Commissioner of Internal Revenue vs. Standard Insurance Co., Inc.

No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, and an action for declaratory relief cannot be maintained to challenge the validity or application of a tax statute after the taxpayer has already breached it, internal revenue taxes being self-assessing and demandable without further assessment, and the taxpayer’s exclusive remedy being an appeal to the Court of Tax Appeals.

Standard Insurance Co., Inc. is a non-life insurance company subject to documentary stamp tax under Section 184 of the National Internal Revenue Code of 1997 (NIRC) on its policies of insurance upon property, and to value-added tax under Section 108. Republic Act No. 10001 had reduced the tax rate on life insurance premiums from 5% to 2%, while non-life insurance policies remained taxed at higher rates under the unamended sections. House Bill No. 3235, seeking to rationalize taxes on non-life insurance policies to equalize treatment, was pending in Congress. Standard Insurance faced deficiency DST assessments for 2011, 2012, and 2013, and, rather than pursuing its remedy before the Court of Tax Appeals, brought an original action for declaratory relief and injunction in the RTC, challenging the constitutionality of the two tax provisions.

• The Tax Assessments: On February 13, 2014, Standard Insurance, a non-life insurance company, received a Preliminary Assessment Notice from the Bureau of Internal Revenue for deficiency documentary stamp taxes for taxable year 2011 in the amount of P377,038,679.55. After the company contested the PAN, the BIR issued a formal letter of demand dated March 27, 2014. On December 4, 2014, Standard Insurance received the Final Decision on Disputed Assessment dated November 25, 2014, finding it liable for P418,830,567.46 in deficiency DST, interest, and compromise penalty. On December 11, 2014, the company sought reconsideration, arguing that the tax imposed under Section 184 of the NIRC violated constitutional limitations on taxation. In addition to the 2011 assessment, the company received demands for deficiency income tax, VAT, premium tax, DST, expanded withholding tax, and fringe benefit tax for 2012, and for deficiency DST for 2013.

• Institution of the Action for Declaratory Relief: On December 19, 2014, before any resolution of its protest, Standard Insurance filed in the RTC, Branch 66, Makati City (Civil Case No. 14-1330), a petition for declaratory relief with prayer for a temporary restraining order and writ of preliminary injunction. The petition sought a judicial declaration that Sections 108 and 184 of the NIRC were unconstitutional as applied to non-life insurance companies. The company emphasized that Republic Act No. 10001 had reduced the tax on life insurance premiums from 5% to 2%, while non-life insurers continued to bear higher tax rates under the unamended provisions, creating an inequality that House Bill No. 3235 was intended to rectify. It alleged that the iniquitous taxes threatened to render it technically insolvent.

• RTC Orders and Judgment: The RTC issued a TRO on December 23, 2014, and a writ of preliminary injunction on January 13, 2015, enjoining the BIR from implementing the challenged provisions with respect to the FDDA for 2011 and the pending assessments for 2012 and 2013. On May 8, 2015, the RTC rendered judgment in favor of Standard Insurance. The trial court reasoned that although taxes are self-assessing, the tax system merely created a liability and the taxpayer retained the right to contest the application of the law; thus, no breach had occurred that would bar declaratory relief. The RTC decreed that the Commissioner, her agents, and any persons acting on her behalf were permanently enjoined from implementing or enforcing Sections 108 and 184 of the NIRC against Standard Insurance “until the Congress shall have enacted and passed into law House Bill No. 3235 in conformity with the provisions of the Constitution.” The Commissioner’s motion for reconsideration was denied on July 10, 2015.

• Impropriety of Declaratory Relief to Contest Tax Assessments: Petitioner maintained that a petition for declaratory relief is not a proper vehicle to contest tax assessments, the exclusive remedy being an appeal to the Court of Tax Appeals.

• Failure to Satisfy Requisites of Rule 63: Petitioner argued that the petition was fatally defective because it failed to meet the basic requisites for declaratory relief under Rule 63 of the Rules of Court, particularly the requirements that there be no breach of the statute, that an actual justiciable controversy exists, and that the issue be ripe for adjudication.

• No Violation of Equal Protection: Petitioner contended that the RTC erred in adjudging Sections 108 and 184 violative of the equal protection clause, given the distinct nature and regulatory treatment of life and non-life insurance.

• Statutory Prohibition Against Injunctions on Tax Collection: Petitioner relied on Section 218 of the NIRC, which expressly prohibits any court from enjoining the collection of national internal revenue taxes, and argued that the injunctive relief was granted without legal or factual basis.

• Relief Outside the Purview of Declaratory Relief: Petitioner asserted that the permanent injunction suspending enforcement until Congress passes a specific bill exceeded the bounds of declaratory relief and violated the principle that judicial decisions must finally determine the rights and obligations of the parties.

• Unequal Tax Treatment and Constitutionality: Respondent argued that Sections 108 and 184 of the NIRC, as applied to non-life insurers, violated the equal protection clause because life insurance premiums had been reduced to 2% under Republic Act No. 10001, while non-life premiums remained subject to significantly higher rates, an inequality that the pending House Bill No. 3235 sought to cure.

• No Breach Prior to Suit: Respondent maintained that the tax assessments merely created a liability and that its petition for declaratory relief was consistent with its right to protest; as long as the taxpayer was contesting the application of the law, there had been no breach that would preclude declaratory relief.

• Existence of an Actual Controversy: Respondent posited that the imminent danger of being rendered technically insolvent by the imposition of what it termed iniquitous taxes constituted a real, justiciable controversy ripe for judicial determination.

• Availability of Injunctive Relief: Whether the Regional Trial Court had the authority to enjoin the enforcement or implementation of Sections 108 and 184 of the NIRC in light of the explicit prohibition in Section 218 of the NIRC against restraining the collection of national internal revenue taxes.

• Propriety of Declaratory Relief: Whether the petition for declaratory relief satisfied the requisites under Section 1, Rule 63 of the Rules of Court, particularly the requirements that the statute had not yet been breached, that an actual justiciable controversy existed, that the issue was ripe for judicial determination, and that no other adequate remedy was available.

• Availability of Injunctive Relief: The RTC had no authority to enjoin tax collection. Section 218 of the NIRC commands that “[n]o court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code.” This prohibition is absolute and implements the lifeblood doctrine. Moreover, under Section 11 of Republic Act No. 1125, as amended, decisions of the Commissioner assessing taxes are immediately executory and their enforcement is not suspended by an appeal, save for the limited power of the Court of Tax Appeals to suspend collection upon a showing of jeopardy to government or taxpayer interests and upon the filing of a deposit or bond. The RTC’s issuance of a TRO, writ of preliminary injunction, and permanent injunction was therefore done without jurisdiction and in violation of the statutory ban.

• Propriety of Declaratory Relief: The action for declaratory relief was procedurally improper. The requisites under Section 1, Rule 63 are: (1) the subject matter is a deed, will, contract, statute, or similar instrument; (2) the terms are doubtful and require construction; (3) there has been no breach of the instrument; (4) there is an actual justiciable controversy between adverse parties; (5) the issue is ripe for judicial determination; and (6) adequate relief is not available through other means. At least the third, fourth, fifth, and sixth requisites were absent. The third requisite failed because the tax statute had already been breached: documentary stamp tax on non-life insurance policies accrues at the moment the policies are issued, and taxes under the NIRC are self-assessing — the assessment merely confirmed an existing liability. The violation occurred upon the taxpayer’s failure to pay the correct DST due at the time of issuance, prior to the filing of the petition. The fourth and fifth requisites were not met because the claimed threat of insolvency was speculative, and the challenge to the tax provisions was contingent on whether Congress would enact House Bill No. 3235; the right asserted was merely inchoate. Finally, an adequate remedy existed: an appeal from the FDDA to the Court of Tax Appeals. Standard Insurance’s resort to declaratory relief instead of appealing to the CTA not only constituted an improper choice of remedy but also caused the 2011 deficiency assessment to become final and unassailable. Consequently, the petition should have been dismissed by the RTC.

• No-Injunction Rule in Tax Collection — Section 218 of the National Internal Revenue Code declares that no court has the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee, or charge. This rule admits no exception in the regular courts; only the Court of Tax Appeals may, under Section 11 of Republic Act No. 1125, suspend collection at any stage of the proceeding upon a showing that collection may jeopardize the interest of the Government and/or the taxpayer, and upon the taxpayer’s deposit of the amount claimed or filing of a surety bond. The RTC has no power to issue such injunctive relief.

• Self-Assessing Nature of Internal Revenue Taxes — Internal revenue taxes, including documentary stamp taxes, are self-assessing. The tax liability arises by operation of law upon the happening of the taxable event (e.g., issuance of an insurance policy). The BIR’s assessment merely confirms an existing obligation; it does not create the liability. Accordingly, the “breach” of a tax statute for purposes of declaratory relief occurs upon the taxpayer’s failure or refusal to pay the correct tax at the time prescribed by law, not upon receipt of a formal assessment.

• Requisites of Declaratory Relief — An action for declaratory relief under Rule 63, Section 1 of the Rules of Court requires the concurrence of six elements: (1) the subject matter is a deed, will, contract, written instrument, statute, executive order, regulation, or ordinance; (2) the terms are doubtful and require judicial construction; (3) there has been no breach of the document; (4) there is an actual justiciable controversy between persons with adverse interests; (5) the issue is ripe for judicial determination; and (6) adequate relief is not available through other means. The absence of any one requisite is fatal. In this case, the breach of the tax statute prior to filing, the speculative nature of the controversy, and the availability of an appeal to the CTA defeated the action.

• Adequate Remedy in Tax Assessment Cases — The proper remedy for a taxpayer aggrieved by a final decision of the Commissioner on a disputed assessment is an appeal to the Court of Tax Appeals, not an original action for declaratory relief in the Regional Trial Court. Failure to pursue that remedy results in the finality of the assessment.

• “No court shall have the authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code.” — Section 218, NIRC, reaffirmed as an absolute bar to injunctive relief against tax collection.

• “An action for declaratory relief is governed by Section 1, Rule 63 of the Rules of Court. It is predicated on the attendance of several requisites, specifically: (1) the subject matter of the controversy must be a deed, will, contract or other written instrument, statute, executive order or regulation, or ordinance; (2) the terms of said documents and the validity thereof are doubtful and require judicial construction; (3) there must have been no breach of the documents in question; (4) there must be an actual justiciable controversy or the ‘ripening seeds’ of one between persons whose interests are adverse; (5) the issue must be ripe for judicial determination; and (6) adequate relief is not available through other means or other forms of action or proceeding.”

• “What was being thereby taxed was the privilege of issuing insurance policies; hence, the taxes accrued at the time the insurance policies were issued. Verily, the violation of Section 184 of the NIRC occurred upon the taxpayer’s failure or refusal to pay the correct DST due at the time of issuing the non-life insurance policies.”

• “[T]he respondent’s adequate remedy upon receipt of the FDDA for the DST deficiency for taxable year 2011 was not the action for declaratory relief but an appeal taken in due course to the Court of Tax Appeals.”

• Angeles City v. Angeles Electric Corporation, G.R. No. 166134, June 29, 2010, 622 SCRA 43 — Cited to support the absolute prohibition against injunctions restraining tax collection under Section 218 of the NIRC.

• Republic v. Roque, G.R. No. 204603, September 24, 2013, 706 SCRA 273 — Cited for the enumeration of the requisites for declaratory relief under Rule 63 and the requirement of an actual justiciable controversy.

• Tambunting, Jr. v. Sumabat, G.R. No. 144101, September 16, 2005, 470 SCRA 92 — Cited for the rule that declaratory relief requires that the statute or instrument must not have been breached prior to the institution of the action.

• Tupaz v. Ulep, G.R. No. 127777, October 1, 1999, 316 SCRA 118 — Cited for the principle that internal revenue taxes are self-assessing, rendering further assessment unnecessary to create a tax liability.

• Section 218, National Internal Revenue Code of 1997 — Expressly prohibits any court from granting an injunction to restrain the collection of any national internal revenue tax, fee, or charge. The Court applied this as an absolute jurisdictional barrier to the injunctive relief issued by the RTC.

• Section 11, Republic Act No. 1125, as amended — Provides that decisions of the Commissioner of Internal Revenue assessing taxes are immediately executory and that an appeal to the Court of Tax Appeals does not suspend collection, except when the CTA, in its discretion, suspends collection upon a showing of jeopardy and the filing of a deposit or bond. The provision underscored that only the CTA, not the RTC, may suspend tax collection.

• Section 1, Rule 63, Rules of Court — Sets forth the requisites for an action for declaratory relief. The Court found that the respondent’s petition failed to meet the requirements of no breach, actual controversy, ripeness, and availability of another remedy.

• Section 108, National Internal Revenue Code of 1997 — Imposes value-added tax on the sale of services, expressly including services of non-life insurance companies. This was one of the provisions whose enforcement the RTC wrongfully enjoined.

• Section 184, National Internal Revenue Code of 1997 — Imposes documentary stamp tax on policies of insurance upon property. The DST deficiency assessments against Standard Insurance were based on this provision; its violation occurred upon the failure to pay the correct tax at issuance, which barred declaratory relief.

Justices Jardeleza, Tijam, and A. Reyes, Jr. (Associate Justice A. Reyes, Jr. was designated in lieu of Associate Justice Mariano C. Del Castillo, who inhibited; Associate Justice Gesmundo was on wellness leave.)