G.R. No. 148948 - Commission on Elections vs. Tagle

Case Summary (G.R. No. 148948)

Key Dates

Revenue Regulation No. 4-2011 (RR 4-2011) issued: March 15, 2011. Petitions for declaratory relief and injunctive relief filed by various banks: April 2015 (with preliminary injunctions issued April 25, 2015 and February 28, 2018). Regional Trial Court (Makati), Branch 57, Order declaring RR 4-2011 null and void: May 25, 2018. Supreme Court decision: December 1, 2021.

Applicable Law and Legal Framework

Primary statutory framework: National Internal Revenue Code of 1997, as amended (notably Sections 27(A), 28, 34, 43, 50, and Section 244 authority to promulgate implementing rules). Constitutional framework: 1987 Constitution (due process and equal protection principles, and separation of powers limiting administrative delegation). Controlling jurisprudential principles include the completeness test and sufficient standard test for valid delegation, and precedent restricting administrative issuances from amending or expanding statutes.

Substance of RR 4-2011

RR 4-2011 prescribed rules for allocation of costs and expenses among operations of a bank’s Regular Banking Unit (RBU) and its Foreign Currency Deposit Unit/Expanded FCDU (FCDU/EFCDU) or Offshore Banking Unit (OBU). It required (1) specific identification of expenses attributable to a particular unit and (2) allocation of common or non-identifiable expenses according to each unit’s percentage share of gross income. The RR disallowed deduction from RBU taxable income of costs related to FCDU/EFCDU/OBU operations, imposed penalties for false declarations, and contained repealing and effectivity provisions.

Procedural History Before the RTC

Multiple banks filed petitions for declaratory relief and preliminary injunctions in the RTC, challenging RR 4-2011 on grounds including lack of statutory basis, encroachment on legislative power, violation of taxpayers’ rights to adopt accounting methods (Section 43), impairment of deductions under Section 34, denial of due process (lack of consultation), and denial of equal protection. The RTC granted preliminary injunctions and ultimately, in an Order dated May 25, 2018, declared RR 4-2011 null and void for being issued beyond the authority of the SOF and CIR, and made the injunctions permanent.

Issues Presented to the Supreme Court

Petitioners (DOF/BIR) raised principally: (1) whether the RTC had jurisdiction to entertain the petitions challenging RR 4-2011, and (2) whether RR 4-2011 is a valid regulation issued within the statutory authority of the Secretary of Finance and the Commissioner of Internal Revenue.

Jurisdictional Determination

The Supreme Court reaffirmed the prevailing rule that the Court of Tax Appeals (CTA), not the Regional Trial Court, has jurisdiction to determine the constitutionality or validity of tax laws, regulations, and revenue issuances of the Commissioner of Internal Revenue (citing Banco de Oro, St. Mary’s Academy, and COURAGE). Accordingly, the RTC had no jurisdiction to render the decision it issued; that RTC Order is void for lack of jurisdiction.

Decision to Reach the Merits Despite Jurisdictional Defect

Notwithstanding the RTC’s lack of jurisdiction, the Supreme Court exercised its judicial prerogative — informed by precedent recognizing the public importance of tax matters and to avoid delay and prejudice — to treat the matter as one properly before the Court and to resolve the central question of RR 4-2011’s validity on the merits.

Legal Principles Governing Validity of Administrative Issuances

The Court reiterated that administrative rules implementing statutes must conform to the law’s objectives and not contradict, expand, or modify the statute. Delegated rulemaking must satisfy (a) the completeness test (the statute sets forth the policy to be executed) and (b) the sufficient standard test (the statute provides adequate guidelines limiting the delegated authority). Administrative rules cannot effect legislative change or add requirements that the statute does not impose.

Ground: RR 4-2011 Is Ultra Vires and Invalid

The Court found RR 4-2011 void because it went beyond implementing the Tax Code and effectively amended statutory provisions. The DOF/BIR failed to identify specific Tax Code provisions that RR 4-2011 sought to implement. Rather than merely filling in details consistent with congressional policy, the RR curtailed deductions, imposed a uniform allocation/accounting approach on banks, and thereby altered the legal rights and tax calculations established by the Code.

Conflict with Section 43 (Accounting Methods)

Section 43 allows taxpayers to compute taxable income according to the accounting period and method regularly employed, with the CIR empowered to prescribe a method only when no method has been employed or the employed method does not clearly reflect income. The Court concluded that RR 4-2011 arbitrarily imposed an allocation/accounting method on banks without evidence that banks lacked an accounting method or that existing methods failed to reflect income. Thus RR 4-2011 unlawfully supplanted taxpayers’ statutory right to choose accounting methods and infringed the limited circumstances where the Commissioner may prescribe a method.

Misapplication of Section 50 (Allocation of Income and Deductions)

Section 50 authorizes allocation of income/deductions among two or more organizations, trades, or businesses owned or controlled by the same interests, to prevent tax evasion or to clearly reflect income — a rule directed mainly at inter-company or controlled-group transactions (e.g., transfer pricing). RR 4-2011 purported to allocate expenses among different units or income streams within a single bank (RBU vs. FCDU/OBU), a context not contemplated by Section 50. The Court held Section 50 was inapplicable to the intra-entity allocations prescribed by the RR, such that the RR could not be justified under Section 50’s authority.

Impairment of Deductibility under Section 34

Section 34(A)(1) grants taxpayers the right to deduct ordinary and necessary business expenses in determining taxable income. RR 4-2011 introduced an additional allocation requirement that limited or qualified deductibility by diverting portions of common expenses to tax-exempt or final-taxed income streams. The Court f

Case Syllabus (G.R. No. 148948)

Case Caption and Decision Citation

Case decided by the Third Division of the Supreme Court on December 1, 2021, recorded as G.R. Nos. 240163 & 240168-69.
Decision authored by Justice Zalameda (ZALAMEDA, J.) with concurrence by Justices Leonen (Chairperson), Carandang, Rosario, and Marquez.
Parties: Petitioners — Department of Finance (DOF), represented by its Secretary; Bureau of Internal Revenue (BIR), represented by its Commissioner. Respondents — a long list of banks and financial institutions including Asia United Bank, BDO Unibank, Inc., Bank of the Philippine Islands (BPI), and many others as enumerated in the caption.
Relief sought below: Petition for Review on Certiorari by petitioners to annul the RTC Order dated May 25, 2018 which invalidated Revenue Regulations No. 4-2011 and made permanent preliminary injunctions.

Nature of the Case and Primary Legal Question

The case concerns the validity of Revenue Regulations No. 4-2011 (RR 4-2011), issued by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue, prescribing rules on allocation of costs and expenses among income earnings of banks and other financial institutions for income tax reporting purposes.
Primary legal question: whether RR 4-2011 is a valid administrative regulation within the authority delegated by the Tax Code or whether it was issued ultra vires and thus void.
Ancillary procedural question: whether the Regional Trial Court (RTC), Branch 57, Makati (which granted declaratory relief and permanent preliminary injunctions) had jurisdiction to hear the petitions assailing RR 4-2011.

Revenue Regulations No. 4-2011 — Text, Purpose, and Key Provisions (as contained in the source)

Date of issuance: March 15, 2011. Title: "Proper Allocation of Costs and Expenses Amongst Income Earnings of Banks and Other Financial Institutions for Income Tax Reporting Purposes."
Section 1 (Objective): Regulations aim to set clear rules on allocation of costs and expenses between Regular Banking Unit (RBU) and Foreign Currency Deposit Unit/Expanded FCDU (FCDU/EFCDU) or Offshore Banking Unit (OBU) given their different taxation regimes under the National Internal Revenue Code (NIRC) of 1997, as amended. Also stated applicable to other financial institutions.
Section 2 (General Principles): Recognizes that RBUs and FCDU/EFCDU/OBUs derive income under different tax regimes — RBUs subject to corporate income tax (Section 27(A)), certain FCDU/EFCDU/OBU transactions exempt under Section 28, and certain FCDU/EFCDU/OBU interest income subject to a 10% final tax.
Section 3 (Method of Allocation of Cost and Expenses):
- Only costs and expenses attributable to RBU operations are deductible in computing taxable income of the RBU subject to regular income tax.
- Costs and expenses related to FCDU/EFCDU or OBU are not deductible from RBU taxable income.
- Two methods for allocation: (1) Specific identification — expenses specifically identifiable to a particular unit; (2) Allocation — common expenses allocated based on percentage share of gross income earnings of a unit to total gross income earnings (including income subject to regular income tax, final tax, or exempt income).
- States applicability of the allocation method to other financial institutions with mixed income streams (regular, final, exempt).
Section 4 (Penalty Clause): Willful filing of false declarations or returns subject to penalties and criminal prosecution where applicable.
Section 5 (Repealing Clause): Inconsistent existing regulations/issuances repealed/amended accordingly.
Section 6 (Effectivity): The Regulations take effect immediately.
Issued and signed by Secretary Cesar V. Purisima, recommending approval by Commissioner Kim S. Jacinto-Henares.

Procedural Background and Lower Court Actions

Respondents filed separate petitions in RTC: Special Civil Action No. 15-287 (filed April 6, 2015) by multiple banks; Civil Case No. 15-291 (filed April 1, 2015) by Bank of the Philippine Islands.
Several banks intervened during proceedings: Development Bank of the Philippines, United Overseas Bank Philippines, Land Bank of the Philippines, Metropolitan Bank & Trust Company, UnionBank of the Philippines, and BDO Capital and Investment Corporation.
Respondents sought declaratory relief and injunctive relief (temporary restraining order and/or writ of preliminary injunction) seeking to enjoin enforcement of RR 4-2011.
RTC issued writs of preliminary injunction on April 25, 2015 and February 28, 2018, and in its Order dated May 25, 2018 (Branch 57, Makati), granted the petitions, declared RR 4-2011 null and void as beyond the authority of the Secretary of Finance and Commissioner of Internal Revenue, and made the preliminary injunctions permanent.
Petitioners (DOF/CIR) filed a Petition for Review on Certiorari to the Supreme Court seeking annulment of the RTC Order; they also raised the RTC's lack of jurisdiction.

Grounds of Respondents' Challenge to RR 4-2011 (as pleaded)

The RR was issued without basis in the Tax Code and thus encroached upon the Legislature’s power.
The RR unlawfully expands allocation of costs and expenses beyond Section 50 of the Tax Code, which pertains to allocation among two or more organizations, trades, or businesses.
The RR contravenes Section 43 of the Tax Code by impairing taxpayers’ right to choose accounting methods.
The RR unduly limits rights to claim deductions expressly granted by the Tax Code; imposes additional qualification on deductibility under Section 34, effectively depriving property without due process.
The RR was issued without prior consultation with affected persons (absence of notice and hearing).
The RR violates equal protection by creating an unjustified classification between banks/financial institutions and other taxpayers.

Petitioners' (DOF/BIR) Principal Contentions in the Supreme Court

The Court of Tax Appeals (CTA) has exclusive jurisdiction over the constitutionality or validity of tax laws, rules, regulations and that RTC lacked jurisdiction; he