNPC


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MPC, formerly Southern Energy Quezon, Inc., is a domestic firm engaged in thegeneration of power which it sells to the National Power Corporation (NPC).

For the construction of the electrical and mechanical equipment portion of itsPagbilao, Quezon plant, MPC secured the services of Mitsubishi Corporation(Mitsubishi) of Japan.

Under R.A. 6395, NPC is exempt from all taxes (which covers both direct andindirect taxes).

In the light of the NPC's tax exempt status, MPC, on the belief that its sale ofpower generation services to NPC is zero-rated for VAT purposes, filed anApplication for Effective Zero Rating.

CIR issued a ruling stating that the supply of electricity by MPC to the NPC shallbe subject to zero percent (0%) VAT.

Consistent with its belief to be zero-rated, MPC opted not to pay the VATcomponent of the progress billings from Mitsubishi for the period covering April1993 to September 1996 - for the E & M Equipment Erection Portion of MPC'scontract with Mitsubishi.

This prompted Mitsubishi to advance the VAT component as this serves as itsoutput VAT which is essential for the determination of its VAT payment.

MPC, while awaiting approval of its application, filed its quarterly VAT return for

the second quarter of 1998 where it reflected an input VAT of P148M+, assupported by an OR.

MPC filed an administrative claim for refund of unutilized input VAT. BIR failed to act on its claim for refund. MPC went to the CTA via a petition for review to forestall the running of the two-

year prescriptive period. BIR asserted that MPC's claim for refund CANNOT be granted since MPC's sale

of electricity to NPC is NOT zero-rated for its failure to secure an approvedapplication for zero-rating.

The CTA granted MPC's claim for input VAT refund or credit for PhP10,766,939.48. The CA rendered its assailed decision modifying that of the CTAdecision by granting most of MPC's claims for tax refund or credit forP146,760,509.48.

I: W/n MPC is entitled to the refund of its input VAT payments made from 1993to 1996

R: Yes, but only to the extent of P10M+, given that claim has prescribed. Prescription.MP's claim for refund / tax credit for the creditable input VAT was

filed beyond the period provided by law for such claim. Sec. 112(A) of the NIRCprovides that any VAT-registered person, whose sales are zero-rated may applyfor the issuance of tax credit WITHIN 2 YEARS after the close of the taxablequarter when the sales were made. MPC filed a refund in Dec 1999 when itshould have filed in Sept 1998 (s ince the close of the quarter was Sept 1996).

Creditable input VAT is an indirect tax which can be shifted or passed on tothe buyer, transferee, or lessee of the goods, properties, or services of thetaxpayer.

The fact that the subsequent sale or transaction involves a wholly-tax exemptclient, resulting in a zero-rated or effectively zero-rated transaction, does NOT,standing alone, deprive the taxpayer of its right to a refund for any unutilizedcreditable input VAT, albeit the erroneous, illegal, or wrongful payment angledoes not enter the equation.

History of VAT. The law that originally imposed the VAT in the country, as wellas the subsequent amendments of that law, has been drawn from the tax creditmethod (practiced in Europe).

If at the end of a taxable quarter the output taxes charged by a seller are EQUALto the input taxes passed on by the suppliers, no payment is required.HOWEVER, when output taxes EXCEED input taxes, the excess has to be paid.On the other hand, if the input taxes EXCEED the output taxes, the excess shallbe CARRIED OVER TO THE succeeding quarter/s.

Should the input taxes result from zero-rated or effectively zero-ratedtransactions or from the acquisition of capital goods, any EXCESS over the outputtaxes shall be refunded to the taxpayer / credited against other internal revenuetaxes.

Zero-rated transactionsgenerally refer to the export sale of goods and supplyof services. The tax rate is set at zero. When applied to the tax base, such rate

obviously results in no tax chargeable against the purchaser. The seller of suchtransactions charges no output tax, but can claim a refund of or a tax creditcertificate for the VAT previously charged by suppliers.

OTHERS:

BIR and other tax agencies have a duty to treat claims for refunds and taxcredits with proper attention and urgency. Had RDO No. 60 and, later, the BIRproper acted, instead of sitting, on MPC's underlying application for effective zerorating, the matter of addressing MPC's right, or lack of it, to tax credit or refundcould have plausibly been addressed at their level and perchance freed thetaxpayer and the government from the rigors of a tedious litigation.

The official receipt proves payment by MPC of its creditable input VAT relative toits purchases from Mitsubishi. BIR is precluded from requiring additional evidenceto prove that input tax had indeed paid or, in fine, that the taxpayer is indeedentitled to a tax refund or credit for input VAT, we agree with the CA's abovedisposition. As the Court distinctly notes, the law considers a duly-executed VATinvoice or OR referred to in the above provision as sufficient evidence to supporta claim for input tax credit.

CIR v. Phil Health Care Providers, Inc.

The Philippine Health Care Providers (PHCPI), a health care organization for sickand disabled persons enrolled in a health care plan, wrote BIR inquiring whetherthe services it provides are exempt from the payment of the VAT.

BIR issued a ruling, confirmed by the BIR Regional Director, stating that PHCPI


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was exempt from the VAT coverage. BIR then sent PHCPI 2 notices for deficiency in its payment of the VAT and

documentary stamp taxes (DST) f P224M+ for taxable years 1996 and 1997. PHCPI protested, but BIR did not take any action, so PHCPI filed with the CTA a

petition for review. CTA ordered PHCPI to pay a reduced deficiency VAT and declared the BIR ruling

void, saying that PHCPI is a service contractor subject to VATsince it doesnot actually render medical service but merely acts as a conduit between themembers and petitioner's accredited and recognized hospitals and clinics.

However, after a careful review of the facts of the case, the CTA resolved togrant petitioner's "Motion for Partial Reconsideration relying on Sec.246 of the1977 Tax code which provides that in the absence of showing of bad faith, theretroactive revocation of the BIR Ruling will be prejudicial to PHCPI. Accordingly,the VAT assessment issued against PHCPI for the taxable years 1996 and 1997was WITHDRAWN and SET ASIDE.

I: 1. W/n PHCPI's services are subject to VAT R: YES. HOWEVER, because of the VAT ruling exempting PHCPI from VAT, it

cannot be retroactively revoked and therefore, PHCPI is still exempt. 1) Section 102 of the NIRC as amended provides that there shall be levied a VAT

equivalent to 12% of gross receipts derived from the sale or exchange ofservices The phrase "sale or exchange of service" means the performance ofall kinds of services in the Philippines for consideration.

Section 103 of the same Code specifies the exempt transactions from theprovision, which includes medical, dental, hospital and veterinary services exceptthose rendered by professionals.

It can be seen from PHCPIs letter to BIR that its services that it is not actuallyrendering medical service but merely acting as a conduit between themembers and their accredited and recognized hospitals and clinics.

Thus, it does NOT fall under VAT-exempt transactions. 2) Section 246 of the 1997 Tax Code, as amended, provides that rulings,

circulars, rules and regulations promulgated by the CIR have no retroactiveapplication if to apply them would prejudice the taxpayer.

The exceptions to this rule are:o (1) where the taxpayer deliberately misstates or omits material

facts from his return or in any document required of him by theBIR

o (2) where the facts subsequently gathered by the BIR arematerially different from the facts on which the ruling is based, or

o (3) where the taxpayer acted in bad faith. PHCPI did not fall under any of these exceptions. PHCPI's failure to refer to itself as a health maintenance organization is not an

indication of bad faith or a deliberate attempt to make false representations. The term "health maintenance organization" was first recorded in the Philippine

statute books only upon the passage of "The National Health Insurance Act of

1995" which defines a "health maintenance org" as one of the classes of a"health care provider."

Thus, the VAT Ruling was issued in PHCPI's favor, and the term "healthmaintenance organization" was yet unknown or had no significance for taxationpurposes. PHCPI therefore, believed in good faith that it was VAT exempt for the

taxable years 1996 and 1997 on the basis of the VAT Ruling. CIR is precluded from adopting a position contrary to one previously taken where

injustice would result to the taxpayer.

CIR v Acesite (Philippines) Hotel Corporation Acesite is the owner and operator of the Holiday Inn Manila Pavilion Hotel. It

leases a portion of the hotels premises to the PAGCOR for casino operations. Italso caters food and beverages to PAGCORs casino patrons through the hotelsrestaurant outlets.

From 1996 to 1997, Acesite incurred VAT amounting to P30M+ from its rentalincome and sale of food and beverages to PAGCOR during said period.

Acesite tried to shift the said taxes to PAGCOR by incorporating it in the amountassessed to PAGCOR but the latter refused to pay the taxes on account of its taxexempt status.

Thus, PAGCOR paid the amount due to Acesite minus the P30M+ VAT whileAcesite paid the VAT to the CIR.

However, Acesite belatedly arrived at the conclusion that its transaction withPAGCOR was subject to zero rate as it was rendered to a tax-exempt entity. In1998, Acesite filed an administrative claim for refund with the CIR but CIR failedto resolve the same, so the case was elevated to the CTA.

I: W/n the 0% VAT rate (under then Sec 108 (B)(3) of the NIRC) applies toAcesite

R: Yes. PD 1869 w/c created PAGCOR granted it an exemption from paying taxes. A close scrutiny of the provisions of the said law gives PAGCOR a blanket

exemption to taxes with no distinction on whether the taxes are direct orindirect.

The law even grants tax exempt status to persons dealing with PAGCOR incasino operations. The unmistakable conclusion is that PAGCOR is not liable forthe P30M+ VAT and neither is Acesite as Acesite is effectively subject to zeropercent rate under the NIRC.

By extending the exemption to entities or individuals dealing with PAGCOR, thelegislature clearly granted exemption also from indirect taxes. It must be notedthat the indirect tax of VAT, as in the instant case, can be shifted or passed tothe buyer, transferee, or lessee of the goods, properties, or services subject toVAT. Thus, by extending the tax exemption to entities or individuals dealing withPAGCOR in casino operations, it is exempting PAGCOR from being liable toindirect taxes.


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Magsaysay Lines offered to buy the shares and the vessels for P168M. The bidwas made by Magsaysay Lines, purportedly for a new company still to be formedcomposed of itself, Baliwag Navigation, Inc., and FIM Limited of the MardenGroup based in Hongkong (collectively, private respondents)

The bid was approved by the Committee on Privatization, and a Notice of Award

was issued to Magsaysay Lines. Private respondents through counsel then received a VAT Ruling from the BIR,

holding that the sale of the vessels was subject to the 10% VAT. They filed amotion for reconsideration but their motion was denied so they elevated the caseto the CTA.

The NDC drew on the Letter of Credit to pay for the VAT, and the amount ofP15,120,000.00 in taxes was paid on 16 March 1989.

CTA ruled that the sale of a vessel was an "isolated transaction," not done in theordinary course of NDCs business, and was thus not subject to VAT, whichunder Section 99 of the Tax Code, was applied only to sales in the course oftrade or business.

I: W/N the sale is subject to VAT R: No, sale is NOT subject to VAT. Any sale, barter or exchange of goods or services not in the course of trade or

business is not subject to VAT. mperial v. CIR: The term "carrying on business" does not mean the

performance of a single disconnected act, but means conducting, prosecutingand continuing business by performing progressively all the acts normallyincident thereof.

Thus, it connotes REGULARITY of activity. In the instant case, the sale was an isolated transaction. The sale which was

involuntary and made pursuant to the declared policy of Government forprivatization could no longer be repeated or carried on with regularity.

It should be emphasized that the normal VAT-registered activity of NDC isleasing personal property.

This finding is confirmed by the Revised Charter of the NDC which bears noindication that the NDC was created for the primary purpose of selling realproperty.

Thus, the sale of the vessels was not in the ordinary course of trade or businessof NDC so it should not be subject to VAT.

CIR v. SEKISUI SEKISUI JUSHI is a domestic corporation with principal office located in the

Special Export Processing Zone in Laguna. It is principally engaged in the business of manufacturing, importing, exporting,

buying, selling wholesale such goods as strapping bands and other packaging

materials. Having registered with the BIR as a VAT taxpayer, Sekisui filed its quarterly

returns with the BIR, in the amount of P4M paid by it in connection with itsdomestic purchase of capital goods and services.

Said input taxes remained unutilized since Sekisui has not engaged in any

business activity or transaction for which it may be liable for output tax and forwhich said input taxes may be credited.

Sekisui then filed with the One-Stop-Shop Inter-Agency Tax Credit and DutyDrawback Center of the Department of Finance (CENTER-DOF) two separateapplications for tax credit/refund of VAT input taxes paid.

CIR denied this, but CTA ruled that Sekisui was entitled to refund. I: W/n SEKISUI is entitled to the refund/tax credit certificate as alleged unutilized

input taxes paid on domestic purchase of capital goods and services R: Yes, it is entitled to refund Business enterprises registered with the Philippine Export Zone Authority (PEZA)

may choose between two fiscal incentive schemes:o (1) to pay a 5% preferential tax rate on its gross income and thus

be exempt from all other taxes; oro (b) to enjoy an income tax holiday, in which case it is not exempt

from applicable national revenue taxes including the value-addedtax (VAT).

If the entity avails itself of the 5% preferential tax rate under the first scheme, itis exempt from all taxes, including the VAT;

Under the second, it is exempt from income taxes for a number of years, but notfrom other national internal revenue taxes like the VAT.

A perusal of the pleadings and supporting documents indicates that Sekisuiavailed itself of the income tax holiday (second). By doing so, it became subjectto VAT. It correctly registered as a VAT taxpayer, because its transactions werenot VAT-exempt.

Notwithstanding the fact that its purchases should have been zero-rated, Sekisuiwas able to prove that it had paid input taxes in the amount of P4M, assubstantially supported by invoices and ORs.

While an ecozone is within the Philippines, it is deemed a separate customsterritory. Sales by suppliers from outside the borders of the ecozone to thisseparate customs territory are deemed as exports and treated as export sales.

Since 100% of Sekisui's products are exported, all its transactions are deemedexport sales and are thus VAT zero-rated. Sekisui has no output tax with which itcould offset its paid input tax. Since the subject input tax it paid for its domesticpurchases of capital goods and services remained unutilized, it can claim arefund for the input VAT previously charged by its suppliers.

ABAKADA vs Ermita (Sept 1, 2005) Several actions were filed by different petitioners assailing the validity of R.A. No.

9337 (increasing VAT to 12%) for being unconstitutional, as it violates Art 6,


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Section 28, w/c provides that The rule of taxation shall be uniform andequitable. The Congress shall evolve a progressive system of taxation.

In particular, SHELL, etc. assailed Section 8, amending Section 110 (B) of theNIRC, imposing a 70% limit on the amount of input tax to be creditedagainst the output tax,making it REGRESSIVE and unconstitutional.

Specific provision: If at the end of any taxable quarter theoutput tax exceeds the input tax, the excess shall be paid by theVAT-registered person. If the input tax exceeds the output tax,the excess shall be carried over to the succeeding quarter orquarters: PROVIDED that the input tax inclusive of input VATcarried over from the previous quarter that may becredited in every quarter shall not exceed 70% of theoutput VAT: PROVIDED, HOWEVER, THAT any input taxattributable to zero-rated sales by a VAT-registered person may athis option be refunded or credited against other internal revenuetaxes. . .

I: W/n RA 9337 is unconstitutional for violating uniformity, equitabilityand progressiveness of taxationNo, it is VALID.

TAX IS UNIFORM.

Uniformity in taxation means that all taxable articles or kinds ofproperty of the same class shall be taxed at the same rate.

The rule of uniform taxation does not deprive Congress of the powerto classify subjects of taxation, and only demands uniformity within theparticular class.

In this case, the tax law is uniform because:o 1) it provides a standard rate of 0% or 10% (or 12%)

on all goods and services;o ) it does not make any distinction as to the type of

industry or trade that will bear the 70% limitation onthe creditable input tax, 5-year amortization of inputtax paid on purchase of capital goods or the 5% finalwithholding tax by the government.

TAX IS EQUITABLE. (Taxes should equally burden all individuals orentities in similareconomic circumstances.)

The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or12%) does not apply to sales of goods or services with gross annual sales orreceipts not exceeding P1.5M.

Also, basic marine and agricultural food products in their original state are stillNOT subject to the tax, thus ensuring that prices at the grassroots level willremain accessible.

Although the law outs a premium on businesses with low profit margins, andunduly favors those with high profit margins, Congress equalized the burden thelaw by likewise imposing a 3% percentage tax on VAT-exempt persons under

Section 109(v), i.e., transactions with gross annual sales and/or receipts notexceeding P1.5 Million.

This acts as an equalizer because in effect, bigger businesses that qualify for VATcoverage and VAT-exempt taxpayers stand on equal-footing.

Moreover, Congress provided under mitigating measures to ease, as well as

spread out, the burden of taxation, which would otherwise rest largely on theconsumers:o Excise taxes on petroleum products and natural gas were reduced.

Percentage tax on domestic carriers was removed. Power producers arenow exempt from paying franchise tax.

o Income tax rates of corporations, in order to distribute the burden oftaxation, were increased

o Domestic, foreign, and non-resident corporations are now subject to a 35%income tax rate, from a previous 32%.

o Intercorporate dividends of non-resident foreign corporations are stillsubject to 15% final withholding tax but the tax credit allowed on thecorporations domicile was increased to 20%.

o PAGCOR is not exempt from income taxes anymore.o Even the sale by an artist of his works or services performed for the

production of such works was not spared. On the INPUT TAX LIMIT*(ITO ata yung impt) Petitioner (Shell) assumes that the input tax exceeds 70% of the output tax, and

therefore, the input tax in excess of 70% remains uncredited. However, to theextent that the input tax is less than 70% of the output tax, then 100% of suchinput tax is still creditable.

More importantly, the excess input tax, if any, is retained in a businesss booksof accounts and remains creditable in the succeeding quarter/s. This is explicitlyallowed by Section 110(B), which provides that if the input tax exceeds theoutput tax, the excess shall be carried over to the succeeding quarter orquarters.

In addition, Section 112(B) allows a VAT-registered person to apply for theissuance of a tax credit certificate or refund for any unused input taxes, to theextent that such input taxes have not been applied against the output taxes.Such unused input tax may be used in payment of his other internal revenuetaxes.

The non-application of the unutilized input tax in a given quarter is not adinfinitum, as petitioners exaggeratedly contend.

On the other hand, it appears that petitioner Garcia failed to comprehend theoperation of the 70% limitation on the input tax. According to petitioner, thelimitation on the creditable input tax in effect allows VAT-registeredestablishments to retain a portion of the taxes they collect, which violates theprinciple that tax collection and revenue should be for public purposes andexpenditures.
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As earlier stated, the input tax is the tax paid by a person, passed on tohim by the seller, when he buys goods. Output tax meanwhile is thetax due to the person when he sells goods. In computing the VAT payable,three possible scenarios may arise:

o If output tax = input tax = no paymento If output tax > input tax = person liable for excess, to be paid to

BIRo If input tax > output tax = excess shall be carried over to the

succeeding quarter or quarters.o IF input tax results from zero-rated or effectively zero-rated

transactions, any excess over the output taxes shall beREFUNDED to the taxpayer / credited against other internalrevenue taxes, at the taxpayers option.

Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax.Thus, a person can credit his input tax only up to the extent of 70% of theoutput tax.

There is no retention of any tax collection because the taxpayer hasalready previously paid the input tax to a seller, and the seller willsubsequently remit such input tax to the BIR. The party directly liable for

the payment of the tax is the seller. What only needs to be done is for theperson/taxpayer to apply or credit these input taxes, as evidenced by receipts,against his output taxes.

TAX IS REGRESSIVE, BUT IT IS NOT INVALID. Taxation is PROGRESSIVE when its rate goes up depending on the resources of

the person affected. The Constitution does not really prohibit theimposition of indirect taxes, like the VAT. What it simply provides isthat Congress shall "evolve a progressive system of taxation."

*NOTE the distinction made by the court:VAT- A tax on spending or consumption. It is levied on the sale, barter, exchange orlease of goods or properties and services. Being an indirect tax on expenditure, theseller of goods or services may pass on the amount of tax paid to the buyer, with theseller acting merely as a tax collector. The burden of VAT is intended to fall on theimmediate buyers and ultimately, the end-consumers.

Direct tax is a tax for which a taxpayer is directly liable on the transaction orbusiness it engages in, without transferring the burden to someone else. Examplesare individual and corporate income taxes, transfer taxes, and residence taxes.

ABAKADA v. Ermita (Oct 18, 2005) This case is about the Resolution of the Motion for Reconsideration filed by

herein petitioners based on the decision rendered by the court on Sept. 1, 2005,upholding the constitutionality of RA 9337 or the VAT Reform Act.

Relevant issues are as follows:1. MR of Escudero, et al.: W/N there was grave abuse of discretion amounting

to lack or excess of jurisdiction on the part of the Bicameral Committeewhen the No Pass-On Provisions for the sale of petroleum products andpower generation services were deleted.

2. MR of Bataan Governor Garcia, Jr.: W/N the VAT law is unconstitutional forbeing arbitrary, oppressive and inequitable because it burdens theconsumers because of the price increase.

3. MR of Association of Pilipinas Shell Dealers: W/N the Court erred inupholding the constitutionality of Section 110(A)(2) and Section110(B) of the NIRC as amended by the EVAT Law imposinglimitations on the amount of input VAT that may be claimed as acredit against the output VAT; Section 114(C) of the NIRC asamended by the EVAT Law, requiring the government or any of itsinstrumentalities to withhold a 5% final withholding tax on theirgross payments on purchases of goods and services; for finding thatthe EVAT Law is not arbitrary, oppressive and confiscatory as to amount adeprivation of property without due process of law; that it did not violatethe equal protection clause.

R:MRs are DENIED. TRO is lifted. Escudero, et al. argues that the bicameral committee should not have touched

on the No Pass-On Provisions since both the Senate and the House ofRepresentatives were in agreement that such provision should be passed whereno VAT Burden shall be passed to the end-consumer and instead will beshouldered by the sellers.

HOWEVER, the deletion of the No Pass-On Provision made thepresent VAT law more in consonance with the very nature of VAT whichis a tax on spending or consumption, thus, the burden thereof isultimately borne by the end-consumer.

As to the contention that the right to credit input tax has already evolved into avested right, the Court finds that the right to credit the same is a merecreation of law.Prior to the enactment of multi-stage sales taxation, the salestaxes paid at every level of distribution are not recoverable from the taxespayable. With the advent of EO 273 imposing a 10% multi-stage tax on all sales,it was only then that the crediting of the input tax paid on purchase orimportation of goods and services by VAT-registered persons against the outputtax was established. This continued with the Expanded VAT Law (R.A. No. 7716),and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit inputtax as against the output tax is clearly a privilege created by law, aprivilege that also the law can limit. It should be stressed that a personhas no vested right in statutory privileges.

The impact of the 70% limitation on the creditable input tax will ultimatelydepend on how one manages and operates its business. Market forces, strategyand acumen will dictate their moves. With or without these VAT provisions, an


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entrepreneur who does not have the ken to adapt to economic variables willsurely perish in the competition. The arguments posed are within the realm ofbusiness, and the solution lies also in business.

CIR v. Toshiba Information Equipment (Phils.), Inc. Toshiba is a domestic corporation with the primary purpose of engaging in the

business of manufacturing and exporting of electrical and mechanical machineryand goods relating to information technology, computer hardware and software.

In 1995, Toshiba registered w/ Philippine Economic Zone Authority (PEZA) as anEcozone Export Enterprise. Toshiba also registered with the BIR as a VATtaxpayer.

Toshiba filed its VAT returns for the year 1996 reporting its input VAT andalleging that its input VAT was from its purchases of capital goods and serviceswhich remained unutilized since it had not yet engaged in any business activityfor which it may be liable for output VAT.

Consequently, Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit andDuty Drawback center of the Department of Finance applications for taxcredit/refund of its unutilized input VAT.

Toshiba also filed a petition for review with the CTA to toll the running of the

two-year prescriptive period for judicially claiming a tax credit/refund. CTA ordered the CIR to refund or to issue a tax credit certificate to Toshiba. CIR opposed on the ground that since Toshiba is registered with PEZA as an

Ecozone Export Enterprise, its business is not subject to VAT pursuant to Section109 of the Tax Code. Since Toshibas business is not subject to VAT, the capitalgoods and services it purchased are considered not used in VAT taxable businessand therefore, it is not entitled to refund of input taxes on such capital goods.

I: W/n Toshiba is entitled to the tax credit/refund of its input VAT on itspurchases of capital goods and services

R: Yes, Toshiba is entitled to tax credit/refund of its input VAT on its purchasesof capital goods and services.

An Ecozone enterprise is a VAT-exempt entity. Sales of goods, properties, andservices by persons from the Customs Territory to Ecozone enterprise shall besubject to VAT at zero percent (0%).

PEZA-registered enterprises, which would necessarily be located within Ecozones,are VAT-exempt entities because of Section 8 of RA 7916 which establishes thefiction that Ecozones are foreign territory. The national territory of the Philippinesoutside of the proclaimed borders of the Ecozone are referred to as CustomsTerritory. The provision provides that PEZA shall manage and operate theEcozones as a separate customs territory, thus creating the fiction that theEcozone is a foreign territory.

The Philippine VAT system adheres to the Cross Border Doctrine, according towhich, no VAT shall be imposed to form part of the cost of goods destined forconsumption outside of the territorial board of the taxing authority.

Sales of goods, properties, and services by a VAT-registered supplier from theCustoms Territory to an Ecozone enterprise shall be treated as export sales.

If such sales are made by a VAT-registered supplier, they shall be subject to VATat 0%. In zero-rated transactions, the VAT-registered supplier shall not pass onany output VAT to the Ecozone enterprise, and at the same time, shall be

entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the export (i.e., the

supplier from Customs territory), who is directly and legally liable for VAT.Meanwhile, sales to an Ecozone enterprise made a by a non-VAT or unregisteredsupplier would only be exempt from VAT and the supplier shall not be able toclaim credit/refund of its input VAT.

Even conceding, however, that Toshiba as a PEZA-registered enterprise, is aVAT-exempt entity that could not have engaged in a VAT-taxable business, giventhe particular circumstances, Toshiba is entitled to a credit/refund of itsinput vat.

The sales made to Toshiba, for which it is claiming a refund or credit of itsunutilized input vat, were made in 1996 under the old rulethat the tax-status ofEcozone enterprises would depend upon the tax incentives it chooses to avail of,either the 5% preferential tax or the income tax holiday under the Omnibus

Investments Code where the entity will only be exempt from income tax but notfrom VAT. Since Toshiba chose to avail of the income tax holiday, it was therefore subject

to the 10% VAT. Therefore Toshibas transactions in 1996 being subject to VAT,is entitled to a credit/refund of the unutilized input VAT it incurred which itwasnt able to apply against its output taxes.

The transaction from a supplier in a customs territory to Toshiba, being aPEZA-registered enterprise, was considered an effectively VAT zero-ratedtransaction. However, the sales made by Toshiba to a foreign country wereconsidered export sales. Thus, they were considered to be automaticallyVAT zero-rated transactions.

Given that in the case of Toshiba, Toshiba was Buyer 1 and not the Seller,then it should not have claimed for an input tax credit since theoretically,there was no input VAT on Toshibas part.

However, the Toshiba case happened prior to RMC 74-99 where PEZA-registered enterprises availed of income tax holidays and so Toshiba wassubject to VAT. Thus, there was an assumption that the seller passed onVAT to Toshiba and so, Toshiba should be allowed to claim for an input taxcredit.

As regards the fact that Toshiba was asking for an input tax credit oncapital goods, the ruling in that case is no longer applicable as input taxcredit for capital goods under RA 9337 are governed by new rules.

In this case, the Court also made a pronouncement that a VAT-registeredsupplier from the customs territory to an Ecozone enterprise shall be


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treated as export sales, while sales to an ECOZONE enterprise made by aNON-VAT or unregistered supplier would only be exempt from VAT and thesupplier shall not be able to claim credit/refund for his input VAT.

CIR v Seagate

Seagate is a resident foreign corporation duly registered with the SEC to dobusiness in the Philippines, with principal office address at the Special EconomicZone in Cebu.

It is also registered with the Philippine Export Zone Authority (PEZA) to engagein the manufacture of recording components primarily used in computers forexport. Furthermore, it is a VAT-registered entity w/c filed VAT returns for theperiod of April 1998 to 30 June 1999.

Subsequently, an administrative claim for refund of VAT input taxes in theamount of P28,369,226.38 with supporting documents (inclusive of theP12,267,981.04 VAT input taxes subject of this Petition for Review), was filed.

CIR did not act upon this so Seagate elevated the case to CTA. CTA granted the claim for refund but the CA modified it in the reduced amount

of P12M, w/c represented the unutilized but substantiated input VAT paid oncapital goods purchased for the period covering April 1, 1998 to June 30, 1999.This was because Seagate had availed itself only of the fiscal incentives underEO 226 and NOT of those under both PD 66 and Section 24 of RA 7916.

Respondent was, therefore, considered exempt only from the payment of incometax when it opted for the income tax holidayin lieu of the 5% preferential taxon gross income earned. As a VAT-registered entity, though, it was still subjectto the payment of other national internal revenue taxes, like the VAT.

I: W/n Seagate is entitled to the refund or issuance of Tax Credit Certificate inthe amount of P12,122,922.66 representing alleged unutilized input VAT paid oncapital goods purchased for the period April 1, 1998 to June 30, 1999

R:YES, Seagate is entitled to refund. THERE IS Preferential Tax Treatment Under the following Special

Laws:o PD 66- law creating PEZAo EO 226- Omnibus Investments Code" of 1987o RA 7227- Bases Conversion and Development Act of 1992o RA 7916- VAT Lawo RA 7844- Export Development Act of 1994;o PD 1853- law requiring deposits of duties upon the opening of

letters of credit to cover imports Seagate is one of the business entities registered in and operating from the SEZ

in Cebu. These entities are exempt from all internal revenue taxes and theimplementing rules relevant thereto, including the VAT.

Although export sales are not deemed exempt transactions, they are nonethelesszero-rated, because the ecozone within which it is registered is managed andoperated by the PEZA as a separate customs territory.

This means that in such zone is created the legal fiction of foreign territory. Under the cross-border principle of the VAT system being enforced by the

BIR, no VAT shall be imposed to form part of the cost of goods destined forconsumption outside of the territorial border of the taxing authority. If exports ofgoods and services from the Philippines to a foreign country are free of the VAT,then the same rule holds for such exports from the national territory -- exceptspecifically declared areas -- to an ecozone.

THUS, sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country

Conversely, sales by a PEZA-registered entity to a VAT-registered person in thecustoms territory are deemed imports from a foreign country.

An ecozone, even though a geographical terri tory of the Philippines, is howeverregarded in law as foreign soil. This legal fiction is necessary to give meaningfuleffect to the policies of the special law creating the zone.

There is a difference between ZERO-RATED TRANSACTIONS and EXEMPT /

EFFECTIVE ZERO-RATED TRANSACTIONS

Zero-rated Exempt

It is automatic zero-rating.Refers to the export sale of goodsand supply of services.

Intended to be enjoyed by the sellerwho is directly and legally liable for

the VAT, making such sellerinternationally competitive by allowingthe refund or credit of input taxes thatare attributable to export sales.

It is effective zero rating.Refers to the sale of goods or supplyof services to persons or entitieswhose exemption under special lawsor Intl agreements to which thePhilippines is a signatory effectivelysubjects such transactions to a zerorate.

Intended to benefit the purchaserwho, not being directly and legally

liable for the payment of the VAT,will ultimately bear the burden of thetax shifted by the suppliers.

There is total relieffor the purchaserfrom the burden of the tax since hedoes not have input VAT and in effect,because VAT is at 0%, it does nothave output VAT.

There is partial relief because thepurchaser is not allowed any taxrefund of or credit for input taxespaid.


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Differentiate zero-rated from effectively zero-rated transactions accordingto SeagateSir pointed out that: the difference between automatic zero-rated transactions fromeffectively zero-rated transactions is that with automatic zero-rated transactions,you only have to look at the Tax Codeprovisions to know which transactions are

automatic zero-rated.However, with EXEMPTIONS / effective zero-rated transactions, you have tolook at other laws; thus, for effective zero-rated transactions, there is a need to geta prior confirmation or prior approval from the BIR that the transaction is effectivelyzero-rated.NOTE however that Revenue Regulations of 4-2007 does not provide anymore thatthere should be an approval before a transaction that is effectively VAT zero-rated tobecome effectively VAT zero-rated, which could be a legal basis why there is no needfor prior confirmation. But Sir does not agree since there is yet no amendment in theTax Code.

Exempt Transaction Exempt Party

- involves goods or services which, by

their nature, are specifically listed in andexpressly exempted from the VAT underthe Tax Code, without regard to the taxstatus of the party (VAT-exempt or not)to the transaction.- such transaction is not subject to theVAT, but the seller is not allowed any taxrefund of or credit for any input taxespaid.

- a person or entity granted VAT

exemption under the Tax Code, a speciallaw or an international agreement towhich the Philippines is a signatory, andby virtue of which its taxable transactionsbecome exempt from the VAT.- Such party is also not subject to theVAT, but may be allowed a tax refund ofor credit for input taxes paid, dependingon its registration as a VAT or non-VATtaxpayer.

While the liabilityis imposed on one person, the burdenmay be passed on to another.Therefore, if a special law merely exempts a party as a seller from its direct liabilityfor payment of the VAT, but does not relieve the same party as a purchaser from itsindirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchasetransaction is not exempt. Applying this principle to the case at bar, the purchasetransactions entered into by respondent are not VAT-exempt.

OTHERS:Special laws may certainly exempt transactions from the VAT. However, the

Tax Code provides that those falling under PD 66 are not. The purchase transactionsit entered into are, therefore, not VAT-exempt. These are subject to the VAT;respondent is required to register. Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent, depending again on the applicationof the destination principle (Under this principle, goods and services are taxed only in

the country where these are consumed. Thus, exports are zero-rated, but imports aretaxed).

When VAT Rate is at 0% or at 10%0%- if Seagate enters into such sales transactions with a purchaser (usually in a

abroad) for use or consumption OUTSIDE the Philippines10%- if Seagate entered into with a purchaser for use or consumption IN thePhilippines, UNLESS the purchaser is exempt from the indirect burden of the VAT, inwhich case it shall also be zero-rated.

Since the purchases of respondent are not exempt from the VAT, the rate to beapplied is zero.

The Tax Exemptions are Broad and Express Applying the special laws enumerated above, respondent as an entity is

exempt from internal revenue laws and regulations. This exemption covers bothdirectand indirect taxes, stemming from the very nature of the VAT as a tax onconsumption, for which the direct liability is imposed on one person but the indirect

burden is passed on to another. Respondent, as an exempt entity, can neither bedirectly charged for the VAT on its sales nor indirectly made to bear, as added cost tosuch sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nosdistinguere debemus. Where the law does not distinguish, we ought not todistinguish.

Tax Refund or Credit is in OrderHaving determined that respondents purchase transactions are subject to a

zero VAT rate, the tax refund or credit is in order. As correctly held by both the CAand the Tax Court, respondent had chosen the fiscal incentives in EO 226over thosein RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5percent preferential tax regime.Therefore, respondent can be considered exempt, notfrom the VAT, but only from the payment of income tax for a certain number of years,depending on its registration as a pioneer or a non-pioneer enterprise.

SummaryTo summarize, special laws expressly grant preferential tax treatment to

business establishments registered and operating within an ecozone, which by law isconsidered as a separate customs territory. As such, respondent is exempt from allinternal revenue taxes, including the VAT, and regulations pertaining thereto. It hasopted for the income tax holiday regime, instead of the 5 percent preferential taxregime.As a matter of law and procedure, its registration status entitling it to suchtax holiday can no longer be questioned. Its sales transactions intended for exportmay not be exempt, but like its purchase transactions, they are zero-rated. No priorapplication for the effective zero rating of its transactions is necessary. Being VAT-


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registered and having satisfactorily complied with all the requisites for claiming a taxrefund of or credit for the input VAT paid on capital goods purchased, respondent isentitled to such VAT refund or credit.

American Express v. CIR Petitioner Amex-Phil is a Philippine branch of American Express International, Inc.,

a corporation duly organized under Delaware, US laws. It is a servicing unit ofAmerican Express International, Inc.HK branch, engaged primarily to facilitatethe collection of Amex HK's receivables from Amex cardholders residing orsituated in the Philippines, as well as the payment of Amex HK to AmericanExpress accredited service establishments and merchants in the Philippines.

Amex-Phil made a request in writing to BIR for qualification as a zero rated VATenterprise.

BIR issued a VAT Ruling declaring that as a VAT registered entity whose service ispaid for in acceptable foreign currency which is remitted inwardly to thePhilippines and accounted for in accordance with the rules and regulations of theCentral Bank of the Philippines, Amex-Phils service income is automatically zeroratedeffective January 1, 1988. For this, there is no need to file an application

for zero-rate. For the taxable year 1998, petitioner allegedly generated and recorded revenues

in the total amount of P81k which were paid for in HK in foreign currency inwardlyremitted to the Philippines and accounted for in accordance with the rules andregulations of the BSP.

Amex-Phil asserts that said revenues qualify as zero-rated pursuant Tax Code asconfirmed in the VAT Ruling. For the same period, Amex-Phil allegedly paid inputVAT amounting to P3.9M+ on its domestic purchases of taxable goods/services.Petitioner nonetheless claims that its output VAT liability for the period amountedonly to P4k thereby leaving an unutilized input VAT of P3M averred to be directlyattributable to its zero-rated sales.

Petitioner contends that the input VAT payments in 1998 were paid in the courseof its trade or business. Further, the unapplied input VAT payments subject of thiscase had not been carried over to the succeeding first quarter of 1999.

I: W/N Amex-Phil is entitled to a refund of P3,967,561.06 allegedly representingunutilized input VAT payments on domestic purchases of taxablegoods/services which are directly attributable to zero-rated sales for the periodJanuary 1 to December 31, 1998

R:YES. Petitioner's claim for refund is hereby PARTIALLY GRANTED. RespondentCIR is ORDERED to REFUND to petitioner the sum of P3,967,336.97 representingunutilized input VAT payments for the period January 1 to December 31, 1998.

The onus (burden) of taxation under our VAT system is in the country where thegoods, proper

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