CIR v. PAL

 

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE AIRLINES, INC. (PAL), respondent.

[G.R. No. 179259. September 25, 2013.] 

FACTS:

For the fiscal year that ended 31 March 2000, respondent PAL filed Tentative Corporate Income Tax Return, reflecting a creditable tax withheld for the fourth quarter amounting to P524,957.00, and a zero taxable income for said year. Hence, respondent filed a written claim for refund before the petitioner.

 

As a consequence thereof, respondent received the Letter of Authority from the BIR Large Taxpayers Service, authorizing the revenue officers named therein to examine respondent's books of accounts and other accounting records for the purpose of evaluating respondent's claim for refund.

 

Respondent was also assessed for deficiency MCIT including interest (P315,566,368.68). Thereafter, respondent received a Formal Letter of Demand.

 

In response thereto, respondent filed its formal written protest and argued:

(1) that it is exempt from, or is not subject to, the 2% MCIT by virtue of its charter,  (PD) 1590; 3 and

(2) that the three-year period allowed by law/ for the BIR to assess deficiency internal revenue taxes for the taxable year ending 31 March 2000 had already lapsed on 15 July 2003.

 

CIR: no final action

­

CTA RULING: granted respondent's petition

CTA EN BANC: affirmed

ISSUE:  W/N respondent PAL is exempt from MCIT.

 

RULING:

Yes, respondent PAL is exempt from MCIT.

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 xxx xxx xx and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

xxx xxx xxx

(E)Minimum Corporate Income Tax on Domestic Corporations. — EACTSH

(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 xxx.

Based on the foregoing, a domestic corporation must pay whichever is the higher of: (1) the income tax under Section 27 (A) of the NIRC of 1997, as amended, 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 same Code, equivalent to 2% of the gross income of the corporation.

 

The Court would like to underscore that although this may be the general rule in determining the income tax due from a domestic corporation under the provisions of the NIRC of 1997, as amended, such rule can only be applied to respondent only as to the extent allowed by the provisions of its franchise.

 

Relevant thereto, PD 1590, the franchise of respondent, contains the following pertinent provisions governing its taxation:

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

. aCHDST

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:

xxx xxx xxx

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.

 

From the foregoing provisions, during the lifetime of the franchise of respondent, its taxation shall be strictly governed by two fundamental rules, to wit:

(1) respondent shall pay the Government either the basic corporate income tax or franchise tax, whichever is lower; and

(2) the tax paid by respondent, 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.

 

Parenthetically, the basic corporate income tax of respondent shall be based on its annual net taxable income, computed in accordance with the NIRC of 1997, as amended. 

 

The franchise tax, on the other hand, shall be 2% of the gross revenues derived by respondent from all sources, whether transport or non-transport 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 respondent from its outgoing flights. 21

 

Accordingly, considering the foregoing precepts, this Court had the opportunity to finally settle this matter and categorically enunciated in Commissioner of Internal Revenue v. Philippine Airlines, Inc., 22 that respondent cannot be subjected to MCIT for the following reasons:

FIRST, Section 13(a) of [PD] 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] 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. HSDCT

A

Section 13(a) of [PD] 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] 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 1 January 2000, shall be imposed on the taxable income of the domestic corporation.

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] 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.

 

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] 1590, which makes PAL liable only for basic corporate income tax, then MCIT is included in "all other taxes" from which PAL is exempted.

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] 1520 (sic) is to extend to PAL tax concessions not ordinarily available to other domestic corporations. Section 13 of [PD] 1520 (sic) 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.

 

The imposition of MCIT on PAL, as the CIR insists, would result in a situation that contravenes the objective of Section 13 of [PD] 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] 1590 to make PAL pay for the lower amount of tax.

 

Based on the foregoing pronouncements, it is clear that respondent is exempt from the MCIT imposed under Section 27 (E) of the NIRC of 1997, as amended. Thus, respondent cannot be held liable for the assessed deficiency MCIT of P326,778,723.35 for fiscal year ending 31 March 2000. AEIHCS

 

More importantly, as to petitioner's contention 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 since it should retain the responsibility of paying its share of the tax burden, this Court has categorically ruled in the above-cited cases that it is not the fact of tax payment that exempts it, but the exercise of its option.

 

By way of reiteration, although it appears that respondent is not completely exempt from all forms of taxes under PD 1590 considering that Section 13 thereof requires it to pay, either the lower amount of the basic corporate income tax or franchise tax (which are both direct taxes), at its option, mere exercise of such option already relieves respondent of liability for all other taxes and/or duties, whether direct or indirect taxes.

 

WHEREFORE, the petition is DENIED for lack of merit. No costs.