DIGESTS
Philippine Airlines, Inc. (PAL)
Nature of a franchise; How construed
A franchise is a legislative grant to operate a public utility. Like those of any other statute, the ambiguous provisions of a franchise should be construed in accordance with the intent of the legislature.
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Brief history of PAL
PAL was established as a private corporation under the general law of the Republic of the Philippines in February 1941. In November 1977, the government, through the Government Service Insurance System (GSIS), acquired the majority shares in PAL. PAL was privatized in January 1992 when the local consortium PR Holdings acquired a 67% stake therein.
It is true that when PD No. 1590 was issued on 11 June 1978, PAL was then a government-owned and controlled corporation; but when RA No. 8424, amending the NIRC, took effect on 1 January 1998, PAL was already a private corporation for six years. The repealing clause under Section 7(B) of RA No. 8424 simply refers to charters of government-owned and controlled corporations, which would simply and plainly mean corporations under the ownership and control of the government at the time of effectivity of said statute. It is already a stretch for the Court to read into said provision charters, issued to what were then government-owned and controlled corporations that are now private, but still operating under the same charters.
That the Legislature chose not to amend or repeal PD 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.
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Fundamental rules governing the taxation of PAL
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 NIRC. PD 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; 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.
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.
N.B.: This case involves a transaction prior to the enactment and effectivity of RA No. 9337.
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Two (2) alternatives to exempt PAL from the payment of “all other taxes”
PD No. 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 two percent 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.
Two points are evident from Section 13 of PD No. 1590. First, as consideration for the franchise, PAL is liable to pay either (a) its basic corporate income tax based on its net taxable income, as computed under the NIRC; or (b) a franchise tax of two percent based on its gross revenues, whichever is lower. Second, the tax paid is “in lieu of all other taxes” imposed by all government entities in the country.
N.B.: This case involves a transaction prior to the enactment and effectivity of RA No. 9337.
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PAL’s tax exemption is not limited to final withholding tax on interest income or excludes therefrom exemption from the overseas communication tax (OCT).
The language used in Section 13 of PD No. 1590, granting respondent tax exemption, is clearly all-inclusive. The basic corporate income tax or franchise tax paid by respondent 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 x x x,” except only real property tax. Even a meticulous examination of PD No. 1590 will not reveal any provision therein limiting the tax exemption of respondent to final withholding tax on interest income or excluding from said exemption the OCT.
Moreover, although the PAL case may involve a different type of tax, certain pronouncements made by the Court therein are still significant in the instant case.
In the PAL case, petitioner likewise opposed the claim for refund of respondent based on the argument that the latter was not exempted from final withholding tax on interest income, because said tax should be deemed part of the basic corporate income tax, which respondent had opted to pay. This Court was unconvinced by petitioner’s argument, ratiocinating that “basic corporate income tax,” under Section 13(a) of PD No. 1590, relates to the general rate of 35% (reduced to 32% by the year 2000) imposed on taxable income by Section 27(A) of the NIRC. Although the definition of “gross income” is broad enough to include all passive incomes, the passive incomes already subjected to different rates of final tax to be withheld at source shall no longer be included in the computation of gross income, which shall be used in the determination of taxable income. The interest income of respondent is already subject to final withholding tax of 20%, and no longer to the basic corporate income tax of 35%. Having established that final tax on interest income is not part of the basic corporate income tax, then the former is considered as among “all other taxes” from which respondent is exempted under Section 13 of PD No. 1590.
It is true that the discussion in the PAL case on “gross income” is immaterial to the case at bar. OCT is not even an income tax. It is a business tax, which the government imposes on the gross annual sales of operators of communication equipment sending overseas dispatches, messages or conversations from the Philippines. According to Section 120 of the NIRC, the person paying for the services rendered (respondent, in this case) shall pay the OCT to the person rendering the service (PLDT); the latter, in turn, shall remit the amount to the BIR. If this Court deems that final tax on interest income – which is also an income tax, but distinct from basic corporate income tax – is included among “all other taxes” from which respondent is exempt, then with all the more reason should the Court consider OCT, which is altogether a different type of tax, as also covered by the said exemption.
N.B.: This case involves a transaction prior to the enactment and effectivity of RA No. 9337.
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The “Substitution Theory” is untenable.
A careful reading of Section 13 of PD No. 1590 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 No. 1590 intended to give PAL 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 is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the annual net taxable income, PD No. 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 No. 1590 sought to assist the finances of the government corporation in the form of lower taxes. When PAL operates at a loss, no taxes are due; in this instance, 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.
While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against the taxpayer and in favor of the taxing power, Section 13 of the franchise of PAL leaves no room for interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either the “basic corporate income tax” or the two percent gross revenue tax.
Determining whether this tax exemption is wise or advantageous is outside the realm of judicial power. This matter is addressed to the sound discretion of the lawmaking department of government.
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Petitioner further avers that respondent cannot avail itself of the benefit of the “in lieu of all other taxes” proviso in Section 13 of PD No. 1590 when it made no actual payment of either the basic corporate income tax or the franchise tax.
In insisting that respondent needs to actually pay a certain amount as basic corporate income tax or franchise tax, before it can enjoy the tax exemption granted to it, petitioner places too much reliance on the use of the word “pay” in the first line of Section 13 of PD No. 1590.
It must do well for petitioner to remember that a statute’s clauses and phrases should not be taken as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts. A strict interpretation of the word “pay” in Section 13 of PD No. 1590 would effectively render nugatory the other rights categorically conferred upon the respondent by its franchise.
Section 13 of PD No. 1590 clearly gives respondent the option to “pay” either basic corporate income tax on its net taxable income or franchise tax on its gross revenues, whichever would result in lower tax.
In the event that respondent incurs a net loss, it shall have zero liability for basic corporate income tax, the lowest possible tax liability. There being no qualification to the exercise of its options under Section 13 of PD No. 1590, then respondent is free to choose basic corporate income tax, even if it would have zero liability for the same in light of its net loss position for the taxable year. Additionally, a ruling by this Court compelling respondent to pay a franchise tax when it incurs a net loss and is, thus, not liable for any basic corporate income tax would be contrary to the evident intent of the law to give respondent options and to make the latter liable for the least amount of tax.
Moreover, then President Ferdinand E. Marcos, the author of PD No. 1590, was mindful of the possibility that respondent would incur a net loss for a taxable year, resulting in zero tax liability for basic corporate income tax.
In allowing respondent to carry over its net loss for five consecutive years following the year said loss was incurred, PD No. 1590 takes into account the possibility that respondent shall be in a net loss position for six years straight, during which it shall have zero basic corporate income tax liability. The Court also notes that net loss carry-over may only be used in the computation of basic corporate income tax. Hence, if respondent is required to pay a franchise tax every time it has zero basic corporate income tax liability due to net loss, then it shall never have the opportunity to avail itself of the benefit of net loss carry-over.
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It is clear from the foregoing that this Court had already settled the issue of whether or not there was a need for the actual payment of tax, either the basic corporate income tax or the 2% franchise tax, before therein respondent PAL could avail itself of the “in lieu of all other taxes” provision under its Charter. This Court finds no cogent reason to deviate from the ruling in the said case.
This Court reiterates the pronouncement of the CTA that under the first option of Section 13 of PD No. 1590, the basis for the tax rate is PAL’s annual net taxable income. By basing the tax rate on the annual net taxable income, PD No. 1590 necessarily recognized the situation in which taxable income may result in a negative amount and, thus, translate into a zero tax liability. In this scenario, respondent PAL operates at a loss and no taxes are due. Consequently, the first option entails a lower tax liability than the second option.
N.B.: The foregoing cases involve transactions prior to the enactment and effectivity of RA No. 9337.
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PAL’s tax exemptions subsists.
Under its franchise, PD No. 1590, PAL may either pay a franchise tax or the basic corporate income tax, and is exempt from paying any other tax, including taxes on interest earned from deposits.
In Commissioner of Internal Revenue v. Philippine Airlines, Inc., this Court ruled that Section 13 of PD No. 1590 is clear and unequivocal in exempting PAL from all taxes other than the basic corporate income tax or the 2% franchise tax.
More recently, PAL’s tax privileges were outlined and confirmed in Commissioner of Internal Revenue v. Philippine Airlines, Inc. when RA No. 9334 took effect, amending Section 131 of the NIRC. RA No. 9334 increased the rates of excise tax imposed on alcohol and tobacco products, and removed the exemption from taxes, duties and charges, including excise taxes, on importations of cigars, cigarettes, distilled spirits, wines and fermented liquor into the Philippines. This Court ruled that PAL’s tax exemptions remain.
PAL’s tax liability was also modified on July 1, 2005, when RA No. 9337 further amended the NIRC. Section 22 of RA No. 9337 abolished the franchise tax and subjected PAL to corporate income tax and to VAT. Nonetheless, it maintained PAL’s exemption from “any taxes, duties, royalties, registration, license, and other fees and charges, as may be provided by their respective franchise agreement.”
Again, in Commissioner of Internal Revenue v. Philippine Airlines, Inc., this Court maintained that despite these amendments to the NIRC, PAL remains exempt from all other taxes, duties, royalties, registrations, licenses, and other fees and charges, provided it pays the corporate income tax as granted in its franchise agreement. It further emphasized that no explicit repeals were made on PD No. 1590.
Thus, PD No. 1590 and PAL’s tax exemptions subsist.
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It bears to note that the repealing clause of RA No. 9337 enumerated the laws or provisions of laws which it repeals. However, there is nothing in the repealing clause, nor in any other provisions of the said law, which makes specific mention of PD 1590 as one of the acts intended to be repealed.
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The franchise of PAL remains the governing law on its exemption from taxes. Its payment of either basic corporate income tax or franchise tax – whichever is lower – shall be in lieu of all other taxes, duties, royalties, registrations, licenses, and other fees and charges, except only real property tax. The phrase “in lieu of all other taxes” includes but is not limited to taxes, duties, charges, royalties, or fees due on all importations by the grantee of the commissary and catering supplies, 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.
However, upon the amendment of the 1997 NIRC, Section 22 of RA No. 9337 abolished the franchise tax and subjected PAL and similar entities to corporate income tax and value-added tax (VAT). PAL nevertheless remains exempt from taxes, duties, royalties, registrations, licenses, and other fees and charges, provided it pays corporate income tax as granted in its franchise agreement. Accordingly, PAL is left with no other option but to pay its basic corporate income tax, the payment of which shall be in lieu of all other taxes, except VAT, and subject to certain conditions provided in its charter
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PAL has the legal personality to claim a refund even of passed-on or indirect taxes.
In relation to indirect taxes, Section 204(c) of the NIRC states that it is the statutory taxpayer which has the legal personality to file a claim fo refund. Accordingly, in cases involving excise tax exemptions on petroleum products under Section 135 of the NIRC, the Court has consistently held that it is the statutory taxpayer who is entitled to claim a tax refund based thereon and not the party who merely bears its economic burden.
However, the above mentioned rule should not apply to instances where the law clearly grants the party to which the economic burden of the tax is shifted an exemption from both direct and indirect taxes. In which case, the latter must be allowed to claim a tax refund even if it is not considered as the statutory taxpayer under the law.
The propriety of a tax refund claim is hinged on the kind of exemption which forms its basis. If the law confers an exemption from both direct or indirect taxes, a claimant is entitled to a tax refund even if it only bears the economic burden of the applicable tax. On the other hand, if the exemption conferred only applies to direct taxes, then the statutory taxpayer is regarded as the proper party to file the refund claim.
In this case, PAL’s franchise grants it an exemption from both direct and indirect taxes units purchase of petroleum products.
Based on Section 13 of PD No. 1590, PAL’s payment of either the basic corporate income tax or franchise tax, whichever is lower, shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges, except only real property tax. The phrase “in lieu of all other taxes” includes but is not limited to taxes that 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 the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement.” In other words, in view of PAL’s payment of either the basic corporate income tax or franchise tax, whichever is lower, PAL is exempt from paying: (a) taxes directly due from or imposable upon it as the purchaser of the subject petroleum products; and (b) the cost of the taxes billed or passed on to it by the seller, producer, manufacturer, or importer of the said products either as part of the purchase price or by mutual agreement or other arrangement. Therefore, given the foregoing direct and indirect tax exemptions under its franchise, and applying the principles as above-discussed, PAL is endowed with the legal standing to file the subject tax refund claim, notwithstanding the fact that it is not the statutory taxpayer as contemplated by law.
N.B.: This case involves transactions prior to the enactment of RA No. 9337.
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Coverage of Letter of Instruction (LOI) 1483 vis-a-vis excise taxes.
LOI 1483 amended PAL’s franchise by withdrawing the tax exemption privilege granted to PAL on its purchase of domestic petroleum products for use in its domestic operations.
Based on Section 13 of PAL’s franchise, PAL’s tax exemption privileges on all taxes on aviation gas, fuel and oil may be classified into three (3) kinds, namely: (a) all taxes due on PAL’s local purchase of aviation gas, fuel and oil; (b) all taxes directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of aviation gas, fuel and oil but are billed or passed on to PAL; and (c), all taxes due on all importations by PAL of aviation gas, fuel, and oil.
Viewed within the context of excise taxes, it may be observed that the first kind of tax privilege would be irrelevant to PAL since it is not liable for excise taxes on locally manufactured/produced goods for domestic sale or other disposition; based on Section 130 of the NIRC, it is the manufacturer or producer, i.e., the local refinery, which is regarded as the statutory taxpayer of the excise taxes due on the same. On the contrary, when the economic burden of the applicable excise taxes is passed on to PAL, it may assert two (2) tax exemptions under the second kind of tax privilege namely, PAL’s exemptions on (a) passed on excise tax costs due from the seller, manufacturer/producer in case of locally manufactured/ produced goods for domestic sale (first tax exemption under the second kind of tax privilege); and (b) passed on excise tax costs due from the importer in case of imported aviation gas, fuel and oil (second tax exemption under the second kind of tax privilege). The second kind of tax privilege should, in turn, be distinguished from the third kind of tax privilege which applies when PAL itself acts as the importer of the foregoing petroleum products. In the latter instance, PAL is not merely regarded as the party to whom the economic burden of the excise taxes is shifted to but rather, it stands as the statutory taxpayer directly liable to the government for the same.
In view of the foregoing, the Court observes that the phrase “purchase of domestic petroleum products for use in its domestic operations” – which characterizes the tax privilege LOI 1483 withdrew – refers only to PAL’s tax exemptions on passed on excise tax costs due from the seller, manufacturer/producer of locally manufactured/ produced goods for domestic sale and does not, in any way, pertain to any of PAL’s tax privileges concerning imported goods, may it be (a) PAL’s tax exemption on excise tax costs which are merely passed on to it by the importer when it buys imported goods from the latter (the second tax exemption under the second kind of tax privilege); or (b) PAL’s tax exemption on its direct excise tax liability when it imports the goods itself (the third kind of tax privilege). Both textual and contextual analyses lead to this conclusion:
First, examining its phraseology, the word “domestic,” which means “of or relating to one’s own country” or “an article of domestic manufacture,” clearly pertains to goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition as opposed to things imported. In other words, by sheer divergence of meaning, the term “domestic petroleum products” could not refer to goods which are imported.
Second, examining its context, certain “whereas clauses” in LOI 1483 disclose that the said law was intended to lift the tax privilege discussed in Department of Finance (DOF) Ruling dated November 17, 1969 (Subject DOF Ruling) which, based on a reading of the same, clarified that PAL’s franchise included tax exemptions on aviation gas, fuel and oil which are manufactured or produced in the Philippines for domestic sales (and not only to those imported). In other words, LOI 1483 was meant to divest PAL from the tax privilege which was tackled in the Subject DOF Ruling, namely, its tax exemption on aviation gas, fuel and oil which are manufactured or produced in the Philippines for domestic sales. Consequently, if LOI 1483 was intended to withdraw the foregoing tax exemption, then the term “purchase of domestic petroleum products for use in its domestic operations” as used in LOI 1483 could only refer to “goods manufactured or produced in the Philippines for domestic sales or consumption or for any other disposition,” and not to “things imported.” In this respect, it cannot be gainsaid that PAL’s tax exemption privileges concerning imported goods remain beyond the scope of LOI 1483 and thus, continue to subsist.
In this case, records disclose that Caltex imported aviation fuel from abroad and merely re-sold the same to PAL, tacking the amount of excise taxes it paid or would be liable to pay to the government on to the purchase price. Evidently, the said petroleum products are in the nature of “things imported” and thus, beyond the coverage of LOI 1483 as previously discussed. As such, considering the subsistence of PAL’s tax exemption privileges over the imported goods subject of this case, PAL is allowed to claim a tax refund on the excise taxes imposed and due thereon.
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Conditions set by Section 13 of PD No. 1590 for PAL’s imported commissary and catering supplies (e.g., tobacco and alcohol products) to be exempt from excise tax.
These conditions are: (1) such supplies are imported for the use of the franchisee in its transport/non-transport operations and other incidental activities; and (2) they are not locally available in reasonable quantity, quality and price.
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PAL may now claim exemption from taxes, duties, charges, royalties, or fees due on all importations of its commissary and catering supplies, provided it shows that 1) such articles or supplies or materials are imported for use in its transport and nontransport operations and other activities incidental thereto; and 2) they are not locally available in reasonable quantity, quality or price.
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PAL cannot be subjected to the minimum corporate income tax (MCIT).
After a conscientious study of Section 13 of PD 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 PD No. 1590 refers to “basic corporate income tax.” In Commissioner of Internal Revenue v. Philippine Airlines, Inc., the Court already settled that the “basic corporate income tax,” under Section 13(a) of PD 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 PD 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 PD 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 PD 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 1 January 2000, shall be imposed on the taxable income of the domestic corporation.
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 PD 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., wherein it held that income tax on the passive income 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 PD 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 PD 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 PD 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 PD No. 1520 is to extend to PAL tax concessions not ordinarily available to other domestic corporations. Section 13 of PD 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 PD 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. 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 PD 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 PD 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 PD 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 CIR alludes as well to RA No. 9337, for reasons similar to those behind the Substitution Theory. Section 22 of RA 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 PD No. 1590 of PAL. PAL may no longer exercise its options or alternatives under Section 13 of PD No. 1590, and is now liable for both corporate income tax and the 12% VAT on its sale of services. The CIR alleges that RA 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 31 March 2001. RA No. 9337, which took effect on 1 July 2005, cannot be applied retroactively and any amendment introduced by said statute affecting the taxation of PAL is immaterial in the present case.
And sixth, PD 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, PD 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 PD 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 PD No. 1520.
Between PD No. 1520, on one hand, which is a special law specifically governing the franchise of PAL, issued on 11 June 1978; and the NIRC of 1997, on the other, which is a general law on national internal revenue taxes, that took effect on 1 January 1998, the former prevails. The rule is that on a specific matter, the special law shall prevail over the general law, which shall be resorted to only to supply deficiencies in the former. In addition, where there are two statutes, the earlier special and the later general – the terms of the general broad enough to include the matter provided for in the special – the fact that one is special and the other is general creates a presumption that the special is to be considered as remaining an exception to the general, one as a general law of the land, the other as the law of a particular case. It is a canon of statutory construction that a later statute, general in its terms and not expressly repealing a prior special statute, will ordinarily not affect the special provisions of such earlier statute.
Neither can it be said that the NIRC of 1997 repealed or amended PD No. 1590.
While Section 16 of PD 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 RA No. 8424, which amended the NIRC in 1997.
The CIR reasons that PAL was a government-owned and controlled corporation when PD No. 1590, its franchise or charter, was issued in 1978. Since PAL was still operating under the very same charter when RA No. 8424 took effect in 1998, then the latter can repeal or amend the former by virtue of Section 7(B).
The Court disagrees.
From the moment PAL was privatized (in January 1992), 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 PD No. 1590 – is just as specious. As has already been settled by this Court, the basic corporate income tax under Section 13(a) of PD 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 RA 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 PD No. 1590, and from which PAL is consequently exempt under the “in lieu of all other taxes” clause of its charter.
For two decades following the grant of its franchise by PD 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 RA 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, and is not covered by the “in lieu of all other taxes” clause of PD 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.
N.B.: This case involves a transaction prior to the enactment and effectivity of RA No. 9337.
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The imposition of MCIT on PAL under RMC No. 66-2003 is not tenable.
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.”
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.”
But the Court is unconvinced.
It is significant to note that RMC No. 66-2003 was issued only on 14 October 2003, more than two years after FY 2000-2001 of PAL ended on 31 March 2001. This violates the well-entrenched principle that statutes, including administrative rules and regulations, operate prospectively only, unless the legislative intent to the contrary is manifest by express terms or by necessary implication.
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.
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 14 October 2003 could PAL have been given notice of said circular, and only following such notice to PAL would RMC No. 66-2003 have taken effect. Given this sequence, it is not possible to say that RMC No. 66-2003 was already in effect and should have been strictly complied with by PAL for its fiscal year which ended on 31 March 2001.
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.” 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. In the Petition at bar, the CTA en banc and in division both adjudged that PAL is not liable for MCIT under PD No. 1590, and this Court has no sufficient basis to reverse them.
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