Conwi vs. Court of Tax Appeals

For purposes of Philippine income taxation, the foreign currency earnings of Filipino citizens working abroad constitute taxable income under Section 21 of the National Internal Revenue Code, and the proper exchange rate for converting such foreign currency earnings to Philippine pesos is the prevailing free market rate prescribed by Revenue Memorandum Circulars issued by the Secretary of Finance pursuant to Section 338 of the NIRC, rather than the par value of the peso under Central Bank regulations.

The cases arose during the floating exchange rate regime following the devaluation of the Philippine peso in February 1970. The dispute centered on whether Filipino citizens temporarily working abroad for foreign subsidiaries of a domestic corporation should compute their Philippine income tax liability using the official par value of the peso (approximately P3.90 to $1.00) or the higher free market rate (P6.25 to $1.00), which would result in a larger peso equivalent and higher tax liability. The controversy required the Court to reconcile the application of Central Bank foreign exchange regulations with revenue regulations issued under the National Internal Revenue Code, and to define the nature of "income" for tax purposes.

• Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine Manufacturing Corporation, a subsidiary of a foreign corporation based in Cincinnati, Ohio, U.S.A., with offices in Makati, Rizal.
• During the years 1970 and 1971, petitioners were assigned for certain periods to other subsidiaries of Procter & Gamble located outside the Philippines.
• While on foreign assignment, petitioners were paid compensation in U.S. dollars for their services rendered to the foreign subsidiaries.
• In their original income tax returns for 1970, petitioners computed the tax due by applying the dollar-to-peso conversion based on B.I.R. Ruling No. 70-027 dated May 14, 1970, using the rate of P3.90 to $1.00 from January 1 to February 20, 1970, and P6.25 to $1.00 from February 21 to December 31, 1970.
• For 1971, petitioners similarly used the P6.25 to $1.00 conversion rate in computing their income tax liability.
• On February 8, 1973, and October 8, 1973, petitioners filed amended income tax returns for 1970 and 1971, respectively, 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 dollar income to Philippine pesos.
• The amended computations using the par value resulted in lower tax liabilities and alleged overpayments, for which petitioners filed claims for refund with the Commissioner of Internal Revenue.
• Without awaiting the Commissioner's resolution on their claims, petitioners filed petitions for review with the Court of Tax Appeals.
• The Court of Tax Appeals rendered a decision on September 26, 1977, denying the claims for refund and dismissing the petitions, with costs against petitioners.

• Petitioners contend that their dollar earnings are not receipts derived from foreign exchange transactions because no actual conversion of currency occurred, as they earned and spent in the same foreign currency while assigned abroad.
• They argue that the proper conversion rate for their dollar earnings is the par value of the peso (P3.90 to $1.00) under Section 48 of Republic Act No. 265, rather than the prevailing free market rate, because Central Bank Circular No. 289—which mandates the use of free market rates for certain transactions—does not apply to income tax computations absent actual inward remittances of foreign exchange.
• They assert that the use of the free market rate is "unrealistic" for income tax purposes, and that the par value provides the correct and realistic basis for computing their tax liability.
• They maintain that since there were no remittances and acceptances of their salaries in U.S. dollars into the Philippines, they are exempt from the coverage of Revenue Memorandum Circulars Nos. 7-71 and 41-71 which regulate such transactions.
• They emphasize that as citizens temporarily residing abroad, their dollar earnings should not be taxed using conversion rates applicable to foreign exchange transactions, and that Section 21 of the NIRC does not brook any exemption for their situation.

• The Commissioner of Internal Revenue argues that the cases involve Philippine income tax for 1970 and 1971, which should be governed by the National Internal Revenue Code and its implementing rules and regulations, not by Central Bank Circular No. 42 or foreign exchange regulations.
• He asserts that petitioners, as citizens of the Philippines temporarily residing abroad, are subject to Philippine income tax on their taxable net income from all sources worldwide under Section 21 of the NIRC.
• He contends that the free market rate of conversion prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71 should be applied to determine the true and correct value in Philippine pesos of petitioners' income for internal revenue tax purposes.
• He argues that Central Bank Circular No. 289 applies only to export products, receipts of foreign exchange, foreign borrowings, and investments, but not to income tax payments, and therefore the par value exception therein is irrelevant.
• He maintains that Revenue Memorandum Circulars Nos. 7-71 and 41-71 were validly issued pursuant to the Secretary of Finance's authority under Section 338 of the NIRC, are presumed valid, and have been consistently applied.
• He refutes the claim that the absence of remittances exempts petitioners from the prescribed rates, emphasizing that the tax is on the income itself, not on the remittance, and that the circulars apply to regular or habitual transactions such as salaries.

• Procedural Issues: N/A
• Substantive Issues: Whether petitioners' dollar earnings constitute taxable income under the National Internal Revenue Code; whether the proper conversion rate for computing income tax liability is the free market rate under Revenue Memorandum Circulars or the par value of the peso under Central Bank regulations; whether Revenue Memorandum Circulars Nos. 7-71 and 41-71 are valid and applicable to petitioners; and whether the absence of actual foreign exchange transactions or remittances into the Philippines exempts petitioners from the prescribed conversion rates.

• Procedural: N/A
• Substantive: The Court held that petitioners' dollar earnings constitute taxable income under Section 21 of the National Internal Revenue Code, defining income 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" and as the "flow of the fruits of one's labor." While the Court agreed with petitioners that their earnings were not derived from foreign exchange transactions—as no currency conversion occurred and foreign exchange strictly means "the conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another"—it ruled that Central Bank Circular No. 289, which provides exceptions to the par value rate, applies only to export products, invisibles, foreign exchange receipts, and similar transactions, and does not cover income tax payments. The Court affirmed that the Secretary of Finance validly exercised his statutory authority under Section 338 of the NIRC by issuing Revenue Memorandum Circulars Nos. 7-71 and 41-71, which prescribed the free market rate of P6.25 to $1.00 for internal revenue tax purposes, and that these circulars are presumed valid until revoked. The Court rejected the argument that the absence of remittances to the Philippines exempted petitioners from these rates, emphasizing that citizens are subject to tax on income from all sources worldwide, and that the refund claims were properly denied.

• Definition of Income — Income is 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," which "unless otherwise specified, means cash or its equivalent," and constitutes the "flow of the fruits of one's labor." The Court applied this definition to hold that petitioners' dollar compensation, as earnings for services rendered abroad, falls within the concept of taxable income regardless of whether the money was remitted to the Philippines or converted to pesos.
• Taxability of Citizens on Worldwide Income — Section 21 of the National Internal Revenue Code imposes tax upon the taxable net income received during each taxable year from all sources by every citizen of the Philippines, whether residing therein or abroad. The Court applied this principle to reject petitioners' claim that the absence of remittances to the Philippines exempted their foreign earnings from the prescribed tax conversion rates.
• Validity of Revenue Regulations — Under Section 338 of the National Internal Revenue Code, the Secretary of Finance is empowered to promulgate all needful rules and regulations for the effective enforcement of the Code. Revenue circulars issued pursuant to this authority are presumed valid and binding until revoked by the Secretary of Finance himself, provided they are not contrary to law.
• Foreign Exchange Transaction Defined — A foreign exchange transaction is strictly the "conversion of an amount of money or currency of one country into an equivalent amount of money or currency of another." The Court applied this definition to determine that petitioners' earning and spending of dollars abroad without conversion to pesos did not constitute a foreign exchange transaction, but ruled that this characterization was irrelevant to the income tax computation which is governed by the NIRC and revenue regulations rather than Central Bank foreign exchange regulations.

• "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 though of as flow of the fruits of one's labor."
• "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.'"
• "Taxes are the lifeblood of the government and one of the duties of a Filipino citizen is to pay his income tax."

• Fisher vs. Trinidad, 43 Phil. 973 — Cited as authority for the definition of income as an amount of money coming to a person or corporation within a specified time.
• Madrigal vs. Rafferty, 38 Phil. 414 — Cited for the concept that income represents the flow of the fruits of one's labor.
• Janda vs. Lepanto Consolidated Mining Co., 99 Phil. 197, 204 — Cited for the technical definition of foreign exchange as the conversion of currency of one country into the equivalent amount of currency of another.
• Hilado vs. Collector of Internal Revenue, 100 Phil. 288 — Cited for the doctrine that revenue circulars are presumed valid until revoked by the Secretary of Finance.
• Commissioner of Internal Revenue vs. Ledesma, 31 SCRA 95 — Cited for the principle that long-standing revenue circulars not contrary to law are valid and binding.
• Philippine Lawyer's Association vs. Agrava, 105 Phil. 173 — Cited in support of the Secretary of Finance's authority under Section 338 of the NIRC to promulgate rules and regulations.

• Section 21, National Internal Revenue Code (as amended up to August 4, 1969) — Provides for the tax upon the taxable net income received during each taxable year from all sources by every citizen of the Philippines, whether residing therein or abroad.
• Section 338, National Internal Revenue Code — Grants the Secretary of Finance the authority to promulgate all needful rules and regulations for the effective enforcement of the NIRC.
• Republic Act No. 265 (Central Bank Act), Section 48 — Cited by petitioners in relation to the par value of the peso as the basis for conversion.
• Commonwealth Act No. 699, Section 6 — Cited in relation to foreign exchange regulations and the par value of the peso.
• Central Bank Circular No. 42 — Regulated foreign exchange transactions subject to prior licensing by the Central Bank; the Court found petitioners' income did not fall under this regulation.
• Central Bank Circular No. 289 (February 21, 1970) — Provided that the par value of the peso shall not apply to specific transactions including export products, invisibles, and foreign exchange receipts; the Court ruled this circular does not cover income tax payments.
• Bureau of Internal Revenue Ruling No. 70-027 (May 14, 1970) — Prescribed floating exchange rates for tax purposes (P3.90 and P6.25 to $1.00) which petitioners initially used in their original tax returns.
• Revenue Memorandum Circular No. 7-71 (February 11, 1971) — Prescribed a uniform free market rate of P6.25 to $1.00 for internal revenue tax purposes for the year 1970.
• Revenue Memorandum Circular No. 41-71 (December 21, 1971) — Prescribed a uniform free market rate of P6.25 to $1.00 for internal revenue tax purposes for the year 1971.