Commissioner of Internal Revenue vs. Marubeni Corporation

The contractor’s tax, being an excise tax on the privilege of engaging in business, may only be imposed on acts, privileges, or business performed within the territorial jurisdiction of the taxing authority; gross receipts attributable to the “Offshore Portion” of a turn‑key contract — comprising design, engineering, and manufacture entirely completed abroad — are not subject to the Philippine contractor’s tax. Additionally, a tax amnesty is strictly construed against the taxpayer, the exception for pending cases in Section 4(b) of E.O. No. 41 is measured from the effectivity date of the amnesty order, and an amendatory amnesty covering new taxes operates prospectively, with the reference date for pending cases being the effectivity of the amendatory issuance.

Marubeni Corporation, a Japanese foreign corporation duly licensed to do business in the Philippines, entered into two turn‑key contracts with Philippine government corporations in 1982: one with the National Development Company (NDC) for the construction of a wharf/port complex, and another with the Philippine Phosphate Fertilizer Corporation (Philphos) for an ammonia storage complex, both at the Leyte Industrial Development Estate. Each contract split the scope of work and price into a “Foreign Offshore Portion” (denominated in Japanese yen, Portion I) covering materials and equipment to be designed, engineered, and manufactured abroad, and a “Philippine Onshore Portion” (Portion II and the Philippine Pesos Portion) covering construction, installation, and other works in the Philippines. In 1985‑1986, the Bureau of Internal Revenue examined Marubeni’s books and assessed deficiency income tax, branch profit remittance tax, and contractor’s tax on the entire gross receipts from both contracts, taking the position that the integrated turn‑key agreements made all income Philippine‑source. While these assessments were being contested, the government issued a series of tax amnesty executive orders covering 1981‑1985 taxes, prompting Marubeni to seek the shelter of the amnesty.

Parties and Nature of Business: Respondent Marubeni Corporation is a foreign corporation organized under Japanese law, licensed to engage in general import‑export trading, financing, and construction in the Philippines, where it maintains a branch office in Manila. Petitioner is the Commissioner of Internal Revenue.

The Assessed Taxes: Following an examination of Marubeni’s branch office books for the fiscal year ending March 1985, the revenue examiners found undeclared income from two construction projects completed in 1984. The Commissioner issued a final assessment letter dated August 15, 1986, covering deficiency income tax, branch profit remittance tax, contractor’s tax, and commercial broker’s tax, together with surcharges and interest. The total deficiency income tax was pegged at P290,583,972.40, the deficiency branch profit remittance tax at P83,036,965.16, and the deficiency contractor’s tax at P85,563,625.46. The surcharges were imposed for failure to report the taxable revenues and for late payment.

The Two Turn‑Key Contracts: The assessed income derived from two turn‑key contracts entered into in 1982: - NDC Contract: For the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate. The contract price was Y12,790,389,000.00 and P44,327,940.00, subdivided into Japanese Yen Portion I, Japanese Yen Portion II, and Philippine Pesos Portion. The work covered design, engineering, supply, construction, erection, installation, testing, and commissioning. - Philphos Contract: For the construction of an ammonia storage complex at the same industrial estate. The contract price was Y3,255,751,000.00 and P17,406,000.00, similarly subdivided.

In both contracts, Japanese Yen Portion I corresponded to the Foreign Offshore Portion; Japanese Yen Portion II and the Philippine Pesos Portion corresponded to the Philippine Onshore Portion.

Execution of the Offshore Portion: Annex III to each contract listed the materials and equipment under Japanese Yen Portion I. Mr. Takeshi Hojo, Marubeni’s former General Manager who supervised the projects, testified that all machines and equipment listed under that portion were completely designed, engineered, fabricated, and manufactured in Japan by Japanese sub‑contractors (principally Kawasaki Steel Corporation). For the NDC project, two sets of ship unloaders/loaders were wholly manufactured in Japan, rolled onto a barge, transported to Isabel, Leyte, rolled off, and merely bolted onto the pier. Tugboats and line boats sailed to the site under their own power; mobile equipment (tractors, cranes, trailers, forklifts) arrived self‑propelled and ready for use. Steel sheets, pipes, channels, beams, navigational, and electrical equipment were likewise fabricated in Japan. For the Philphos project, ammonia storage tank steel plates were cut and shaped in Japan, then shipped and assembled on site; refrigeration units were fully assembled in Japan and simply installed in Leyte.

All materials and equipment were inspected and tested in Japan before shipment. Payments to Japanese sub‑contractors were made in Japan, and Marubeni itself received payment from NDC and Philphos in Japan through letters of credit established with the Bank of Tokyo and funded by the Overseas Economic Cooperation Fund (OECF) or supplier’s credit. Respondent had already declared and paid Philippine taxes on the income from the Onshore Portion of both projects.

Tax Amnesty Availment: E.O. No. 41 declared a one‑time amnesty for unpaid income taxes for 1981‑1985 and took effect on August 22, 1986. It required filing a sworn net worth statement and paying 10% of the net worth increase from December 31, 1980 to December 31, 1985. Marubeni filed its amnesty return on October 30, 1986 (received by the BIR on November 3, 1986) and paid P2,891,273.00. E.O. No. 64, which took effect on November 17, 1986, expanded the coverage to estate and donor’s taxes and business taxes (under which the contractor’s tax falls) and allowed taxpayers who had already filed under E.O. No. 41 to avail of the extended immunities by filing an amended return and paying an additional 5% on the increase in net worth. Marubeni filed its supplemental return on December 15, 1986, paying an extra P1,445,637.00.

• Amnesty Disqualification: Petitioner maintained that Marubeni fell under the exception in Section 4(b) of E.O. No. 41 because CTA Case No. 4109 had already been filed and was pending before the Court of Tax Appeals when Marubeni filed its income tax amnesty return on October 30, 1986. Petitioner argued that the disqualification applied regardless of the date the amnesty order took effect.

• Contractor’s Tax on Entire Receipts: Petitioner contended that the two contracts were indivisible turn‑key agreements calling for both supply of materials and services, and that the situs of the projects being in the Philippines rendered the entire gross receipts — including those from the Offshore Portion — income from Philippine sources. It relied on Commissioner of Internal Revenue v. Engineering Equipment & Supply Co. to assert that the total gross receipts covering both labor and materials should be subjected to contractor’s tax.

• Timing of Amnesty Disqualification: Respondent argued that Section 4(b) disqualifies only those with income tax cases filed “as of the effectivity hereof,” which referred to the effectivity of E.O. No. 41 on August 22, 1986. Since its petition was filed on September 26, 1986, it did not fall within the exception. Respondent further contended that the phrase “income tax cases” and the word “hereof” in Section 4(b), even when carried over to E.O. No. 64, continued to refer exclusively to E.O. No. 41, so that its pending CTA case did not bar it from the business tax amnesty.

• Territorial Limitation of Contractor’s Tax: Respondent maintained that, assuming the amnesty under E.O. No. 64 did not apply, it was still not liable for the deficiency contractor’s tax on the Offshore Portion because all materials, equipment, design, and engineering for that portion were manufactured and completed in Japan and thus not subject to Philippine taxes. It claimed that it had already declared and paid taxes on the Onshore Portion income.

• Income Tax Amnesty under E.O. No. 41: Whether Marubeni was disqualified from the income tax amnesty on the ground that CTA Case No. 4109 was already pending when it filed its amnesty return.

• Branch Profit Remittance Tax Amnesty: Whether the branch profit remittance tax assessment was likewise covered by the valid income tax amnesty.

• Contractor’s Tax Amnesty under E.O. No. 64: Whether Marubeni was entitled to the business tax amnesty under E.O. No. 64 for the deficiency contractor’s tax, given the pendency of CTA Case No. 4109 when that order took effect.

• Situs of the Contractor’s Tax on the Offshore Portion: Whether the gross receipts from the Offshore Portion of the two turn‑key contracts — for materials designed, engineered, and manufactured entirely in Japan — were subject to the Philippine contractor’s tax.

• Income Tax Amnesty under E.O. No. 41: The disqualification in Section 4(b) applies to taxpayers with income tax cases already filed “as of the effectivity hereof,” meaning the date E.O. No. 41 took effect — August 22, 1986. CTA Case No. 4109 was filed on September 26, 1986, after that date. Consequently, Marubeni did not fall within the exception and its availment of the income tax amnesty was valid. The date the taxpayer files the amnesty return is immaterial for the purpose of the exception.

• Branch Profit Remittance Tax Amnesty: Branch profit remittance tax is imposed under Title II (Income Tax) of the National Internal Revenue Code and is a tax on income. It is therefore covered by the same amnesty and the same timing analysis applies; the deficiency branch profit remittance tax assessment was likewise validly cancelled.

• Contractor’s Tax Amnesty under E.O. No. 64: E.O. No. 64 is a substantive amendment that expanded the amnesty to business taxes and did not operate retroactively. It reenacted the exceptions in E.O. No. 41 through its Section 8, keeping all provisions not inconsistent with it. When read prospectively, the word “hereof” in Section 4(b) must refer to E.O. No. 64 itself, and the term “income tax cases” must be construed, strictly against the taxpayer, to include cases involving the newly covered taxes (business taxes). Since E.O. No. 64 took effect on November 17, 1986, and CTA Case No. 4109 had already been filed and was pending on that date, Marubeni was disqualified from the business tax amnesty. The vagueness created by the amendment was resolved in favor of the taxing authority.

• Situs of the Contractor’s Tax on the Offshore Portion: The contractor’s tax under Section 205 of the NIRC is an excise tax on the privilege of engaging in business, leviable only on acts, privileges, or business performed within the taxing jurisdiction. The design, engineering, fabrication, and manufacture of the materials and equipment under Japanese Yen Portion I were all performed in Japan by Japanese entities, tested and inspected in Japan, and paid for in Japan. These services were rendered wholly outside Philippine territory and are therefore not subject to the Philippine contractor’s tax. The finished products were merely shipped to and installed in the Philippines. Commissioner v. Engineering Equipment & Supply Co. is inapposite because that case involved only domestic services with no foreign element. The deficiency contractor’s tax assessment on the Offshore Portion could not be collected even absent a valid amnesty.

• Strict Construction of Tax Amnesty — A tax amnesty, like a tax exemption, is never favored nor presumed in law; it must be strictly construed against the taxpayer and liberally in favor of the taxing authority. Any doubt as to the intent of the legislature must be resolved in favor of the State. He who claims the amnesty must justify his claim by the clearest grant of organic or state law; it cannot rest on vague implication.

• Prospective Operation of Amendatory Acts — An amendatory act operates prospectively unless retroactive effect is expressly provided or necessarily implied and no vested rights or contractual obligations are impaired. Where a statute amending a tax law is silent on retroactivity, the amendment will not be given retroactive effect so as to subject to tax past transactions not covered by the original act. Every doubt is resolved against retroactivity.

• Situs of the Contractor’s Tax as an Excise Tax — The contractor’s tax is an excise tax on the privilege of selling services or labor, not a tax on products. It can be levied only when the acts, privileges, or business are performed within the territorial jurisdiction of the taxing authority. Services of design, engineering, and manufacture completed abroad, even if the resulting goods are later shipped and installed in the Philippines under a turn‑key contract, are not subject to the Philippine contractor’s tax. Only the portion of gross receipts attributable to services performed within the Philippines may be taxed.

• Interpretation of the Pending Case Exception in E.O. Nos. 41 and 64 — Section 4(b) of E.O. No. 41 disqualifies taxpayers with income tax cases already filed “as of the effectivity hereof,” meaning as of August 22, 1986, not as of the date the taxpayer filed the amnesty return. Under E.O. No. 64, the same exception clause, when applied to business taxes, takes “hereof” to refer to the effectivity date of the later order (November 17, 1986), and the phrase “income tax cases” is read to include cases involving the newly covered taxes, following the strict‑construction rule.

• “A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is inherent in government. The State cannot strip itself of the most essential power of taxation by doubtful words. He who claims an exemption (or an amnesty) from the common burden must justify his claim by the clearest grant of organic or state law. It cannot be allowed to exist upon a vague implication. If a doubt arises as to the intent of the legislature, that doubt must be resolved in favor of the state.”

• “A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.”

• “All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor’s tax.”

• Commissioner of Internal Revenue v. Engineering Equipment & Supply Co., 64 SCRA 590 (1975) — Distinguished. That case involved no foreign element; all services were performed within the local taxing jurisdiction. It did not control the present dispute where the taxpayer demonstrated that design, engineering, and manufacture occurred entirely abroad.

• Republic v. Intermediate Appellate Court, 196 SCRA 335 (1991) — Cited for the definition of tax amnesty as a general pardon or intentional overlooking by the State of its authority to impose penalties for tax evasion, partaking of an absolute forgiveness and a chance to start with a clean slate.

• Asiatic Petroleum v. Llanes, 49 Phil. 466 (1926) — Applied for the rule that tax exemptions and amnesties are strictly construed against the taxpayer and that doubts are resolved in favor of the government.

• Collector of Internal Revenue v. La Tondena, Inc., 115 Phil. 841 (1962) — Relied upon for the principle that an amendatory tax statute silent on retroactivity does not operate retroactively to subject past transactions to tax.

• Section 4(b), Executive Order No. 41 — Excepted from the income tax amnesty “those with income tax cases already filed in Court as of the effectivity hereof.” The Court construed “effectivity hereof” as the date E.O. No. 41 became effective (August 22, 1986), not the date the taxpayer filed its amnesty return.

• Section 8, Executive Order No. 64 — Provided that provisions of E.O. Nos. 41 and 54 not inconsistent with the amendatory order remained in full force and effect. This reenacted Section 4(b) for purposes of the expanded amnesty, but the Court read the word “hereof” prospectively to refer to E.O. No. 64’s effectivity date (November 17, 1986) when applied to business taxes.

• Section 24(b)(2)(ii), Title II, National Internal Revenue Code (1984 and 1986) — Imposed the branch profit remittance tax. The Court classified it as an income tax under Title II, making it subject to the same amnesty analysis as the income tax.

• Section 205, Chapter II, Title V, National Internal Revenue Code (1984) — Imposed the contractor’s tax at four percent of gross receipts on independent contractors engaged in the sale of services for a fee. The Court characterized it as an excise tax on the privilege of doing business, leviable only on acts performed within Philippine territory.

Chief Justice Davide, Jr. (Chairman), and Justices Kapunan, Pardo, and Ynares‑Santiago concurred.

N/A — The decision was unanimous.