Sunday, February 26, 2012

CIR vs. PAL [504 SCRA 90]

Facts: A franchise is a legislative grant to operate a public utility. In the present case, P.D. 1590 granted PAL an option to pay the lower of two alternatives: (a) “the basic corporate income tax based on PAL’s annual net taxable income computed in accordance with the provisions of the NIRC” or (b) “a franchise tax of 2% of gross revenues.” Availment of either of these two alternatives shall exempt the airline from the payment of “all other taxes” including the 20 percent final withholding tax on bank deposits. On Nov. 5, 1997, PAL’s AVP-Revenue filed with the CIR a written request for refund in the amount of P2M, which represents the total amount of 20% final withholding tax withheld from the respondent by various withholding agent banks. CTA ruled PAL was not entitled to refund. The CA held that PAL was bound to pay only either (A) or (B); that Sec. 13 of PD 1590 exempts respondent form paying all other taxes, duties, royalties and other feeds of any kind. Having chosen to pay its corporate income tax liability, respondent should now be exempt from paying all other taxes including the final withholding tax. 

Issue: Whether the CA erred on a question of law ruling that the “in lieu of all other taxes” provisions in Sec. 13 of PD No. 1590 applies even if there were in fact no taxes paid under any of subsections (A) and (B) of the said decree. 

Held: Note that the tax liability of PAL under the option it chose (Item ‘a’ of Sec. 13 of PD 1590) is to be “computed in accordance with the provisions of the NIRC”. “Taxable income” means the pertinent items of gross income specified in the Tax Code, less the deductions and/or personal and additional exemptions, if any, authorized for these types of income. Under Sec. 32 of the Tax Code, gross income means income derived from whatever source, including compensation for services; the conduct of trade or business or the exercise of a 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. Sec. 34 enumerates the allowable deductions; Sec. 35, personal and additional exemptions. 

The definition of gross income is broad enough to include all passive incomes subject to specific rates or final taxes. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of gross income, which determines taxable income. 

Thus, PAL’s franchise exempts it from paying any tax other than the option it chooses: either the “basic corporate income tax” or the 2% gross revenue tax.

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