CIR vs. PHILIPPINE AIRLINES, INC. - Minimum Corporate Income Tax

Category: Income Taxation

FACTS:

PHILIPPINE AIRLINES, INC. had zero taxable income for 2000 but would have been liable for Minimum Corporate Income Tax based on its gross income. However, PHILIPPINE AIRLINES, INC. did not pay the Minimum Corporate Income Tax using as basis its franchise which exempts it from “all other taxes” upon payment of whichever is lower of either (a) the basic corporate income tax based on the net taxable income or (b) a franchise tax of 2%.

ISSUE:

Is PAL liable for Minimum Corporate Income Tax?

HELD:

NO. PHILIPPINE AIRLINES, INC.’s franchise clearly refers to "basic corporate income tax" which refers to the general rate of 35% (now 30%). In addition, there is an apparent distinction under the Tax Code between taxable income, which is the basis for basic corporate income tax under Sec. 27 (A) and gross income, which is the basis for the Minimum Corporate Income Tax under Section 27 (E). The two terms have their respective technical meanings and cannot be used interchangeably. Not being covered by the Charter which makes PAL liable only for basic corporate income tax, then Minimum Corporate Income Tax is included in "all other taxes" from which PHILIPPINE AIRLINES, INC. is exempted.

The CIR also can not point to the “Substitution Theory” which states that Respondent may not invoke the “in lieu of all other taxes” provision if it did not pay anything at all as basic corporate income tax or franchise tax. The Court ruled that it is not the fact tax payment that exempts Respondent but the exercise of its option. The Court even pointed out the fallacy of the argument in that a measly sum of one peso would suffice to exempt PAL from other taxes while a zero liability would not and said that there is really no substantial distinction between a zero tax and a one-peso tax liability. Lastly, the Revenue Memorandum Circular stating the applicability of the MCIT to PAL does more than just clarify a previous regulation and goes beyond mere internal administration and thus cannot be given effect without previous notice or publication to those who will be affected thereby.

Minimum Corporate Income Tax