View full case

CIR v. PHILIPPINE AIRLINES

FACTS:

This case involves a dispute between Philippine Airlines, Inc. (PAL) and the Commissioner of Internal Revenue regarding the assessment and payment of deficiency Minimum Corporate Income Tax (MCIT). PAL filed its tentative corporate income tax return for the fiscal year ending on March 31, 2000, showing zero taxable income and claimed a refund. The Bureau of Internal Revenue examined PAL's records and issued a preliminary assessment notice and a deficiency MCIT assessment. PAL protested these assessments, claiming exemption from the MCIT and that the three-year assessment period had lapsed. Since there was no final action on the protest, PAL filed a petition for review with the Court of Tax Appeals (CTA) Second Division. The CTA Second Division ordered the cancellation and withdrawal of the assessment notice and formal letter of demand, stating that PAL's liability is limited to either the basic corporate income tax or the 2% franchise tax, whichever is lower. PAL argued that the MCIT is not part of the basic corporate income tax and should not be imposed on them. The CTA En Banc and subsequent Supreme Court also ruled in favor of PAL, affirming that the MCIT is not included in the franchise tax and should not be imposed on PAL.

In another case, a telecommunications company disputed its liability for the MCIT imposed by the government. The company argued that it should be exempt from the MCIT based on its franchise, which provides for the payment of either the basic corporate income tax or the 2% franchise tax, whichever is lower. The Court of Tax Appeals (CTA) Second Division and CTA En Banc both ruled in favor of the company, finding that the MCIT should not be imposed on them as it would negate the tax relief granted under their franchise. The Supreme Court was petitioned by the government to reverse the decision, questioning whether the MCIT should be considered as "other taxes" under the company's franchise.

In another case, a corporation engaged in electric power distribution argued that it should not be liable for the MCIT under the National Internal Revenue Code (NIRC) because it is not mentioned in their charter. The petitioner argued that by choosing to be covered by the income tax provision of the NIRC, the corporation should also be liable for the MCIT. However, the corporation maintained that since the MCIT is not specifically mentioned in their charter, it should fall under the category of "other taxes" for which they are not liable.

ISSUES:

  1. Whether respondent is exempt from the Minimum Corporate Income Tax (MCIT) imposed under Section 27(E) of the NIRC of 1997, as amended.

  2. Whether respondent is entitled to choose between the basic corporate income tax and franchise tax, whichever is lower.

  3. Whether the airline company is subject to the Minimum Corporate Income Tax (MCIT) under Section 27(E) of the National Internal Revenue Code (NIRC) of 1997.

  4. Whether the payment of basic corporate income tax by the airline company exempts it from paying the MCIT.

  5. Whether or not Philippine Airlines (PAL) is liable to pay the Minimum Corporate Income Tax (MCIT) despite being exempted from paying other taxes under its franchise.

  6. Whether or not Philippine Airlines (PAL) is liable for the Minimum Corporate Income Tax (MCIT) imposed under Section 27(E) of the National Internal Revenue Code (NIRC) of 1997.

  7. Whether the petition has merit.

RULING:

  1. Yes, respondent is exempt from the MCIT imposed under Section 27(E) of the NIRC of 1997, as amended. The Court emphasized that although the general rule is that a domestic corporation must pay the higher of the income tax under Section 27(A) or the MCIT under Section 27(E), such rule can only be applied to respondent to the extent allowed by the provisions of its franchise.

  2. Yes, respondent is entitled to choose between the basic corporate income tax and franchise tax, whichever is lower. The franchise of respondent, PD 1590, explicitly provides that respondent shall pay to the Philippine Government whichever of the basic corporate income tax or franchise tax will result in a lower tax. The tax paid by respondent, under either alternative, shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges.

  3. The airline company is not subject to the MCIT under Section 27(E) of the NIRC of 1997.

  4. The payment of basic corporate income tax by the airline company does not exempt it from paying the MCIT.

  5. The Court ruled that PAL is exempt from paying the MCIT under its franchise. The MCIT is different from the basic corporate income tax and falls under the category of "all other taxes" from which PAL is exempted. The MCIT and the basic corporate income tax are paid in the alternative, with the government having the opportunity to collect the higher amount. PAL is liable only for the basic corporate income tax or the franchise tax, whichever is lower, under its franchise. The intent of the franchise is to give PAL tax concessions not normally available to other domestic corporations. Imposing the MCIT on PAL would go against the objective of the franchise to make PAL pay the lowest amount of tax possible. The "in lieu of all other taxes" clause in the franchise applies even if PAL did not pay anything as basic corporate income tax or franchise tax. It is the exercise of the option that exempts PAL from other taxes. The Substitution Theory posited by the Commissioner of Internal Revenue (CIR) is not tenable and has been rejected by the Court. Additionally, the Court found no merit in the CIR's reference to Republic Act No. 9337.

  6. The Supreme Court ruled that PAL is not liable for the MCIT imposed under Section 27(E) of the NIRC of 1997. The Court held that PAL is exempt from the MCIT based on the provisions of its franchise under Presidential Decree (PD) 1590. The Court emphasized that while PAL is not completely exempt from all forms of taxes, the exercise of its option to pay either the lower amount of basic corporate income tax or franchise tax relieves PAL of liability for all other taxes and/or duties, whether direct or indirect taxes. The Court found that the MCIT falls under the category of "all other taxes" and thus exempted PAL from its payment. Furthermore, the Court ruled that the MCIT cannot be imposed retroactively, as the statute introducing it took effect after the taxable year in question. Hence, the Court affirmed the decision of the Court of Tax Appeals (CTA) dismissing the petition and absolving PAL from liability for the MCIT.

  7. The petition is denied for lack of merit.

PRINCIPLES:

  • A domestic corporation must pay the higher of the income tax under Section 27(A) of the NIRC of 1997, as amended, or the MCIT under Section 27(E), unless exempted under the provisions of its franchise.

  • A corporation with a franchise is entitled to choose between the basic corporate income tax and franchise tax, whichever is lower, in accordance with the provisions of its franchise. The tax paid by the corporation under either alternative shall be in lieu of all other taxes and fees.

  • The "basic corporate income tax" refers to the general rate of corporate income tax imposed by the NIRC of 1997. It is distinct from the MCIT and is computed based on the annual net taxable income of the domestic corporation.

  • Taxable income, which is the basis for the basic corporate income tax, is arrived at by deducting authorized deductions from gross income, as specified by the NIRC of 1997 or special laws.

  • Gross income, as the basis for the MCIT, has a specialized definition under the NIRC of 1997. It is more limited than the gross income used in the computation of basic corporate income tax.

  • The basic corporate income tax and the MCIT are distinct and separate taxes. Payment of one does not exempt the taxpayer from paying the other.

  • The MCIT is different from the basic corporate income tax and falls under the category of "all other taxes" from which PAL is exempted under its franchise.

  • The basic corporate income tax and the MCIT are paid in the alternative, and the government has the opportunity to collect the higher amount.

  • The intent of the franchise is to give PAL tax concessions not available to other domestic corporations.

  • The "in lieu of all other taxes" clause in the franchise applies regardless of whether PAL paid anything as basic corporate income tax or franchise tax.

  • The Substitution Theory, positing that PAL is liable for "other taxes" such as the MCIT if it did not pay anything at all as basic corporate income tax or franchise tax, is not tenable.

  • The payment of a measly sum of one peso is enough to exempt PAL from other taxes, while a zero liability arising from losses would not make PAL exempt from other taxes.

  • Special laws prevail over general laws, and the terms of the special law are considered exceptions to the general law.

  • The burden of proof is on the BIR to show that a taxpayer is liable for a new tax provision, especially when the taxpayer is claiming exemption based on existing tax laws.

  • The exercise of the taxpayer's option to pay either basic corporate income tax or franchise tax relieves the taxpayer from liability for all other taxes and/or duties. The fact of tax payment is not the basis for exemption, but the exercise of the option.

  • Lack of merit as grounds for denying a petition.