Case Summary (G.R. No. 173854)
Background and Procedural History
The case arose from the CIR’s issuance of Assessment Notice No. INC-FY-99-2000-000085 and Formal Letter of Demand against PAL, demanding payment of a deficiency Minimum Corporate Income Tax (MCIT) amounting to ₱326,778,723.35 for the fiscal year ending March 31, 2000. PAL had filed its tentative corporate income tax return reflecting zero taxable income and subsequently filed a claim for refund of creditable withholding tax. The Bureau of Internal Revenue (BIR) conducted an audit and determined a deficiency MCIT, leading to the issuance of the demand for payment. PAL protested the assessment, citing exemption under its charter (PD 1590) and expiration of the statutory assessment period.
The Court of Tax Appeals (CTA) Second Division ruled in favor of PAL by canceling the deficiency assessment and demand letter. The CTA En Banc subsequently affirmed this decision. The CIR elevated the case to the Supreme Court via a Petition for Review on Certiorari, contesting the CTA En Banc’s ruling.
Legal Issues Presented
- Whether the MCIT constitutes “other taxes” under PAL’s charter, thereby exempting PAL from MCIT liability.
- Whether the CTA En Banc erred in ruling that PAL is not liable for the assessed deficiency MCIT for the fiscal year ending March 31, 2000.
Statutory and Charter Provisions Governing Tax Liability
- National Internal Revenue Code (NIRC) of 1997, as amended: Imposes corporate income tax at graduated rates under Section 27(A) and MCIT of 2% of gross income under Section 27(E). A taxpayer pays either the basic corporate income tax based on taxable income or the MCIT based on gross income, whichever is higher.
- Presidential Decree No. 1590 (PD 1590), PAL’s Charter:
- Section 13 grants PAL the option, in consideration for the franchise, to pay either:
- (a) Basic corporate income tax computed on annual net taxable income per NIRC, or
- (b) Franchise tax of 2% on gross revenues derived from all sources.
- The tax paid shall be in lieu of all other taxes, fees, and charges imposed by government entities, except the real property tax.
- PAL can calculate depreciation at twice the normal rate and carry over net losses for up to five years.
- Section 13 grants PAL the option, in consideration for the franchise, to pay either:
Factual Findings by the CTA
- PAL’s charter provision is clear and unambiguous, offering a choice between paying basic corporate income tax or franchise tax, whichever results in a lower tax liability.
- The “in lieu of all other taxes” clause exempts PAL from payment of all other taxes except real property tax once it has exercised its option.
- The basic corporate income tax referred to in PD 1590 is distinct from the MCIT under the NIRC; the latter is not part of the charter’s provided options.
- PAL’s tax return reflected zero taxable income for the year, hence resulting in no basic corporate income tax liability and no obligation to pay MCIT.
Legal Analysis and Rationale of the Supreme Court
1. Distinction Between Basic Corporate Income Tax and MCIT
The Supreme Court emphasized the technical and conceptual differences between the basic corporate income tax and MCIT:
- The basic corporate income tax under PD 1590 and NIRC Section 27(A) is applied to taxable income, which is gross income less allowable deductions, including special deductions authorized by the charter (e.g., accelerated depreciation and net loss carryover).
- The MCIT under NIRC Section 27(E) is computed on gross income, defined more narrowly to gross receipts less certain deductions necessary to provide services but excludes broader deductions allowed under PD 1590.
This distinction means the MCIT is a separate tax, not covered by the charter’s reference to “basic corporate income tax,” and is classified as one of “other taxes” from which PAL is exempt.
2. Special Law Prevails Over the General Law
PD 1590, enacted as a special law and granted before the NIRC of 1997, governs PAL’s taxation specifically. In cases of conflict between the special law and the general tax code, the special law prevails absent an express repeal or amendment. The MCIT provision under RA 8424 (NIRC of 1997) is a general law and does not specifically amend PAL’s charter. The administrative issuance (Revenue Memorandum Circular No. 66-2003) also cannot override PD 1590.
3. The “In Lieu of All Other Taxes” Clause
The Court interpreted the charter’s language as granting PAL exemption from all taxes except the chosen one (basic corporate income tax or franchise tax) and real property tax. The MCIT, being a different tax, falls under “all other taxes” from which PAL is exempted when it exercises its option.
4. Rejection of the “Substitution Theory”
The CIR argued that if PAL pays no tax under either option (e.g., zero taxable income), it should be liable for MCIT as a substitute tax. The Court rejected this theory, reasoning that the charter allows PAL to choose the option resulting in the lower tax liability, including a zero tax liability. The exemption does not depend on the actual amount paid but on exercising the option.
5. Net Loss Carryover and Tax Relief Purpose
PD 1590 explicitly allows PAL to carry over net losses for five years, recognizing that it may incur losses. Subjecting PAL to MCIT during loss periods would nullify this provision and defeat the legislative intent to provide tax relief as inducement for PAL’s public service.
Conclusion and Final Ruling
The Supreme Court upheld the ruling of the CTA En Banc and the CTA Second Division, denying the CIR’s petition for review. PAL is exempt from paying the MCIT for the fiscal year ending March 31, 2000, by virtue of the express
Case Syllabus (G.R. No. 173854)
Background and Nature of the Case
- This case emanates from a Petition for Review on Certiorari filed before the Supreme Court to reverse and set aside the Court of Tax Appeals En Banc (CTA En Banc) decision dated 19 July 2007 and its Resolution of 23 August 2007.
- The issue arose from the Commissioner of Internal Revenue’s (CIR) issuance of an Assessment Notice and Formal Letter of Demand against Philippine Airlines, Inc. (PAL) for deficiency Minimum Corporate Income Tax (MCIT) amounting to ₱326,778,723.35 for the fiscal year ending 31 March 2000.
- PAL had filed a Tentative Corporate Income Tax Return declaring zero taxable income and later filed a claim for refund for creditable withholding tax.
- The Bureau of Internal Revenue (BIR) conducted an audit which resulted in the MCIT assessment and demand for payment.
- PAL protested the assessment on grounds of exemption under its legislative franchise (Presidential Decree No. 1590) and prescription of the assessment period.
- The CTA Second Division and later the CTA En Banc ruled in favor of PAL and cancelled the MCIT assessment, prompting the CIR to elevate the case to the Supreme Court.
Factual Antecedents
- The CIR is empowered to assess and collect national internal revenue taxes, including the 2% MCIT under Section 27(E) of the National Internal Revenue Code (NIRC) of 1997, as amended.
- PAL is a domestic corporation organized under Philippine law, operating under the franchise granted by PD 1590.
- For the fiscal year ending 31 March 2000, PAL filed its income tax return showing zero taxable income.
- PAL received a Letter of Authority from the BIR authorizing examination of its books regarding its refund claim.
- Subsequent audits led to the Preliminary and Formal Assessment Notices demanding deficiency MCIT payments.
- PAL filed motions and protests against such assessments citing exemptions under its franchise and expiration of the assessment period.
Issues Before the Supreme Court
- Whether the CTA En Banc erred in ruling that the MCIT is to be classified as an "other tax" exempt under PAL's franchise pursuant to PD 1590.
- Whether the CTA En Banc erred in reversing the deficiency MCIT assessment against PAL for the fiscal year ending 31 March 2000.
- Consolidated, the issue is whether the MCIT deficiency assessment should be cancelled affirming PAL's exemption under its franchise.
Legal Framework and Provisions Involved
- Section 27 of the NIRC of 1997, as amended, distinguishes:
- Basic corporate income tax: imposed at 32% on taxable income.
- MCIT: imposed at 2% on gross income, effective beginning the fourth taxable year of operation when MCIT exceeds regular income tax.
- PD 1590, Section 13, grants PAL the privilege to pay either:
- The basic corporate income tax based on net taxable income, or
- A 2% franchise tax based on gross revenues.
- The tax paid under these options sh