July 7, 1989
Ponente: Cruz, J.
SUMMARY:
ESSO was claiming that the margin fees it had paid to the Central Bank for its profit remittance to its head office in NY constitute necessary and ordinary business expense. As such, the total margin fees it had paid should be made a valid deduction from its gross income and ultimately be exempt from income tax, and whatever tax it had paid for said fees be refunded. The SC held otherwise, ruling that the imposition of margin fees was in exercise of the State’s police power and not power of taxation. The SC also held that ESSO failed to discharge its burden of proving that the payment of margin fees constituted a necessary and ordinary business expense.
FACTS:
ESSO Standard Eastern (ESSO) filed an appeal before the SC seeking to overturn the Court of Tax Appeals' (CTA) ruling on two cases, namely: CTA Case No. 1251 and CTA Case No. 1558.
CTA Case No. 1251:
o ESSO deducted from its gross income for 1959, as part of its ordinary and necessary business expenses, the amount it had spent for drilling and exploration of its petroleum concessions. This claim was disallowed by the Commission on Internal Revenue (CIR), saying said expense can only be
written off as a loss if a dry hole should result therefrom.
o Later on, ESSO sought yet again for a refund for the same expense by reason of its abandonment as dry holes of several of its oil wells. It also claimed as ordinary and necessary expenses the amount of P340,822.04, which it had paid to the Central Bank as margin fees resulting from its profit remittance to its NY office.
o The CIR disallowed said deduction, but granted ESSO a tax credit of P221,033.
CTA Case No. 1558:
o The CIR assessed ESSO a deficiency income tax of P434,232.92 (deficiency of P367,994 plus 18% interest of P66,238.93) for the year 1960 as a result of the disallowance of the margin fees paid by ESSO to the Central Bank on its profit remittances to its NY head office.
o ESSO deducted its tax credit of P221,033 from the sum owed, leaving a balance of P213,201.92, which ESSO paid under protest.
o ESSO argued that the tax credit should have been deducted from the deficiency of P367,994, which should leave a balance of P146,961. ESSO argued the 18% interest was erroneously charged to the entire amount when it should have been charged only against the balance of P146,961. The CIR denied this claim.
o Nonetheless, the CIR granted ESSO's claim of P39,787.94 as overpayment on the interest on its deficiency income tax.
In total, ESSO was claiming a refund of P102,246.00 for 1959 and P434,234.92 for 1960, representing the margin fees it had paid the Central Bank for its profit remittance to its NY head office, as well as refund for payment of excess interest amounting to P39,787.94.
RULING:
CTA rulings affirmed.
Whether the imposition of margin fees payable to the Central Bank is a police measure or a revenue measure. – POLICE MEASURE.
Whether margin fees are a form of tax. – NO.
ESSO: Margin fees are taxes; the background and legislative history of the Margin Fee Law would show that it was a form of excise tax on foreign exchange. Since the margin levy is a tax on the purchase of foreign exchange, it should therefore not form part of the exchange rate.
CIR: A margin fee is not a tax but an exaction designed to curb the excessive demands upon our international reserve.
SC: Margin fee is not a tax but a form of exchange control or restriction designed to discourage imports and encourage exports, and ultimately curtail any excessive demand upon the international reserves; in order to stabilize the currency. The margin fee was imposed by the State in the exercise of its police power and not the power of taxation.
So while a tax is levied to provide revenue for government operations, the proceeds of the margin fee, on the other hand, are applied to strengthen our country's international reserves.
Granted that the margin fee is not a tax, can it be considered an ordinary and necessary expense that would make it exempt from income tax? – NO.
ESSO: Margin fees should be considered necessary and ordinary business expenses and therefore still deductible from its gross income. The fees were paid for the remittance by ESSO as part of the profits to the head office in the US. Such remittance was an expenditure necessary and proper for the conduct of its corporate affairs. Pursuant to Sec. 30(a)(1)* of the NIRC, "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business" is a valid deduction from gross income in computing net income
CIR: Margin fees are not a necessary and ordinary business expense, and cannot be validly deducted from gross income in the computation of taxable net income.
Such a deduction is not allowed.
SC: When a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. The law allowing expenses as deduction from gross income for purposes of the income tax is Section 30(a)(1) of the NIRC.
o To be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be ordinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying trade or business. In addition, not only must the taxpayer meet the business
test, he must substantially prove by evidence or records the deductions claimed under the law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its deduction.
o As applied to ESSO: Were the margin fees paid by petitioner on its profit remittance to its Head Office in NY appropriate and helpful in the taxpayer's business in the Philippines? Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner's branch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profit or of minimizing
a loss in the Philippines? Obviously not.
o ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its own trade or business. It merely presumed that all corporate expenses are necessary and appropriate in the absence of a showing that they are illegal or ultra vires. This is error.
o Having assumed an expense properly attributable to its head office, ESSO cannot now claim this as an ordinary and necessary expense paid or incurred in carrying on its own trade or business.
DOCTRINE:
Claims for deductions are a matter of legislative grace and do not turn on mere equitable considerations. The taxpayer in every instance has the burden of justifying the allowance of any deduction claimed.
