PLDT VS. CIR

Petitioner PLDT claiming that it terminated in 1995 the employment of several rank and file, supervisory and executive employees dues to redundancy.  In compliance with labor law requirements, it paid those separated employees separation pay and other benefits, and that as employer and withholding agent, it deducted from the separation pay withholding taxes which was remitted to BIR.

Petitioner filed with BIR a claim of tax credit or refund invoking sec. 28(b)(7)(B) of NIRC which excluded from gross income any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from service of the employer due to death, sickness or other physical ability or for any cause beyond the control of the said official or employer.

CTA denied PLDT claim on the ground that it failed to sufficiently prove that the terminated employees received separation pay and that taxes were withheld therefrom or remitted to the BIR.

ISSUE: WON the withholding taxes, which petitioner remitted to the BIR, should be refunded for having been erroneously withheld and paid to the later?

HELD:
PLDT failed to establish that the redundant employees actually received separation ay and it withheld taxes therefrom and remitted the same to the BIR.

A taxpayer must do two (2) things to be able to be able to successfully make a claim for the tax refund:
1.  Declare the income payment it received as part of its gross income.
2.  Establish the fact of withholding.

On this score, the relevant revenue regulations provides as follows:
Sec. 10. Claims for tax credit or refund -  claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received was declared as part of the gross income and the fact of withholding is established by a copy of the statement duly issued by the payer to the payee showing the amount paid and the amount of tax withheld therefrom.

HENDERSON VS. CIR

The spouses Arthur Henderson and Marie Henderson filed with BIR returns of annual net income for the years 1948-1952.  Henderson's received notice of assessment from BIR, subsequently, paid the assessment.  BIR reassessed the taxpayers income for the year 1948-1952 and demanded payment of the deficiency taxes.

In the assessments, BIR considered as part of their taxable income the taxpayers-husband allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to Marikina Gun and Country Club paid by his employer for his account; and travelling allowance of his wife.

Taxpayer claim that taxpayer-husband allowances for the rental and utilities did not receive the money but that they lived in the said apartment furnished and paid by his employer for its convenience.  As to the entrance fee to the Marikina Gun and Country Club paid by his employer and should not be considered as part of their income as with the wife-taxpayer travelling allowance.

ISSUE: WON the allowance for rental of the apartment furnished by the husband-taxpayers employer-corporation, including utilities and the allowance for travel expenses given by his employer-corporation to his wife in 1952 part of the taxable income?

HELD:
Bills for rentals and utilities were paid directly by the employer-corporation to the creditors.  CTA held that taxpayers are entitled only to ratable value of the allowance in question, and the reasonable amount they would have spend for house rentals and utilities such as light, water, telephone should be the amount subject to tax and the excess considered as expense of the corporation.

The taxpayer claim is supported by evidence.  Loberiza ( Head of Accounting department of the American Int'l underwriters...)  testified that rentals, utilities, water, phone, and electric bills of executive of the corporation were entered in the books of account as 'subsistence allowance and expenses; that there was a separate account for salaries and wages of employees.

The manager's residential expenses in 1948 should be treated as rentals for apartments and utilities and should not form part of the ratable value subject to tax.

Commissioner of Internal Revenue vs. Juliane Baier-nickel

Respondent Juliane Baier-nickle, a non-resident German citizen, is the President of JUBANITEX, a domestic corporation engaged in manufacturing, marketing on wholesale only embroided textile products.  The corporation appointed and engaged the service of respondent as commission agent.  It was agreed that respondent will receive 10% sales commission on all sales actually concluded and collected through her efforts.

In 1995, respondent received the amount of PhP1,707,772.64 representing her sales commission income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to PhP170,777.26 and remitted the same to the BIR.  Respondent filed a claim to refund the amount PhP170,777.26 alleged to have been mistakenly withheld and remitted by JUBANITEX to the BIR.  Respondent contended that her sales commission income is not   taxable in the Philippines because the same was a compensation for her services rendered in Germany considered as income from source outside the Philippines.

ISSUE: WON respondent's sales commission income is taxable in the Philippines?

HELD:

YES.  Commission received by respondent were actually her remuneration in the performance of her duties as President of JUBANITEX and not as a mere sales agent.  The income derived by respondent is therefore an income taxable in the Philippines because JUBANITEX is a domestic corporation.

Pursuant to the foregoing provision of the NIRC, non-resident aliens, whether or not engaged in trade or business, are subject to Philippine income taxation on their income received from all sources within the Philippines.

Respondent failed to discharge the burden of proving that her income was from sources outside the Philippines and exempt from the application of our income tax law.

NDC vs. CIR

The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the construction of its 12 ocean-going vessels.  The purchase price was to come from the proceeds of bonds issued by the Central Bank.  Initial payments were made in cash and through irrevocable letter of credit.  Fourteen (14) promissory notes were signed for the balance by the NDC guaranteed by Republic of the Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by the NDC to Tokyo.  The NDC remitted to the ship builders in Tokyo the total amount of US$4,066,580 as interest on the balance of the purchase price.  No tax was withheld.

The Commissioner then held the NDC liable on such tax in the total sum of PhP5,115,234.74.  The BIR thereupon served on the NDC a warrant of distraint and levy to enforcce collection of the claimed amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the Tax Code because all the related activities- the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC - were done in Tokyo.

ISSUE: WON the Tokyo shipbuilders are subject to tax?

HELD:
  The law specifies: interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligation of resident, corporate or otherwise.  Nothing there speak of the 'acts or activity' of non-residential corporation in the Philippines, or place where the contract is signed.

The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income.  Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines.  The interest is paid not by the bond note or other interest-bearing obligations, but by the obligor.

CIR vs. Smart Communication

Smart Communication (Smart for brevity), is a domestic corporation and duly registered with the Board of Investment.

Respondent Smart entered into three agreements for Programming and Consultancy Services with PRISM Transactive, a non-resident corporation duly organized and existing under the law of Malaysia.  Under the agreement, PRISM was to provide programming and consultancy service for the installation of SDM and CM, for the implementation of SIM.

PRISM billed respondent of US$547822.45 and respondent withheld the 25% royalty tax of US$136,955.61.

Respondent filed a claim of refund with the BIR of the amount PhP7,008,840.  Respondent claim that it is entitled to a refund because the payment made to PRISM are not royalties but business profits pursuant to the definition of royalties under the RP-Malaysia Tax Treaty.

ISSUE: WON the payment made to PRISM constitite "business profits" or royalties?

HELD:

SDM Agreement read, "The SDM shall be installed by PRISM, inlcuding the SDM libraries, the Intellectual Property Right (IPR) of which shall be retained by PRISM.

SIM agreement provides, " The client shall own the IPR for the specification and the source code for the SIM application.

PRISM has intellectual property right over the SDMprogram, but not over the CM and SIM application programs as the proprietary rights of these programs belong to respondent.  In other words, out of the payments made to PRISM, only the payment for the SDM program is a royalty subject to a 25% withholding tax.

A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM application agreement is therefore in order.

CIR vs. Isabela Cultural Corporation

Isabela Cultural Corp.(ICC for brevity) , a domestic corporation received from BIR assessment notice no. FAS-1-86-90000680 (680 for brevity) for deficiency income tax in the amount of PhP 333,196.86 and assessment notice no. FAS-1-86-90-000681 (681 for brevity) for deficiency expanded withholding tax in the amount of PhP 4,897.79, inclusive of surcharge and interest both for the taxable year 1986.  The deficiency income tax of PhP 333,196 arose from BIR disallowance of ICC claimed expenses deductions for professional and security services billed to and paid by ICC in 1986.

The deficiency expanded withholding tax of PhP4,897.79 was allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed PhP244,890 deduction for security services.

Court of Tax Appeal and Court of Appeal affirmed that the professional services were rendered to ICC in 1984 and 1985, the cost of the service was not yet determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC received the billing statement for said service.  It further ruled that ICC did not state its interest income from the promissory notes of Realty Investment and that ICC properly withheld the remitted taxes on the payment for security services for the taxable year 1986.

Petitioner contend that since ICC is using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 9185 should have been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986.

ISSUE (1):  WON CA is correct in sustaining the deduction of the expenses for professionals and security services form ICC gross income?

HELD: NO

Revenue Audit Memorandum Order No.1-2000 provides that under the accrual method of accounting, expenses not being claimed as deductions by a tax payer in the current year when they are incurred cannot be claimed as deductions from the income for the succeeding year.

ISSUE (2): WON CA correctly held that ICC did not understate its interest income from the promissory notes of Realty Investment, Inc; that ICC withheld the required 1% withholding tax from the deduction for security services.

HELD:

Sustaining the finding of the CTA and CA that no such understatement exist and that only simple interest computation and not a compounded one should have been applied by the BIR.  There is no indeed no stipulation between the latter and ICC on the application of compound interest.

Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due should not further earn interest.

Commissioner vs. Tours Specialist

Tours specialist had derived income from its activities as a travel agency servicing the need of foreign tourists and travelers and Filipino during their stay in the country.

In order to ably supply these services to the foreign tourists, Tour specialist and its counterpart tourist agencies abroad have agreed to offer a package fee for the tourists.  Although the fee to be paid by said tourist is quoted by the petitioner, the payment of the hotel accommodations food and other personal expenses, as a rule, are paid directly either by tourists themselves or by their foreign travel agencies to the local hotels.

In some cases the foreign agencies request local tour agencies such as respondent that the hotel room charges be paid through them.  By this arrangement, the foreign tour agency entrust to respondent the fund for hotel room accommodation, which in turn is paid by respondent tour agency to the local hotel when billed because room charge is exempt from tax under PD 31.

Petitioner CIR assessed respondent for deficiency of 3% contractor's tax as independent contractor by including the entrusted hotel charges in its gross receipt from services for the year 1974 to 1976.  Respondent formally protested the assessment made by CIR on the ground that the hotel room charges were not considered and have never been considered by it as part of its taxable gross receipt for purposes of computing and paying its contractor's tax.

ISSUE:
WON the amount received by a local tourist and travel agency included in a package fee from tourist or foreign tour agencies, intended or earmarked for hotel accommodation form part of gross recipt subject to 3% contractor's tax?

Held:

NO.  Money entrusted to Tour Specialist, earmarked and paid for hotel room charges does not form part of its gross receipt subject to the 3% independent contractor's tax under NIRC.

GROSS RECEIPT do not include monies or receipt entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; it is not necessary that there must be a law or regulation which would exempt such monies or receipt within the meaning of gross receipts under the Tax Code.

If the hotel room charges entrusted to petitioner will be subject to 3% contractor's tax as what CIR would want to do in this case, that would in effect do indirectly what PD 31 would not like hotel room charges of foreign tourist to be subject to hotel room tax.

Plaridel Surety Co vs. Collector

Plaridel Surety Co vs. Collector, GR No L-21520, Dec. 11, 1967

Petitioner Plaridel Surety is a domestic corporation engaged in the bonding business.

Petitioner surety and Constancio San Jose (principal), solidarily executed a performance bond in favor of the PL Galang Machinery to secure the performance of San Jose contractual obligation to produce and supply logs. To afford itself adequate protection against loss or damages on the performance, petitioner required San Jose and Ramon Cuervo to execute an indemnity agreement obligating themselves, solidarity to indemnify petitioner for whatever liability it may incur by reason of said performance bond. San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor while Ramon Cuervo executed a real estate mortgage.

San Jose failed to deliver the logs to Galang Machinery and sued on the performance bond.  The lower court directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery.

Petitioner in his income tax claimed that the amount P44,490 as deductible loss from its gross income.

CIR disallowed the claimed deductions and assessed against petitioner the sum P8,898, plus interest, as deficiency income tax for the year 1957.

ISSUE: WON petitioner can claim P44,490 as a deductible loss from its gross income.

Held:

NO

Petitioner was duly compensated for otherwise than by insurance- thru the mortgage in its favor executed by San Jose and Cuervo and it had not yet exhausted all its available remedies, especially as against Cuervo to minimize its loss.

LOSS is deductible only in the taxable year it actually happens or is sustained.  However, if it is compensable by insurance or otherwise deductions for the loss suffered is postponed to a subsequent year, with, to be precise, is that year in which it appears that no compensation at all can be had, on that there is a remaining or net loss.

City Lumber vs. Domingo and CTA

City Lumber vs. Domingo and CTA, GR. No. L-18611, January 30,1964

Petitioner seek the review of CTA decision, upholding an assessment by respondent on an additional income of P16, 678 representing minor deductions from the alleged expenses, on undisclosed sales of plywood, nails and GI sheets and on a cash credit balance.

Petitioner claim the plywood and GI sheet were lost in a fire and the credit cash balance as a loan secured by petitioner.

Issue: WON petitioner can claim deductions on his expenses/loss?

Held:

NO

The lower court rejected the alleged loss of plywood because said loss was never reported in the books of petitioner, and neither was such loss reported in the ITR of petitioner for that year. Neither were any receipt or other evidence reduced to show that said amount was a loan secured by petitioner or that loan was never secured.

CIR vs Mitsubishi

CIR vs Mitsubishi, GR No L-54908, January 22, 1990

Atlas Consolidated Mining and Dev Corp (Atlas) entered into a loan and sales contract with Mitsubishi, a Japanese corp licenses to engage in business in the Phils., for purposes of the projected expansion of the productive capacity of Atlas.

Mitsubishi agreed to extend a loan to Atlas for the installation of a new concentrator for copper production and Atlas to sell to Mitsubishi all the copper concentrates produced for 15 years.

Mitsubishi applied for a loan with Export-Import Bank of Japan (Eximbank) for purpose of its obligation under said contract. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by Atlas to Mitsubishi for the years 1974-75.  The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to sec. 24(b)(1) and sec. 53 (b)(2) of NIRC, as amended by PD 131, and duly remitted to the government.

Private respondent filed a claim for the tax credit requesting the sum of P1,971,595.01 be applied against their existing and future tax liabilities. It was later noted by respondent CTA that Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.

Mitsubishi filed a petition for review with respondent court on the ground that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government.  Such government status of Eximbank, if it may be so called, is the basis for private respondents claim for exemption from paying the tax on the interest payment on the loan. It was further claimed that the interest payments on the loan from the consortium of Japanese banks were likewise exempt because loan supposedly came from or were fniancé by Eximbank.  Relying on the provision of sec. 29(b)(7)(A) NIRC.

CTA promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas and the court declared that all papers and documents pertaining to the loan obtained by Mitsubishi from Eximbank shows that this was the same amount given to Atlas. It also observed that the money for the loan from the consortium of private Japanese banks originated from Eximbank.  From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank.  Mitsubishi was acting as a mere “arranger or conduit through which the loan flowed from the creditor Eximbank to the debtor Atlas.

ISSUE: 1) WON the interest income from the loan extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to sec. 29(b)(7)(A), NIRC and therefore, exempt from withholding tax.

       

            2) WON Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investment in the Phils. On loans are exempt from taxes.

HELD:

1)    NO

The signatories on the loans and sales contract were Mitsubishi and Atlas, nowhere in the contract can it be inferred that Mitsubishi acted for and behalf of Eximbank of Japan nor of any entity, private or public, for that matter.  When Mitsubishi obtained the loan of USD 20M from Eximbank of Japan said amount ceased to be the property of the bank and become property of Mitsubishi. 

Mitsubishi and not Eximbank is the sole creditor of Atlas, the former being the owner of the USD 20M upon completion of its loan contract with Eximbank of Japan.  The interest income of the loan paid by Atlas to Mitsubishi is therefore entirely different from the interest income paid by Mitsubishi to Eximbank of Japan.  What was the subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas.

2)    NO

When Mitsubishi secured the loan, it was in its own independent capacity as a private entity and not as a conduit of the consortium of Japanese banks or the Eximbank of Japan.  While loans were secured by Mitsubishi primarily “as a loan to and in consideration for importing copper concentrates from Atlas, the fact remains that it was a loan by Eximbank of Japan to Mitsubishi and not to Atlas.

China Banking Corporation vs. CA

[G.R. No. 125508. July 19, 2000]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Petitioner China Banking Corp made an equity investment in the First CBC Capital, a HongKong subsidiary engaged in financing and investment with “deposit-taking” function.

A regular examination by Bangko Sentral on petitioner financial book and investment portfolio shows that First CBC Capital has become insolvent. With approval of Bangko Sentral, petitioner wrote off as being worthless in its investment in First CBC in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income.  Respondent CIR disallowed the deduction and assessed petitioner for income deficiency, inclusive of surcharge, interest and compromise penalty.

Issue: WON petitioner is allowed to claim for the deductions?

Held:

NO.

The disallowance of the deduction was made on the ground that the investment should not be classified as being “worthless” and that, although the HongKong Banking Commissioner had revoked the license of First CBC Capital as a “deposit-taking company” it can still exercise its financing investments.  Also, it should be classifies as capital loss and not as a bad debts expense there being no indebtedness to speak petitioner and its subsidiary.

Madrigal vs. Rafferty

G.R. No. L-12287            August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, 
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.

Vicente Madrigal and Susana Paterno were legally married and have conjugal partnership.

Madrigal filed his total net income for the year is P296,302.73.

Subsequently, Madrigal submitted the claim that the said total net income of year 1914 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife, and the computing and assessing the additional income tax provided by the Act of Congress of Oct. 3, 1913, the income declared by Madrigal and the other half of Paterno.

Madrigal and Paterno brought action against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum P3,786.08.

The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiff the sum of P2,921.09, which taken together amount of P5842.18 instead of P9,668.21.

Issue: WON the additional income tax should be divided into equal parts because of the conjugal partnership existing between them?

Held:

NO.

Paterno has an inchoate right in the property of her husband Madrigal during the lifetime of the conjugal property.  She has an interest in the ultimate ownership of property acquired as income of the conjugal partnership. Not being seized of the separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax.  As she has no estate or income, actually and legally vested in her and entirely distinct from her husband property, the income cannot properly be considered the separate income of the wife for the purpose of the additional tax.  The income tax law does not look on the spouses as individual partners in an ordinary partnership.

The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.