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V. Construction of Tax Laws

Lorenzo vs Posada 64 Phil 803 (1937)

A.

Oct 4, 1932 – Lorenzo brought action to CFI for refund of the inheritance tax he paid for the estate of Thomas Hanley and for the collection of interest thereon at 6% from Sept. 1934 when he paid it under protest.

General Rules of Construction of Tax Laws

Luzon Stevedoring v Trinidad, 43 Phil 803 (1922) Recovery of CIR from LS P2,422.81 percentage tax from the gross receipts of the business. LS paid under protest. CFI judge, against CIR holding that LS is not a contractor. Business was loading and unloading cargo from vessels in port at certain rates of charge per unit cargo. Direct supervision of officers of the ships and under instruction by captain and officers of the ship.

May 27, 1922 – Thomas Hanley died with will. No disposal for 10 years. Given to nephew Matthew. CFI considered it proper to appoint a trustee to administer the real properties. PJM Moore, one of the two executors was appointed trustee. Moore took oath of office and gave bond on March 10, 1924 and resigned on Feb 29, 1932, and this is when Lorenzo took his stead.

Issue: WON LS is a contractor Held: No. Definition of lexicographers cannot always be adopted as correct meaning for statutory words and phrases. The intention and the object which it intended to attain must be taken into consideration for the purpose of determining the meaning of words and phrases. Revenue laws imposing taxes on business must be strictly construed in favor of the citizen. If one rendering service submits himself to the direction of the employer as to the details of the work, not merely as to the result but also to the means by which that result is to be attained=servant and is not a contractor in respect to that work. If engaged under a contract in an independent operation, not subject to the direction and control of his employer=contractor and contractee relationship. If the question presented in the interpretation of a tariff law is one of doubt, the doubt would be resolved in favor of the importer, as duties are never imposed upon citizens upon vague and doubtful interpretation. True test of a contractor: He renders the service in the course of an independent occupation, representing the will of his employer only as to the result of his work, and not as to the means by which it is accomplished. Disposition: Plaintiff not a contractor in the sense that that word is used in section 1462 of Act 2711 and therefore tax paid under protest was illegally collected and should be repaid.

CIR collected inheritance tax from July 1, 1931 to the date o payment (Sept. 1934). CFI in favor of CIR. Issue: WON real property passed to instituted heir from the moment of death and thus, inheritance tax must be paid from that date and not after 10 years as stated in the will. Held: The accrual of the inheritance tax is distinct from the obligation to pay the same. The tax is upon transmission or the transfer or devolution of property of a decedent, made effective by his death. It is in reality an exercise or privilege tax imposed on the right to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant of girt to become operative at or after death. Art. 667, rights to the succession of a person are transmitted from the moment of his death. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of death of the testator in accordance with Art. 657 of the CC. Whatever may be the time when actual transmission of the inheritance takes place, succession takes place in any event at the moment of the decedent’s death. Thomas died on May 27, 1922, inheritance tax accrued as of that date. But it does not follow that the obligation to pay the tax arose as of that date. Sec. 1543 of Act. 3031 and sec. 1544(b) shall apply. “In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary or intestate proceedings shall be instituted prior to the expiration of the said period, the payment shall be made by the executor or administrator before delivering to each beneficiary his share.

If death is the generating source from which the power of the state to impose inheritance taxes takes its being and if, upon the death of the decedent, succession takes place and the right of the state to tax vests instantly, the tax should be measured by the value of the estate as it stood at the time of the decedent’s death, regardless of any subsequent contingency affecting value or any subsequent increase/decrease in value. A trustee is entitled to receive a fair compensation for his services. But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the estate subject to tax. There is no statute in the Phil which requires trustees’ commissions to be deducted in determining the net value of the estate subject to inheritance tax. Inheritance taxation is governed by the statue in force at the time of the death of the decedent. A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statue clearly demands or expresses that it shall have a retroactive effect. Liability to pay tax may arise at a certain time and the tax may be paid within another given time. The mere failure to pay one’s tax does not render one delinquent until and unless the entire period has elapsed within which the taxpayer is authorized by law to make such payments without being subjected to the payment of penalties for failure to pay his taxes within the prescribed period. The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our inheritance tax law or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid on or before March 10, 1924, to escape the penalties of the law. This is so for the reason already stated that the delivery of the estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. On the case of Lim Co Chui vs Posadas, the fact that riots prevented the plaintiffs from paying their internal revenue tax on time does not authorize the CIR to extend time prescribed for the payment and to accept them without the additional penalty. Modes adopted to enforce the taxes levied should be interfered with as little as possible.

Umali v Estanislao (Sec. of Finance) 209 SCRA 446 (1992) Mandamus and prohibition. RA 7167: Adjusting the basic personal and additional exemptions allowable to individuals for income tax purposes to the poverty threshold level. Act was approved and published by President on Dec. 19, 1991 and published on Jan 14, 1992. On Dec 26, 1991, respondents promulgated IRR. IRR states that right to claim the exemptions shall be allowed with respect to compensation paid on or after Jan. 1, 1992. The petitions were filed both in Feb 1992 to compel the CIR to implement the mandate of the law, adjusting the personal and additional exemptions. Issues: WON RA 7167 took effect on approval or after 15 days from publication and if after 15 days, WON covers to compensation income earned or received during the calendar year 1991. Held: 15 days after publication or on Jan. 30, 1992. Yes applies to compensation income earned in 1991. Tanada vs Tuvera: Publication is indispensable in every case but the legislature may in its discretion provide that the usual 15 day period be shortened or extended. 1991: Sec. 29 (L) of No. 4 of the NIRC: Upon the recommendation of the Sec of Finance, the President shall automatically adjust not more often than once every three years, the personal and additional exemptions taking into account, among others, the movement in consumer price indices, levels of minimum wages, and bare subsistence levels. It may have been adjusted in 1989 but the President did not adjust. But it may be observed that RA 7167, speaks of the adjustments that it provides for, as adjustments “to the poverty threshold level”. This is certainly at the time RA 7167 was enacted by Congress and not poverty threshold levels in future, at which time there may be need of further adjustments in personal exemptions. Congress cannot lose sight of the fact that these exemptions are fixed amounts to which an individual taxpayer is entitled. This is a social legislation to alleviate in part the present economic plight of the lower income taxpayers.

Since RA 7167 was effective on Jan 30, 1992, the increased exemptions are literally available on or before April 15, 1992( though not before January 30, 1992). But these increased exemptions can be available on April 15, 1992 only in respect of compensation income earned or received during the calendar year 1991. As regards IRR which defers to 1993 the reduction of governmental tax revenues which irresistibly follows from the application of RA 7167. But the law-making authority has spoken and the Court can not refuse to apply the law-makers’ words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress (not this Court) to decide.

CIR vs Solidbank GR 148191 (2003) 1995-Solidbank filed Quarterly Percentage Tax Returns reflecting gross receipts (pertaining to 5% GRT rate) in the amount of P1.4B with corresponding gross receipts tax payments of P 73M. Solidbank alleges that the total gross receipts in the amoung of 1.4B included the sum of P350M representing gross receipts from passive income which was already subjected to 20% final withholding tax. CA rendered a decision in a CTA case Asia Bank Corp vs CIR which held that 20% of the withholding tax on bank’s interest income should not form part of its taxable gross receipts for purposes of computing gross receipts tax. 1997, based on decision, SB filed request for a refund or a tax credit for P3M representing alleged overpaid gross receipts tax for 1995. CTA rendered decision for refund but reduced to P1.5M. Issue: WON the 20% WT on bank’s interest income forms part of the taxable gross receipts in computing the 5% gross receipts tax. CIR claims it is part even if not actually received by the CIR because it was remitted directly to the government. SB maintains CA correctly ruled. Held: Yes. The amount of interest income withheld in payment of the 20% FWT forms part of gross receipts in computing for the GRT on banks. The WT and the GRT are two different taxes. The 5% is imposed by Section 119 of the Tax Code under Title V. Other Percentage Tax which is not subject to withholding while the 20% FWT is governed by Section 24(e)(1) of Title II which is subject to withholding. It is a tax on passive income, deducted and withheld at source by the payor-corporation and/or person as withholding agent. GRT=percentage tax FWT=income tax. Bank covered by both taxes. Percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of foods sold, bartered or imported; or of the gross receipts or earning derived by any person engaged in the sale of services. Not subject to withholding.

Income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a taxable year. It is subject to withholding. In a withholding tax system: Payee=taxpayers, person on whom the tax is imposed Payor=separate entity, acts as no more than an agent of the government for the collection of the tax in order to ensure its payment. The amount used to settle tax liability is deemed sourced from the proceeds constitutive of the tax base. Proceeds are either actual or constructive. Bank no actual receipt of the amount withheld. Issue: WON there is constructive receipt since the payee, and not the payor, is the real taxpayer. Held: There is constructive receipt. CC Art. 531-532 applied by analogy for determination of actual and constructive receipt. CIR based interpretation on Sec 7 of RR 17-84 =”if the recipient of the above-mentioned items (interest paid or accrued on bank deposits or deposit substitutes declared for purpose of imposing the WT) of income are financial institutions, the same shall be included as part of the tax base upon which the receipts tax is imposed. Solidbank based interpretation on Sec.4(e) of RR 12-80, that the tax rates to be imposed on the gross receipts of banks xxx shall be based on all items of income actually received. Art. 531: Possession is acquired by the material occupation of a thing of the exercise of a right, or by the fact that it is subject to the action of our will, or by the proper acts and legal formalities established for acquiring such right. (Underlined refers to juridical actsacquisition of possession by sufficient title—to which the law gives the force of acts of possession). Art. 532: Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his agent, or by any person without any power whatever; but in the last case, the possession shall not be considered as acquired until the person in whose name the act of possession was executed has ratified the same, without prejudice to the juridical consequences of negotiorum gestio in a proper case.

In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. The process o bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed—for legal purposes—tantamount to delivery, receipt or remittance.

b. If the later regulation covers the whole subject of an earlier one and is clearly intended as a substitute. Where a part of an earlier regulation embracing the same subject as a later one may not be enforced without nullifying the pertinent provision of the latter, the earlier regulation is deemed impliedly amended or modified to the extent of the repugnancy.

RR 12-80 superseded by RR 17-84. Pertinent to the title to which this case presently under (Construction of Tax Laws): General Rule: Rules and regulations issued by administrative or executive officers pursuant to the procedure or authority conferred by law upon the administrative agency have the force and effect, or patake the nature, of a statute. The reason is that statues express the policies, purposes, objectives, remedies and sanctions intended by the legislature in general terms. Details and manner of carrying them out=left to the administrative agency entrusted with their enforcement. Here it is the finance secretary who promulgates the revenue regulations, upon the recomm of the BIR Comm. A revenue regulation is binding on the courts as long as the procedure fixed for its promulgation is followed. Regulation must be: a) Germane to the object and purpose of the law b) Not contradict, but conform to, the standards the law prescribes; c) Be issued for the sole purpose of carrying into effect the general provisions of our tax laws. Repeal=express or implied. Express-declaration in a regulation, that another identified regulation, is repealed. Implied=all others. Two categories of implied repeals: a. In case the provisions are in irreconcilable conflict, the later regulation, to the extent of the conflict, constitutes an implied repeal of an earlier one

Manila Jockey Club case inapplicable-earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts, because, although delivered or received, these are by law or regulation reserved or some person other than the taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are in constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process. It is ownership that determines whether interest income forms part of taxable gross receipts. Being originally owned by these financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts. The amounts withheld are part of an income tax liability which is different from a percentage tax liability. In the construction and interpretation of tax statutes and of statues in general, the primary consideration is to ascertain and give effect to the intention of the legislature. We ought to impute to the lawmaking body the intent to obey the constitutional mandate, as long as its enactments fairly admit of such construction. In fact, “no tax can be levied without express authority of law, but the statutes are to receive a reasonable construction with a view to carrying out their purpose and intent. Sec. 24(e) imposes income tax while Sec. 119 imposes percentage tax. The legislature intended two different taxes. FWT is on passive income, GRT is on business. Withholding of one is not equivalent to the payment of the other. Taxing act will be construed and the intent and meaning of the legislature ascertained, from its language. Its clarity and implied intent must exist to uphold the taxes as against a taxpayer in whose favor doubts will be resolved. No process of interpretation or construction need be resorted to where a provision or law peremptorily calls for application. A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or contradict the evident meaning of the statue taken as a while.

Tax refunds are in the nature of tax exemptions. These are strictly construed against the taxpayer. They must be able to point to some positive provision, not merely a vague implication, of the law creating that right. Respondent has not been able to satisfactorily show that its FWT on interest income is exempt from the GRT. No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity in the tax collection effort of the government and to assure its steady source of revenue even during an economic slump. No Double Taxation. DT means taxing the same property twice when it should be taxed only once i.e. taxing the same person twice by the same jurisdiction for the same thing .

In May 1954, CIR wrote demand letter to LT for payment of specific taxes on alcohol lost by evaporation thu rerectification or re-distillation from June 1950 to Feb 1954. LT protested and CIR refused to reconsider the assessment. LT appealed to the Conference Staff of the BIR. It was ordered to comply with DOF 213 to deposit ½ of the amount in cash and the balance by a surety bond. LT action to CTA. CTA ordered LT to pay P672.15 by way of specific tax. The amount of P154K which corresponds to the period after January 1951 and up to Feb. 1954, pursuant to RA 592=LT is exempt from liability assessed therefor. CIR appealed to SC. Issue: WON LT should pay the specific tax. Held: No.

Direct Duplicate Taxation = two taxes must be imposed a. on the same subject matter b. for the same purpose, c. by the same taxing authority, d. within the same jurisdiction, e. during the same taxing period, and f. they must be of the same kind or character. Taxes imposed here are on two different subject matter. FWT=passive income GRT=privilege of engaging in the business of banking. A tax based on receipts is a tax on business rather than on the property; hence it is an excise rather than a property tax.

Collector vs La Tondena, 5 SCRA 665 (1962) LT is engaged in the business of manufacturing wines and liquor with a distillery in Manila. It purchases alcohol from Negros Occidental and from Batangas and has been removing this alcohol from the centrals to resp distillery under joint bonds without prepayment of specific taxes. Quantity of alcohol purchased and received-entered into the BIR Official Register Books. In the manufacture of Manila Rum, LR uses as basic materials low test alcohol, purchased in crude form from the suppliers which it re-rectifies or subjects to further rectification or distillation==from this process, losses through evaporation incurs, for which CIR had given...