G.R. No. L-22735 October 30, 1975
Republic of the Philippines, plaintiff-appellant, vs. Pacific Exchange Corporation, defendant-appellee.

FACTS

The defendant, Pacific Exchange Corporation, a domestic corporation engaged in import-export and indent order business, maintained branch offices abroad. During the effectivity of Republic Act No. 601 (the 17% foreign exchange tax law) from 1951 to 1954, these branches earned foreign exchange totaling US $208,325.87 from profits and commissions. These dollar earnings were not remitted to the Central Bank as required by law but were instead utilized abroad by the defendant to cover the normal business expenses of its overseas offices without prior Central Bank authority. The Central Bank’s Exchange Control Department subsequently demanded payment of the 17% special excise tax on the full amount of these earnings.
The Court of First Instance of Manila, after trial, rendered a decision ordering the defendant to pay the tax, but only on 30% of the foreign exchange earnings. The court excluded 70% from the tax base, reasoning that this portion represented amounts expended for the normal business operations of the overseas branches. The Republic appealed, contending that the tax should be levied on the entire amount of foreign exchange earned.

ISSUE

Whether the 17% special excise tax under Republic Act No. 601 should be imposed on the total foreign exchange earnings of the defendant’s overseas branches, or only on the net amount after deducting expenses incurred abroad.

RULING

The Supreme Court ruled in favor of the plaintiff-appellant and modified the lower court’s decision. The defendant is liable for the 17% special excise tax on the entire amount of US $208,325.87, converted to P71,362.03. The legal logic is anchored on the mandatory surrender requirement under Central Bank Circular No. 20. The circular obligated all recipients of foreign exchange, including branch offices, to sell such foreign exchange to the Central Bank or its authorized agents within one business day following its receipt. Any utilization of foreign exchange without prior Central Bank license was deemed equivalent to a sale, thereby triggering the tax liability.
The Court rejected the deduction of normal business expenses. The defendant’s admitted earnings constituted net profits or commissions, not gross receipts subject to deductions. Furthermore, the Monetary Board’s Resolution No. 1924, interpreting the relevant circular, explicitly stated that utilizing earnings to cover overseas branch expenses remained subject to the exchange tax. The defendant’s failure to surrender the foreign exchange and its subsequent unauthorized utilization abroad constituted a violation of the circular, making the full amount of earnings subject to the tax. The lower court’s allowance of a deduction was therefore erroneous.