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A lean harvest of tax cases

(Article published in WEALTH magazine)

On the surface, the results of the eleven (11) tax cases decided during the first six months of 2006, as they are currently posted in the Supreme Court’s website, appear to be impressive, numbers-wise and revenue-wise.

         The BIR won seven (7) cases and lost four (4).  Of the four (4), one (1), namely the case of  Commissioner of Internal Revenue v. Legasto, G.R. No. 148443, 20 April 2006, was really an election case, and had no revenue impact.  In effect, out of the ten (10) honest-to-goodness tax cases, the BIR won seven (7) or seventy per cent (70%).

         The government revenue loss, resulting, from the three (3) cases won by the taxpayer is only Php15,243,878.00.  In contrast, the seven (7) cases that the BIR won, in deficiency assessments or denied refunds, yielded Php137,713,516.00.

         A deeper analysis, however, shows that no significant advance in tax jurisprudence arose from this year’s first semester crop of tax decisions. Two (2) cases yielded no benefit except to the winning taxpayers.  Half of the cases were won more on account of ineptness of the losing party than the proper handling by the winners. The rest were straight forward applications of statutory provisions or dull reiterations of previous court pronouncements.              

         Two of the cases lost by the BIR namely, Bicolandia Drug Corporation v. Commissioner of Internal Revenue, G.R. No. 142299, 22 June 2006, and Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 148512, 26 June 2006,  yielded no significant benefit to other taxpayers. In both Bicolandia and Central Luzon, the Commissioner vigorously argued that the discount given to seniors citizens pursuant to R.A. No. 7432  can be claimed only as a tax deduction and not as a tax credit.  The taxpayers, in response, simply countered with a citation of the text of the statute.  Before the Supreme Court could rule on the issue, however, the Senior Citizen’s Act (R.A. No. 7432) was amended by R.A. No. 9257, clearly stating that the discount can be claimed only as a deduction from gross income and not as a credit against income tax.

         When the Supreme Court, citing the text of R.A. No. 7432,  eventually ruled against the Commissioner the taxpayers’ victories were pyrrhic since the Commissioner had already made his point in Congress.

         The third tax case lost by the BIR, namely, Commissioner of Internal Revenue v. Azucena T. Reyes, G.R. No. 159694, 27 January 2006, was the first instance of bungling by the losing party.  The  Supreme Court ruled that the BIR’s assessment for estate taxes against the estate of the late Maria C. Tancinco, amounting to Php14,912,205.47 was void because the Commissioner did not follow the procedure laid out in Section 228 of the National Internal Revenue.  R.A. No. 8424 (known as the Tax Reform Act of 1997) itself states that “the taxpayer shall be informed in writing of law and the facts on which an assessment is made; otherwise the assessment was void.” 

 The bungling was not a government monopoly.  The taxpayers had their share of it, too.  In Far East Bank and Trust Company v. Commissioner of Internal Revenue, 02 May 2006, the Supreme Court decided in favor of the BIR because of “the multiple levels of incompetence on the part of petitioner which this Court cannot simply give sanctions to.”  The most serious instance among such “multiple levels of incompetence” consisted in Far East Bank and Trust Co. not knowing how to prove that its various qualified retirement trusts, which were tax exempt, in fact paid taxes on the income of their “money market placements, bank deposits, other deposit substitute instruments and government securities, particularly treasury bills.”  It should have presented confirmation receipts and purchase orders which would have irrefutably shown just how much tax-exempt income was nevertheless subjected to the withholding tax.

         The following month, it was the turn of the Rizal Commercial Banking Corporation, in Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue, G.R. No. 168498, 16 June 2006, to lose to the BIR. In this case, the secretary of the bank’s legal counsel is said to have misfiled and lost a resolution of the Court of Tax Appeals (CTA) dismissing the bank’s petition for review.  The resolution of the CTA thus became final and RCBC lost its chance to prove in a higher court that the BIR’s tax assessment of about Php100,716,380 as gross onshore tax and documentary stamp taxes on its special savings placements was wrong.

 Banks too, did not have an exclusive franchise on bungling.  In Benguet Corporation v. Commissioner of Internal Revenue, 22 June 2006, the taxpayer was accused by the BIR of not remitting the taxes it withheld on the compensation of its executives.  All that the taxpayer had to do was to show that its confidential payroll agent, an accounting firm, actually remitted the taxes withheld.  All that the taxpayer presented, however, were the agent’s payment orders and confirmation receipts. It did not submit the checks themselves that were used to remit the taxes withheld.  For failure to submit the best evidence, the taxpayer lost the case.

           The weirdest error, however, was committed in San Pablo Manufacturing Corporation v. Commissioner of Internal Revenue, 22 June 2006.  The taxpayer’s loss had nothing to do with its tax situation.  When San Pablo Manufacturing filed with the Court of Appeals its petition for review under Rule 43 for the purpose of contesting a decision of the Court of Tax Appeals, it did not comply with the requirements of verification and certification on non-forum shopping when filing a petition for review under Rule 43.  It failed to submit the corporate secretary’s certificate, board resolution or power of attorney, authorizing the taxpayer’s chief financial officer to execute the verification and certification of non-forum shopping.

         The last three cases were boring application of the law or reiteration of previous rulings, or both.  On 02 May 2006, the Supreme Court decided the case of Commissioner of Internal Revenue v. Trustworthy Pawnshop, Inc. G.R. No. 149834.  The issue was whether a pawnshop is, as maintained by the Commissioner, liable for the lending investor’s tax.  To decide this case, the Supreme Court simply invoked its previous ruling in Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc. G.R. No. 150947, 15 July 2003,  to answer in the negative.

         In Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Reveneue, G.R. No. 166786, 03 May 2006  the BIR assessed the taxpayer Php13,142,986.02 by way of deficiency documentary stamp tax on its pawn tickets issued for 1997.  The taxpayer’s contention was that the pawn ticket is not among the documents subject to documentary stamp tax under Title VII of the National Internal Revenue Code.  In ruling against the taxpayer, the Supreme Court simply fell back on its 1999 ruling in Philippine Home Assurance Corporation v. Court of Appeals, 361 Phil. 368, wherein it held  that the DST is a tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto.  The right to enter into a pledge is explicitly taxed under Section 195. Therefore, Michel J. Lhuillier Pawnshop, Inc. was liable for the tax.

         Finally, in the case of Commissioner of Internal Revenue v. Bank of the Philippine Islands, G.R. No. 147375, 26 June 2006, the issue is whether the 20% final tax on a bank’s interest income withheld from the bank at source forms part of the base in computing for the said bank’s gross receipts tax liability.   All the Supreme Court did is to invoke its previous rulings in China Banking Corporation v. Court of Appeals, 451 Phil. 772 (2003); Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, 25 Nov. 2003; and Commissioner of Internal Revenue v. Bank of Commerce, G.R. No. 149636, 08 June 2005, to answer in the affirmative.

         Clear from this all, I submit, is the lesson that the judiciary is hardly the venue for improving tax collection and administration in the country.  In subsequent issues, I shall deal with specific tax reform measures that must be put in place as well as collection strategies that may be pursued with reasonable chance of success.