G.R. No. 48532 and G.R. No. 48533 , August 31, 1992.
HERNANDO B. CONWI, et al., petitioners, vs. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

ENRIQUE R. ABAD SANTOS, et al., petitioners, vs. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

FACTS

Petitioners are Filipino citizens employed by Procter and Gamble, Philippine Manufacturing Corporation. During 1970 and 1971, they were assigned to other Procter & Gamble subsidiaries outside the Philippines and were paid in U.S. dollars for these foreign assignments. In their original income tax returns for those years, they converted their dollar income to Philippine pesos using the floating rates prescribed by BIR Ruling No. 70-027 (P3.90 to $1 from Jan 1-Feb 20, 1970, and P6.25 to $1 from Feb 21-Dec 31, 1970, with the latter rate also used for 1971). Later, in 1973, they filed amended returns using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 (the Central Bank Act) as the basis for conversion, which resulted in claims for refund or tax credit for alleged overpayments. Without awaiting the Commissioner’s resolution, they filed petitions for review with the Court of Tax Appeals (CTA). The CTA denied their claims, holding that the proper conversion rates were those prescribed under Revenue Memorandum Circulars Nos. 7-71 and 41-71 (which adopted the free market rate). The petitioners elevated the case to the Supreme Court.

ISSUE

What is the proper rate of exchange for converting petitioners’ U.S. dollar earnings into Philippine pesos for computing their Philippine income tax liability for the years 1970 and 1971?

RULING

The Supreme Court denied the petition and affirmed the decision of the Court of Tax Appeals. The proper conversion rate is the free market rate of exchange as prescribed by Revenue Memorandum Circular Nos. 7-71 and 41-71, not the par value of the peso.
The Court held that:
1. Petitioners’ dollar earnings are not receipts from “foreign exchange transactions” (which involve conversion of one currency to another), but are income—compensation for services rendered.
2. Central Bank Circular No. 289, which petitioners cited to support using the par value, applies to export products, receipts from sale of foreign exchange, foreign borrowings, and investments, and does not govern income tax payments.
3. As Philippine citizens, their income from all sources, including wholly foreign sources, is subject to Philippine income tax under Section 21 of the National Internal Revenue Code (NIRC).
4. Revenue Memorandum Circular Nos. 7-71 and 41-71, issued by the Secretary of Finance pursuant to the rule-making authority under Section 338 of the NIRC, validly prescribed a uniform exchange rate (the free market rate) for internal revenue tax purposes. These circulars are a valid interpretation of the tax code.
5. The use of the free market rate is necessary to ascertain the true and correct value in Philippine pesos of the income of dollar earners for tax purposes. The petitioners’ original tax payments using these prescribed rates were correct, and thus no refund was due.