SECOND DIVISION
[G.R. No. 48532. August 31, 1992.]
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN
T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A.
RIALP, LEANDRO G. SANTILLAN, and JAIME A. SOQUES, Petitioners, v. THE
HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, Respondents.
[G.R. No. 48533. August 31, 1992.]
ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA,
JAIME E. DY-LIACO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN,
VICENTE D. HERRERA, BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR.,
ADRIAN O. MICIANO, EDUARDO A. RIALP and JAIME A. SOQUES, Petitioners, v.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, Respondents.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
SYLLABUS
1. TAXATION; INCOME TAX; INCOME; DEFINED. — Income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as
payment for services, interest or profit from investment. Unless otherwise specified, it
means cash or its equivalent. Income can also be thought of as a flow of the fruits of
one’s labor.
2. ID.; ID.; FOREIGN EXCHANGE TRANSACTION; DOLLAR EARNED ARE NOT RECEIPTS
DERIVED THEREFROM. — Petitioners are correct as to their claim that their dollar
earnings are not receipts derived from foreign exchange transactions. For a foreign
exchange transaction is simply that — a transaction in foreign exchange, foreign
exchange being "the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another." When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they were earning in their
assigned nation’s currency and were ALSO spending in said currency. There was no
conversion, therefore, from one currency to another.
3. ID.; ID.; EXCHANGE RATE TO DETERMINE THE PESO EQUIVALENT OF FOREIGN
EARNINGS; RULE. — What exchange rate should be used to determine the peso
equivalent of the foreign earnings of petitioners for income tax purposes. Petitioners
claim that since the dollar earnings do not fall within the classification of foreign
exchange transactions, there occurred no actual inward remittances, and, therefore,
they are not included in the coverage of Central Bank Circular No. 289 which provides
for the specific instances when the par value of the peso shall not be the conversion
rate used. They conclude that their earnings should be converted for income tax
purposes using the par value of the Philippine peso. Respondent Commissioner argues
that CB Circular No. 289 speaks of receipts for export products, receipts of sale of
foreign exchange or foreign borrowings and investments but not income tax. He also
claims that he had to use the prevailing free market rate of exchange in these cases
because of the need to ascertain the true and correct amount of income in Philippine
peso of dollar earners for Philippine income tax purposes. A careful reading of said CB
Circular No. 289 shows that the subject matters involved therein are export products,
invisibles, receipts of foreign exchange, foreign exchange payments, new foreign
borrowing and investments — nothing by way of income tax payments. Thus,
petitioners are in error by concluding that since C.B. Circular No. 289 does not apply to
them, the par value of the peso should be the guiding rate used for income tax
purposes. The dollar earnings of petitioners are the fruits of their labors in the foreign
subsidiaries of Procter & Gamble. It was a definite amount of money which came to
them within a specified period of time of two years as payment for their services.
4. ID.; SECRETARY OF FINANCE; EMPOWERED TO PROMULGATE RULES AND
REGULATIONS FOR THE PROPER ENFORCEMENT OF THE NATIONAL INTERNAL
REVENUE CODE. — And in the implementation for the proper enforcement of the
National Internal Revenue Code, Section 338 thereof empowers the Secretary of
Finance to "promulgate all needful rules and regulations" to effectively enforce its
provisions. Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 and
41-71 were issued to prescribe a uniform rate of exchange from US dollars to Philippine
pesos for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971,
respectively. Said revenue circulars were a valid exercise of the authority given to the
Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And
these are presumed to be a valid interpretation of said code until revoked by the
Secretary of Finance himself.
DECISION
NOCON, J.:
Petitioners pray that this Court reverse the Decision of the public respondent Court of
Tax Appeals, promulgated September 26, 1977 1 denying petitioners’ claim for tax
refunds, and order the Commissioner of Internal Revenue to refund to them their
income taxes which may claim to have been erroneously or illegally paid or collected.
As summarized by the Solicitor General, the facts of the cases are as follows: chanrobles.com.ph : virtual law library
Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building Ayala Avenue, Makati,
Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based
in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned,
for certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines,
during which petitioners were paid U.S. dollars as compensation for services in their
foreign assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and
2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511 filed their
income tax returns for the year 1970, they computed the tax due by applying the
dollar-to-peso conversion on the basis of the floating rate ordained under B.I.R. Ruling
No. 70-027 dated May 14, 1970, as follows: chanrob1es virtual 1aw library
From January 1 to February 20, 1970 at the conversion rate of P3.90 to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of P6.25 to U S. $1.00
Petitioners in C.T.A Case No. 2594 likewise used the above conversion rate in
converting their dollar income for 1971 to Philippine peso. However, on February 8,
1973 and October 8, 1973, petitioners in said cases filed with the office of the
respondent Commissioner, amended income tax returns for the above-mentioned
years, this time using the par value of the peso as prescribed in Section 48 of Republic
Act No. 265 in relation to Section 6 of Commonwealth Act No. 699 as the basis for
converting their respective dollar income into Philippine pesos for purposes of
computing and paying the corresponding income tax due from them. The aforesaid
computation as shown in the amended income tax returns resulted in the alleged
overpayments, refund and/or tax credit. Accordingly, claims for refund of said over-
payments were filed with respondent Commissioner. Without awaiting the resolution of
the Commissioner of Internal Revenue on their claims, petitioners filed their petitions
for review in the above-mentioned cases.
Respondent Commissioner filed his Answer to petitioners’ petition for review in C.T.A.
Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on
August 7, 1974.
Upon joint motion of the parties on the ground that these two cases involve common
question of law and facts, the respondent Court of Tax Appeals heard the cases jointly.
In its decision dated September 26, 1977, the respondent Court of Tax Appeals held
that the proper conversion rate for the purpose of reporting and paying the Philippine
income tax on the dollar earnings of petitioners are the rates prescribed under Revenue
Memorandum Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund and/or
tax credit of petitioners in the above-entitled cases was denied and the petitions for
review dismissed, with costs against petitioners. Hence, this petition for review
on certiorari. 2
Petitioners claim that public respondent Court of Tax Appeals erred in holding: chanrobles.com:cralaw:red
1. That petitioners’ dollar earnings are receipts derived from foreign exchange
transactions.
2. That the proper rate of conversion of petitioners’ dollar earnings for tax purposes is
the prevailing free market rate of exchange and not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners’ dollar earnings for
tax purposes into Philippine pesos is "unrealistic" and, therefore, the prevailing free
market rate should be the rate used.
Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners’
claims as follows:chanrob1es virtual 1aw library
At the outset, it is submitted that the subject matter of these two cases are Philippine
income tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No.
2594) and, therefore, should be governed by the provisions of the National Internal
Revenue Code and its implementing rules and regulations, and not by the provisions of
Central Bank Circular No. 42 dated May 21, 1953, as contended by petitioners.
Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable
year from all sources by a citizen of the Philippines, whether residing here or abroad.
Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
employment. Thus, in their income tax returns for the period involved herein, they gave
their legal residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal
(Annexes ‘A’ to ‘A-8’, and Annexes ‘C’ to ‘C-8’, Petition for Review, CTA Cases Nos.
2511 and 2594).
Petitioners being subject to Philippine income tax, their dollar earnings should be
converted into Philippine pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated
February 11, 1971 for 1970 income and Revenue Memorandum Circular No. 41-71
dated December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-O27
dated May 4, 1970, to wit: chanrob1es virtual 1aw library
‘For internal revenue tax purposes, the free market rate of conversion (Revenue
Circulars Nos. 7-71 and 41-71) should be applied in order to determine the true and
correct value in Philippine pesos of the income of petitioners.’ 3
After a careful examination of the records, the laws involved and the jurisprudence on
the matter, We are inclined to agree with respondents Court of Tax Appeals and
Commissioner of Internal Revenue and thus vote to deny the petition.
This is basically an income tax case. For the proper resolution of these cases income
may be defined as an amount of money coming to a person or corporation within a
specified time, whether as payment for services, interest or profit from investment.
Unless otherwise specified, it means cash or its equivalent. 4 Income can also be
thought of as a flow of the fruits of one’s labor. 5
Petitioners are correct as to their claim that their dollar earnings are not receipts
derived from foreign exchange transactions. For a foreign exchange transaction is
simply that — a transaction in foreign exchange, foreign exchange being "the
conversion of an amount of money or currency of one country into an equivalent
amount of money or currency of another." 6 When petitioners were assigned to the
foreign subsidiaries of Procter & Gamble, they were earning in their assigned nation’s
currency and were ALSO spending in said currency. There was no conversion, therefore,
from one currency to another. chanrobles lawlibrary : rednad
Public respondent Court of Tax Appeals did err when it concluded that the dollar
incomes of petitioner fell under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7
The issue now is, what exchange rate should be used to determine the peso equivalent
of the foreign earnings of petitioners for income tax purposes. Petitioners claim that
since the dollar earnings do not fall within the classification of foreign exchange
transactions, there occurred no actual inward remittances, and, therefore, they are not
included in the coverage of Central Bank Circular No. 289 which provides for the
specific instances when the par value of the peso shall not be the conversion rate used.
They conclude that their earnings should be converted for income tax purposes using
the par value of the Philippine peso.
Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export
products, receipts of sale of foreign exchange or foreign borrowings and investments
but not income tax. He also claims that he had to use the prevailing free market rate of
exchange in these cases because of the need to ascertain the true and correct amount
of income in Philippine peso of dollar earners for Philippine income tax purposes.
A careful reading of said CB Circular No. 289 8 8a shows that the subject matters
involved therein are export products, invisibles, receipts of foreign exchange, foreign
exchange payments, new foreign borrowing and investments — nothing by way of
income tax payments. Thus, petitioners are in error by concluding that since C.B.
Circular No. 289 does not apply to them, the par value of the peso should be the
guiding rate used for income tax purposes.
The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries
of Procter & Gamble. It was a definite amount of money which came to them within a
specified period of time of two years as payment for their services.
Section 21 of the National Internal Revenue Code, amended up to August 4, 1969,
states as follows:chanrob1es virtual 1aw library
Sec. 21. Rates of tax on citizens or residents. — A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every
individual, whether a citizen of the Philippines residing therein or abroad or an alien
residing in the Philippines, determined in accordance with the following schedule: chanrob1es virtual 1aw library
x x x
And in the implementation for the proper enforcement of the National Internal Revenue
Code, Section 338 thereof empowers the Secretary of Finance to "promulgate all
needful rules and regulations" to effectively enforce its provisions. 9
Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11
were issued to prescribe a uniform rate of exchange from US dollars to Philippine pesos
for INTERNAL REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Said
revenue circulars were a valid exercise of the authority given to the Secretary of
Finance by the Legislature which enacted the Internal Revenue Code. And these are
presumed to be a valid interpretation of said code until revoked by the Secretary of
Finance himself. 12
Petitioners argue that since there were no remittances and acceptances of their salaries
and wages in US dollars into the Philippines, they are exempt from the coverage of
such circulars. Petitioners forget that they are citizens of the Philippines, and their
income, within or without, and in these cases wholly without, are subject to income tax.
Sec. 21, NIRC, as amended, does not brook any exemption.
Since petitioners have already paid their 1970 and 1971 income taxes under the
uniform rate of exchange prescribed under the aforestated Revenue Memorandum
Circulars, there is no reason for respondent Commissioner to refund any taxes to
petitioner as said Revenue Memorandum Circulars, being of long standing and not
contrary to law, are valid. 13
Although it has become a worn-out cliche, the fact still remains that "taxes are the
lifeblood of the government" and one of the duties of a Filipino citizen is to pay his
income tax. chanrobles.com.ph : virtual law library
WHEREFORE" the petitions are denied for lack of merit. The dismissal by the
respondent Court of Tax Appeals of petitioners’ claims for tax refunds for the income
tax period for 1970 and 1971 is AFFIRMED. Costs against petitioners.
SO ORDERED.
Narvasa, C.J., Padilla and Regalado, JJ., concur.
Melo, J., took no part.
Endnotes:
