THIRD DIVISION
|
COMMISSIONER
OF INTERNAL REVENUE, Petitioner, - versus - philippine
airlines, inc., Respondent. |
|
G.R. No. 180066 Present: YNARES-SANTIAGO,
J., Chairperson, CHICO-NAZARIO, VELASCO, JR., NACHURA, and PERALTA, JJ. Promulgated: _____________________ |
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CHICO-NAZARIO,
J.:
Before
this Court is a Petition for Review on Certiorari,
under Rule 45 of the Revised Rules of Court, seeking the reversal and setting
aside of the Decision[1]
dated P272,421,886.58.
There
is no dispute as to the antecedent facts of this case.
PAL
is a domestic corporation organized under the corporate laws of the Republic of
the Philippines; declared the national flag carrier of the country; and the
grantee under Presidential Decree No. 1590[4] of
a franchise to establish, operate, and maintain transport services
for the carriage of passengers, mail, and property by air, in and between any
and all points and places throughout the Philippines, and between the
Philippines and other countries.[5]
For
its fiscal year ending 31 March 2001 (FY 2000-2001), PAL allegedly incurred
zero taxable income,[6]
which left it with unapplied creditable withholding tax[7] in
the amount of P2,334,377.95. PAL
did not pay any MCIT for the period.
In
a letter dated
Acting on the aforementioned letter
of PAL, the Large Taxpayers Audit and Investigation Division 1 (LTAID 1) of the
BIR Large Taxpayers Service (LTS), issued on 16 August 2002, Tax Verification
Notice No. 00201448, authorizing Revenue Officer Jacinto Cueto, Jr. (Cueto) to
verify the supporting documents and pertinent records relative to the claim of
PAL for refund of its unapplied creditable withholding tax for FY
2000-20001. In a letter dated
BIR officers and PAL representatives
attended the scheduled informal conference, during which the former relayed to
the latter that the BIR was denying the claim for refund of PAL and, instead,
was assessing PAL for deficiency MCIT for FY 2000-2001. The PAL representatives argued that PAL was
not liable for MCIT under its franchise.
The BIR officers then informed the PAL representatives that the matter
would be referred to the BIR Legal Service for opinion.
The LTAID 1 issued, on P262,474,732.54,
representing deficiency MCIT for FY 2000-2001, plus interest and compromise
penalty, computed as follows:
|
Sales/Revenues
from Operation |
|
|
|
Less: Cost of Services |
30,316,679,013.00 |
|
|
Gross
Income from Operation |
8,482,042,672.00 |
|
|
Add: Non-operating income |
465,111,368.00 |
|
|
Total
Gross Income for MCIT purposes |
9,947,154,040.00[8] |
|
|
Rate
of Tax |
2% |
|
|
Tax
Due |
178,943,080.80 |
|
|
Add: 20% interest ( |
83,506,651.74 |
|
|
Compromise Penalty |
25,000.00 |
|
|
Total
Amount Due |
|
|
PAL
protested PAN No. INC FY-3-31-01-000094 through a letter dated
On
P271,421,88658, based on the following
calculation:
|
Sales/Revenues
from Operation |
|
|
|
|
Less:
Cost of Services |
|
|
|
|
Direct Costs - |
|
|
|
|
Less: Non-deductible |
|
|
|
|
interest expense |
433,082,004.00 |
30,316,679,013.00 |
|
|
Gross
Income from Operation |
|
|
|
|
Add:
Non-operating Income |
465,111,368.00 |
|
|
|
Total Gross Income for MCIT
purposes |
|
|
|
|
MCIT
tax due |
|
|
|
|
Interest – 20% per annum – |
92,453,805.78 |
|
|
|
Compromise
Penalty |
|
25,000.00 |
|
|
Total MCIT due and
demandable |
|
|
|
PAL received the foregoing Formal
Letter of Demand on
The BIR LTS rendered on
PAL
filed a Petition for Review with the CTA, which was docketed as C.T.A. Case No.
7010 and raffled to the CTA Second Division.
The CTA Second Division promulgated its Decision on
WHEREFORE, premises considered, the
instant Petition for Review is hereby GRANTED. Accordingly, Assessment Notice No. INC
FY-3-31-01-000094 and Formal Letter of Demand for the payment of deficiency
Minimum Corporate Income Tax in the amount of P272,421,886.58 are hereby
CANCELLED and WITHDRAWN.[11]
In a Resolution dated
It
was then the turn of the CIR to file a Petition for Review with the CTA en banc, docketed as C.T.A. E.B. No.
246. The CTA en banc found that “the cited legal provisions and jurisprudence
are teeming with life with respect to the grant of tax exemption too vivid to
pass unnoticed,” and that “the Court in Division correctly ruled in favor of
the respondent [PAL] granting its petition for the cancellation of Assessment
Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the deficiency
MCIT in the amount of P272,421,886.58.”[12] Consequently, the CTA en banc denied the Petition of the CIR for lack of merit. The CTA en
banc likewise denied the Motion for Reconsideration of the CIR in a
Resolution dated
Hence,
the CIR comes before this Court via the instant Petition for Review on Certiorari, based on the grounds stated
hereunder:
THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS ASSAILED DECISION BECAUSE:
(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX PROVISION OF THE NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE, IT IS COVERED BY THE MCIT PROVISION OF THE SAME CODE.
(2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF “OTHER TAXES” WHICH WOULD ENABLE RESPONDENT TO AVAIL ITSELF OF THE “IN LIEU” (sic) OF ALL OTHER TAXES” CLAUSE UNDER SECTION 13 OF P.D. NO. 1590 (“CHARTER”).
(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT OF [PAL’S] CHARTER.
(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT WILL GIVE IT THE BENEFIT OF A LOWER TAX, BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE TAX BURDEN, AS IS EVIDENT IN SECTION 22 OF RA NO. 9337.
(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED; [PAL] IS LIABLE FOR THE DEFICIENCY MCIT.[13]
There
is only one vital issue that the Court must resolve in the Petition at bar, i.e.,
whether PAL is liable for deficiency MCIT for FY 2000-2001.
The
Court answers in the negative.
Presidential
Decree No. 1590, the franchise of PAL, contains provisions specifically
governing the taxation of said corporation, to wit:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or nontransport operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but are billed or passed on to the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its transport and nontransport operations and other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and nontransport operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether foreign or domestic, of aircraft, engines, equipment, machinery, spare parts, and other property rented, leased, or chartered by the grantee where the payment of such taxes is assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by the grantee where the payment of such taxes is assumed by the grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition, and transfer of aircraft, equipment, motor vehicles, and all other personal and real property of the grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with existing law.
For purposes of computing the basic corporate income tax as provided herein, the grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of depreciation; and
(b) To carry over as a deduction from taxable income any net loss incurred in any year up to five years following the year of such loss.
Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly basis to the Commissioner of Internal Revenue. Within sixty (60) days after the end of each of the first three quarters of the taxable calendar or fiscal year, the quarterly franchise or income-tax return shall be filed and payment of either the franchise or income tax shall be made by the grantee.
A final or an adjustment return covering the operation of the grantee for the preceding calendar or fiscal year shall be filed on or before the fifteenth day of the fourth month following the close of the calendar or fiscal year. The amount of the final franchise or income tax to be paid by the grantee shall be the balance of the total franchise or income tax shown in the final or adjustment return after deducting therefrom the total quarterly franchise or income taxes already paid during the preceding first three quarters of the same taxable year.
Any excess of the total quarterly payments over the actual annual franchise of income tax due as shown in the final or adjustment franchise or income-tax return shall either be refunded to the grantee or credited against the grantee's quarterly franchise or income-tax liability for the succeeding taxable year or years at the option of the grantee.
The term "gross revenues" is herein defined as the total gross income earned by the grantee from; (a) transport, nontransport, and other services; (b) earnings realized from investments in money-market placements, bank deposits, investments in shares of stock and other securities, and other investments; (c) total gains net of total losses realized from the disposition of assets and foreign-exchange transactions; and (d) gross income from other sources. (Emphases ours.)
According
to the afore-quoted provisions, the taxation of PAL, during the lifetime of its
franchise, shall be governed by two fundamental rules, particularly: (1) PAL
shall pay the Government either basic corporate income tax or franchise tax,
whichever is lower; and (2) the tax paid by PAL, under either of these
alternatives, shall be in lieu of all other taxes, duties, royalties,
registration, license, and other fees and charges, except only real property
tax.
The
basic corporate income tax of PAL shall be based on its annual net taxable
income, computed in accordance with the National Internal Revenue Code
(NIRC). Presidential Decree No. 1590
also explicitly authorizes PAL, in the computation of its basic corporate
income tax, to (1) depreciate its assets twice as fast the normal rate of
depreciation;[14]
and (2) carry over as a deduction from taxable income any net loss incurred in
any year up to five years following the year of such loss.[15]
Franchise
tax, on the other hand, shall be two per cent (2%) of the gross revenues
derived by PAL from all sources, whether transport or nontransport
operations. However, with respect to
international air-transport service, the franchise tax shall only be imposed on
the gross passenger, mail, and freight revenues of PAL from its outgoing
flights.
In
its income tax return for FY 2000-2001, filed with the BIR, PAL reported no net
taxable income for the period, resulting in zero basic corporate income tax,
which would necessarily be lower than any franchise tax due from PAL for the
same period.
The
CIR, though, assessed PAL for MCIT for FY 2000-2001. It is the position of the CIR that the MCIT
is income tax for which PAL is liable.
The CIR reasons that Section 13(a) of Presidential Decree No. 1590
provides that the corporate income tax of PAL shall be computed in accordance
with the NIRC. And, since the NIRC of
1997 imposes MCIT, and PAL has not applied for relief from the said tax, then
PAL is subject to the same.
The
Court is not persuaded. The arguments of
the CIR are contrary to the plain meaning and obvious intent of Presidential
Decree No. 1590, the franchise of PAL.
Income
tax on domestic corporations is covered by Section 27 of the NIRC of 1997,[16]
pertinent provisions of which are reproduced below for easy reference:
SEC. 27. Rates of Income Tax on Domestic Corporations. –
(A) In General – Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
x x x x
(E) Minimum Corporate Income Tax on Domestic Corporations. –
(1) Imposition of Tax. – A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.
Hence, a domestic corporation must pay whichever is higher
of: (1) the income tax under Section 27(A) of the NIRC of 1997, computed by
applying the tax rate therein to the taxable income of the corporation; or (2)
the MCIT under Section 27(E), also of the NIRC of 1997, equivalent to 2% of the
gross income of the corporation.
Although this may be the general rule in determining the income tax due
from a domestic corporation under the NIRC of 1997, it can only be applied to
PAL to the extent allowed by the provisions in the franchise of PAL specifically
governing its taxation.
After
a conscientious study of Section 13 of Presidential Decree No. 1590, in
relation to Sections 27(A) and 27(E) of the NIRC of 1997, the Court, like the
CTA en banc and Second Division, concludes
that PAL cannot be subjected to MCIT for FY 2000-2001.
First, Section 13(a) of Presidential
Decree No. 1590 refers to “basic
corporate income tax.” In Commissioner of Internal Revenue v.
Philippine Airlines, Inc.,[17]
the Court already settled that the “basic corporate income tax,” under Section
13(a) of Presidential Decree No. 1590, relates to the general rate of 35%
(reduced to 32% by the year 2000) as stipulated in Section 27(A) of the NIRC of
1997.
Section
13(a) of Presidential Decree No. 1590 requires that the basic corporate income
tax be computed in accordance with the NIRC.
This means that PAL shall compute its basic corporate income tax using
the rate and basis prescribed by the NIRC of 1997 for the said tax. There is nothing in Section 13(a) of
Presidential Decree No. 1590 to support the contention of the CIR that PAL is
subject to the entire Title II of the NIRC of 1997, entitled “Tax on Income.”
Second, Section 13(a) of Presidential
Decree No. 1590 further provides that the basic corporate income tax of PAL
shall be based on its annual net taxable
income. This is consistent with
Section 27(A) of the NIRC of 1997, which provides that the rate of basic
corporate income tax, which is 32% beginning
Taxable
income is defined under Section 31 of the NIRC of 1997 as the pertinent items of gross income specified
in the said Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by the same Code or
other special laws. The gross income,
referred to in Section 31, is described in Section 32 of the NIRC of 1997 as
income from whatever source, including compensation for services; the conduct
of trade or business or the exercise of profession; dealings in property;
interests; rents; royalties; dividends; annuities; prizes and winnings;
pensions; and a partner’s distributive share in the net income of a general
professional partnership.
Pursuant
to the NIRC of 1997, the taxable income of a domestic corporation may be
arrived at by subtracting from gross income deductions authorized, not just by
the NIRC of 1997,[18]
but also by special laws. Presidential
Decree No. 1590 may be considered as one of such special laws authorizing PAL,
in computing its annual net taxable income, on which its basic corporate income
tax shall be based, to deduct from its gross income the following: (1)
depreciation of assets at twice the normal rate; and (2) net loss carry-over up
to five years following the year of such loss.
In
comparison, the 2% MCIT under Section 27(E) of the NIRC of 1997 shall be based
on the gross income of the domestic
corporation. The Court notes that gross
income, as the basis for MCIT, is given a special definition under Section
27(E)(4) of the NIRC of 1997, different from the general one under Section 34
of the same Code.
According
to the last paragraph of Section 27(E)(4) of the NIRC of 1997, gross income of
a domestic corporation engaged in the sale of service means gross receipts, less sales returns,
allowances, discounts and cost of services.
“Cost of services” refers to all direct
costs and expenses necessarily incurred to provide the services required by
the customers and clients including (a) salaries and employee benefits of
personnel, consultants, and specialists directly rendering the service; and (b)
cost of facilities directly utilized in providing the service, such as
depreciation or rental of equipment used and cost of supplies.[19] Noticeably, inclusions in and
exclusions/deductions from gross income for MCIT purposes are limited to those
directly arising from the conduct of the taxpayer’s business. It is, thus, more limited than the gross
income used in the computation of basic corporate income tax.
In
light of the foregoing, there is an apparent distinction under the NIRC of 1997
between taxable income, which is the basis for basic corporate income tax under
Section 27(A); and gross income, which is the basis for the MCIT under Section
27(E). The two terms have their
respective technical meanings, and cannot be used interchangeably. The same reasons prevent this Court from
declaring that the basic corporate income tax, for which PAL is liable under
Section 13(a) of Presidential Decree No. 1590, also covers MCIT under Section
27(E) of the NIRC of 1997, since the basis for the first is the annual net
taxable income, while the basis for the second is gross income.
Third, even if the basic corporate
income tax and the MCIT are both income taxes under Section 27 of the NIRC of
1997, and one is paid in place of the other, the two are distinct and separate
taxes.
The
Court again cites Commissioner of
Internal Revenue v. Philippine Airlines, Inc.,[20]
wherein it held that income tax on the passive income[21]
of a domestic corporation, under Section 27(D) of the NIRC of 1997, is
different from the basic corporate income tax on the taxable income of a
domestic corporation, imposed by Section 27(A), also of the NIRC of 1997. Section 13 of Presidential Decree No. 1590
gives PAL the option to pay basic corporate income tax or franchise tax,
whichever is lower; and the tax so paid shall be in lieu of all other taxes,
except real property tax. The income tax
on the passive income of PAL falls within the category of “all other taxes”
from which PAL is exempted, and which, if already collected, should be refunded
to PAL.
The
Court herein treats MCIT in much the same way.
Although both are income taxes, the MCIT is different from the basic
corporate income tax, not just in the rates, but also in the bases for their
computation. Not being covered by
Section 13(a) of Presidential Decree No. 1590, which makes PAL liable only for
basic corporate income tax, then MCIT is included in “all other taxes” from which
PAL is exempted.
That,
under general circumstances, the MCIT is paid in place of the basic corporate
income tax, when the former is higher than the latter, does not mean that these
two income taxes are one and the same.
The said taxes are merely paid in the alternative, giving the Government
the opportunity to collect the higher amount between the two. The situation is not much different from
Section 13 of Presidential Decree No. 1590, which reversely allows PAL to pay,
whichever is lower of the basic corporate income tax or the franchise tax. It does not make the basic corporate income
tax indistinguishable from the franchise tax.
Given
the fundamental differences between the basic corporate income tax and the
MCIT, presented in the preceding discussion, it is not baseless for this Court
to rule that, pursuant to the franchise of PAL, said corporation is subject to
the first tax, yet exempted from the second.
Fourth, the evident intent of Section 13
of Presidential Decree No. 1520 is to extend to PAL tax concessions not
ordinarily available to other domestic corporations. Section 13 of Presidential Decree No. 1520
permits PAL to pay whichever is lower
of the basic corporate income tax or the franchise tax; and the tax so paid
shall be in lieu of all other taxes,
except only real property tax. Hence,
under its franchise, PAL is to pay the least amount of tax possible.
Section
13 of Presidential Decree No. 1520 is not unusual. A public utility is granted special tax
treatment (including tax exceptions/exemptions) under its franchise, as an
inducement for the acceptance of the franchise and the rendition of public
service by the said public utility.[22] In this case, in addition to being a public
utility providing air-transport service, PAL is also the official flag carrier
of the country.
The
imposition of MCIT on PAL, as the CIR insists, would result in a situation that
contravenes the objective of Section 13 of Presidential Decree No. 1590. In effect, PAL would not just have two, but
three tax alternatives, namely, the basic corporate income tax, MCIT, or
franchise tax. More troublesome is the
fact that, as between the basic corporate income tax and the MCIT, PAL shall be
made to pay whichever is higher,
irrefragably, in violation of the avowed intention of Section 13 of
Presidential Decree No. 1590 to make PAL pay for the lower amount of tax.
Fifth, the CIR posits that PAL may not
invoke in the instant case the “in lieu of all other taxes” clause in Section
13 of Presidential Decree No. 1520, if it did not pay anything at all as basic
corporate income tax or franchise tax.
As a result, PAL should be made liable for “other taxes” such as
MCIT. This line of reasoning has been
dubbed as the Substitution Theory, and this is not the first time the CIR
raised the same. The Court already
rejected the Substitution Theory in Commissioner
of Internal Revenue v. Philippine Airlines, Inc.,[23]
to wit:
“Substitution
Theory”
of
the CIR Untenable
A careful reading of Section 13 rebuts the argument of the CIR that the “in lieu of all other taxes” proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.
Under Subsection (a), the basis for the tax rate is respondent’s annual net taxable income, which (as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may result in a negative amount and thus translate into a zero tax liability.
Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instances, it has a lower tax liability than that provided by Subsection (b).
The fallacy of the CIR’s argument is evident from the fact that the payment of a measly sum of one peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no substantial distinction between a zero tax and a one-peso tax liability. (Emphasis ours.)
Based on
the same ratiocination, the Court finds the Substitution Theory unacceptable in
the present Petition.
The
CIR alludes as well to Republic Act No. 9337, for reasons similar to those
behind the Substitution Theory. Section
22 of Republic Act No. 9337, more popularly known as the Expanded Value Added
Tax (E-VAT) Law, abolished the franchise tax imposed by the charters of
particularly identified public utilities, including Presidential Decree No.
1590 of PAL. PAL may no longer exercise
its options or alternatives under Section 13 of Presidential Decree No. 1590,
and is now liable for both corporate income tax and the 12% VAT on its sale of
services. The CIR alleges that Republic
Act No. 9337 reveals the intention of the Legislature to make PAL share the tax
burden of other domestic corporations.
The
CIR seems to lose sight of the fact that the Petition at bar involves the
liability of PAL for MCIT for the fiscal year ending
And sixth, Presidential Decree No. 1590
explicitly allows PAL, in computing its basic corporate income tax, to carry over as deduction any net loss
incurred in any year, up to five years following the year of such loss. Therefore, Presidential Decree No. 1590 does
not only consider the possibility that, at the end of a taxable period, PAL
shall end up with zero annual net
taxable income (when its deductions exactly equal its gross income), as
what happened in the case at bar, but also the likelihood that PAL shall incur net loss (when its deductions exceed
its gross income). If PAL is subjected
to MCIT, the provision in Presidential Decree No. 1590 on net loss carry-over
will be rendered nugatory. Net loss carry-over
is material only in computing the annual net taxable income to be used as basis
for the basic corporate income tax of PAL; but PAL will never be able to avail
itself of the basic corporate income tax option when it is in a net loss
position, because it will always then be compelled to pay the necessarily
higher MCIT.
Consequently,
the insistence of the CIR to subject PAL to MCIT cannot be done without
contravening Presidential Decree No. 1520.
Between Presidential Decree No. 1520, on one
hand, which is a special law specifically governing the franchise of PAL,
issued on
Neither
can it be said that the NIRC of 1997 repealed or amended Presidential Decree
No. 1590.
While
Section 16 of Presidential Decree No. 1590 provides that the franchise is
granted to PAL with the understanding that it shall be subject to amendment,
alteration, or repeal by competent authority when the public interest so
requires, Section 24 of the same Decree also states that the franchise or any
portion thereof may only be modified, amended, or repealed expressly by a special law or decree that shall
specifically modify, amend, or repeal said franchise or any portion
thereof. No such special law or decree
exists herein.
The
CIR cannot rely on Section 7(B) of Republic Act No. 8424, which amended the
NIRC in 1997 and reads as follows:
Section 7. Repealing Clauses. –
x x x x
(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including charters of government-owned or controlled corporations, decrees, orders, or regulations or parts thereof, that are inconsistent with this Act are hereby repealed or amended accordingly.
The CIR reasons that PAL was a
government-owned and controlled corporation when Presidential Decree No. 1590,
its franchise or charter, was issued in 1978.
Since PAL was still operating under the very same charter when Republic
Act No. 8424 took effect in 1998, then the latter can repeal or amend the
former by virtue of Section 7(B).
The
Court disagrees.
A
brief recount of the history of PAL is in order. PAL was established as a private corporation
under the general law of the Republic of the
It
is true that when Presidential Decree No. 1590 was issued on
That
the Legislature chose not to amend or repeal Presidential Decree No. 1590, even
after PAL was privatized, reveals the intent of the Legislature to let PAL continue
enjoying, as a private corporation, the very same rights and privileges under
the terms and conditions stated in said charter. From the moment PAL was privatized, it had to
be treated as a private corporation, and its charter became that of a private
corporation. It would be completely
illogical to say that PAL is a private corporation still operating under a
charter of a government-owned and controlled corporation.
The
alternative argument of the CIR – that the imposition of the MCIT is pursuant
to the amendment of the NIRC, and not of Presidential Decree No. 1590 – is just
as specious. As has already been settled
by this Court, the basic corporate income tax under Section 13(a) of Presidential
Decree No. 1590 relates to the general tax rate under Section 27(A) of the NIRC
of 1997, which is 32% by the year 2000, imposed on taxable income. Thus, only provisions of the NIRC of 1997
necessary for the computation of the basic corporate income tax apply to
PAL. And even though Republic Act No.
8424 amended the NIRC by introducing the MCIT, in what is now Section 27(E) of
the said Code, this amendment is actually irrelevant and should not affect the
taxation of PAL, since the MCIT is clearly distinct from the basic corporate
income tax referred to in Section 13(a) of Presidential Decree No. 1590, and
from which PAL is consequently exempt under the “in lieu of all other taxes”
clause of its charter.
The
CIR calls the attention of the Court to RMC No. 66-2003, on “Clarifying the
Taxability of Philippine Airlines (PAL) for Income Tax Purposes As Well As
Other Franchise Grantees Similarly Situated.”
According to RMC No. 66-2003:
Section 27(E) of the
Code, as implemented by Revenue Regulations No. 9-98, provides that MCIT of two
percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is
imposed upon any domestic corporation beginning the 4th taxable
year immediately following the taxable year in which such corporation commenced
its business operations. The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of MCIT is greater
than the normal income tax due from such corporation.
With the advent of such provision beginning January
1, 1998, it is certain that domestic corporations subject to normal income tax
as well as those choose to be subject thereto, such as PAL, are bound to pay
income tax regardless of whether they are operating at a profit or loss.
Thus, in case of operating loss, PAL may either opt
to subject itself to minimum corporate income tax or to the 2% franchise tax,
whichever is lower. On the other hand, if PAL is operating at a profit, the
income tax liability shall be the lower amount between:
(1) normal income tax or MCIT whichever is higher;
and
(2) 2% franchise tax.
The
CIR attempts to sway this Court to adopt RMC No. 66-2003 since the
“[c]onstruction by an executive branch of government of a particular law
although not binding upon the courts must be given weight as the construction
comes from the branch of the government called upon to implement the law.”[27]
But
the Court is unconvinced.
It
is significant to note that RMC No. 66-2003 was issued only on
Moreover,
despite the claims of the CIR that RMC No. 66-2003 is just a clarificatory and
internal issuance, the Court observes that RMC No. 66-2003 does more than just
clarify a previous regulation and goes beyond mere internal
administration. It effectively increases
the tax burden of PAL and other taxpayers who are similarly situated, making
them liable for a tax for which they were not liable before. Therefore, RMC No. 66-2003 cannot be given
effect without previous notice or publication to those who will be affected
thereby. In Commissioner of Internal Revenue v. Court of Appeals,[29]
the Court ratiocinated that:
It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
"RMC NO. 10-86
Effectivity of Internal Revenue Rules and Regulations "It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on 'due process of law' and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).
"In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said Revenue Tax Issuances:
"(1). This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and regulations.
"(2). Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed.
"Due notice of the said issuances may be fairly presumed only after the following procedures have been taken:
"xxx xxx xxx "(5). Strict compliance with the foregoing procedures is enjoined.13
Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and comply with the above requirements before giving effect to its questioned circular. (Emphases ours.)
The
Court, however, stops short of ruling on the validity of RMC No. 66-2003, for
it is not among the issues raised in the instant Petition. It only wishes to stress the requirement of
prior notice to PAL before RMC No. 66-2003 could have become effective. Only after RMC No. 66-2003 was issued on
Even
conceding that the construction of a statute by the CIR is to be given great
weight, the courts, which include the CTA, are not bound thereby if such
construction is erroneous or is clearly shown to be in conflict with the
governing statute or the Constitution or other laws. "It is the role of the Judiciary to
refine and, when necessary, correct constitutional (and/or statutory)
interpretation, in the context of the interactions of the three branches of the
government."[30] It is furthermore the rule of long
standing that this Court will not set aside lightly the conclusions reached by
the CTA which, by the very nature of its functions, is dedicated exclusively to
the resolution of tax problems and has, accordingly, developed an expertise on
the subject, unless there has been an abuse or improvident exercise of
authority.[31] In the Petition at bar, the CTA en banc and in division both adjudged
that PAL is not liable for MCIT under Presidential Decree No. 1590, and this
Court has no sufficient basis to reverse them.
As
to the assertions of the CIR that exemption from tax is not presumed, and the
one claiming it must be able to show that it indubitably exists, the Court
recalls its pronouncements in Commissioner
of Internal Revenue v. Court of Appeals[32]:
We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that “(a) statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. x x x (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.” Parenthetically, in answering the question of who is subject to tax statutes, it is basic that “in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.” (Emphases ours.)
For
two decades following the grant of its franchise by Presidential Decree No.
1590 in 1978, PAL was only being held liable for the basic corporate income tax
or franchise tax, whichever was lower; and its payment of either tax was in
lieu of all other taxes, except real property tax, in accordance with the plain
language of Section 13 of the charter of PAL.
Therefore, the exemption of PAL from “all other taxes” was not just a
presumption, but a previously established, accepted, and respected fact, even for the BIR.
The
MCIT was a new tax introduced by Republic Act No. 8424. Under the doctrine of strict interpretation,
the burden is upon the CIR to primarily prove that the new MCIT provisions of
the NIRC of 1997, clearly, expressly, and unambiguously extend and apply to
PAL, despite the latter’s existing tax exemption. To do this, the CIR must convince the Court
that the MCIT is a basic corporate income tax,[33]
and is not covered by the “in lieu of all other taxes” clause of Presidential
Decree No. 1590. Since the CIR failed in
this regard, the Court is left with no choice but to consider the MCIT as one
of “all other taxes,” from which PAL is exempt under the explicit provisions of
its charter.
Not
being liable for MCIT in FY 2000-2001, it necessarily follows that PAL need not
apply for relief from said tax as the CIR maintains.
WHEREFORE, premises considered, the instant Petition for
Review is hereby DENIED, and the Decision dated
SO ORDERED.
|
|
MINITA V. CHICO-NAZARIOAssociate Justice |
WE
CONCUR:
Associate Justice
Chairperson
PRESBITERO J. VELASCO, JR.
Associate Justice |
ANTONIO EDUARDO B. NACHURA Associate Justice |
|
|
|
DIOSDADO M. PERALTAAssociate
Justice |
|
I attest that the conclusions in the
above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Court’s Division.
|
|
CONSUELO YNARES-SANTIAGO Associate Justice Chairperson, Third Division |
Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.
|
|
REYNATO S. PUNO
Chief Justice |
[1] Penned by Associate Justice
Erlinda P. Uy with Presiding Justice Ernesto D. Acosta and Associate Justices
Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova, and Olga Palanca-Enriquez,
concurring; rollo, pp. 43-56.
[2]
[3] Penned by Associate Justice
Juanito C. Castañeda with Associate Justices Erlinda P. Uy and Olga
Palanca-Enriquez, concurring, id. at 70-90.
[4] An Act Granting a New Franchise to
Philippine Airlines, Inc. to Establish, Operate, and Maintain Air-Transport
Services in the Philippines and Other Countries.
[5] Section
1 of Presidential Decree No. 1590.
[6] According
to the Annual Income Tax Return of PAL for the fiscal year in question, its
allowable deductions exactly equalled its total gross income of P39,470,862,232.00,
thus, leaving zero taxable income.
[7] Withheld
at source, meaning, it was previously deducted and withheld by various
withholding agents from the income payments made to PAL.
[8] Should be P8,947,154,040.00.
[9] Rollo, p. 105.
[10]
[11]
[12]
[13]
[14] As a general rule, there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. (Section 34(F)(1) of the NIRC of 1997)
[15] In general, losses shall be deducted
from gross income in the same taxable year said losses were incurred. The recognized exception under Section 39(D)
of the NIRC of 1997, allowing net capital loss carryover, may only be availed
of by a taxpayer “other than a corporation.”
[16] Prior
to its amendment by Republic Act No. 9337, which was signed into law on
[17] G.R.
No. 160528,
[18] Section 34 of the NIRC of 1997
enumerates the allowable deductions, while Section 35 identifies the personal
and additional exemptions.
[19] Section
27(E)(4) of the NIRC of 1997.
[20] Supra
note 17at 98, 100.
[21] Passive income includes interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties [Section 27(D)(1) of the Tax Code of 1997]; capital gains from the sale of shares of stock not traded in the stock exchange [Section 27(D)(2); income derived under the Expanded Foreign Currency Deposit System [Section 27(D)(3)]; intercorporate dividends [Section 27(D)(4)]; and capital gains realized from sale, exchange or disposition of lands and/or buildings [Section 27(D)(5)].
[22] See
Carcar Electric and Ice Plant Co., Inc.
v. Collector of Internal Revenue, 100 Phil. 50, 54 (1956).
[23] Supra
note 17 at 100-101.
[24] Article
4 of the Civil Code provides that “Laws shall have no retroactive effect,
unless the contrary is provided.”
[25] Commissioner of Internal Revenue v. Central
Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414, 449.
[26] http://www.philippineairlines.com/about_pal/milestones/milestones.jsp
[27] Memorandum
of the CIR, rollo, p. 264.
[28] BPI Leasing Corporation v. Court of Appeals,
461 Phil. 451, 460 (2003).
[29] 329
Phil. 987, 1007-1009 (1996).
[30] Philippine Scout Veterans Security and
Investigation Agency, Inc. v. National Labor Relations Commission, 330
Phil. 665, 676 (1996).
[31] Commissioner of Internal Revenue v.
Philippine National Bank, G.R. No. 161997, 25 October 2005, 474 SCRA 303,
320; Commissioner of Internal Revenue v.
Manila Mining Corporation, G.R. No. 153204, 31 August 2005, 468 SCRA 571,
593-594.
[32] 338 Phil. 322, 330-331 (1997).
[33] Since
it is readily apparent that the MCIT does not constitute the alternative
franchise tax.