CTA Case No. 2045 (Decision)

I Republic or the Philippines COURT OF TAX APPEAlS . Quezon City EDW� A. BFJJ:J:S, Petitioner, -versus - C.T .A. CASE NO. 2Q$5 COMMISSIONER OF INrERNAL REVENUE, Respo:m.dent. x----- .. ----41tx � DECISION Petitioner has appealedr fram the decision of respond- ent holding :him ll.able for the sum of' PS,504.�.34, as daf'ioiocy income tax for the year 1962, including surcharge, interest � and compromise penalty. This daf'iciency assessment was brollght about b.1 the disallowance of petitioner's c~ for deduct~on of certain taxes paid by him in the United States, as follows: 1. Town and country tax -Village of leke Success, N.Y. - - - - - P.L, ~8.95 _ 2. Real property tax - Village ot I.eke Success, N.Y. - - - - - 906.,30 .3. School tax - Nassau Count~, N.Y. (Second half, 1961-19&) - - - 1 1122.8.3 4. School tax - Nassau County, N.Y. (1962-196.3) - - - .. - - - - - - 2,.429.]2 ~ o t a l - -r 5.@,42 Petitioner is an American citizen and a resident or the Philippines in 1962. In that year, he derived incomes both from t\he Phill.ppines and U, S, sources, all of which he re- . ported for purposes of the ~ippine income tax. The sole issue raised in this appeal is whether or not the aforesaid taxes which he paid in the U, S, are deductible -from his gross income. The pertinent provisions o� Section .30 of ~he National

EDW. A.. BElLIS }. C.T .A. Nc. 2045 Internal Revenue Code relating to deduetibility of taxes read as follows: Sec. 30. Ptductions tram grorsg ;i.l'loome... lD. computing net income there shall be allowed as deduction - - � X X X (o) tiD�.: (1) In general.- Taxes ~ paid or aocrued w:tthin the taxable yea r 1 except - (A) The income tax provided for under this Ti- tle; (B) Income, war-profits, and excess-profits taxes imposed by �the authority of e:rv foreigm coun- try; but this deduction shall be allowed in the case or a taxP3\Ver who does not signify in his I'e'!'" turn his desire to have to any extent the benefits of pare.graph (3) o� this subsection (relating to credit for taxes o� f~eign COUl!ltries)J .. (C) Estate, inheritance and gift taxes; am (D) Taxes assessed against local bene.fits of a kind tending to increase the value .or the prop- erty assessed. (2) Limitations on ded.uctions..- (A) I� the case or a nonresiden~ alien individ- ual and a �roroign corporation, the deductions for :taxes provided in paragraph (1) of �this subsection (c) shall be allowed only if and to the extent that they are com1ected. �with income f'rom sources with- in the Philippines; and (B) In the case or a oitizen or a foreign country residing in the Philippines whose income from souroes within such foreign country is not taxable under this Title, on+Y that portion or the taxes paid to such foreign country which corresponds to his net income taxable UDder this Title shall be allowed as deduction. � Section 30(c) o� the Revenue Code permits deduction ot taxes in general without qualification, except (1) the Rd.JJrp- pine income tax; ~2) income, war profits and excess-profits taxes paid in foreign countries it they are claimed as a tax credit; (3) estate, inheritance and gift taxes; and

EDW. A. BEILIS C.T.A. No. 2045 -3- {4) taxes assessed against local benefits of a kim tending . oi .to increase the value the property assessed (referring to special assessments). There are two limitations on de- ductibility of taxes1 but they are not here relevant, as the only basis relied upon by respondent in disallowing the deduction of �the taxes mention~ above which were paid by petitioner to the u.s. Government is that the term "taxesP. under Section �30(c) of the Reve ue Code does not include taxes paid in foreign countries because of the provisions .- - of Section 80 of RG!enue Regulations ~� 21 reading as follows& Sec. 80. Taxes in general,.- As a general rule, tQtCeS are deductible with the exception ot those with reapect to which the law does not per- a mit deduction. However, in the case of non- resident alien individual and a foreign corpora- tion, deduction is alloyed onlY i f and to the extent that the taxes for� which deduction� is olSimed are connected with i-ncome from sources within the Philippines. Import duties Paid to the proper customs officers, and business, occupation, licemse1 � privilege, excise and stamp taxes and 8D1 other taxes of every name or nature paid directl:y to the GoTernment of the Hl.ilippines or to arty poli- tiQal subdivision thereof, are �deductible. The word �taxes� means taxes proper and no deduction should be allowed for amounts representing inter- est, surcharges, or penalties -incident to delin- quency. Postage is not � a tax. AUtomobile r~gis tration fees are considered taxes. Taxes are de- ductible as �such �onlj" by the person upon whom they are imposed.� Thus1 the merchants � sales tax imposed by law upon sales is not deductible by the � individ- ual plrehaser even .though the tax mq ~billed to him as a separate item. :X: :X: X X Respondent claims that 11on].y ta;xes paid to the GovEJ~DMt or any of its political Subdivision are deductible,� to the exolusion of taxes paid in foreign ~o~tries. (Page 21 Memoran- dum for Respondent, Feb. 14, ~1972.) Respondent has obviousq � misread the provisions of Section 80 of Revenue Regulations No.

.~ C.T .A.NO. 2045 EDW� A. BELLIS -4- 21 or the Income Tax ~gulations. There is nothing in the Regulations which seys that ~ taxes paid to the Govern- ment of the Philippines or to axr:y of its political _subdivisions are deductible. The word 11only11 before the term �taxes0 in the opl.nion of respondent has been merely supplied by him. A earef'ul reading of Seotion 80 of the said Regulations would show that the portion thereof referring to 11a:a;y other taxes � ot every name and � nature paid direotly to the Government of the Philippines or to ~ political subdivision thereot� is intended merely as a part of the enumeration of some tax- es which are allowed as deduction fioom gross income. The enumeration was not meant to be all inclusive. It is to be noted that the first paragraph of Section SO of the said Regulations states that taxes in geperaJ. are deductible, which is merely a restatement of the statutory provision (Sec. 30(c)1 Rev. Code). Since all taxes, meaning taxes in general, are deductible, the enumeration in paragraph 2 of said Regulations of the taxes which are deductible could not have been intended to exclude other taxes. Examples of tax- es which are deductible but are not inoluded in the enumera- tion are _res~idence taxes 1 amusement taxes 1 sugar adjustment taxes 1 etc. To cona:brue the Regulations as 1imiting deduction to taxes paid to the Government of the Philippines would run ~\ counter to the express provision of the law which permits de- \ duction of all taxes 1 without distinction betweeB taxes paid in the Philippines and taxes paid in foreign countries. To show the weakness of respondent's theor.11 let us take the example of a Filipino who goes abroad on a tour. If he pays a travel tax in a foreign country whiiia abroad, ~ not

EDW� A. BELLIS. .C.T.A. NO. 2045 such tax be deducted by 'him whe.ll he files his income tax - - return in the .Philippines? It is believed that he is en- -- . ~ .. -- titled to the deduction of the travel tax even if he bas no income in the foreign co1:1ntry ubere lie paid such tax. Let us consider a more striking example, that of a Philip- pine citizen permanent.:cy residing i:m. the United States1 nuzy he .not deduct taxes paid by him in the Uldted States when he files his income tax return iD the P.h1lippines2 We do not think respondent can or is disallowing deduction of taxes paid in foreign countries in these two cases. In fact, respondent has gone to the extent of allowing P.hilip- .pine citizens residing abroad to claill1 deduction for items which are not allowable u:m. der our .present Incane Tax law.1 (See Revenue Memorandum CirculUt" No� .4(}.711 dated December 20, 1971, approved by the Secreta.ry of Finance�.) Since the law allowing deduction of taxes in general (not including foreign income tax) applies equally to P.hilippine citizens and resident aliens, both being stiliject to income tax on all their incomes wherever de:L..ived, it follows that resident aliens, like petitioner herein, are entitled to deduction of the said taxes paid by them in the United States. This has been the opinion of this Court since 1962. (See Robert . I L. Janda v. ~aneta, C.T.A. No. 87, July 161 19621 citing 1 Under Rev. 1-lrono. Cir. No. 40-?11 all items of deduction allowed by a foreign government to Philippine citizens residing in such foreign countr,y are allowed to be deducted here, and these items or deduction obviously include taxes paid in such � foreign country. The circular goes further by providing that rentals of apartments, or in case a Filipino citizen abroad owns his house, the fair rental value or such house, is deductible, in effect amending the Income Tax Law. We are at a loss to deter- mine where the Commissioner of Internal Revenue got his author- ity for such actiom. 2 This case was not appealed b'IJ the Government.

EDW. A. BELLIS C.T .A. NO. 2045 -6- Mertens, le.w of Fed. Income Taxation, Vol. 51 Chap. 27, P� 551 1956 ed.) If' the claim of petitioner is to be denied, the some rule should apply to Fbilippine citizens~ whether residing in the fb:l:lippines or permanent~ residing abroad. A contrar,y rule would constitute unfair discrimination. Respondent alleges that - o � � To give due course to petitioner's argument, that is, to allow the deduction or taxes paid abroad, will amount to a grant of exanption by the state, which is frowned up()n (by) the Courts. In fact, the Supr;-eme Court ruled in the case of �Collector of InternaL Revenue vs. Manila Iockey Club, Inc.n . (G.R. No. L-8'1551 March 241 1956) that n~emptions from taxation are highly disfavored in law and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implication.� (Page 21 J'ifemorandum for 1972.) Respondent, Feb. 14, There cs.n be no question as to the soundness of the pdnciple that tax exemption laws, like those on deductions, must be strictly construed against the person claiming the exemption or deduction, and that an exemption or deduction can- not be permitted to exist upon vague implication. However1 if this principle has any application to the instant case, it should be applied to respondent's decision. Petitioner is not claim- ing deduction �upon vague implication." There is no claim or pretense that Section 30(c) of the Revenue Code, which al- lows deduction of all taxes, is vague. What is vague is the provision of Section 80 of the Income Tax Regulations which al- lmTs deduction, among 0thers1 of us:ny other taxes of every name and nature paid direct~ to the Government of the Ibilip- pines or to any political subdivision thereof," which has been rendered more vague by respondent when he seeks to insert i

EDW. A. BELLIS C.T.A. NO. 2045 -7- said provision the word '"ohly0 so as to limit deduction ohly to taxes .paid directly to the Government or the Philip- pines or to any of its political subdivision, which is not justified, because it woUld reDder the regula.tione invalid aa it would run counter to the express provision of law. To be valid, regulatior� mnst not be contrary to the law which they seek to int erpret or implement. (Sy Man v. Jacinto, 9.3 Hlil. 1{1).3; People v. Que Po Ley, 94 llrl.l. 640; Lim Hoa Ting v. Central Bank, 104 Fhil. 57.3.) To repeat, this is not a ease where petitioner is seeking deduction upon vague implien- �~ tion; his claim being based on a plain and explicit statutory provision; rather, it is a ease where respondent seeks to deny petitioner's claim upo11 a stilted interpretation of the Income Tax RegulatioiiB. WHEREFORE, the decision appealed from is hereby reversed. SO CRDERED. Quezon City, April 29, 19~. ROHAN 1-t. UMALI Presiding Judge I CONCUR: fL.-- -t ~. RA.MJN L.AVAIDENA Associate Judge Associate �Judge ESTANISIAO R. ALVAREZ di ssents in a separate opinion.

' '\!!:PUBLIC 011' TBE PBILIPPJNEI COURT OF TAX APPEALI ~N ClT1' EDW � A. BELLIS , C. T.A. CASE NO. 2~5 Petitioner , versus COMHISSIONER OF INTERNAL REVENUE , Respondent . X- - - - - - - - - X DISSENTING OPINION I find �myself unable to concur in the decision of this Court that foreign taxes paid by petitioner, an American citizen, in the United States are neces- sarily deductible from his Philippine ,gross income . The facts of the case ar e embodied in the Stipulation of Facts submitted by the parties to this Court which reads as follows: 1. The petitioner Edw . A. Bellis is an American citizen residing in the Philippines . 2. On April 3, 1963 the petitioner filed with the Bureau of internal Revenue his income tax return for the calendar ~y3e5ar, 901896. 200� and he p aid thereon a tax of . A copy each of the return, of the receipt of payment , and of the two withholding statements are attached hereto marked Annexes ttA11 , B 11 11 , nB-1" and "B- 211 , respectively , and made parts hereof . 3 � Among the deductions claimed by the petitioner in his 1962 income tax return is the amount of ~5 , 487 . 47 , the total taxes paid abroad, to wit:

DISQE~~lNO OPINION - CT CASE No. 2045 , r 2 a. Town and county tax - Village of Lake S uc- cess, N.Y. ----------~1,028.95 b. Real property tax - - - Village of L--a-k-e -S--u-c---� cess, N.Y. 906.30 c. School tax - Nassau County, N. y�. (Second half' 1961-1962) -:---�1 ,122. 83 d. School �tax - Nassau County, N.Y. (1962- 1963) ----------~---~2 ,429.~~ TOTAL ----------~5,487. ttacbed hereto as Annexes ncu, "C-111, 11C-:2 11 a nd 11C-3 11 are copies of the receipts for the payment of the said taxes. - - 4. The petitioner reported in his 1962 income tax return diVidends receiVed :from the corporations in the United States, to wit: Crown Williamette and Amer:i..can Telephone and Telegraph Com- pany (See Schedule F, Rider 5 of Income Tax Return, Annex A 11 11 ). 5. On April 14, 1967 the petitioner received from the Bureau of Internal Revenue an income tax assessment notice requesting that he pay on April 15, 1967 �2,898.90 as tax, plus �521.64 as interest,_ or:a total amount of �3;�419. 64 on his 1'762 income. A copy of the assess- ment notice is attached here to, marked Annex 11D11 , and made part hereof. 6. On the same day, April 14, 1967, the petitioner asked the Bureau of In- ternal Revenue that he be given time to determine the correctness of his defi- ciency income tax assessment; a copy of the letter dated April 14, 1967 is attached hereto marked Annex 11E11 and _made pa~t hereof. 7. On March 9, 1968 the petitioner re~ ceived a letter :from the Bureau of In- ternal Revenue dated February 23, 1968 in- forming him that the deficiency assess- ment was arrived at due to the disallow- ance of the amount of �5,487.47 represent-

. '' ~00 OPINION - CTA CASE No. 2045 3 1ng the. amount of taxes on properties abroad, and requesting that the peti- tioner pay the sum of �3 ,504.34 as de- ficiency income tax, interest, sur- charge , and compromise.penalty. A copy of the letter dated lt,ebruary 23, 1968 is attached hereto, marked Annex uFn, and made part hereof . 8. on March 14, 1968 the petitioner wrote the Cornmiss ioner of Internal Reve- nue a letter requesting that the defi- c1sncy income tax . assessment be can- celled. A copy of the letter is at- tached hereto marked Annex "Gu and made �part hereof. 9. On September 12, 1969 the petition- er received a lette-r from the Bureau of Internal Revenue denying his request for the cancellation of the deficiency income tax assessment. A copy qf said letter dated July 14, 1969 is attached hereto, marked Annex 11Htt and made part hereof. 10. on october 3, 1969 the peti- tioner filErl with the Court of Tax Ap- peals the above - entitled p~tition to review the final decision of respondent holding petitioner liable for delinquen- cy income tax for the year 1962. Petitioner is an American citizen and a resident of the Philippines in 1962. During the same year, he derived from this country and the United States a total gross income of �106,811. 92 broken do'llrn as follows: Total Philippine gross income ��� 1!103,090. 14 Total u.s. diVidend income � � �� � � ~�, ~21 . 78 ~otal income from all sources ��� �10 , 11 . 92 . Among the deductions claimed by petitioner in his 1962 income tax return are the taxes paid in the United �.

States amounting to ~5 , ~-87. 97 described and � computed as follows : Town and county tax ��������� �1 ,028.95 eal property tax ���������� 906. 30 School tax � � � � � � � � � � � � � � � � � 1 ,122. 83 �25'_; 42~ - ~~ S chool tax ������� ��� ������� TOT.AL IN U. S�� � 48_. __ TJ~ PJUD On the - bas :J_s of the foregoing facts, the sole issue presented to this Court for resolution is whether or not an American citizen,_residing in the Philippines, who derived substantial income of �103 ,0 90 .1 ~ from Philippine sources and a minor divi- dend income of �-3 ,721.78 from the United States , may deduct from his gross income of ~106 , 811 . 92 the for- eign taxes amounting to ~5 ,487. 97 under the provi- sions of Section 30(c)(l) of the National Internal Revenue Code, in relation to Section 30(2)(B) and (3 )(B) of the same Code . The law cited above reads as follows: SEC. 30. Deductions from gros�s in- ~�- In computing net income there shall be allowed as deductions - XX XX XX XX (c) rraxes: (1) In gen~ral.- Taxes paid or accrued within the taxa le year , except - (A) The income tax provided for under this Title; � (B) Income, war- profits, and excess- profits taxes imposed by the authority of any foreign country; but this deduction shall be allowed in the case of a taxpayer who does not signify in his return his de- sire to have to any extent the bene+it~ of

DISBENml:N6 OPINION ~ I CTA CASE o. 204-5 5 paragraph �(3) of this subsection (re- lating to credit for taxes of :foreign countries) ; (.As amended by section 7, Republic Act No. 82. ) � � (C) Estate, inheritance. and gift taxes; and (D) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed. (2) Limitations on deductions . - XX XX XX (B) In the case of a citizen of a foreign country residing in the Philip- pines whose income :from sources within such foreign country is not taxable under this Title , only that portion of the taxes paid to such foreign country which corresponds to his net income taxable under this Title shall be .allovTed as deduction. (3) Credits against tax for t~fL of foreign countries . - XX XX XX XX (B) Alien res ide.nt of the Phllippin~s_. In the case of a.n alien resident of the Philippines , the amount of any such taxes paid or accrued during the taxable year to any fore :Lgn country , if the fore jgn country of \vhich such al_ien resident is a citizen or subject,.. 1.0 imposing such taxes, allows a similar credit to citizens of the Philippines residing in such country; XX XX Section 30(c)(l) of the Tax Code, supra, allovm the deduction of fltaxes 11 from the gross income of a taxpayer in computing the net income. The law is silent as. to whether or not the word tttaxes" inclUdes the taxes paid in a foreign country. Likevlise '� the

~~S:2E{fTINS OPINION - ' CTA C.ASE No . 20lt5 6 same provisionsllaw is silent as to whether or not the deduction o� taxes from gross income may be availed of by resident or non- resident alien deriv- ing income from Philippine sources . The general statu-~ory rule, therefore , is that taxes are deduct - . ' ible from a taxpayer ' s gross income and the exceptions are those enumerated in (A) , (B) , (C) , and (D) of Section 30(c)(l) of the Revenue1 Code , supra,, which provides , among others , that income taxes paid are not deductible from gross income . Petitioner claims that the i'oreign taxes of ��5,487. 47 paid by him in the United States are neces- $ar.ily deductible from his gross income because said taxes are not among those specified in Section 30(c) (1) of the Tax Code, supra, as not deductible in computing net income . Respondent contends, however, that J;e titioner ' s claim is baseless and without merit becaose only those taxes paid t9 the Government of the Philippines or its political subdiVisions are de- ductible from petitioner ' s gross income . In support of his stand , respondent cited Section 80 o� the In- come Tax Regulations (Revenue Regulations No. 2) which provides as follows: Sec. 80. Taxes in general .- .As �a general rule �, taxes are deductible , with the exception of those with respect .to which the la-\v does not permit deduction. However, in the case of a nonresident alien indiVidual and a foreign corporation,

. ' D'HSE'l'lflliNG- OPI NION - .. CTA C/~E No. 2045 ?� deduction is allowed only if and to the extent that the taxes ~or which deduction is claime d are connected with income from sources withip the Philippines . - On the stregth of the foregoing provisions of the Income Tax Regulations , which were promulgated under Section 338 o~ the Tax Code for the effective enf.orcement thereof , respondent ins is ted that only , those taxes which were paid directly to the Govern- or ment of the Philippines to any of its political subdiVisions are deductible from petitioner 's gross income . '.k .:am: in accord with the stand of the re- spondent Commissioner of Internal Revenue. It is a cardinal rule in taxation that the pro- Vis ions on tax- exemption, like tax-deduction, are acts of legislative grace. They are cons trued strictly became tax-exemption and tax-deduction provis ions are in derogation of the sovereign and inherent porTer of the State to tax. To be en titled ' . .to a tax-deduction which has the effect of a tax- exempt;ion, .a taxpayer must establish his legal right thereto and he should not rely solely .on the implica- tion aris 1ng from the unexplained wording of the

., I DlSSENa!NG OPI1UON - CTA C.ASE No. 2045 8 tax-deduc,tion provis ion. The deduction and credit of foreign taxes were intended by law to cushion the impact of taxing the same income twice - one by the State of the taxpayer 's residence and the other by the country where he re - sides: Consequently, the tax- deduction and tax- credit provisions in our Tax Code must be interpreted with a view to avoid the evils and burden of international do uble taxation. That is precisely the reason why , despite the express prohibition against the deduc tion of income tax found in Section 30(c )(A) , supra , our Income Tax Law allows the deduction or cre:di t , under certa~ specifi~d conditions , of foreign income taxes � .'I :- am constrained to discws the application of . the tax- credit and tax- deduction provisions of our Tax Code in order to show that the w.ord 11taxes 11 refers to foreign income taxes as a means to avoid the evils and burden of international double taxation of income . The net income of petitioner from Philippine sources is taxable in full in this country and yet the same is taxable in the United States b' ecawe petitioner is a ci1(_izen of �that country� Sines petitioner derived diVidend income from the United States which was de~ clared ~ in his Philippine income tax return, he is en- titled to tax credit of foreign income tax paid and the applicable formula i~ ' as follows: / ( --~ ) ~

- . :1)\.J:S.s.E'l<J.TING- OPINION - GTA CASE No� . 2045 9 Net income in u.s . taxable in the Phili]2pines X Philippine income Total net income .from u.s. tax and Philippine sources Aside .from tax credit of .foreign income tax paid or the deduction thereo.f .from gross income, ~etitioner is not entitled to a deductio~ or credit of .foreign . taxes other than i,ncome tax because the "other taxes n sought to be deducted .from gross income have no rele- vance in the solution o.f the international double tax- ation of the same income. The same principle applies w~ere a Filipino citi- zen, . residing in the United States , re ce ives income .from United States : sources . The said income is tax- able in .full in the United States a nd yet the same income is taxable in the Philippines because the Fi- lipino taxpayer is a citizen of this country. In the same manner, . the Filipino taxpayer is entitled to� credit or deduction of the .foreign income tax paid in the United S tates upon declaring the same income in this country. ~ � r~ shall illustrate by .figures and examples the mechanics of credit or deduction of foreign inc.ome tax. Let us say, for example, that petitioner's net income from Philippine sources is �100,000.00 and that , the income tax due and paid to the Philippine Govern- ment was ~37,000.00. As a citizen of the United S tates,

IDISSEH1ING OPINION - ''' CTA CASE No. 204-5 10 petitioner is likewise subject to u.s . income tax on the said Philippine income 9f �100,000.00. Let us assume that the u.s . income tax on the Philippine in- come of f.lOO ,ooo.oo is tc5o ,ooo.oo. Without the recip- � rocal benefit of tax credit , . petitioner will have to pay the Philippine Government and the u.s . Government the income taxes of �37 ,000.00 and~o,ooo.oo, respec - tively, or a total of t87, 000. 00. ~fith the application of the reciprocity provis�ions, petitioner who is an Ame rican citizen is entitled to a tax credit of ~37 , 000. 00 , representing the income tax paid to .the Philippine Government, i :n paying his in- u. s. I Govern- ' come tax liability of ~5o , ooo. oo due to the ment . Consequently, petitioner h~ _to pay only �13,000. 00 to the u.s . Government. Under the same figures given above , if the tax- payer is a Filipino citizen residing in the United States and that the income � af ~100 , 000. 00 was received therein, the Filipino taxpayer residing abroad is not liable to pay the Phil�ippine Government any amount of income tax because he had already paid f50 , 000. 00 as u.s . income tax which is �in excess of �37,000. 00 due from him as Philippine income tax. In both ins_tances, the evils ani burden of international double taxation of the same income are avoided and the laudable purpose - and intent of the reciprocity provisions of the law are attained.

llJJ?.s.mltif5l:J:NG -OPI NION - ''' CTA CASE No . 2045 11 'T The deduction of foreign income tax from gross income is also motivate.d l?Y the same purpose . The only dif.t:ere.nce is that in the �cas.e of ta~ deduction , the deduction of the foreign income tax is from gross income instead of from the tax due as in the case of tax credit. The reciprocity provisions, therefore, embodied -in our Income Tax Law refers to payment of foreign income tax and not to 11other taxes u as a means of avoiding internetional double taxation of the same income . Double taxation does not exist in this case be- cause the u.s . diVidend income of ~3,721 . 78 is very much less than the "other taxes 11 of �5.,487. 97 paid in the United States . In order that -foreign taxes may be deducted by a resident alien from Philippine gross in- come, llhe must be entitled to a tax credit , or the option to deduct from gross income disappears alto- gether. 11 (Commissioner of Internal Revenue v . Lednic- ky, G. R. Nos. L-181_69 , L-18286 and L-2llt-3Lt�, July 31, 1964. ) Elaborating on 1ts decis ion on the Lednicky case , our Supreme Court, thru Justice Jose B. L. Reyes, he.ltl. that double taxation does not exist and ruled that whatever taxes were paid to a foreign government are not deductible from. Philippine gross income because our tax collection will be at the mercy of a foreign power which is incompatible With the status of the Philippines as an independent and sovereign state� .�

' �I ' . D:ISSElrlttNG OPINI.ON - CTA CPSE No . 20l.f.5 12 The Supreme court therefore said: Huch stress is laid on the thesis that if the respondent taxpayers are not allov1ed to deduct the income taxes they are required to pay to the government of �thg United S tat~s , in their return for Philippine income tax , they would be subjected to double � tax�tion. What re- spondents .fail to observe is that double taxation becomes obnoxious only where the taxpayer is taxed twice .for the bene- fit of the same ~oveynmental entity� .In the present case, while the taxp~yers -would have to pay two taxes on the same income , the Philippine government only receives the proceeds of ~ tax. As between the Phili ppines , where the income was earned and where the taxpayer is domiciled , and the United States , where the income was not earned and where the taxpayer d�id not reside , it is indisputa- ble that justice and equity demand that the tax on the income �should accrue to the benefit .of the Philippines. Any relief from the alleged double taxation should come from the -United States, and not from . the Philippines, since the former 's right to burden the taxpayer is solely predicated on his citizenship , without contributing to the production of the wealth that is being taxed. Aside from not conforming to the fundamental doctrine of income taxation that the right o:f a government to tax in- come emanates fro m its partnership in the production of income, by providing the protection, resources, incentive , and proper climate for such production, the interpretation given by the respondents to the revenue law provision in question operates, in its application, to place a resident alien with only domestic sources of income in an equal , if not in a better, position than one who has both ( domes tic and foreign sources of income, a situation which� is manifestly unfair and short of logic. Finally, t.o_ allovl an alien resident.

... ' DlSSE~N~ OPINION � CTA CASE No. 2045 13 to deduct from his gross income what- ever taxes he pays to his own govern- ment amounts to conferring on th~ lat- t~r the power to reduce the tax in- cgme of the Philippine government 2 implY by increas ing the tax r~te� on the alien res iQ,ent . Everytime the rate of taxation imposed upon an alien re- sident is increased by his own govern- ment , his deduction from Philippine taxes would correspondingly increase , and the proceeds from the Philippines diminished, thereby subordinating our 0\110 taxes to them e levied by a foreign government . Such a result is incom- patible with the status of the Philip- pines as an independent and sovereign state . (Underscoring supplied . ) (G. R. NosL -18169 , L-1 8286, L- 21434, July 31 ' 1964. ) In an earlier case decided by th~ Tax Court, -but which was not appealed to the Supreme Court, it was held tha t the word ''taxes 11 under Section 30(c)(l) of the Tax Code does not make any d istinc- tion as to whether they refer to domestic and foreign taxes and , therefore , there is no justifi- cation to make a distinction. In allowing the de- > duction of foreign taxes from Philippine gross in- come of an alien resident taxpayer, the said Court ~ in the case of Janda v. Araneta , CTA Case No. 87, decided on July 10 , 1962 , held as follows: Note what the law says: 11In com- puting net income, there shall be al- lowed as deductions , 11 among others, "Taxes pgid or accrued within the tax- able year. 11 As correctly pointed out by the petitioner herein, the law does not make any dis tinction as to whether the taxes mentioned therein are domestic /

IIll!SSEJruNG- OPINION - , CTA CASE No . 2045 or foreign taxes, and we are satisfied that no distinction was intended and that none is warranted. (Castro vs � Collector of Internal Revenue , G. R. No . L-12174, April 26, 1962. ) Ubi lex non dis t ing,uit, ne c nos dis t ;LnQ.ue re de-bemus � When tlie law does not distinguish , _ there is no justification to make any d istinction. Therefore, foreign taxes, like domes tic taxes , paid or accrued within the taxable year are deductible from the gross income of Philippine of citizens and resident aliens . (See Mertens, Law Federal Income Taxation, Vol. 5, Chap. 27 , P�. 55, 1956 Edition. ) In justifying the deduction of foreign taxes, other than income tax, from the gross income of a resident alien , the Tax Court relied on Mertens , Federal Income Taxation , Vol . 5, p. 55, 1956 edition, wherein it was stated: ltlhere alien residents of' the United S tates were not e ntitled to the credit for taxes paid to foreign countries because .the country of their citizenship did not satisfy . the similar credit requirement , they were entitled to deductions for taxes paid to the foreign governments . The footnote to the foregoing syllabus shows that Mr . Mertens was referring to the cas es of Max Freudmann v. Commissioner of Internal Revenue and Henri FreUdmann v. Commissioner of Internal Revenue, 10 TC 775. By reading carefully the de- � � cision of the u.s . Tax Court, �-� Il ~am convinced that the said syllabus is erroneous and misleading be- cause they were decided on a set of facts entirely different from that which exists in the Janda case

~~S~~NQ OPINION ~ CTA CASE No. 2045 15 or in the instant case � .The Freudmann brothers were 'citizens of Bel- .. gium and their country does not satisfy the credit requirement of Section 131(a)(3) bf the u.s . Reve- . . - nue Code of 1928 because Belgium does not allmtoT any credit to citizens of the United States resid- ing in Belgium for the amount of �income tax paid to the United S tates . Consequently, the u.s . Tax Court disallowed a foreign tax credit for income taxes paid by the Freudmann brothers in connection with their business in Canada. The u.s . � Tax �c~urt, how- ever, � allowed them to deduct from their u.s . gross income the income taxes paid to the Canadian Govern- ment because Art . X:V of the 11Tax Convention" and protocoi between the United States and Canada al- lows as a. deduction from income taxes imposed by the United States the appropriate amount of such taxes paid to Canada. In short , 1n the Freudmann cases, the allowance for deduction. of taxes paid to a / foreign ~overnment was predicated on a tax treaty involving "income taxes" and 1~ot .the kind of taxes here at issue. Accordingly, ill�:! hold that the, tow:n and county tax, real property tax, and school taxes amounting to �5 , 487. 97 , which were paid by peti- tioner 1D the United States , are not deductible from his 1962 gross income in the Philippines.

~.S!t~lNG OPINION - , CTA CASE NO . 20~5 16 For the foregoing considerations, I am constrained to dissent from the majority opin- ion. I sustain, therefore, the decision of re- spondent appealed from except the compromise penalty. Quezon City, May 17, 1972. , ~~~~~7 7 ~SIAO R. ALVAREZ Associate Judge