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. …

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 they claim to have
been erroneously or illegally paid or collected.

As summarized by the Solicitor General, the facts of the cases
are as follows:

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:

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:

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:

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. 70-027 dated May 4, 1970, to wit:

‘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.

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]
shows that the subject matters involved therein are export products,
invisibles, receipts of foreign exchange, foreign exchange payments, new
foreign borrowing 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:

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:

xxx                                        xxx                                          xxx

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 cliché, 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.

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., (Chairman), Padilla, and Regalado, JJ., concur.

Melo, J., no part.

^[1]
Judge Amante Filler, ponente, concurred in
by Judge Constantino C. Roaquin.

^[2]
Rollo, pp. 98-100.

^[3]
Id, pp. 100-101.

^[4]
Fisher vs. Trinidad, 43 Phil. 973.

^[5]
Madrigal vs. Rafferty, 38 Phil. 414.

^[6]
Janda vs. Lepanto Consolidated Mining Co., 99 Phil. 197, 204.

^[7]
“Section 2.- The following are foreign exchange transactions and as required by
Central Bank Circular No. 20 are subject to prior licensing by or on behalf of
the Central Bank:

“xxx                  xxx                   xxx.

“(f) Any transaction by which a
resident performs any service for a non-resident other than tourists or
temporary visitors. If the proper
license is obtained, the former shall demand and obtain payment for such
service within ninety days in U.S. dollars or in any other foreign currency
acceptable to the Central Bank;

“(g) Any transaction by which
a resident performs for another resident service rendered in a business or
profession of the latter located outside the Philippines. If proper license is obtained, the former
shall demand and obtain payment of the fair value of such service within ninety
days from the date of the performance of the aforesaid service, in U.S. dollar
or in any other foreign currency acceptable to the Central Bank;

“xxx`     xxx      xxx.

“(m) Any other transactions
involving international financial implications.”

^[8]
“Pursuant to the provisions of Republic Act No. 265, the Monetary Board, by
unanimous vote and with the approval of the President of the Philippines, and
in accordance with existing executive and international agreement to which the
Republic of the Philippines is a party, hereby promulgates the following
regulations on foreign exchange transactions.

“Section 1. Eighty (80) per
cent of all receipts from the leading export products, i.e., exports whose
annual average value exceeded $75 million in the base period 1966-68, shall be
surrendered to the Central Bank at the par value. The par value shall not apply to the remaining twenty (20) per cent, which shall be held to
authorized agent banks at the prevailing free market rate. For purposes of this section, the following
are considered as the leading export products: logs, centrifugal sugar, copra and copper (ore or concentrates).

“Section 2. The par value likewise shall not apply to all receipts
from all other export products as well as from invisibles, which shall be sold
to authorized agents of the Central Bank of the Philippines at the prevailing
free market rate.

“Section 3. All receipts of
foreign exchange by resident persons, firms, companies or corporations shall
represent not less than the full value of the transactions involved. All such receipts shall be sold to
authorized agents of the Central Bank of the Philippines by the recipients
within three business days following the receipt of such foreign exchange and
must be received in currencies prescribed to form part of the international
reserve. Resident persons, firms,
companies or corporations shall not delay taking ownership of their foreign
exchange earnings except when such
delay is customary.

“Section 4. The par value likewise shall not apply to all foreign
exchange payments, which shall be negotiated at the prevailing free market
rate, except for outstanding foreign obligations and letters of credit covered
by forward exchange contracts. Only authorized agent banks may sell foreign
exchange for imports and invisible disbursements.

“Section 5. Authorized
agent banks may sell foreign exchange for imports except those falling under
the UC, SUC and NEC categories, without prior specific approval of the Central
Bank. Such imports may be financed by
letters of credit, or under D/A and open account arrangements subject to rules
to be promulgated by the Monetary Board. Monthly ceiling on foreign currency letters of credit and special time
deposit requirements (STD) are hereby lifted. Existing STDS shall be released as they mature.

“Section 6. The sale of
foreign exchange for current invisible payments by authorized agent banks shall
be allowed, without prior specific approval of the Central Bank, provided that
amounts of more than $100.00 are substantiated by documentary evidence
attesting to the veracity of the purpose and the amount applied for, and
provided further that travel, remittance for educational expenses and student
maintenance, maintenance of dependents abroad of Philippine residents,
remittance of profits, dividends, and interests, royalties film and other
rentals shall be subject to the regulations to be promulgated by the Monetary
Board.

“Section 7. New foreign borrowing and investments, and transfer of
assets by emigrants shall be subject to regulations to be promulgated by the
Monetary Board.

“Section 8. The free market rate shall not be administratively
fixed but shall be determined through transactions in the foreign exchange
market on a day-to-day basis. The
authorities shall not intervene in the market except to the extent necessary to
compensate for excessive fluctuations but shall not operate against the trend
in the market.

“Section 9. All provisions of existing circulars, memorandum and
regulations of the Central Bank governing transactions in foreign exchange
inconsistent with the provisions hereafter are hereby revoked.

“Section 10. Strict observance of the provisions of this Circular
is hereby enjoined, and any person, firm, company or corporation, whether
residing and/or located in the Philippines or not, who, being bound to the
observance of said provisions, or of such other rules, terms and conditions, or
directives which may be issued by the Central Bank in the implementation of
this ‘Circular, shall fail or refuse to comply with or abide by, or shall
violate the same, shall be subject to the penal sanctions of the Central Bank
Act.

“Section 11. This Circular shall take effect immediately.

FOR THE MONETARY BOARD:

(SGD.) G. S. LICAROS

Governor

February 21, 1970.”

^[9]
Section 338, National Internal Revenue Code (1970), as amended; Philippine
Lawyer’s Association vs. Agrava, 105 Phil. 173.

^[10]
“SUBJECT: Prescribing a uniform rate for U.S. Dollars to Philippine Pesos for Internal
Revenue Tax Purposes.

TO: All Internal
Revenue Officers and others concerned:

For the Purpose of establishing a uniform rate of exchange to U.S.
dollars to Philippine pesos for internal revenue tax purposes for the year
1970, the following schedule of exchange rates are hereby prescribed for
reference and guidelines of all concerned;

Schedule of Exchange Rates

1. In all cases of transactions
involving remittances and acceptances of U.S. dollars occurring during the
period from January 1 to February 20, 1970, the official rate of exchange of
P3.90 to $1.00 shall be used.

2. In the case of transactions
involving remittances or acceptance of U.S. dollars occurring after February
20, 1970 the following rules shall govern:

(a) In the case
of regular or habitual transactions involving remittances and acceptances of
U.S. dollars, such as salaries, royalty payments and the like, the uniform rate
of P6.25 to U.S. $1.00 shall be used; provided however, that in the case of
transactions involving the computation of advance sales or compensating taxes,
the rates used by the Bureau of Customs at the time of the payment of such
taxes shall prevail.

(b) In the case
of an isolated or casual transaction involving remittances or acceptances of
U.S. dollars, such as dividends, occasional sales of property and the like the
exchange rate quoted by the Foreign Exchange Department of the Central bank of
the Philippines prevailing at the time of such remittances or acceptance shall
be used.

Enforcement and
Publicity

All internal revenue officers and
others charged with the enforcement of internal revenue laws are enjoined to
enforce the provisions of this circular accordingly and to give as wide a
publicity as possible.

(Sgd.) MISAEL P. VERA

Commissioner of
Internal Revenue

APPROVED.

(Sgd.) CESAR VIRATA

Secretary of Finance”

^[11]
“SUBJECT: Prescribing a uniform exchange rate for U.S. dollars to
Philippine pesos for internal revenue tax purposes

TO: All Internal Revenue Officers and others concerned:

For the purpose of establishing a
uniform rate of exchange to U.S, dollars or other foreign currencies to
Philippine pesos for internal revenue tax purposes for the year 1971, the
following schedule of exchange rates are hereby prescribed for reference and
guidelines of all concerned:

Schedule of Exchange Rates

In all cases of transactions
involving remittances and acceptances of U.S. dollars and other foreign currencies
occurring during the year 1971, the following rules shall govern:

(a) In the case
of regular or habitual transactions involving remittances or acceptances of US
dollars or other foreign currencies such as salaries, wages, fees or other
renominations for personal services, royalties, rents, interests or other fixed
or determinable annual or periodical income, the uniform rate of P6.25 to U.S.
$1.00 shall be used.

(b) In the case
of transactions involving the computation of advance sales or compensating
taxes, the rate of exchange used by the Bureau of Customs at the time of the
payment of such taxes shall prevail.

(c) In the case
of an isolated or casual transaction involving remittances of acceptances of
U.S. dollars or other foreign currencies such as dividends, interests, capital
gains or other gains from occasional sales of property and the like, the
exchange rate quoted by the Foreign Exchange Department of the Central Bank of
the Philippines prevailing at the time of such remittances or acceptances shall
be used.

(d) Where the
currency involved is other than U.S. dollars, the foreign currency shall first
be converted to U.S. dollars at the prevailing rate of exchange between the two
currencies. The resulting amount shall
then be converted to Philippine pesos in accordance with the above-promulgated
rules.

All internal revenue officers and
others charged with the enforcement of internal revenue laws are enjoined to
enforce the provisions of this circular accordingly and to give it as wide a
publicity as possible.

(SGD.) MISAEL P. VERA

Commissioner of
Internal Revenue

APPROVED:

(SGD.) CESAR VIRATA

Secretary of Finance”

^[12]
Hilado vs. Collector of Internal Revenue, 100 Phil. 288.

^[13]
Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95.