GEN PRINCIPLES Taxation

GENERAL PRINCIPLES OF TAXATION
Compiled by AttyNeri B. Yu
TAXATION LAW
GENERAL PRINCIPLES
POWER OF TAXATION
TAXATION power by which the sovereign through its law-making body raises revenue to
defray the necessary expenses of the government. It is a way of apportioning the costs of
the government among those who in some measure are privileged to enjoy its benefits and
must bear its burden.
BASIS OF TAXATION (Lifeblood Theory)
The power of taxation is essential because the government can neither exist nor endure
without taxation. Taxes are the lifeblood of the government and their prompt and certain
availability is an imperious need. (Bull vs. United States) The collection of taxes must be
made without hindrance if the state is to maintain its orderly existence.
Government projects and infrastructures are made possible through the availability of funds
provided through taxation. The governments ability to serve and protect the people
depends largely upon taxes. Taxes are what we pay for a civilized society. (CIR vs. Algue,
158 SCRA 9)
LIFEBLOOD Theory
The CTA ordered CIR to refund to CEPOC overpayments made by the latter of ad valorem
taxes on cement sold by it. The CIR opposed the ruling, claiming that it had a right to apply
the overpayment to another tax liability of CEPOC-sales tax on a, manufactured product
(the cement). CEPOC opposed the CIR, claiming that the overpayment must be refunded
pending the determination of whether the assessed sales tax was proper. CEPOC claims
that the cement cannot be considered a manufactured product and is instead a mineral
product exempt from sales tax.
ISSUE: Whether the CIR must refund the overpayment of the ad valorem tax.
HELD: No, the CIR has the right to apply the overpayment to CEFCCs sales tax deficiency.
It is well settled that cement is a manufactured product. There was some confusion because
in a previous case, it was said that cement was subject to sales tax prior to the effectivity of
RA 1299, which introduced the definitions of "mineral" and "manufactured." However, the
decision cannot be taken to have meant that cement was no longer a manufactured product
because such determination was not at issue. The assessment of sales tax is enforceable
despite its being contested because of the urgency to collect the taxes as the lifeblood of
the government, If the payment of taxes could be postponed by questioning their validity,
the government would be paralyzed, The Tax Code provides that no court shall have
authority to grant an injunction or restrain the collection of taxes, except when in the
opinion of the CTA, the collection by the EIR or the Bureau of Customs may jeopardize the
interest of the Government and/or the taxpayer. In such a case, the Court, at any stage of
the proceeding may suspend the collection and require the taxpayer to either deposit the
amount claimed or to file a surety bond for not more than double the amount with the
Court. The exception does not apply in this case.
To require the CIR to refund the overpayment, which he later would have to collect anyway
for application to the sales tax assessment, is an idle ritual.
Commissioner
Internal
Revenue
vs.
Cebu
Portland
Cement
Co.
GR L29059 December 15, 1987
I-Fundamental Principles of Taxation: Meaning of Taxation
Revenue laws are not intended to be liberally construed. Considering that taxes are the
lifeblood of the government and in Holmes's memorable metaphor, the price we pay for
civilization, tax laws must be faithfully and strictly implemented.
Commissioner of Internal Revenue vs. Rosemarie Acosta, G.R. No. 154068, August 3, 2007
Antero M. Sison Jr. vs Ruben Ancheta 136 SCRA 654
THEORIES ON TAXATION
1. Necessity Theory
Taxes proceed upon the theory that the existence of the government is a necessity; that it
cannot continue without the means to pay its expenses; and that for those means, it has a
right to compel all citizens and property within its limits to contribute. The power to tax is
an attribute of sovereignty emanating from necessity. It is a necessary burden to preserve
the State's sovereignty and a means to give the citizenry an army to resist an aggression, a
navy to defend its shores from invasion, a corps of civil servants to serve, public
improvements designed for the enjoyment of the citizenry and those which come within the
State's territory, and facilities and protection which a government is supposed to provide.
(Phil. Guaranty Co., Inc. vs. CIR)
2. Benefits-Protection/Reciprocity Theory
The power of the State to demand and receive taxes is based on the reciprocal duties of
support and protection. The citizen supports the State by paying the portion from his
property that is demanded in order that he may, by means thereof, be secured in the
enjoyment of the benefits of an organized society. This theory spawned the Doctrine of
Symbiotic Relationship
Every person who is able must contribute his share in the burden of running the
government. The government for its part is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their material
and moral values.
(C I R vs. Algue)
This symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power
(Commissioner of internal Revenue v. Algue, Inc. et. al. 158 SCRA 8 16-17 (1988).The
symbiotic relationship being established by the following:(a) Taxes are what we paid for a
civilized society. Without taxes, the government would be paralyzed for lack of motive power
to activate and operate it. (b) Despite the natural reluctance to surrender part of one's hard
earned income to the taxing authority, every person who is able must contribute his share in
tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material running the government. (c) The government for its part, is
expected to respond in the form of values
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.
Commissioner of Internal Revenue, et al. vs. Court of Appeals, et al., G.R. No. 119322,
June 4, 1996
COMMISSIONER OF INTERNAL REVENUE vs. ALGUE, INC., and THE COURT OF TAX
APPEALS, [G.R. No. L-28896. February 17, 1988.]
SYLLABUS
1.
TAXATION; NATIONAL INTERNAL REVENUE CODE; DEFICIENCY INCOME TAXES;
PERIOD TO APPEAL ASSESSMENT, SUSPENDED BY FILING OF PROTEST. According to
Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision
or ruling challenged. It is true that as a rule the warrant of distraint and levy is "proof of the
finality of the assessment" and "renders hopeless a request for reconsideration," being
"tantamount to an outright denial thereof and makes the said request deemed rejected."
But there is a special circumstance in the case at bar that prevents application of this
accepted doctrine. The proven fact is that four days after the private respondent received
the petitioner's notice of assessment, it filed its letter of protest. This was apparently not
taken into account before the warrant of distraint and levy was issued; indeed, such protest
could not be located in the office of the petitioner. It was only after Atty. Guevara gave the
BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be served. As the
Court of Tax Appeals correctly noted, the protest filed by private respondent was not pro
forma and was based on strong legal considerations. It thus had the effect of suspending on
January 18, 1965, when it was filed, the reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period started running again only on
April 7, 1965, when the private respondent was definitely informed of the implied rejection
of the said protest and the warrant was finally served on it. Hence, when the appeal was
filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
2.
ID.; ID.; INCOME TAX; DEDUCTION FROM GROSS INCOME; P75,000.00
PROMOTIONAL FEES; FOUND NECESSARY AND REASONABLE IN CASE AT BAR. We agree
with the respondent court that the amount of the promotional fees was not excessive. The
total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion, considering that it was the payees who
did practically everything, from the formation of the Vegetable Oil Investment Corporation
to the actual purchase by it of the Sugar Estate properties. In the present case, however,
we find that the onus has been discharged satisfactorily. The private respondent has proved
that the payment of the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent businessmen to venture in an
experimental enterprise and involve themselves in a new business requiring millions of

pesos.
DECISION
hindrance. On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good, may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the
appeal of the private respondent from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for
the years 1958 and 1959. On January 18, 1965, Algue filed a letter of protest or request for
reconsideration, which letter was stamp-received on the same day in the office of the
petitioner. On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest. A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. On April 7, 1965, Atty. Guevara was finally
informed that the BIR was not taking any action on the protest and it was only then that he
accepted the warrant of distraint and levy earlier sought to be served. Sixteen days later,
on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals.
The above chronology shows that the petition was filed seasonably. According to Rep. Act
No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. It is true that as a rule the warrant of distraint and levy is "proof of the finality
of the assessment"
and "renders hopeless a request for reconsideration,"
being
"tantamount to an outright denial thereof and makes the said request deemed rejected."
But there is a special circumstance in the case at bar that prevents application of this
accepted doctrine.
The proven fact is that four days after the private respondent received the petitioner's
notice of assessment, it filed its letter of protest. This was apparently not taken into account
before the warrant of distraint and levy was issued; indeed, such protest could not be
located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of
the protest that it was, if at all, considered by the tax authorities. During the intervening
period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted, the protest filed by private respondent was
not pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period which started
on the date the assessment was received, viz., January 14, 1965. The period started
running again only on April 7, 1965, when the private respondent was definitely informed of
the implied rejection of the said protest and the warrant was finally served on it. Hence,
when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had
been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary, reasonable or necessary business expense. The Court of
Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had
been legitimately paid by the private respondent for actual services rendered. The payment
was in the form of promotional fees. These were collected by the payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development
Company.
Parenthetically, it may be observed that the petitioner had originally claimed these
promotional fees to be personal holding company income but later conformed to the
decision of the respondent court rejecting this assertion. In fact, as the said court found,
the amount was earned through the joint efforts of the persons among whom it was
distributed. It has been established that the Philippine Sugar Estate Development Company
had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara,
Isabel Guevara, Edith O'Farell, and Pablo Sanchez worked for the formation of the
Vegetable Oil Investment Corporation, inducing other persons to invest in it. Ultimately,
after its incorporation largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties. For this sale, Algue received as agent a
commission of P125,000.00, and it was from this commission that the P75,000.00
promotional fees were paid to the aforenamed individuals.
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. The Court of Tax Appeals also
found, after examining the evidence, that no distribution of dividends was involved.
The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made as
to how such payments were made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt
to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as each
payee's need arose. It should be remembered that this was a family corporation where
strict business procedures were not applied and immediate issuance of receipts was not
required. Even so, at the end of the year, when the books were to be closed, each payee
made an accounting of all of the fees received by him or her, to make up the total of
P75,000.00.
Admittedly, everything seemed to be informal. This arrangement was
understandable, however, in view of the close relationship among the persons in the family
corporation.
We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the
private respondent was P125,000.00. After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was
60% of the total commission. This was a reasonable proportion, considering that it was the
payees who did practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties.
This finding of the respondent court is in accord with the following provision of the Tax
Code:
"SEC. 30.
Deductions from gross income. In computing net income there shall be
allowed as deduction
(a)
Expenses:
(1)
In general. All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for
salaries or other compensation for personal services actually rendered; . . ."
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
"SEC. 70.
Compensation for personal services. Among the ordinary and necessary
expenses paid or incurred in carrying on any trade or business may be included a
reasonable allowance for salaries or other compensation for personal services actually
rendered. The test of deductibility in the case of compensation payments is whether they
are reasonable and are, in fact, payments purely for service. This test and its practical
application may be further stated and illustrated as follows:
"Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a
distribution of a dividend on stock. This is likely to occur in the case of a corporation having
few stockholders, practically all of whom draw salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar services, and the excessive payment correspond
or bear a close relationship to the stockholdings of the officers of employees, it would seem
likely that the salaries are not paid wholly for services rendered, but the excessive
payments are a distribution of earnings upon the stock. . . ." (Promulgated Feb. 11, 1931,
30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of
Algue nor were they its controlling stockholders.
The Solicitor General is correct when he says that the burden is on the taxpayer to prove
the validity of the claimed deduction. In the present case, however, we find that the onus
has been discharged satisfactorily. The private respondent has proved that the payment of
the fees was necessary and reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in an experimental enterprise
and involve themselves in a new business requiring millions of pesos. This was no mean
feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard-earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement
in all democratic regimes that it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not
been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was
filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also
find that the claimed deduction by the private respondent was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto,
without costs.
SO ORDERED.
Claim of tax deductions

The Phil. Sugar Estate Development Company (PSEDC) appointed Algue,
Inc.,a family corporation, as its agent, authorizing it to sell its land, factories, and oil
manufacturing process. Pursuant to this authority, five members of the family corporation
formed the Vegetable Oil Investment Corp. and induced other persons to invest in it. The
newly formed corporation then purchased the PSEDC properties. For this sale, PSEDC gave
Algue, Inc. a commission of P125,000. From this amount, Algue Inc. paid the five family
members P75,000 as promotional fees. Algue, Inc. declared this P75,000 as a deduction
from its income tax as a legitimate business expense. The CIR questioned the deduction,
claiming that it was not an ordinary, reasonable, or necessary expense and was merely an
attempt to evade payment of taxes.
ISSUE: Whether the P75,000 is taxdeductible as a legitimate business
expense of Algue, Inc.
HELD: Yes, the P75,000 promotional fee is tax-deductible. Sec. 30 of the Tax Code provides
that ordinary and necessary expenses incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for salaries or other compensation for
personal services actually rendered are tax-deductible. However, the burden in proving the
validity of a claimed deduction belongs to the taxpayer. In this case, the burden has been
satisfactorily discharged by the taxpayer Algue, Inc. Algue, Inc. was able to prove that the
promotional fees were not fictitious and were in fact paid periodically to the five family
members. Moreover, the amount of the promotional fees was reasonable, considering that
the five payees actually performed a service for Algue, Inc. by making the sale of the
properties of PSEDC possible. As a result of this sale, Algue, Inc. earned a net commission
of P50,000.
Commissioner of Internal Revenue v. Algue GR L28896 February 17, 1988
Symbiotic relationship between government and people is the rationale of taxation.
It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for the lack of the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of one's hard-earned income to taxing
government. The government for its part is expected to respond in the form of tangible and
Every person who is able to must contribute his share in the running of the government. It
is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard-earned income to the taxing
government. The government for its part, is expected to respond in the form of tangible and
hindrance. On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of the common good, may be achieved.
Commissioner of Internal Revenue vs. Algue, Inc., et al., G.R. No. L-28896, February 17,
1988
Lifeblood Theory
Principle of estoppel does not operate against the government for neglect or omission of its
officials tasked to collect taxes. Taxes are the lifeblood of the Government and their prompt
and certain availability are imperious need. Upon taxation depends the Government's ability
to serve the people for whose benefit taxes are collected. To safeguard such interest,
neglect or omission of government officials entrusted with the collection of taxes should not
be allowed to bring harm or detriment to the people, in the same manner as private
persons may be made to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal affair. This should not hold
true to government officials with respect to matters not of their own personal concern. This
is the philosophy behind the government's exception, as a general rule, from the operation
of the principle of estoppel.
Misael P. Vera, et al. vs. Jose F. Fernandez, et al., G.R. No. L-31364, March 30, 1979
Obligation to pay taxes rests upon the necessity of money for the support of the state.
The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection
afforded to, a citizen by the government, but upon the necessity of money for the support
of the state. For this reason, no one is allowed to object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out. While courts will not enlarge,
by construction, the government's power of taxation, they also will not place upon tax laws
so loose a construction as to permit evasions on merely fanciful and insubstantial
distinctions. When proper, a tax statute should be construed to avoid the possibilities of tax
evasion. Construed this way, the statute, without resulting in injustice to the taxpayer,
becomes fair to the government.
Pablo Lorenzo vs. Juan Posadas, Jr., G.R. No. 43082, June 18, 1937
NATURE OF THE TAXING POWER
1. It is an inherent attribute of sovereignty- the power of taxation is inherent in sovereignty
as an incident or attribute thereof, being essential to the existence of every government. It
exists apart from constitutions and without being expressly conferred by the people.
2. It is legislative in character - such power is exclusively vested in the legislature except
when the Constitution provides otherwise. This is based upon the principle that "taxes are a
grant of the people who are taxed, and the grant must be made by the immediate
representatives of the people. And where the people have laid the power, there it must be
exercised (Cooley)
The power of taxation is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent government without being expressly granted by the
people. Tax is an attribute of sovereignty, which emanates from necessity upon which the
very existence of the government is dependent. Without tax money, the government would
not be able to undertake the purposes for which it was organized, thus negating the need
for its existence.
Pepsi-Cola Bottling Co. v. Tanauan, Leyte, 69 SCRA 460 (1976);
SCOPE OF LEGISLATIVE TAXING POWER
1. Person, property, occupation, excises or privileges to be taxed provided they are within
the taxing jurisdiction
2. Amount or rate of tax
3. Purposes for which taxes shall be levied provided they are for public
purposes
4. Kind of tax to be collected
5. Apportionment of the tax (whether the tax shall be general or limited to a particular
locality or partly general and partly local)
6. Situs of taxation
7. Method of collection
The objects of taxation may be:
(1) Persons, whether natural or juridical;
(2) Property, whether real or personal, tangible or intangible;
(3) Transactions, business, interest, rights or privileges.
The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It is
a necessary burden to preserve the State's sovereignty and a means to give the citizenry an
army to resist an aggression, a navy to defend its shores from invasion, a corps of civil
servants to serve, public improvements designed for the enjoyment of the citizenry and
those which come within the State's territory, and facilities and protection which a
government is supposed to provide.
Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L22074, April 30, 1965
IS THE POWER TO TAX THE POWER TO DESTROY? Marshall laid down the rule that the "Power to tax is the power to destroy".
According to Cooley, this is because such power includes the power to regulate- even to the
extent of prohibition or destruction. Cooley also emphasized that this should be used to
describe not the purposes for which the taxing. Power may be utilized but the degree of
vigor with which the taxing power may be employed in order to raise revenue. According to
Justice Cruz, the power to tax includes the power to destroy if it is used validly as an
implement of the police power in discouraging and in effect, ultimately prohibiting certain
things or enterprises inimical to the public welfare. But where the power to tax is used
solely for the purpose of raising revenues, the modern view is that it cannot be allowed to
confiscate or destroy. According to Holmes the Power to tax is not the power to destroy
while the Supreme Court sits because of the constitutional restraints placed on a taxing
power that violates fundamental rights. Although the power to tax is almost unlimited, it
must not be exercised in an arbitrary manner. If the abuse is so great so as to destroy the
natural and fundamental rights of people, it is the duty- of the judiciary to hold such an act
as unconstitutional.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation is
progressive when its rate goes up depending on the resources of the person affected. The
power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude, the power to tax is not unconfined as there are
restrictions. Adversely effecting as it does property rights, both the due process and equal
protection clauses of the Constitution may properly be invoked to invalidate in appropriate
cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of
Chief Justice Marshall that "the power to tax involves the power to destroy." The web or
unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice
Holmes' pen, thus: "The power to tax is not the power to destroy while this Court sits." "So
it is in the Philippines."
Antero M. Sison, Jr. vs. Ruben B. Ancheta, G.R..L-59431, July 25, 1984 130 SCRA 654
The power to tax is not the power to destroy.
Taxation is said to be equitable when its burden falls on those better able to pay. Taxation
is progressive when its rate goes up depending on the resources of the person affected. The
power to tax "is an attribute of sovereignty". In fact, it is the strongest of all the powers of
government. But for all its plenitude, the power to tax is not unconfined as there are
restrictions. Adversely effecting as it does property rights, both the due process and equal
protection clauses of the Constitution may properly be invoked to invalidate in appropriate
cases a revenue measure. If it were otherwise, there would be truth to the 1903 dictum of
Chief Justice Marshall that "the power to tax involves the power to destroy." The web or
unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr.
Justice Holmes' pen, thus: "The power to tax is not the power to destroy while this Court
sits." "So it is in the Philippines."
Antero M. Sison, Jr. vs. Ruben B. Ancheta, G.R..L-59431, July 25, 1984 130 SCRA 654
POWER OF JUDICIAL REVIEW IN TAXATION
As long as the legislature, in imposing a tax, does not violate applicable constitutional
limitations or restrictions, it is not within the province of the courts to inquire into the
wisdom or policy of the exaction, the motives behind it, the amount to be raised or the
persons, property or other privileges to be taxed. The courts power in taxation is limited
only to the application and interpretation of the law.
The power to tax is unlimited in force and so searching in extent, that courts scarcely
venture to declare that it is subject to any restrictions whatever, except such as rest in the
discretion of the authority which exercises it. It is also unlimited in its range, acknowledging
in its very nature no limits, so that security against the abuse is to be found only in the
responsibility of the legislature which imposes the tax.
As a general rule, the power to tax is an incident of sovereignty and its in the constituency
or citizens who are to pay it
(Mactan Cebu International Airport Authority v. Marcos et .al. 261 SCRA 667
ASPECTS OF TAXATION _
1. Levy or imposition of the tax (tax legislation) - enactment of tax laws or
statutes, includes the determination of the persons, property or excises to be taxed, the
sum or sums to be raised, the due date thereof and the time and manner of levying and
collecting taxes.
Levying or imposition- which is a legislative act; or passing of tax legislation; to levy means
"an imposition or for collection of an assessment, tax, tribute or fine
2. Enforcement or tax administration (tax administration) -collection of taxes already levied
and implemented by law.
Collection Enforcement- which is essentially administrative in nature and includes criminal
prosecution, forfeiture, etc.
PURPOSES AND OBJECTIVES OF TAXATION
1. Revenue to raise funds or property to enable the state to promote the general welfare
and protection of its citizens.
2. Non-Revenue
a. Promotion of general welfare .
b. Regulation
c. Reduction of social inequality -possible through progressive system of
taxation
where the object is to prevent the undue concentration of wealth in the hands of a few
individuals
d. Encourage economic growth by granting incentives or exemptions in order to encourage
investments
e. Protectionism taxes sometimes provide protection to local industries
like protective tariffs and customs duties
First, revenue purpose- To raise revenue for governmental needs in(1) Promoting public welfare;
(2) funding various infrastructure projects vital to nation building;
(3) meeting its domestic (i.e., salaries) and international obligations e.g., payment of
foreign loans) and commitments.
Second, regulatory purpose- The state Increases taxes on harmful substance making
them
more expensive thus limiting consumption (i.e. tobacco/ liquor taxes).
Third, compensatory purpose- to
(1) Maintain high level of employment;
(2) control inflation;
(3) Social justice through distribution of income using the progressive system of
taxation.
Fourth, equitable wealth distribution- reduce excessive inequality of wealth (i.e.,
reduction of social inequality); that is, it is a tool to promote more equitable distribution of
wealth and social benefits.
Regulatory taxes are those taxes with twin- purpose of regulating and raising revenues on
taxable matters invoking two inherent powers of the state- power to tax and regulate.
Taxation is no longer envisioned as a measure merely to raise revenue to support the
existence of the government. Taxes may be levied with a regulatory purpose to provide
means for the rehabilitation and stabilization of a threatened industry which is affected with
public interest as to be within the police power of the state (Caltex Phil. Inc. v. Commission
on Audit, 208 SCRA 726(1992); Osmena v. Orbos, 220 SCRA (1993).
(1) Coconut Levy Funds under Coconut Investment Fund created by Rep. Act No. 6260,
Coconut Consumers Stabilization Fund under PD No. 276; Coconut Industry Development
Fund under PD No. 582 and Coconut Industry Stabilization Fund under PD No. 1841.
(2) Regulation of non-useful occupations.
Non-Revenue purpose
Pres. Marcos issued PD 1956 creating the Oil Price Stabilization Fund (OPSF), which was
designed to reimburse oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustments and from increases in the world market
prices of crude oil. A portion of the OPSF was taken from collections of ad valorem taxes
levied on oil companies,
Subsequently, the OPSF was reclassified into a trust liability account and ordered released
from the National Treasury to the Ministry of Energy. The EO authorized the investment of
the fund in government securities, with the earnings accruing to the fund. Petitioner alleges
that the creation of the trust fund violates the Constitution since the money collected
pursuant to PD 1956 is a special fund, and under the Constitution, if a special tax is
collected for a specific purpose, the revenue generated there from shall be treated as a
special fund to be used only for the purpose indicated, and not channeled to another
government objective.
ISSUE: Whether the creation of the trust fund is violative of the Constitution.
HELD: No, The creation of the trust fund was valid, In order for the funds to fall under the
prohibition, it must be shown that they were collected as taxes as a form of revenue. In
this case, while the funds were referred to as taxes they were exacted not under the power
of taxation, but in the exercise of the police power of the State. The main objective was not
revenue but to stabilize the price of oil and petroleum products. The OPSF is actually a
special fund. It is segregated from the general fund; and while it is placed in what the law
refers to as a trust liability account," the fund nonetheless remain subject to the scrutiny
EDC review of the COA. These measures comply with the constitutional description of a
"special fund.
John Osmena v. Secretary Oscar Orbos GR L99886 March 31, 1993
Non-revenue Purpose
FACTS: Petitioners are drugstores assailing the constitutionality of Sec. 4 (a) of R.A. No.
9257 (Expanded Senior Citizens Act of 2003). They assert that the law constitutes
deprivation of private property as it compels drugstore owners and establishments to grant
discounts to senior citizens. They allege that this will result in a loss of profit and capital
because 1) drugstores impose a mark-up of only 5% to 10% on branded medicines; and 2)
the law failed to provide a scheme whereby drugstores will be justly compensated for the
discount.
ISSUE: Is Sec. 4 (a) of R.A. No. 9257 unconstitutional?
RULING: No. One of the policies of R.A. No. 9257 is "to recognize the important role of the
private sector in the improvement of the welfare of senior citizens and to actively seek their
partnership." To implement this policy, the law grants a 20% discount to senior citizens for
purchases of their medicines, among others. As a form of reimbursement, the law provides
that business establishments extending the 20% discount to senior citizens may claim the
discount as a tax deduction. Based on the July 10, 2004 DOF Opinion, the tax deduction
scheme does not fully reimburse petitioners for the discount privilege accorded to senior
citizens. This is because the discount is treated as a deduction, a tax-deductible expense
that is subtracted from the gross income and results in a lower taxable income. The
permanent reduction in their total revenues is a forced subsidy corresponding to the taking
of private property for public use or benefit. This constitutes compensable taking for which
petitioners would ordinarily become entitled to a just compensation. However, a tax
deduction does not offer full reimbursement of the senior citizen discount. As such, it would
not meet the definition of just compensation.
The law is a legitimate exercise of police power which has general welfare for its object.
Thus, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due
process, must yield to general welfare.
Moreover, the right to property has a social
dimension. While Article XIII of the Constitution provides the precept for the protection of
property, various laws and jurisprudence, continuously serve as a reminder that the right to
property can be relinquished upon the command of the State for the promotion of public
good. The success of the senior citizens program rests largely on the support imparted by
petitioners and the other private establishments concerned. This being the case, the means
employed in invoking the active participation of the private sector, in order to achieve the
purpose or objective of the law, is reasonably and directly related.
Carlos Superdrug Corp., et al. vs. DSWD, et al., G.R. No. 166494, June 29, 2007
BASIC PRINCIPLES OF A SOUND TAX SYSTEM (FAT)
1. Fiscal Adequacy - sources of government revenue must be sufficient to meet
government expenditures and other public needs. Chavez v. Ongpin et. al., 186 SCRA
331
2. Administrative Feasibility - tax laws must be capable of effective and efficient
enforcement.
3. Theoretical Justice - a sound tax system must take into consideration the taxpayers
ability to pay (Ability to pay theory). Our laws mandate that taxes
must be reasonable,
fair, just and conscionable. The tax laws can reasonably be enforced neither unduly
burdensome upon nor discouraging to business activity. The Constitution provides that
taxation must be uniform and equitable and the State shall evolve a progressive system of
taxation.
DISTINCTIONS
TAXATION
1.Purpose
POLICE POWER
EMINENT DOMAIN
To raise revenue
To promote public purpose

through regulations
To facilitate the States need

of property for public use
Limited to the cost of

regulation, issuance of the
license or surveillance
No exaction; but private

property is taken by the
State for public purpose
No direct benefit is received;

a healthy economic standard
of society is attained
A direct benefit results in the

form of just compensation to
the property owner
Contracts may be impaired
Contract may be impaired
No transfer but only restraint

in its exercise
Transfer is effected in favor

of the State
All persons, property, rights

and privileges
Only
upon
property
2.Amount of Exaction
No limit
3.Benefits Received
No special or direct benefit is
received by the taxpayer;
merely general benefit of
protection
4. Non-impairment of Contracts
Contracts
impaired
may
not
be
5. Transfer of Property Rights

Taxes paid become part of
public funds
6. Scope
All persons,
exercises
property
and
particular
TAXES - enforced proportional contributions from the persons and property levied by the
law-making body of the State by virtue of its sovereignty in support of government and for
public needs.
ESSENTIAL CHARACTERISTICS OF A TAX
1. It is an enforced contribution - not dependent on the will of the person taxed, not a
contract but a positive act of the government
2. It is generally payable in money
3. It is proportionate in character taxes must be based on ability to pay in accordance with

the constitutional mandate to Congress to evolve a progressive system of taxation
4. It is levied on persons, on rights and on property
5. It is levied by the state which has jurisdiction over the person or property
6. It is levied by the law making body of the state
7. It is levied for public purpose/s
REQUISITES OFAVALID TAX
1. Should be for a public purpose
2. The rule of taxation shall be uniform
3. That either the person or property taxed should be within the jurisdiction of the taxing
authority
4. That the assessment and collection of certain kinds of taxes guarantees against injustice
to individuals, especially by way of notice and opportunity for hearing is provided
5. The tax must not impinge on the inherent and Constitutional limitations on the power of
taxation
CLASSIFICATION OF TAXES
1. As to subject matter or object:
a. Personal, poll or capitation - tax of a fixed amount imposed upon persons
residing within a specified territory, whether citizens or not, without regard to their
property, occupation or business in which they may be engaged (ex. Community tax).
b. Property tax imposed on property, whether real or personal, in proportion either to its
value or some other reasonable rule of apportionment (ex. Real estate tax).
c. Excise or Privilege-charge imposed upon the performance of an act, the
enjoyment of a privilege or engaging in an occupation, profession or business (ex. Donors
tax).
2. As to who bears the burden:
a. Direct tax which is demanded from the person who also shoulders the
burden of the tax; the taxpayer is directly or primarily liable which he cannot shift to
another (ex. Income tax);
b. indirect tax wherein the incidence or liability for the payment falls on one person but
the burden can be shifted or passed on to another (ex. VAT).
3.
a.
to
b.
of
As to purpose:
General, fiscal or revenue - tax is imposed for the general purposes of the Government,
raise revenue for governmental needs. (ex.- income Tax)
Special or regulatory- tax imposed to achieve some social or economic ends irrespective
whether revenue is actually raised or not ( customs duties)
4. As to determination of amount:
a. Specific- tax of a fixed amount imposed by head or number or by
standard of weight or measurement, it requires no valuation other than a listing or
classification of the objects to be taxed.
b. Ad Valorem (Value) tax of a fixed portion of the value of the property
with respect to which the tax is assessed; it requires the intervention of assessors or
appraisers to estimate the value of such property before the amount of tax due from each
taxpayer can be determined.
5. As to taxing authority:
a. National levied by the National Government
b. Local levied by the local government

6. As to rate:
a. Progressive or graduated tax the rate of which increases as the tax base or bracket
increases.
b. Regressive - tax the rate of which decreases as the tax base increases.
c. Proportional - based on a fixed percentage of the amount of the property, receipts or
other basis to be taxed.
COMPENSATION OR SET OFF OF TAXES
General Rule: Taxes cannot be the subject of compensation or set-off because the
government and the taxpayer are not creditors and debtors of each other. Obligations in the
nature of debts are due to the government in
its corporate capacity while taxes are due to the government in its sovereign capacity.
(Philex Mining vs. CIR GR125704 August 28,1998)
Exceptions:
1. Solutioindebiti - Compensation takes place by operation of law, where the government
and the taxpayer are in their own right reciprocally debtors and creditors of each other, and
that the debts are both already due and demandable. This is in consequence of Articles
1278 and 1279 of the Civil Code. (Domingo vs. Garlitos 8 SCRA 443)
2. If the case involves local government taxes.
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents. [G.R. No. 125704.
August 28, 1998.]
SYLLABUS
1.
CIVIL LAW; EXTINGUISHMENT OF OBLIGATIONS; COMPENSATION; TAXES CANNOT
BE SUBJECT TO LEGAL COMPENSATION. In several instances prior to the instant case,
we have already made the pronouncement that taxes cannot be subject to compensation
for the simple reason that the government and the taxpayer are not creditors and debtors
of each other. There is a material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the Government in its
sovereign capacity. We find no cogent reason to deviate from the aforementioned
distinction. Prescinding from this premise, in Francia vs. Intermediate Appellate Court, we
categorically held that taxes cannot be subject to set-off or compensation, thus: "We have
consistently ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the
government." The ruling in Francia has been applied to the subsequent case of Caltex
Philippines, Inc. vs. Commission on Audit, which reiterated that: ". . . a taxpayer may not
offset taxes due from the claims that he may have against the government. Taxes cannot
be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off." Further, Philex's reliance on our holding in
Commissioner of Internal Revenue vs. Itogon-Suyoc Mines, Inc., wherein we ruled that a
pending refund may be set off against an existing tax liability even though the refund has
not yet been approved by the Commissioner, is no longer without any support in statutory
law. It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which the
Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated
in Itogon-Suyoc cannot be invoked by Philex.
2.
TAXATION; NATIONAL INTERNAL REVENUE CODE; A TAXPAYER CANNOT REFUSE TO
PAY HIS TAXES WHEN THEY FALL DUE SIMPLY BECAUSE HE HAS A CLAIM AGAINST THE
GOVERNMENT OR THAT THE COLLECTION OF THE TAX IS CONTINGENT ON THE RESULT OF
THE LAWSUIT IT FILED AGAINST THE GOVERNMENT. We fail to see the logic of Philex's
claim for this is an outright disregard of the basic principle in tax law that taxes are the
lifeblood of the government and so should be collected without unnecessary hindrance.
Evidently, to countenance Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure,
we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been
granted. It must be noted that a distinguishing feature of a tax is that it is compulsory
rather than a matter of bargain. Hence, a tax does not depend upon the consent of the
taxpayer. If any taxpayer can defer the payment of taxes by raising the defense that it still
has a pending claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply
because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. Moreover, Philex's
theory that would automatically apply its VAT input credit/refund against its tax liabilities
can easily give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.
3.
ID.; ID.; PENALTIES; PAYMENT OF SURCHARGE IS MANDATORY; THE BUREAU OF
INTERNAL REVENUE IS NOT VESTED WITH ANY AUTHORITY TO WAIVE THE COLLECTION
THEREOF. The fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under
Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection thereof. The same
cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying
its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section
106(e) of the National Internal Revenue Code of 1977, which requires the refund of input
taxes within 60 days, when it took five years for the latter to grant its tax claim for VAT
input credit/refund.
4.
ID.; ID.; THE BUREAU OF INTERNAL REVENUE VIOLATED SECTION 106(e) OF THE
NATIONAL INTERNAL REVENUE CODE REQUIRING REFUND OF INPUT TAXES WITHIN 60
DAYS FROM THE DATE OF THE APPLICATION FOR REFUND WAS FILED. In this regard, we
agree with Philex. While there is no dispute that a claimant has the burden of proof to
establish the factual basis of his or her claim for tax credit or refund, however, once the
claimant has submitted all the required documents, it is the function of the BIR to assess
these documents with purposeful dispatch. After all, since taxpayers owe honesty to
government it is but just that government render fair service to the taxpayers. In the
instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these
erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent
and judicious with their duty, it could have granted the refund earlier. We need not remind
the BIR that simple justice requires the speedy refund of wrongly-held taxes. Fair dealing
and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its
function. As aptly held in Roxas vs. Court of Tax Appeals: "The power of taxation is
sometimes called also the power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally
and uniformly, lest the tax collector kill the 'hen that lays the golden egg.' And, in order to
maintain the general public's trust and confidence in the Government this power must be
used justly and not treacherously." Despite our concern with the lethargic manner by which
the BIR handled Philex's tax claim, it is a settled rule that in the performance of
governmental function, the State is not bound by the neglect of its agents and officers.
Nowhere is this more true than in the field of taxation. Again, while we understand Philex's
predicament, it must be stressed that the same is not a valid reason for the non-payment of
its tax liabilities.
5.
ID.; ID.; ID.; REMEDIES OF AGGRIEVED TAXPAYER FOR OFFICIAL INACTION,
WILLFUL NEGLECT AND UNREASONABLE DELAY IN THE PERFORMANCE OF OFFICIAL
DUTIES. This is not to state that the taxpayer is devoid of remedy against public servants
or employees, especially BIR examiners who, in investigating tax claims are seen to drag
their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for
refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner
prescribed by law. Second, if the inaction can be characterized as willful neglect of duty,
then recourse under the Civil Code and the Tax Code can also be availed of. Article 27 of
the Civil Code provides: "Art. 27. Any person suffering material or moral loss because a
public servant or employee refuses or neglects, without just cause, to perform his official
duty may file an action for damages and other relief against the latter, without prejudice to
any disciplinary action that may be taken." More importantly, Section 269(c) of the National
Internal Revenue Act of 1997 states: ". . . (c) wilfully neglecting to give receipts, as by law
required for any sum collected in the performance of duty or wilfully neglecting to perform,
any other duties enjoined by law." Simply put, both provisions abhor official inaction, willful
neglect and unreasonable delay in the performance of official duties. In no uncertain terms
must we stress that every public employee or servant must strive to render service to the
people with utmost diligence and efficiency. Insolence and delay have no place in
government service. The BIR, being the government collecting arm, must and should do no
less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it
wishes to remain true to its mission of hastening the country's development. We take
judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is
up to the latter to prove its detractors wrong. In sum, while we can never condone the
BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's
non-payment of its tax liabilities. The adage "no one should take the law into his own
hands" should have guided Philex's action.
DECISION
Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on
April 8, 1996 in CA-G.R. SP No. 36975 affirming the Court of Tax Appeals decision in CTA
Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52
as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992
plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and
249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its
tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of
1992 in the total amount of P123,821,982.52 computed as follows:
PERIOD COVERED
BASIC TAX
25% SURCHARGE
INTEREST
TOTAL EXCISE
TAX DUE
2nd Qtr., 1991
12,911,124.60
3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991
14,994,749.21
3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr.,
19,406,480.13
47,312,353.94
8,988,362.97 68,128,805.39
4,917,922.94 215,580.18
10,753,385.43
5,835,462.49 1,710,669.82 30,887,982.25
19,671,691.76
43,013,541.70
11,828,088.48
1st Qtr., 199223,341,849.94

2nd Qtr., 1992
4,851,620.03 2,631,837.72 26,889,937.88
24,805,194.88
1,926,250.00 55,693,177.13
90,325,895.64
22,581,473.91
10,914,612.97
123,821,982.52
===========
===========
===========
===========
In a letter dated August 20, 1992, Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid
for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore,
these claims for tax credit/refund should be applied against the tax liabilities, citing our
ruling in Commissioner of Internal Revenue v. Itogon-Suyoc Mines. Inc.
In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philex's position.
Since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the BIR reiterated its demand
that Philex settle the amount plus interest within 30 days from the receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund
against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on
November 6, 1992. In the course of the proceedings, the BIR issued Tax Credit Certificate
SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of
Philex of P123,821,982.52; effectively lowered the latter's tax obligation to
P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
"Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. 'Liquidated' debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259).
In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and
still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated
debt of the Petitioner to the government cannot, therefore, be set-off against the
unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de
Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34)"
Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract." The dispositive portion of the
CTA decision provides:
"In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52
representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Section 248 and 249 of the Tax Code, as amended."
Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed
as CA-G.R. CV No. 36975. Nonetheless, on April 8, 1996, the Court of Appeals affirmed the
Court of Tax Appeals observation. The pertinent portion of which reads:
"WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED."
Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution
dated July 11, 1996.
However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for
1992 and 1994, computed as follows:
Period Covered
Tax Credit
By Claims For Certificate

VAT refund/credit
Date
of
Number
Issue Amount
1994 (2nd Quarter) 007730
11 July 1996 P25,317,534.01
1994 (4th Quarter)
007731
11 July 1996 P21,791,020.61
1989
11 July 1996 P37,322,799.19
007732
1990-1991
007751
1992 (1st-3rd Quarter)
16 July 1996 P84,662,787.46

007755
23 July 1996 P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now contends that the same
should, ipso jure, off-set its excise tax liabilities since both had already become "due and
demandable, as well as fully liquidated;" hence, legal compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. There is a material distinction
between a tax and debt. Debts are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity. We find no cogent reason to
deviate from the aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically
held that taxes cannot be subject to set-off or compensation, thus:
"We have consistently ruled that there can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the
government."
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, which reiterated that:
". . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off."
Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. ItogonSuyoc Mines. Inc., wherein we ruled that a pending refund may be set off against an
existing tax liability even though the refund has not yet been approved by the
Commissioner, is no longer without any support in statutory law.
It is important to note that the premise of our ruling in the aforementioned case was
anchored on Section 51(d) of the National Revenue Code of 1939. However, when the
National Internal Revenue Code of 1977 was enacted, the same provision upon which the
Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated
in Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within the
time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the
excise tax liabilities within the prescribed period since, after all, it still has pending claims
for VAT input credit/refund with BIR.
We fail to see the logic of Philex's claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. Evidently, to countenance Philex's whimsical
reason would render ineffective our tax collection system. Too simplistic, it finds no support
in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not
yet been granted. It must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain. Hence, a tax does not depend upon the
consent of the taxpayer. If any taxpayer can defer the payment of taxes by raising the
defense that it still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. Moreover, Philex's
theory that would automatically apply its VAT input credit/refund against its tax liabilities
can easily give rise to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under
Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory
and the BIR is not vested with any authority to waive the collection thereof. The same
cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying
its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106(e) of the National Internal Revenue
Code of 1977, which requires the refund of input taxes within 60 days, when it took five
years for the latter to grant its tax claim for VAT input credit/refund.
In this regard, we agree with Philex. While there is no dispute that a claimant has the
burden of proof to establish the factual basis of his or her claim for tax credit or refund,
however, once the claimant has submitted all the required documents, it is the function of
the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe
honesty to government it is but just that government render fair service to the taxpayers.
In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge
of its function. As aptly held in Roxas v. Court of Tax Appeals:
"The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the 'hen that lays the
golden egg.' And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously."
Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim,
it is a settled rule that in the performance of governmental function, the State is not bound
by the neglect of its agents and officers. Nowhere is this more true than in the field of
taxation. Again, while we understand Philex's predicament, it must be stressed that the
same is not a valid reason for the non-payment of its tax liabilities.
To be sure, this is not to state that the taxpayer is devoid of remedy against public servants
or employees, especially BIR examiners who, in investigating tax claims are seen to drag
their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for
refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner
prescribed by law. Second, if the inaction can be characterized as willful neglect of duty,
then recourse under the Civil Code and the Tax Code can also be availed of.
Article 27 of the Civil Code provides:
"Art. 27.
Any person suffering material or moral loss because a public servant or
employee refuses or neglects, without just cause, to perform his official duty may file an
action for damages and other relief against the latter, without prejudice to any disciplinary
action that may be taken."
More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:
"xxx
xxx
xxx
(c)
wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform any other duties enjoined by law."
Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay m
the performance of official duties. In no uncertain terms must we stress that every public
employee or servant must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it is up to the latter to prove its detractors
wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its
duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage
"no one should take the law into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO
ORDERED.
FOOTNOTES:
Period within which refund of input taxes may be made by the Commissioner. The
Commissioner shall refund input taxes within 60 days from the date the application for
refund was filed with him or his duly authorized representative. No refund of input taxes
shall be allowed unless the VAT-registered person files an application for refund within the
period prescribed in paragraphs (a), (b) and (c) as the case may be.
This provision has been amended by Section 112 (D) of Republic Act 8424 entitled the
"National Internal Revenue Act of 1997."
"(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) days from the date of submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)
hereof.
In case of full of partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals."
Doctrine of Equitable Recoupment where the refund of a tax illegally or erroneously
collected or overpaid by a taxpayer is barred by prescription,
any tax presently being
assessed against a taxpayer may be recouped or set-off against the tax whose refund is
now barred by prescription. (UST vs. Collector) The doctrine is NOT followed in the
Philippines because of the lifeblood theory.
TAXPAYERS SUIT
A case where the act complained of directly involves the illegal disbursement of public
funds derived from taxation (Justice Melo, dissenting in Kilosbayan, Inc vs. Guingona,
Jr 232 SCRA 110) - Taxpayers have locus standi for they are parties in interest to be
prejudiced or benefited by the avails of the suit but not if executive acts do not involve
the use of public funds. (Gonzales vs. Marcos)
REQUISITES FOR TAXPAYERS SUIT
Taxpayers suits may be given course and allowed when their petition or complaint may avail
any of the following grounds, among others:
(1) That tax money is "being extracted and spent in violation of specific constitutional
protections against abuses of legislative power."[ Flast v. Cohen 382 US 83 (1980)];
(2) That public money being deflated to any improper use.[ Pascual v. Secretary of Public
Works, 110 Phil. 33 (1960)]; or
(3) That the petitioners seek to restrain respondents from wasting public funds through
enforcement of an invalid or unconstitutional law (Garcia v. Enriquez, Jr. GR. No. 112655
prom. Dec. 9, 1993).
(4) That there is improper delegation of legislative power (delegata potestas non protest
delegare)- a delegated power cannot be further delegated.
(5) Set-off or compensation is allowable.
(6) Constitutional limitations and restrictions on the power of taxation been grossly violated
(i.e., due process, uniformity, equitableness of taxation.).
Objections to taxpayer's suits for lack of sufficient personality or locus standi is a procedural
technicality which the court could brush aside, where the issues are of such importance in
keeping with the court's duty, under the 1987 Constitution and the laws, to determine that
public office has not abused the discretion given to them [or to determine whether
taxpayers have been prejudiced by such illegal expenditures. Courts may make such
determination being interpreters of the law. Kilosbayan, Inc. v. Guingona, J. 232 SCRA 110
(1994)].
TAXES DISTINGUISHED FROM OTHER IMPOSITIONS

Tax and Special Assessment
Imposed on persons,
property and exercise
Levied only on hand
Personal
liability
attaches on the person
assessed in case of nonpayment
Not
based
on
any
special or direct benefit
Cannot be made a personal liability of the person

assessed
Levied
annually
Exceptional both as to time and locality
and
paid
Based wholly on benefit
Exemption granted by
Art. VI, Sec 28 (3) OF
THE 1987 Constitution
is applicable
Tax and License Fee
Exemption does not apply. N.B. If property is exempt

from Special Assessment
Based on the power of

taxation
Emanates from police power
The
purpose
is
generate revenue
The purpose is regulatory
to
Amount is unlimited
Amount is limited to the cost of(1) issuing the license,

and (2) inspection and surveillance
Normally paid after the

start of a business
Normally paid before commencement of business
Taxes,
being
the
lifeblood of the State,
cannot be surrendered
except
for
lawful
consideration
Non-payment does not
make
the
business
illegal but maybe a
ground
for
criminal
prosecution
License fee may be with or without consideration
Non-payment makes the business illegal
Tax and Debt

An obligation imposed
by law
Created by contract
Due to the government

in its sovereign capacity
May be due to the government but in its corporate

capacity
Payable in money
Payable in money, property or service
Does not draw interest

except
in
case
of
delinquency
Not assignable
Draws interest if stipulated or delayed
Not
subject
to
compensation or set-off
Subject to compensation or set-off
Non-payment
is
punished
by
imprisonment except in
poll tax
Imposed only by public
authority
No imprisonment in case of non-payment (Art.III, Sec.

20,1987 Constitution
Assignable
Can be imposed by private individual
Non -Revenue Purpose

The Philippine Sugar Institute (Philsugin), a semi-public corporation, was created for the
purpose conducting research in and advancing the sugar industry in the country. To carry
out these objectives, the charter of Philsugin authorized the levy of ten centavos per picul of
sugar for five years to be collected from sugar cane planters in the country. The proceeds of
this levy would go to a special fund to be used exclusively by Philsugin. Philsugin then
purchased the insular Sugar Refinery using money from this special fund. Several years
later, insular Sugar Refinery had accumulated tremendous losses. Three sugar centrals
refused to continue paying their contributions to the fund on the ground that the purchase
of the Insular Sugar Refinery by Philsugin was not authorized by its charter and that the
continued operation of the refinery was inimical to their interests. They contended that their
obligation to pay their contributions subsisted only to the limit and extent that they were
benefited by the contributions, since the levy was merely e special assessment and not a
tax.
ISSUE: Whether the levy is a special assessment or a revenue measure.
HELD: It is neither. The levy for the Philsugin Fund is not so much an exercise of the
power of taxation nor the imposition of a special assessment, but the exercise of the
police power for the general welfare of the entire country. It is therefore an exercise of a
sovereign power, which no private citizen may lawfully resist.
The decision cited the case of Lutz v. Araneta in which the Court held that since sugar
production is one of the leading industries of our nation, its promotion, protection, and
advancement redound greatly to the general welfare. Hence, the Legislature found it in the
interest of the general welfare to stabilize the sugar industry with the help of the power of
taxation.
Republic v. Bacolod-Murcia Milling Co.
II A- Inherent limitations
LIMITATIONS ON THE TAXING POWER
A. INHERENT LIMITATIONS ( KEY: PENIS )
These proceed from the very nature of the taxing power itself. These are:
a. public purpose
b. tax exemptions of the government
c. non delegability of the taxing power
d. international comity and
e. territoriality or situs of taxation,
PUBLIC OR GOVERNMENTAL PURPOSE
The term public purpose is synonymous with "governmental purpose" It means a purpose
affecting the inhabitants of the state or taxing district as a community and not merely as
individuals and is designed to support the services of government for some of the
recognized objects of the country. The tax must be used:
1.
for
the
support
2.
for
any
of
the
recognized
3. to promote the welfare of the community.
of
objects
the
government;
of
government;
or
The reason for this rule is that a tax levied for a private purpose constitutes taking of
property without due process of law as it is beyond the power of the government to impose.
Also, since the government is established for public purpose - the promotion of the general
welfare, therefore public money can only be spent for the same purpose. Thus, time
limitation of public purpose is implied in the Constitution.
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, petitioner and
appellant, vs. THE SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL.,
respondents and appellees. [G.R. No. L-10405. December 29, 1960.]
SYLLABUS
1.
CONSTITUTIONAL LAW; LEGISLATIVE POWERS; APPROPRIATION OF PUBLIC
REVENUES ONLY FOR PUBLIC PURPOSES; WHAT DETERMINES VALIDITY OF A PUBLIC
EXPENDITURE. "It is a general rule that the legislature is without power to appropriate
public revenues for anything but a public purpose. . . . It is the essential character of the
direct object of the expenditure which must determine its validity as justifying a tax and not
the magnitude of the interests to be affected nor the degree to which the general advantage
of the community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental advantage to the public or to the state, which results from the
promotion of private interests, and the prosperity of private enterprises or business, does
not justify their aid by the use of public money." (23 R. L. C. pp. 398-450).
2.
ID.; ID.; ID.; UNDERLYING REASON FOR THE RULE. Generally, under the express
or implied provisions of the constitution, public funds may be used only for a public
purpose. The right of the legislature to appropriate public funds is correlative with its right
to tax, and, under constitutional provisions against taxation except for public purposes and
prohibiting the collection of a tax for one purpose and the devotion thereof to another
purpose, no appropriate of state funds can be made for other than a public purpose. (81
C.J.S. p. 1147).
3.
ID.; ID.; ID.; TEST OF CONSTITUTIONALITY. The test of the constitutionality of a
statute requiring the use of public funds is whether the statute is designed to promote the
public interests, as opposed to the furtherance of the advantage of individuals, although
such advantage to individuals might incidentally serve the public. (81 C.J.S. p. 1147).
4.
ID.; ID.; ID.; ID.; POWERS OF CONGRESS AT THE TIME OF PASSAGE OF A STATUTE
SHOULD BE CONSIDERED. The validity of a statute depends upon the powers of
Congress at the time of its passage or approval, not upon events occurring, or acts
performed, subsequently thereto, unless the latter consist of an amendment of the organic
law, removing, with retrospective operation, the constitutional limitation infringed by said
statute.
5.
ID.; ID.; ID.; APPROPRIATION FOR A PRIVATE PURPOSE NULL AND VOID;
SUBSEQUENT DONATION TO GOVERNMENT NOT CURATIVE OF DEFECT. Where the land
on which projected feeder roads are to be constructed belongs to a private person, an
appropriation made by Congress for that purpose is null and void, and a donation to the
Government, made over five (5) months after the approval and effectivity of the Act for the
purpose of giving a "semblance of legality" to the appropriation, does not cure the basic
defect. Consequently, a judicial nullification of said donation need not precede the
declaration of unconstitutionality of said appropriation.
6.
ID.; ID.; ID.; ID.; RIGHT OF TAXPAYERS TO CONTEST CONSTITUTIONALITY OF A
LEGISLATION. The relation between the people of the Philippines and its taxpayers, on
the one hand, and the Republic of the Philippines, on the other, is not identical to that
obtaining between the people and taxpayers of the U.S. and its Federal Government. It is
closer, from a domestic viewpoint, to that existing between the people and taxpayers of
each state and the government thereof, except that the authority of the Republic of the
Philippines over the people of the Philippines is more fully direct than that of the states of
the Union, insofar as the simple and unitary type of our national government is not subject
to limitations analogous to those imposed by the Federal Constitution upon the states of the
Union, and those imposed upon the Federal Government in the interest of the states of the
Union. For this reason, the rule recognizing the right of taxpayers to assailed the
constitutionality of a legislation appropriating local or state public funds - which has been
upheld by the Federal Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) - has greater
application in the Philippines than that adopted with respect to acts of Congress of the
United States appropriating federal funds.
7.
CONTRACTS; DEFENSE OF ILLEGALITY; EXCEPTIONS TO ARTICLE 1421 OF THE
CIVIL CODE. Article 1421 of the Civil Code is subject to exceptions. For instance, the
creditors of a party to an illegal contract may, under the conditions set forth in Article 1177
of said Code, exercise the rights and actions of the latter, except only those which are
inherent in his person, including his right to the annulment of said contract, even though
such creditors are not affected by the same, except indirectly, in the manner indicated in
said legal provision.
DECISION
Appeal, by petitioner Wenceslao Pascual, from a decision of the Court of First Instance of
Rizal, dismissing the above entitled case and dissolving the writ of preliminary injunction
therein issued, without costs.
On August 31, 1954, petitioner Wenceslao Pascual, as Provincial Governor of Rizal,
instituted this action for declaratory relief, with injunction upon the ground that Republic Act
No. 920, entitled An Act Appropriating Funds for Public Works", approved on June 20, 1953,
contained, in section 1-C (a) thereof, an item (43[h]) of P85,000.00, "for the construction,
reconstruction, repair, extension and improvement" of "Pasig feeder road terminals (Gen.
Roxas Gen. Araneta Gen. Lucban Gen. Capinpin Gen. Segundo Gen. Delgado
Gen. Malvar Gen. Lim)"; that, at the time of the passage and approval of said Act, the
aforementioned feeder roads were "nothing but projected and planned subdivision roads,
not yet constructed, . . . within the Antonio Subdivision . . . situated at . . . Pasig, Rizal"
(according to the tracings attached to the petition as Annexes A and B, near Shaw
Boulevard, nor far away from the intersection between the latter and Highway 54), which
projected feeder roads "do not connect any government property or any important premises
to the main highway"; that the aforementioned Antonio Subdivision (as well as the lands on
which said feeder roads were to be constructed) were private respondent Jose C. Zulueta,
who, at the time of the passage and approval of said Act, was a member of the Senate of
the Philippines; that on May 29, 1953, respondent Zulueta, addressed a letter to the
Municipal Council of Pasig, Rizal, offering to donate said projected feeder roads to the
municipality of Pasig, Rizal; that, on June 13, 1953, the offer was accepted by the council,
subject to the condition "that the donor would submit a plan of the said roads and agree to
change the names of two of them"; that no deed of donation in favor of the municipality of
Pasig was, however, executed; that on July 10, 1953, respondent Zulueta wrote another
letter to said council, calling attention to the approval of Republic Act No. 920, and the sum
of P85,000.00 appropriated therein for the construction of the projected feeder reads in
question; that the municipal council of Pasig endorsed said letter of respondent Zulueta to
the District Engineer of Rizal, who, up to the present "has not made any endorsement
thereon"; that inasmuch as the projected feeder roads in question were private property at
the time of the passage and approval of Republic Act No. 920, the appropriation of
P85,000.00 therein made, for the construction, reconstruction, repair, extension and
improvement of said projected feeder roads, was "illegal and, therefore, void ab initio"; that
said appropriation of P85,000.00 was made by Congress because its members were made
to believe that the projected feeder roads in question were "public roads and not private
streets of a private subdivision"; that, "in order to give a semblance of legality, when there
is absolutely none, to the aforementioned appropriation", respondent Zulueta executed, on
December 12, 1953, while he was a member of the Senate of the Philippines, an alleged
deed of donation copy of which is annexed to the petition of the four (4) parcels of
land constituting said project feeder roads, in favor of the Government of the Republic of
the Philippines; that said alleged deed of donation was on the same date, accepted by the
ten Executive Secretary; that being subject to an onerous condition, said donation partook
of the nature of a contract; that, such, said donation violated the provision of our
fundamental law prohibition members of Congress from being directly or indirectly
financially interested in any contract with the Government, and, hence, is unconstitutional,
as well as null and void ab initio, for the construction of the projected feeder roads in
question with public funds would greatly enhance or increase the value of the
aforementioned subdivision of respondent Zulueta, "aside from relieving him from the
burden of constructing his subdivision streets or roads at his own expense"; that the
construction of said projected feeder roads was then being undertaken by the Bureau of
Public Highways; and that, unless restrained by the court, the respondents would continue
to execute, comply with, follow and implement the aforementioned illegal provision of law,
"to the irreparable damage, detriment and prejudice not only to the petitioner but to the
Filipino nation."
Petitioner prayed, therefore, that the contested item of Republic Act No. 920 be declared
null and void; that the alleged deed of donation of the feeder roads in question be "declared
unconstitutional and, therefore, illegal"; that a writ of injunction be issued enjoining the
Secretary of Public Works and Communications, the Director of the Bureau of Public Works,
the Commissioner of the Bureau of Public Highways and Jose C. Zulueta from ordering or
allowing the continuance of the above-mentioned feeder roads project, and from making
and securing any new and further releases on the aforementioned item of Republic Act No.
926 and the disbursing officers of the Department of Public Works and Communications, the
Bureau of Public Works and the Bureau of Public Highways from making any further
payments out of said funds provided for in Republic Act No. 920; and that pending final
hearing on the merits, a writ of preliminary injunction be issued enjoining the
aforementioned parties respondent from making and securing any new and further releases
on the aforesaid item of Republic Act No. 920 and from making any further payments out of
said illegally appropriated funds.
Respondents moved to dismiss the petition upon the ground that petitioner had "no legal
capacity to sue", and that the petition did "not state a cause of action". In support to this
motion, respondent Zulueta alleged that the Provincial Fiscal of Rizal, not its provincial
governor, should represent the Province Administrative Code; that said respondent "not
aware of any law which makes illegal the appropriation of public funds for the improvement
of . . . private proper"; and that, the constitutional provision invoked by petitioner
inapplicable to the donation in question, the same being a pure act of liberality, not a
contract. The other respondents, in turn, maintained that petitioner could not assail the
appropriation in question because "there is no actual bona fide case . . . in which the
validity of Republic Act No. 920 is necessarily involved and petitioner "has not shown that
he has a personal and substantial interest" in said Act "and that its enforcement has caused
or will cause him a direct injury".
Acting upon said motion to dismiss, the lower court rendered the aforementioned decision,
dated October 29, 1953, holding that, since public interest is involved in this case, the
Provincial Governor of Rizal and the provincial fiscal thereof who represents him therein,
"have the requisite personalities" to question the constitutionality of the disputed item of
Republic Act No. 920; that "the legislature is without power to appropriate public revenues
for anything but a public purpose", that the construction and improvement of the feeder
roads in question, if such roads were private property, would not be a public purpose; that,
being subject to the following condition:
"The within donation is hereby made upon the condition that the Government of the
Republic of the Philippines will use the parcels of land hereby donated for street purposes
only and for no other purposes whatsoever; it being expressly understood that should the
Government of the Republic of the Philippines violate the condition hereby imposed upon it,
the title to the land hereby donated shall, upon such violation, ipso facto revert to the
DONOR, JOSE C. ZULUETA." which is onerous, the donation in question is a contract; that
said donation or contract is "absolutely forbidden by the Constitution" and consequently
illegal", for Article 1409 of the Civil Code of the Philippines, declares in existent and void
from the very beginning contracts "whose cause, object or purpose is contrary to law,
morals . . . or public policy"; that the legality of said donation may not be contested,
however, by petitioner herein, because his "interests are not directly affected" thereby; and
that, accordingly, the appropriation in question "should be upheld" and the case dismissed.
At the outset, it should be noted that we are concerned with a decision granting the
aforementioned motions to dismiss, which as such, are deemed to have admitted
hypothetically the allegations of fact made in the petition of appellant herein. According to
said petition, respondent Zulueta is the owner of several parcels of residential land, situated
in Pasig Rizal, and known as the Antonio Subdivision, certain portions of which had been
reserved for the projected feeder roads aforementioned, which, admittedly, were private
property of said respondent when Republic Act No. 920, appropriating P85,000.00 for the
"construction, reconstruction, repair, extension and improvement" of said roads, was
passed by Congress, as well as when it was approved by the President on June 20, 1953.
The petition further alleges that the construction of said feeder roads, to be undertaken with
the aforementioned appropriation of P85,000.00, would have the effect of relieving
respondent Zulueta of the burden of constructing its subdivision streets or roads at his own
expenses, and would greatly enhance or increase the value of the subdivision" of said
respondent. The lower court held that under these circumstances, the appropriation in
question was "clearly for a private, not a public purpose."
Respondents do not deny the accuracy of this conclusion, which is self-evident. However,
respondent Zulueta contended, in his motion to dismiss that:
"A law passed by Congress and approved by the President can never be illegal because
Congress is the source of all laws . . .. Aside from the fact that the movant is not aware of
any law which makes illegal the appropriation of public funds for the improvement of what
we, in the meantime, may assume as private property . . .." (Record on Appeal, pp. 33.)
The first proposition must be rejected most emphatically, it being inconsistent with the
nature of the Government established under the Constitution of the Philippines and the
system of checks and balances underlying our political structure. Moreover, it is refuted by
the decisions of this Court invalidating legislative enactments deemed violative of the
Constitution or organic laws.
As regards the legal feasibility of appropriating public funds for a private purpose the
principle according to Ruling Case Law, is this:
"It is a general rule that the legislature is without power to appropriate public revenue for
anything but a public purpose. . . . It is the essential character of the direct object of the
expenditure which must determine its validity as justifying a tax, and not the magnitude of
the interests to be affected nor the degree to which the general advantage of the
community, and thus the public welfare, may be ultimately benefited by their promotion.
Incidental advantage to the public or to the state, which results from the promotion of
private interests and the prosperity of private enterprises or business, does not justify their
aid by the use of public money." (25 R.L.C. pp. 398-400; Italics supplied.)
The rule is set forth in Corpus Juris Secundum in the following language:
"In accordance with the rule that the taxing power must be exercised for public purposes
only, discussed supra sec. 14, money raised by taxation can be expanded only for public
purposes and not for the advantage of private individuals." (85 C.J.S. pp. 645-646; italics
supplied.)
Explaining the reason underlying said rule, Corpus Juris Secundum states:
"Generally, under the express or implied provisions of the constitution, public funds may be
used for a public purpose. The right of the legislature to appropriate funds is correlative
with its right to tax, under constitutional provisions against taxation except for public
purposes and prohibiting the collection of a tax for one purpose and the devotion thereof to
another purpose, no appropriation of state funds can be made for other than a public
purpose. . .
xxx
xxx
xxx
"The test of the constitutionality of a statute requiring the use of public funds is whether the
statute is designed to promote the public interests, as opposed to the furtherance of the
advantage of individuals, although each advantage to individuals might incidentally serve
the public. . . ." (81 C.J.S. p. 1147; italics supplied.)
Needless to say, this Court is fully in accord with the foregoing views which, apart from
being patently sound, are a necessary corollary to our democratic system of government,
which, as such, exists primarily for the promotion of the general welfare. Besides, reflecting
as they do, the established jurisprudence in the United States, after whose constitutional
system ours has been patterned, said views and jurisprudence are, likewise, part and parcel
of our own constitutional law.
This notwithstanding, the lower court felt constrained to uphold the appropriation in
question, upon the ground that petitioner may not contest the legality of the donation
above referred to because the same does not affect him directly. This conclusion is,
presumably, based upon the following premises namely: (1) that, if valid, said donation
cured the constitutional infirmity of the aforementioned appropriation; (2) that the latter
may not be annulled without a previous declaration of unconstitutionality of the said
donation; and (3) that the rule set forth in Article 1421 of the Civil Code is absolute, and
admits of no exception. We do not agree with these premises.
The validity of a statute depends upon the powers of Congress at the time of its passage or
approval, not upon events occupying, or acts performed, subsequently thereto, unless the
latter consist of an amendment of the organic law, removing, with retrospective operation,
the constitutional limitation infringed by said statute. Referring to the P85,000.00
appropriation for the projected feeder roads in question, the legality thereof depended upon
whether said roads were public or private property when the bill, which, later on, became
Republic Act No. 920, was passed by Congress, or when said bill was approved by the
President and the disbursement of said sum became effective, or on June 20, 1953 (see
section 13 of said Act). Inasmuch as the land on which the projected feeder roads were to
be constructed belonged then to respondent Zulueta, the result is that said appropriation
sought a private purpose, and, hence, was null and void. The donation to the Government,
over five (5) months after the approval and effectivity of said Act, made according to the
petition, for the purpose of giving a "semblance of legality", or legalizing, the appropriation
in question, did not cure its aforementioned basic defect. Consequently, a judicial
nullification of said donation need not precede the declaration of unconstitutionality of said
appropriation.
Again, Article 1421 of our Civil Code, like many other statutory enactments, is subject to
exceptions. For instance, the creditors of a party to an illegal contract may, under the
conditions set forth in Article 1177 of said Code, exercise the rights and actions of the
latter, except only those which are inherent in his person, including, therefore, his right to
the annulment of said contract, even though such creditors are not affected by the same,
except indirectly, in the manner indicated in said legal provision.
Again, it is well settled that the validity of a statute may be contested only by one who will
sustain a direct injury in consequence of its enforcement. Yet, there are many decisions
nullifying, at the instance of taxpayers, laws providing for the disbursement of public funds,
upon the theory that "the expenditure of public funds by an officer of the State for the
purpose of administering an unconstitutional act constitutes an misapplication of such
funds," which may be enjoined at the request of a taxpayer. Although there are some
decisions to the contrary, the prevailing view in the United States is stated in the American
Jurisprudence as follows:
"In the determination of the degree of interest essential to give the requisite standing to
attack the constitutionality of a statute the general rule is that only persons individually
affected, but also taxpayers, have sufficient interest in preventing the illegal expenditure of
moneys raised by taxation and may therefore question the constitutionality of statutes
requiring expenditure of public moneys." (11 Am. Jur. 761; italics supplied.)
However, this view was not favored by the Supreme Court of the U.S. in Frothingham vs.
Mellon (262 U.S. 447), insofar as federal laws are concerned, upon the ground that the
relationship of a taxpayer of the U.S. to its Federal Government is different from that of a
taxpayer of a municipal corporation to its government. Indeed, under the composite system
of government existing in the U.S., states of the Union are integral part of the Federation
from an international viewpoint, but, each state enjoys internally a substantial measure of
sovereignty, subject to the limitations imposed by the Federal Constitution. In fact, the
same was made by representatives of each state of the Union, not of the people of the U.S.,
except insofar as the former represented the people of the respective States, and the
people of each State has, independently of that of the others, ratified said Constitution. In
other words, the Federal Constitution and the Federal statutes have become binding upon
the people of the U.S. in consequence of an act of, and, in this sense, through the
respective states of the Union of which they are citizens. The peculiar nature of the relation
between said people and the Federal Government of the U.S. is reflected in the election of
its President, who is chosen directly, not by the people of the U.S., but by electors chosen
by each State, in such manner as the legislature thereof may direct (Article II, section 2, of
the Federal Constitution).
The relation between the people of the Philippines and its taxpayers, on the other hand, and
the Republic of the Philippines, on the other, is not identical to that obtaining between the
people and taxpayers of the U.S. and its Federal Government. It is closer, from a domestic
viewpoint, to that existing between the people and taxpayers of each state and the
government thereof, except that the authority of the Republic of the Philippines over the
people of the Philippines is more fully direct than that of the states of the Union, insofar as
the simple and unitary type of our national government is not subject to limitations
analogous to those imposed by the Federal Constitution upon the states of the Union, and
those imposed upon the Federal Government in the interest of the states of the Union. For
this reason, the rule recognizing the right of taxpayers to assail the constitutionality of a
legislation appropriating local or state public funds which has been upheld by the Federal
Supreme Court (Crampton vs. Zabriskie, 101 U.S. 601) has greater application in the
Philippines than that adopted with respect to acts of Congress of the United States
appropriating federal funds.
Indeed, in the Province of Tayabas vs. Perez (56 Phil., 257), involving the expropriation of a
land by the Province of Tayabas, two (2) taxpayers thereof were allowed to intervene for
the purpose of contesting the price being paid to the owner thereof, as unduly exorbitant. It
is true that in Custodio vs. President of the Senate (42 Off. Gaz., 1243), a taxpayer and
employee of the Government was not permitted to question the constitutionality of an
appropriation for backpay of members of Congress. However, in Rodriguez vs. Treasurer of
the Philippines and Barredo vs. Commission on Election (84 Phil., 368; 45 Off. Gaz., 4411),
we entertained the action of taxpayers impugning the validity of certain appropriations of
public funds, and invalidated the same. Moreover, the reason that impelled this Court to
take such position in said two (2) cases the importance of the issues therein raised is
present in the case at bar. Again, like the petitioners in the Rodriguez and Barredo cases,
petitioner herein is not merely a taxpayer. The province of Rizal, which he represents
officially as it Provincial Governor, is our most populated political subdivision, and, the
taxpayers therein bear a substantial portion of the burden of taxation, in the Philippines.
Hence, it is our considered opinion that the circumstances surrounding this case sufficiently
justify petitioner's action in contesting the appropriation and donation in question; that this
action should not have been dismissed by the lower court; and that the writ of preliminary
injunction should have been maintained.
Wherefore, the decision appealed from is hereby reversed, and the records are remanded to
the lower court for further proceedings not inconsistent with this decision, with the costs of
this instance against respondent Jose C. Zulueta. It is so ordered.
PUBLIC PURPOSE REQUIREMENT
Congress passed an RA appropriating P85,000 for the construction of Pasig feeder road
terminals. The Provincial Governor of Rizal filed an action for declaratory relief and
injunction, claiming that at the time of the passage and approval of the Act, these feeder
roads had not yet been constructed and were not connected to any government property or
main highway. The feeder roads were actually within the Antonio Subdivision, which was
owned by Jose Zulueta, a member of the Senate of the Philippines. Zulueta, before the
passage of the Act, had offered to donate the property to the
municipality of Pasig, but the deed of donation was executed only several
months after the RA was passed. Hence, Congress appropriated public
funds for the construction of feeder roads that were, at the time the law
was passed, private property.
ISSUE: Whether the appropriation is valid.
HELD: The appropriation is INVALID. The taxing power must be exercised for public
purposes only and not for the advantage of private individuals. The right of the legislature
to appropriate public funds is correlative with its right to tax. As the Constitution prohibits
taxation except for a public purpose, so also no appropriation of state funds can be made
other than for a public purpose. The test of the constitutionality of a statute requiring the
use of public funds is whether the statute is designed to promote the public interests as
opposed to the furtherance of the advantage of individuals, although such advantage to
individuals might incidentally serve the public. Even if subsequently, Zulueta executed the
deed of donation in favor of the municipality, making the roads public property, the
appropriation is still invalid. The validity of the statute depends upon the powers of
Congress at the time of its passage, not upon events occurring after. At the time the bill
was passed, the road was still private property. Therefore, the appropriation sought a
private purpose and was null and void. The subsequent donation could not have cured this
nullity. "It is a general rule that the legislature is without power to appropriate public
revenues for anything but a public purpose. It is the essential character of the direct object
of the expenditure which must determine its validity as justifying a tax and not the
magnitude of the interests to be affected nor the degree to which the general advantage of
the community, and thus the public welfare, may be ultimately benefited by their
promotion. Incidental advantage to the public or to the state, which results from the
promotion of private interests, and the prosperity of private enterprises or business, does
not justify their aid by the use of public money." Where the land on which projected feeder
roads are to be constructed belongs to a private person, an appropriation made by
Congress for that purpose is null and void, and a donation to the Government, made over
five (5) months after the approval and effectivity of the Act for the purpose of giving a
"semblance of legality" to the appropriation, does not cure the basic defect. Consequently, a
judicial nullification of said donation need not precede the declaration of unconstitutionality
of said appropriation. The test of the constitutionality of a statute requiring the use of public
funds is whether the statute is designed to promote the public interests, as opposed to the
furtherance of the advantage of individuals, although such advantage to individuals might
incidentally serve the public.
WENCESLAO PASCUAL, in his official capacity as Provincial Governor of Rizal, vs. THE
SECRETARY OF PUBLIC WORKS AND COMMUNICATIONS, ET AL. [G.R. No. L-10405.
December 29, 1960.]
Public Purpose
Commonwealth Act No. 567, known as the Sugar Adjustment Act, was promulgated in 1940
in response to the imminent threat to the sugar industry by the imposition of export taxes
upon sugar as provided in the Tydings-McDuffie Act and the loss of its preferential position
in the US market. In order to stabilize the sugar industry, CA 567 provided for an increase
in the existing tax on the manufacture of sugar, the proceeds of which would accrue to the
Sugar Adjustment and Stabilization Fund.
Walter Lutz, in his capacity as administrator of the Estate of Antonio Ledesma, wanted to
recover from the Collector of Internal Revenue the amount paid by the estate as taxes,
alleging that the tax imposed by CA 567 is unconstitutional, being levied for the aid and
support of the sugar industry exclusively, which is not a public purpose.
ISSUE: Whether the tax is unconstitutional because it is not devoted to a public purpose.
HELD: The tax law is valid. The defect in the argument of Lutz is his assumption that the
tax provided for in CA 567 is a pure exercise of the taxing power. In reality, the tax is levied
with a regulatory purpose, to provide means for the rehabilitation and stabilization of the
threatened sugar industry. It is primarily an exercise of police power. The Court takes
judicial notice of the fact that sugar production is one of the great industries of our nation.
Its promotion, protection, and advancement redound greatly to the general welfare. Hence,
the legislature may determine within reasonable bounds what is necessary for its protection
and expedient for its promotion. Taxation may be made for the implemention of the State's
police power.
It does not matter that the funds raised under the Sugar Stabilization Act should be
exclusively spent in aid of the sugar industry, since it is that very enterprise that is being
protected. This still does not constitute expenditure of tax money for private purposes,
since the funds will be used to seek increase of efficiency in sugar production, solution of its
problems and the improvement of laying and working conditions in sugar mills or
plantations.
Walter Lutz v. J. Antonio Araneta GR L-7859 December 22, 1955
EXEMPTION OF GOVERNMENT
EXEMPTION OF THE GOVERNMENT
Property of the national government as well as those of the local government units are not
subject to tax, otherwise it will result in the absurd situation of the government taxing
money from one pocket and putting it in another? (Cooley as cited in Board of Assessment
Appeals of Laguna vs. CTA)
Therefore nothing can prevent Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions may be subject to tax.
(MCIAA vs. Marcos) -Unless otherwise provided by law, the exemption applies only to
government entities through which the government immediately and directly exercises its
government powers, (Infantry Post Exchange vs. Posadas)
Rules:
a. Administrative Agencies performing:
1) Governmental functions tax exempt unless when the law expressly provides for tax.
[Sec. 32(B)(7)]
2) Proprietary functions taxable unless exempted by law. [Sec. 27(C)]
b. Government-owned and controlled corporations
General Rule: Since they are performing proprietary functions, they are subject to taxation.
Their income is taxable at the rate imposed upon corporations or associations engaged in a
similar business, industry, or activity.
Except: GSIS, SSS, PHIC and PCSO [Sec. 27(C), NIRC as amended by RA 9337]
NOTE: PAGCOR used to be exempt but effective July 1, 2005, RA 9337 removed the
exemption.
EXEMPTION of GOVERNMENT agencies and instrumentalities
Agencies and instrumentalities of the government are generally exempt from taxation
because it would mean that the government would be taxing itself in order to raise money
that it will then pay over to itself. Moreover, this immunity rests upon fundamental
principles of government being necessary in order that the functions of government would
not be unduly impeded. Exemption of government agencies from taxation also reduces the
amount of money to be handled by the government in the course of its operations.
Municipalities are empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation, but also to levy for public purposes, just and
uniform taxes.
SOCIAL SECURITY SYSTEM

vs. CITY OF BACOLOD and MIGUEL REYNALDO as City
Treasurer of Bacolod City [G.R. No. L-35726. July 21, 1982.]
SYNOPSIS
For petitioner Social Security System's (SSS) failure to pay realty taxes for 3 years on the
lands and buildings used in pursuance of its operations, respondent City of Bacolod levied
upon said properties and thereafter declared them forfeited in its favor. Petitioner in a letter
addressed to the city Mayor, sought reconsideration of the forfeiture proceedings on the
ground that petitioner, being a government-owned and controlled corporation, is exempt
from payment of real estate taxes. When no action was taken thereon, petitioner filed an
action in the Court of First Instance for nullification of the forfeiture proceedings. After due
hearing, the lower court rendered a decision declaring the properties of the Social Security
System not exempt from the payment of realty taxes since the SSS does not fall under the
provisions of Section 29 of the Charter of the City of Bacolod and there is no law exempting
said entity from taxes. Hence this petition.
The Supreme Court held that under Section 29 of the Charter of the City of Bacolod, lands
and buildings owned by the Republic of the Philippines, regardless of whether such property
is devoted to governmental or proprietary purpose is exempt from payment of real estate
taxes; and that Presidential Decree No. 24, which amended the Social Security Act of 1954,
has removed all doubts as to the exemption of the SSS from taxation by explicitly providing
for such exemption.
SYLLABUS
1.
CONSTITUTIONAL LAW; TAXATION; CHARTER OF BACOLOD CITY; GOVERNMENT
LANDS AND BUILDINGS ARE EXEMPT FROM REAL ESTATE TAX. The subject of inquiry in
the case at bar is not whether a government corporation exercising ministrant or
proprietary function, such as petitioner Social Security System, is exempt from the payment
of legal fees, but whether the properties in question, which are concededly owned by the
government, are exempt from realty taxes. We hold that under Section 29 of the Charter of
the City of Bacolod, they are so exempt. It bears emphasis that the said section does not
contain any qualification whatsoever in providing for the exemption from real estate taxes
of "lands and buildings owned by the Commonwealth or Republic of the Philippines." Hence,
when the legislature exempted lands and buildings owned by the government from payment
of said taxes, what it intended was a broad and comprehensive application of such
mandate, regardless of whether such property is devoted to governmental or proprietary
purpose.
2.
ID.; ID.; PRESIDENTIAL DECREE NO. 24 EXEMPTS SOCIAL SECURITY SYSTEM
FROM TAXATION. Presidential Decree No. 24, which amended the Social Security Act of
1954, has already removed all doubts as to the exemption of the SSS from taxation.
AQUINO, J ., concurring:
TAXATION; REAL PROPERTY TAX CODE; EXEMPTION PROVIDED IN P. D. NO. 24. I concur
because the Social Security System, which is controlled and directed by a Social Security
Commission headed by the Minister of Labor and Employment and six members appointed
by the President of the Philippines, and which is an agency of the Republic of the
Philippines, providing for sickness, unemployment, retirement, disability and death benefits
for employees, is indubitably a part of the Government of the Republic and, therefore, it is
clearly exempted from realty tax under the Assessment Law and the Real Property Tax
Code. That exemption is clearly provided for in Presidential Decree No. 24, amending
Section 16 of the Social Security Law.
DECISION
We set aside the decision of the Court of First Instance of Negros Occidental in Civil Case
No. 5980, entitled "Social Security System versus City of Bacolod and Miguel Reynaldo, as
City Treasurer of Bacolod City," which sustained the forfeiture of certain real properties of
the Social Security System in favor of the City of Bacolod for delinquency in payment of real
estate taxes.
Petitioner Social Security System is a government agency created under Republic Act No.
1161, whose primary function is to "develop, establish gradually and perfect a social
security system which shall be suitable to the needs of the people throughout the
Philippines, and shall provide protection against the hazards of disability, sickness, old age,
and death."
In pursuance of its operations, petitioner, maintains a number of regional offices, one of
which is the five-storey building, known as SSS Building in Bacolod City, occupying four
parcels of land. In 1970, said lands and building were assessed for taxation at
P1,744,840.00.
For petitioner's failure to pay the realty taxes for the years 1968, 1969 and 1970 which,
including penalties, amounted to P104,956.06, respondent city sometime in early 1970
levied upon said lands and building; and on April 3, 1970, it declared said properties
forfeited in its favor.
In protest thereto, petitioner addressed a letter dated July 27, 1970 to the City Mayor of
Bacolod, through respondent city treasurer, seeking reconsideration of the forfeiture
proceedings on the ground that petitioner, being a government-owned and controlled
corporation, is exempt from payment of real estate taxes.
When no action thereon was taken by respondent city treasurer,. petitioner filed an action
in the Court of First Instance of Negros Occidental for nullification of the forfeiture
proceedings. In the same complaint it sought the issuance of a writ of preliminary injunction
to restrain respondent city from consolidating its ownership over the forfeited properties,
and this writ was issued by the court upon petitioner's posting of a cash bond in the amount
of P105,000.00.
After due hearing, the lower court rendered a decision declaring
". . . the properties of the Social Security System not exempt from the payment of real
property tax inasmuch as the SSS does not fall under the provisions of Section 29 of the
Charter of the City of Bacolod, and considering further that there is no law which exempts
said entity from taxes, the same should therefore be subject to taxation like any other
corporation in accordance with Section 27 of the City Charter of Bacolod City. The complaint
is hereby dismissed with costs against the plaintiff."
Hence, this petition.
We find the petition meritorious. Section 29 of the Commonwealth Act No. 326, otherwise
known as the Charter of the City of Bacolod, provides as follows:
"SECTION 29. Exemption from taxation. Lands and buildings owned by the United States
of America, the Commonwealth of the Philippines, the City of Bacolod, the Province of
Occidental Negros, and cemeteries, churches and their adjacent parsonages and convents,
and lands, buildings and improvements used exclusively for religious, charitable, scientific
or educational purposes, and not for profit, shall be exempt from taxation; but such
exemptions shall not extend to lands or buildings held for investment, though the income
therefrom be devoted to religious, charitable, scientific or educational purposes."
The court a quo restricted the scope of the exemption contemplated by the above section
exclusively to those government agencies, entities and instrumentalities exercising
governmental or sovereign functions. It relied on the ruling laid down in "NACOCO versus
Bacani, et al." to the effect that the National Coconut Corporation, a government agency
performing mere ministrant functions, is not included in the term "Government of the
Republic of the Philippines" for purposes of exemption from the legal fees provided for in
Rule 130 of the Rules of Court. Invoking the case of "SSS versus Hon. Soriano, et al."
where this Court definitively categorized the SSS as a government agency performing
proprietary functions, the trial court concluded that petitioner SSS does not fall within the
coverage of Section 29 of the Charter of Bacolod City.
There can be no question that a government owned or controlled corporation is subject to
payment of the legal fees provided for in Rule 130 of the Rules of Court. Such liability is
plainly written in Section 1 of Republic Act No. 104, which reads:
". . . All corporations, agencies, or instrumentalities owned or controlled by the government
shall pay such duties, taxes, fees and other charges upon their transaction, business,
industry, sale, or income as are imposed by law upon individuals, associations or
corporations engaged in any taxable business, industry, or activity except on goods or
commodities imported or purchased and sold or distributed for relief purposes as may be
determined by President of the Philippines."
However, the subject of inquiry in the case at bar is not whether a government corporation
exercising ministrant or proprietary function, such as petitioner SSS, is exempt from the
payment of legal fees, but whether the properties in question, which are concededly owned
by the government, are exempt from realty taxes. We hold that under Section 29 of the
Charter of the City of Bacolod, they are so exempt.
It bears emphasis that the said section does not contain any qualification whatsoever in
providing for the exemption from real estate taxes of "lands and buildings owned by the
Commonwealth or Republic of Philippines." Hence, when the legislature exempted lands and
buildings owned by the government from payment of said taxes, what it intended was a
broad and comprehensive application of such mandate, regardless of whether such property
is devoted to governmental or proprietary purpose.
This conclusion is ineluctable from an examination of Commonwealth Act No. 470, a statute
which deals specifically with the incidence of real estate taxes and the exemption thereto. It
is to be noted that Section 3(a) of said statute contains a similarly worded exemption from
the payment of realty taxes of "properties owned by . . . the Republic of the Philippines, any
province, city, municipality or municipal district . . ." And in "Board of Assessment Appeals
versus Court of Tax Appeals" , this Court interpreted this provision in this wise:
". . . in exempting from taxation 'property owned by the Republic of the Philippines, any
province, city, municipality or municipal district . . .' said section 3(a) of Republic Act No.
470 makes no distinction between property held in a sovereign, governmental or political
capacity and those possessed in a private propriety or patrimonial character. And where the
law does not distinguish neither may we, unless there are facts and circumstances clearly
showing that the lawmaker intended the contrary, but no such facts and circumstances
have been brought to our attention. Indeed, the noun 'property' and the verb 'owned' used
in said section 3 (a) strongly suggest that the object of exemption is considered more from
the view point of dominion, than from that of domain. Moreover, taxes are financial burdens
imposed for the purpose of raising revenues with which to defray the cost of the operation
of the Government, and a tax on property of the Government, whether national or local,
would merely have the effect of taking money from one pocket to put it in another pocket
(Cooley on Taxation, Sec. 621, 4th Edition). Hence, it would not serve, in the final analysis,
the main purpose of taxation. What is more, it would tend to defeat it, on account of the
paper work, time and consequently, expenses it would entail. (The Law on Local Taxation,
by Justiniano Y. Castillo, p. 13)."
The distinction laid down in "NACOCO versus Bacani" between government agencies
exercising constituent functions, on the one hand, and those performing ministrant
functions, on the other, has therefore no relevance to the issue before Us. What is decisive
is that the properties possessed by the SSS, albeit devoted to private or proprietary
purpose, are in fact owned by the government of the Philippines. As such they are exempt
from realty taxes. It is axiomatic that when public property is involved, exemption is the
rule and taxation, the exception.
In connection with the issue at hand, it would not be amiss to state that Presidential Decree
No. 24, which amended the Social Security Act of 1954, has already removed all doubts as
to the exemption of the SSS from taxation. Thus
"SEC. 16.
Exemption from tax, legal process, and lien. All laws to the contrary
notwithstanding, the SSS and all its assets, all contributions collected and all accruals
thereto and income therefrom as well as all benefit payments and all papers or documents
which may be required in connection with the operation or execution of this Act shall be
exempt from any tax, assessment, fee, charge or customs or import duty; and all benefit
payments made by the SSS shall likewise be exempt from all kinds of taxes, fees or
charges, and shall not be liable to attachment, garnishments, levy or seizure by or under
any legal or equitable process whatsoever, either before or after receipt by the person or
persons entitled thereto, except to pay any debt of the covered employee to the SSS."
WHEREFORE, the decision under review is hereby set aside, and the surety bond filed by
petitioner cancelled.
SO ORDERED.
AQUINO, J ., concurring:
I concur because the Social Security System, which is controlled and directed by a Social
Security Commission headed by the Minister of Labor and Employment and six members
appointed by the President of the Philippines, and which is an agency of the Republic of the
Philippines, providing for sickness, unemployment, retirement, disability and death benefits
for employees, is indubitably a part of the Government of the Republic and, therefore, it is
clearly exempted from realty tax under the Assessment Law and the Real Property Tax
Code. That exemption is clearly provided for in Presidential Decree No. 24, amending
section 16 of the Social Security Law.
The SSS is like the Government Service Insurance System (exempt from taxes under
section 33 of Presidential Decree No. 1146), the Civil Service Commission or any bureau of
the Government. It is not in the category of government-owned or controlled corporation.
Exemption of Government Instrumentalities
The SSS had an office building in Bacolod City. It failed to pay realty taxes to the city for
three consecutive years. The City levied upon the property and forfeited it in its favor. The
SSS protested the forfeiture on the ground that the SSS, being a government owned and
controlled corporation, is exempt from payment of real estate taxes.
ISSUE: Whether a government-owned or controlled corporation, performing proprietary
functions like the SSS, is exempt from paying realty taxes.
HELD: Yes. The SSS is exempt from paying realty taxes. The Charter of the City of Bacolod
provides that lands and buildings owned by the government are exempt from realty taxes.
In ruling that the SSS is not covered by the exemption, the CFI restricted the scope of the
exemption only to those properties owned by government agencies and instrumentalities
performing governmental or sovereign functions. It excluded from the coverage of the
exemption those performing proprietary functions, such as the SSS. It relied on the case of
NACOCO v. Bacani in which the Court held that government agencies performing
proprietary functions are not exempt from paying legal fees. The application of the NACOCO
v, Bacani case is incorrect, since that case cited was referring to legal fees and not to realty
taxes. For purposes of exemptions in the payment of realty taxes,.the distinction between
government agencies performing constituent and ministerial function is not important. What
is decisive is merely that the properties possessed by the SSS are in fact owned by the
government of the Philippines. As such, they are exempt from realty taxes. To make such a
distinction would have the effect of taking money from one pocket and putting it in another
pocket. It would not serve the main purpose of taxation and would even tend to defeat it,
because
of
the
paperwork,
SSS vs City of Bacolod:
time,
and
expenses
that
it
would
entail.
Distinction between acts in the performance of a government function and those in the
performance of a corporate or proprietary function
The Supreme Court made a distinction between acts in the performance of a government
function and those in the performance of a corporate or proprietary function and held:
"As ordinarily constituted, municipal corporations (and this may be said of the National
Government) have dual character, the one governmental, legislative, or public; the other,
proprietary or private. In their public capacity, a responsibility exists in the performance of
acts for the public benefit, and in this respect they are merely a part of the machinery of
government of the sovereignty creating them, and the authority of the state is supreme.
But in their PROPRIETARY or private character their powers are supposed to be conferred
not from considerations of state, but for the private advantage of the particular corporation
as a distinct legal personality (Bouvier's Law Dictionary, 3rd revision, vol. II, p. 2270).
In its governmental or public character, the corporation is made by the state one of its
instruments, or the local depository of certain limited and prescribed political powers, to be
exercised for the public good in behalf of the state rather than for itself. But in its
proprietary or private character, the theory is that the powers were supposed not to be
conferred primarily or chiefly from considerations connected with the government of the
state at large, but for the private advantage of the compact community which it is
incorporated as a distinct legal personality or corporate individual; and as to such powers,
and to property acquired and contracts made thereunder, the corporation is frequently
regarded as having the rights and obligations of a private rather than those of a public
corporation.
The governmental functions of a municipal corporation are those conferred or imposed upon
it as a local agency, to be exercised not only in the interest of its inhabitants, but also in the
advancement of the public good and welfare as affecting the public generally (37 Am. Jur.
727).
The distinction between acts in the performance of a governmental function and those in
the performance of a corporate or proprietary function is that in the case of the former, the
municipal corporation is executing a legislative mandate with respect to a public duty
generally, while in the other, it is exercising its private rights as a corporate body.
Angat River Irrigation System vs. Angat River Workers' Union,
102 Phil. 789,
796797
EXEMPTION OF ASSETS FROM TAXATION; NO DISTINCTION IN THE LAW EXEMPTING
GOVERNMENT FROM TAXATION, BETWEEN PROPERTY HELD IN GOVERNMENTAL CAPACITY
AND THOSE HELD IN PROPRIETARY CHARACTER
EXEMPTION NEVER RULED BY SUPREME COURT IN PREVIOUS CASES. The Supreme
Court never ruled in the case of City of Cebu vs. NAWASA, GR. No. L-12892, decided on
April 30, 1960, that the assets of the water system of the City of Cebu, which the NAWASA
had sought to take over, were subject to taxation. In that case, the doctrine laid down in
the case of City of Baguio vs. NAWASA, 106 Phil., 144, that municipal corporations held in
their proprietary character the assets of their respective waterworks, which, accordingly,
cannot be taken or appropriated by the National Government and placed under the
NAWASA without payment of just compensation, was merely reiterated.
In exempting from taxation "property owned by the Republic of the Philippines,
any province, city, municipality or municipal district . . . section 3(c) of Republic Act No. 470
makes no distinction between property held in a sovereign, governmental or political
capacity and those possessed in a private, proprietary or patrimonial character. The noun
"property" and the verb "owned" used in said section strongly suggest that the object of
exemption is considered more from the view point of dominion than from that of domain.
BOARD OF ASSESSMENT APPEALS, PROVINCE OF LAGUNA vs. COURT OF TAX APPEALS
and THE NATIONAL WATERWORKS AND SEWERAGE AUTHORITY (NAWASA) G.R. No. L18125 May 31, 1963
THE NATIONAL WATERWORKS AND SEWERAGE AUTHORITY (NWSA), plaintiff- appellee, vs.
QUEZON CITY and THE CITY MAYOR, defendants-appellants.
[G.R. No. L-25310.
April 26, 1968.]
SYLLABUS
1.
TAXATION; REAL PROPERTY TAX; EXEMPTION OF GOVERNMENT PROPERTIES,
INCLUDING NWSA PROPERTIES. The properties of the NWSA are exempt from realty tax
as properties of the Republic of the Philippines under Sec. 47(a) of Republic Act 537 (Rev.
Charter of Quezon City). And as held in Board of Assessment Appeals of Laguna vs. Court of
Tax Appeals (L-18125, May 31, 1963), NWSA properties are exempt from realty tax as
properties of the Republic regardless of the nature of said property, whether public or
patrimonial.
2.
ID.; ID.; PAYMENT NOT MADE UNDER PROTEST; EFFECT. Starting from 1957 up
to 1962, NWSA already knew it was exempt, as shown by its payment in 1957 under
protest, reiterated in 1961. NWSA, therefore, should have paid the rest of the taxes from
1957 to 1962 under protest. Section 63 of Rep. Act 537 applies to said payments and their
recovery. Said law directs its limitation to the court, not to the taxpayer, stating that no
court can entertain a suit unless the taxes are paid under protest. Accordingly, NWSA can
only recover the taxes paid for 1961, in the amount of P55,260.15. The tax paid for 1957,
altho under protest, cannot be recovered because of prescription, suit having been filed
more than six years after 1957, on July 17, 1964.
3.
ID.; ID.; EXEMPTION: LEASE TO PRIVATE ENTITIES; EFFECT. Although some lots
of NWSA were leased to private entities the Capitol Hills Golf Club and the International
Development Corporation - the same does not defeat exemption, in the light of the ruling in
the Board of Assessment Appeals of Laguna case, that exemption obtains even as to
properties that are patrimonial in nature, as long as they are owned by the Republic of the
Philippines, which includes NWSA..
DECISION
The National Waterworks and Sewerage Authority (NWSA for short) owns various parcels of
land in Balara, Quezon City. It paid real property taxes for them to Quezon City, as follows:
Year
Taxes
1951
P 92,160.90
1952
37,031.63
1953
33,126.95
1954
34,477.42
1955
35,052.73
1956
168,286.80
1957
135,359.65
1958
174,694.47
1959
55,104.59
1960
55,160.25
1961
55,160.15
1962
108,969.00
TOTAL P984,494.54
==========
Of the abovementioned taxes paid, only those for the years 1957 and 1961 were paid under
protest.
On May 31, 1963, We promulgated our decision in Board of Assessment Appeals, Province
of Laguna v. Court of Tax Appeals and NWSA, L-18125, declaring NWSA, a government
corporation, exempt from real property tax pursuant to Sec. 3(a) of Commonwealth Act
470. Said Commonwealth Act 470 exempts from real property taxes, properties owned by
the Republic of the Philippines. It is noteworthy that Quezon City's Charter, * also exempts
said kind of property from realty tax.
On October 30, 1963, pursuant to the aforementioned decision of this Court, NWSA
demanded, by letter to the Mayor of Quezon City, refund of the realty taxes paid by it from
1951 to 1962 in the total amount of P984,494.54.
Since Quezon City made no refund, NWSA filed on July 7, 1964, the present action in the
Court of First Instance of Manila, for recovery of the P984,494.54 aforementioned. Three
defenses were set up by defendant Quezon City in its answer: The taxes were paid without
protest except for 1957 and 1961; taxes paid four years or more prior to the filing of the
complaint have prescribed; and the taxes were collected under Republic Act 537 (Revised
Charter of Quezon City), not under Republic Act 104, so that the Supreme Court decision in
the Board of Assessment Appeals of Laguna case, supra, does not apply.
The parties thereafter stipulated that: (1) The total amount paid to Quezon City by NWSA
as realty taxes is P984,494.54; (2) NWSA claimed refund on October 30, 1963; and (3)
Prescription for refund of realty taxes erroneously paid is six years pursuant to Art. 1145,
Civil Code.
On June 25, 1965, the Court of First Instance rendered judgment, ordering Quezon City to
refund the realty taxes to NWSA, except those paid more than six years prior to the filing of
the complaint.
The present appeal was then taken to Us by Quezon City. Assigned as errors are: First, the
Court a quo erred in not declaring that NWSA's exemption started only from June 22, 1963,
the effective date of Republic Act 3597 giving NWSA exemption from taxes; second, the
Court a quo erred in applying the Board of Assessment Appeals of Laguna case, supra;
Third, the Court a quo erred in not requiring payment under protest for purposes of refund;
and fourth, the Court a quo erred in granting exemption on lands of NWSA leased by it to
private entities, thereby violating the rule of uniformity of taxation.
1.
NWSA's charter was amended on June 22, 1963 by Republic Act 3597 providing
exemption to NWSA from all taxes. Appellant urges the interpretation that Republic Act
3597's passage shows that NWSA enjoyed no tax exemption prior to that time.
Such submission is untenable. The properties of NWSA are exempt from realty tax as
properties of the Republic of the Philippines under Sec. 47(a) of Republic Act 537 (Revised
Charter of Quezon City). And as held in Board of Assessment Appeals of Laguna v. Court of
Tax Appeals, supra NWSA's properties are exempt from realty tax as properties of the
Republic of the Philippines, regardless of the nature of said property, whether public or
patrimonial.
2.
Appellant however disputes the applicability of the Board of Assessment Appeals of
Laguna case, on the ground that it was not a party thereto. Appellant forgets that said case
is not being applied on the principle of res judicata but on that of stare decisis. The
statutory construction made in said case, resulting in the ruling that NWSA's properties are
exempt from realty tax, is applicable herein.
3.
Republic Act 537 (Revised Charter of Quezon City) in Section 63 provides: "No court
shall entertain any suit assailing the validity of a tax assessed under this article until the
taxpayer shall have paid, under protest, the taxes assessed against him, . . . " Since NWSA
did not pay under protest the realty taxes in question, except for 1957 and 1961, recovery
thereof cannot be made as to said unprotested payments.
NWSA however claims that it made payments without protest because it honestly, the
erroneously, believed that it was liable for said taxes in the light of Republic Act 104. Said
Republic Act requires government corporations to pay duties, fees and other charges upon
their transaction, business, industry, sale, or income as are imposed by law upon
individuals, associations, or corporations engaged in taxable business. And, it is argued by
NWSA, the payments having been made in good faith, they are in the nature of solutio
indebiti, so that an action for their recovery falls under the rules and concept of an ordinary
action, not necessitating the prerequisite of payment under protest.
The Court a quo on this point held that Section 63 of Republic Act 537 requiring protest at
the time of payment is not applicable. It premised this conclusion on the reasoning that
NWSA innocently paid the taxes in question despite its exemption, believing it was not
exempt, and thus NWSA could not be required or expected to pay under protest when it
then really believed that it was liable.
NWSA's aforesaid contention and the Court a quo's reasoning fall in the face of the fact that
NWSA did pay under protest the taxes for 1957 and 1961. And thus, as far as the years
subsequent to 1957 are concerned, it cannot be said that NWSA could not be expected to
pay under protest because it paid in the innocent belief that it was liable for said taxes. And
as for the taxes paid before 1957, the same are not involved in this appeal, since the action
to recover them was held to have prescribed in the decision of the Court a quo, from which
NWSA did not appeal.
Stated otherwise, this appeal concerns only the taxes paid for 1958 to 1962 (total amount:
P449,088.46). Starting from 1957 up to 1962, NWSA already knew it was exempt, as
shown by its payment in 1957 under protest, reiterated in 1961. NWSA, therefore, should
have paid the rest of the taxes from 1957 to 1962 under protest. Sec. 63 of Republic Act
537 applies to said payments and their recovery. Said law, it should be noted, directs its
limitation to the court, not to the taxpayer, stating that no court can entertain a suit unless
the taxes are paid under protest.
Accordingly, NWSA can only recover the taxes paid for 1961, in the amount of P55,160.15.
As stated, the tax paid for 1957, although under protest, cannot be recovered because of
prescription, suit having been filed more than six years after 1957, on July 17, 1964. **
4.
Anent the fact that some lots of NWSA were leased to private entities the Capitol
Hills Golf Club and the International Development Corporation the same does not defeat
the exemption, in the light of the ruling in the Board of Assessment Appeals of Laguna case,
supra, that the exemption obtains even as to properties that are patrimonial in nature, as
long as they are owned by the Republic of the Philippines, which includes NWSA.
WHEREFORE, the appealed judgment is hereby modified, so as to allow plaintiff NWSA to
recover only the realty taxes it paid under protest to the defendant for the year 1961, in the
amount of P55,160 No costs.
SO ORDERED.
NATIONAL POWER CORPORATION, petitioner, vs. CITY OF CABANATUAN, respondent. [G.R.
No. 149110. April 9, 2003.]
SYNOPSIS
Petitioner is a government owned and controlled corporation created under Commonwealth
Act No. 120, as amended. For many years, petitioner sold electric power to the residents of
Cabanatuan City. Pursuant to a 1992 ordinance, the respondent assessed the petitioner a
franchise tax. In refusing to pay the tax assessment, petitioner argued that the respondent
had no authority to impose tax on government entities like itself and that it was a tax
exempt entity by express provisions of law. Hence, respondent filed a collection suit
demanding payment of the assessed tax due alleging that petitioner's exemption from local
taxes has been repealed. The trial court dismissed the case and ruled that the tax
exemption privileges granted to petitioner still subsists. On appeal, the Court of Appeals
reversed the trial court's order. Petitioner's motion for reconsideration was denied by the
appellate court. Hence, this petition for review filed before the Supreme Court.
The Supreme Court denied this petition and affirmed the decision of the Court of Appeals.
According to the Court, one of the most significant provisions of the Local Government Code
(LGC) is the removal of the blanket exclusion of instrumentalities and agencies of the
national government from the coverage of local taxation. Although as a general rule, Local
Government Units (LGU) cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e.,
when specific provisions of the LGC authorize the LGU to impose taxes, fees or charges on
the aforementioned entities. In the case at bar, Section 151 in relation to Section 137 of the
LGC clearly authorized the respondent city government to impose on the petitioner the
franchise tax in question.
SYLLABUS
1.
TAXATION; TAXES AS THE LIFEBLOOD OF THE GOVERNMENT; CONSTRUED.
Taxes are the lifeblood of the government, for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives
its source from the very existence of the state whose social contract with its citizens obliges
it to promote public interest and common good. The theory behind the exercise of the
power to tax emanates from necessity; without taxes, government cannot fulfill its mandate
of promoting the general welfare and well-being of the people.
2.
ID.; POWER TO TAX; LOCAL GOVERNMENT UNITS; ENJOY DIRECT AUTHORITY TO
LEVY TAXES, FEES AND OTHER CHARGES PURSUANT TO ARTICLE X, SECTION 5 OF THE
CONSTITUTION; RATIONALE. In recent years, the increasing social challenges of the
times expanded the scope of state activity, and taxation has become a tool to realize social
justice and the equitable distribution of wealth, economic progress and the protection of
local industries as well as public welfare and similar objectives. Taxation assumes even
greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to
tax is no longer vested exclusively on Congress; local legislative bodies are now given direct
authority to levy taxes, fees and other charges pursuant to Article X, Section 5 of the 1987
Constitution, viz: "Section 5. Each Local Government unit shall have the power to create
its own sources of revenue, to levy taxes, fees and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy.
Such taxes, fees and charges shall accrue exclusively to the Local Governments." This
paradigm shift results from the realization that genuine development can be achieved only
by strengthening local autonomy and promoting decentralization of governance. For a long
time, the country's highly centralized government structure has bred a culture of
dependence among local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders." The only way to shatter this culture
of dependence is to give the LGUs a wider role in the delivery of basic services, and confer
them sufficient powers to generate their own sources for the purpose. To achieve this goal,
Section 3 of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers.
3.
ID.; ID.; ID.; CANNOT IMPOSE TAXES, FEES OR CHARGES OF ANY KIND ON THE
NATIONAL GOVERNMENT, ITS AGENCIES AND INSTRUMENTALITIES AS A RULE;
EXCEPTION. Considered as the most revolutionary piece of legislation on local autonomy,
the LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of
LGUs to include taxes which were prohibited by previous laws such as the imposition of
taxes on forest products, forest concessionaires, mineral products, mining operations, and
the like. The LGC likewise provides enough flexibility to impose tax rates in accordance with
their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies
the minimum and maximum tax rates and leaves the determination of the actual rates to
the respective sanggunian. One of the most significant provisions of the LGC is the removal
of the blanket exclusion of instrumentalities and agencies of the national government from
the coverage of local taxation. Although as a general rule, LGUs cannot impose taxes, fees
or charges of any kind on the National Government, its agencies and instrumentalities, this
rule now admits an exception, i.e., when specific provisions of the LGC authorize the LGUs
to impose taxes, fees or charges on the aforementioned entities, viz: "Section 133.
Common Limitations on the Taxing Powers of the Local Government Units Unless
otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following: . . . (o) Taxes,
fees, or charges of any kind on the National Government, its agencies and instrumentalities,
and local government units."
4.
MERCANTILE LAW; FRANCHISE; DEFINED AND CONSTRUED. In its general
signification, a franchise is a privilege conferred by government authority, which does not
belong to citizens of the country generally as a matter of common right. In its specific
sense, a franchise may refer to a general or primary franchise, or to a special or secondary
franchise. The former relates to the right to exist as a corporation, by virtue of duly
approved articles of incorporation, or a charter pursuant to a special law creating the
corporation. The right under a primary or general franchise is vested in the individuals who
compose the corporation and not in the corporation itself. On the other hand, the latter
refers to the right or privileges conferred upon an existing corporation such as the right to
use the streets of a municipality to lay pipes of tracks, erect poles or string wires. The rights
under a secondary or special franchise are vested in the corporation and may ordinarily be
conveyed or mortgaged under a general power granted to a corporation to dispose of its
property, except such special or secondary franchises as are charged with a public use.
5.
TAXATION; FRANCHISE TAX IMPOSED UNDER THE LOCAL GOVERNMENT CODE;
REQUISITES. In Section 131 (m) of the LGC, Congress unmistakably defined a franchise
in the sense of a secondary or special franchise. This is to avoid any confusion when the
word franchise is used in the context of taxation. As commonly used, a franchise tax is "a
tax on the privilege of transacting business in the state and exercising corporate franchises
granted by the state." It is not levied on the corporation simply for existing as a
corporation, upon its property or its income, but on its exercise of the rights or privileges
granted to it by the government. Hence, a corporation need not pay franchise tax from the
time it ceased to do business and exercise its franchise. It is within this context that the
phrase "tax on businesses enjoying a franchise" in Section 137 of the LGC should be
interpreted and understood. Verily, to determine whether the petitioner is covered by the
franchise tax in question, the following requisites should concur: (1) that petitioner has a
"franchise" in the sense of a secondary or special franchise; and (2) that it is exercising its
rights or privileges under this franchise within the territory of the respondent city
government. To stress, a franchise tax is imposed based not on the ownership but on the
exercise by the corporation of a privilege to do business. The taxable entity is the
corporation which exercises the franchise, and not the individual stockholders.
6.
ID.; TAX EXEMPTION; CONSTRUED STRONGLY AGAINST THE CLAIMANT;
APPLICATION IN CASE AT BAR. As a rule, tax exemptions are construed strongly against
the claimant. Exemptions must be shown to exist clearly and categorically, and supported
by clear legal provisions. In the case at bar, the petitioner's sole refuge is Section 13 of
Rep. Act No. 6395 exempting from, among others, "all income taxes, franchise taxes and
realty taxes to be paid to the National Government, its provinces, cities, municipalities and
other government agencies and instrumentalities." However, Section 193 of the LGC
withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by
private and public corporations. Contrary to the contention of petitioner, Section 193 of the
LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local
taxes. It reads: "Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No. 6938,
non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code." It is a basic precept of statutory construction that the express
mention of one person, thing, act, or consequence excludes all others as expressed in the
familiar maxim expressio unius est exclusio alterius. Not being a local water district, a
cooperative registered under R.A. No. 6938, or a non-stock and non-profit hospital or
educational institution, petitioner clearly does not belong to the exception. It is therefore
incumbent upon the petitioner to point to some provisions of the LGC that expressly grant it
exemption from local taxes.
7.
POLITICAL LAW; GOVERNMENT OWNED AND CONTROLLED CORPORATION;
CONSTRUED. Section 2 of Pres. Decree No. 2029 classifies government-owned or
controlled corporations (GOCCs) into those performing governmental functions and those
performing proprietary functions, viz: "A government-owned or controlled corporation is a
stock or a non-stock corporation, whether performing governmental or proprietary
functions, which is directly chartered by special law or if organized under the general
corporation law is owned or controlled by the government directly, or indirectly through a
parent corporation or subsidiary corporation, to the extent of at least a majority of its
outstanding voting capital stock . . . ." Governmental functions are those pertaining to the
administration of government, and as such, are treated as absolute obligation on the part of
the state to perform while proprietary functions are those that are undertaken only by way
of advancing the general interest of society, and are merely optional on the government.
Included in the class of GOCCs performing proprietary functions are "business-like" entities
such as the National Steel Corporation (NSC), the National Development Corporation (NDC),
the Social Security System (SSS), the Government Service Insurance System (GSIS), and
the National Water Sewerage Authority (NAWASA), among others.
DECISION
This is a petition for review of the Decision and the Resolution of the Court of Appeals
dated March 12, 2001 and July 10, 2001, respectively, finding petitioner National Power
Corporation (NPC) liable to pay franchise tax to respondent City of Cabanatuan.
Petitioner is a government-owned and controlled corporation created under Commonwealth
Act No. 120, as amended. It is tasked to undertake the "development of hydroelectric
generations of power and the production of electricity from nuclear, geothermal and other
sources, as well as, the transmission of electric power on a nationwide basis." Concomitant
to its mandated duty, petitioner has, among others, the power to construct, operate and
maintain power plants, auxiliary plants, power stations and substations for the purpose of
developing hydraulic power and supplying such power to the inhabitants.
For many years now, petitioner sells electric power to the residents of Cabanatuan City,
posting a gross income of P107,814,187.96 in 1992. Pursuant to Section 37 of Ordinance
No. 165-92,
the respondent assessed the petitioner a franchise tax amounting to
P808,606.41, representing 75% of 1% of the latter's gross receipts for the preceding year.
Petitioner, whose capital stock was subscribed and paid wholly by the Philippine
Government, refused to pay the tax assessment. It argued that the respondent has no
authority to impose tax on government entities. Petitioner also contended that as a nonprofit organization, it is exempted from the payment of all forms of taxes, charges, duties
or fees in accordance with Sec. 13 of Rep. Act No. 6395, as amended, viz:
Sec. 13.
Non-profit Character of the Corporation; Exemption from all Taxes, Duties,
Fees, Imposts and Other Charges by Government and Governmental Instrumentalities.
The Corporation shall be non-profit and shall devote all its return from its capital
investment, as well as excess revenues from its operation, for expansion. To enable the
Corporation to pay its indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, the Corporation is
hereby exempt:
(a)
From the payment of all taxes, duties, fees, imposts, charges, costs and service fees
in any court or administrative proceedings in which it may be a party, restrictions and
duties to the Republic of the Philippines, its provinces, cities, municipalities and other
government agencies and instrumentalities;
(b)
From all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities;
(c)
From all import duties, compensating taxes and advanced sales tax, and wharfage
fees on import of foreign goods required for its operations and projects; and
(d)
From all taxes, duties, fees, imposts, and all other charges imposed by the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and
instrumentalities, on all petroleum products used by the Corporation in the generation,
transmission, utilization, and sale of electric power."
The respondent filed a collection suit in the Regional Trial Court of Cabanatuan City,
demanding that petitioner pay the assessed tax due, plus a surcharge equivalent to 25% of
the amount of tax, and 2% monthly interest.
Respondent alleged that petitioner's
exemption from local taxes has been repealed by Section 193 of Rep. Act No. 7160, which
reads as follows:
"Sec. 193.
Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code."
On January 25, 1996, the trial court issued an Order dismissing the case. It ruled that the
tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No.
7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be
repealed by Rep. Act No. 7160 which is a general law; (2) Section 193 of Rep. Act No. 7160
is in the nature of an implied repeal which is not favored; and (3) local governments have
no power to tax instrumentalities of the national government. Pertinent portion of the Order
reads:
"The question of whether a particular law has been repealed or not by a subsequent law is a
matter of legislative intent. The lawmakers may expressly repeal a law by incorporating
therein repealing provisions which expressly and specifically cite(s) the particular law or
laws, and portions thereof, that are intended to be repealed. A declaration in a statute,
usually in its repealing clause, that a particular and specific law, identified by its number or
title is repealed is an express repeal; all others are implied repeal. Sec. 193 of R.A. No.
7160 is an implied repealing clause because it fails to identify the act or acts that are
intended to be repealed. It is a well-settled rule of statutory construction that repeals of
statutes by implication are not favored. The presumption is against inconsistency and
repugnancy for the legislative is presumed to know the existing laws on the subject and not
to have enacted inconsistent or conflicting statutes. It is also a well-settled rule that,
generally, general law does not repeal a special law unless it clearly appears that the
legislative has intended by the latter general act to modify or repeal the earlier special law.
Thus, despite the passage of R.A. No. 7160 from which the questioned Ordinance No. 16592 was based, the tax exemption privileges of defendant NPC remain.
Another point going against plaintiff in this case is the ruling of the Supreme Court in the
case of Basco vs. Philippine Amusement and Gaming Corporation, 197 SCRA 52, where it
was held that:
'Local governments have no power to tax instrumentalities of the National Government.
PAGCOR is a government owned or controlled corporation with an original charter, PD 1869.
All of its shares of stocks are owned by the National Government. . . . Being an
instrumentality of the government, PAGCOR should be and actually is exempt from local
taxes. Otherwise, its operation might be burdened, impeded or subjected to control by mere
local government.'
Like PAGCOR, NPC, being a government owned and controlled corporation with an original
charter and its shares of stocks owned by the National Government, is beyond the taxing
power of the Local Government. Corollary to this, it should be noted here that in the NPC
Charter's declaration of Policy, Congress declared that: '. . . (2) the total electrification of
the Philippines through the development of power from all services to meet the needs of
industrial development and dispersal and needs of rural electrification are primary
objectives of the nations which shall be pursued coordinately and supported by all
instrumentalities and agencies of the government, including its financial institutions.'
(emphasis supplied). To allow plaintiff to subject defendant to its tax-ordinance would be to
impede the avowed goal of this government instrumentality.
Unlike the State, a city or municipality has no inherent power of taxation. Its taxing power
is limited to that which is provided for in its charter or other statute. Any grant of taxing
power is to be construed strictly, with doubts resolved against its existence.
From the existing law and the rulings of the Supreme Court itself, it is very clear that the
plaintiff could not impose the subject tax on the defendant."
On appeal, the Court of Appeals reversed the trial court's Order on the ground that Section
193, in relation to Sections 137 and 151 of the LGC, expressly withdrew the exemptions
granted to the petitioner. It ordered the petitioner to pay the respondent city government
the following: (a) the sum of P808,606.41 representing the franchise tax due based on
gross receipts for the year 1992, (b) the tax due every year thereafter based in the gross
receipts earned by NPC, (c) in all cases, to pay a surcharge of 25% of the tax due and
unpaid, and (d) the sum of P10,000.00 as litigation expense.
On April 4, 2001, the petitioner filed a Motion for Reconsideration on the Court of Appeal's
Decision. This was denied by the appellate court, viz:
"The Court finds no merit in NPC's motion for reconsideration. Its arguments reiterated
therein that the taxing power of the province under Art. 137 (sic) of the Local Government
Code refers merely to private persons or corporations in which category it (NPC) does not
belong, and that the LGC (RA 7160) which is a general law may not impliedly repeal the
NPC Charter which is a special law finds the answer in Section 193 of the LGC to the
effect that 'tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations except
local water districts . . . are hereby withdrawn.' The repeal is direct and unequivocal, not
implied.
IN VIEW WHEREOF, the motion for reconsideration is hereby DENIED.
SO ORDERED."
In this petition for review, petitioner raises the following issues:
"A.
THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC, A PUBLIC NONPROFIT CORPORATION, IS LIABLE TO PAY A FRANCHISE TAX AS IT FAILED TO CONSIDER
THAT SECTION 137 OF THE LOCAL GOVERNMENT CODE IN RELATION TO SECTION 131
APPLIES ONLY TO PRIVATE PERSONS OR CORPORATIONS ENJOYING A FRANCHISE.
B.
THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT NPC'S EXEMPTION
FROM ALL FORMS OF TAXES HAS BEEN REPEALED BY THE PROVISION OF THE LOCAL
GOVERNMENT CODE AS THE ENACTMENT OF A LATER LEGISLATION, WHICH IS A GENERAL
LAW, CANNOT BE CONSTRUED TO HAVE REPEALED A SPECIAL LAW.
C.
THE COURT OF APPEALS GRAVELY ERRED IN NOT CONSIDERING THAT AN
EXERCISE OF POLICE POWER THROUGH TAX EXEMPTION SHOULD PREVAIL OVER THE
LOCAL GOVERNMENT CODE."
It is beyond dispute that the respondent city government has the authority to issue
Ordinance No. 165-92 and impose an annual tax on "businesses enjoying a franchise,"
pursuant to Section 151 in relation to Section 137 of the LGC, viz:
"Sec. 137.
Franchise Tax. Notwithstanding any exemption granted by any law or other
special law, the province may impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt, or realized, within its territorial
jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of
one percent (1%) of the capital investment. In the succeeding calendar year, regardless of
when the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein." (emphasis supplied)
xxx
xxx
xxx
Sec. 151.
Scope of Taxing Powers. Except as otherwise provided in this Code, the
city, may levy the taxes, fees, and charges which the province or municipality may impose:
Provided, however, That the taxes, fees and charges levied and collected by highly
urbanized and independent component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes."
Petitioner, however, submits that it is not liable to pay an annual franchise tax to the
respondent city government. It contends that Sections 137 and 151 of the LGC in relation
to Section 131, limit the taxing power of the respondent city government to private entities
that are engaged in trade or occupation for profit.
Section 131 (m) of the LGC defines a "franchise" as "a right or privilege, affected with
public interest which is conferred upon private persons or corporations, under such terms
and conditions as the government and its political subdivisions may impose in the interest
of the public welfare, security and safety." From the phraseology of this provision, the
petitioner claims that the word "private" modifies the terms "persons" and "corporations."
Hence, when the LGC uses the term "franchise," petitioner submits that it should refer
specifically to franchises granted to private natural persons and to private corporations.
Ergo, its charter should not be considered a "franchise" for the purpose of imposing the
franchise tax in question.
On the other hand, Section 131 (d) of the LGC defines "business" as "trade or commercial
activity regularly engaged in as means of livelihood or with a view to profit." Petitioner
claims that it is not engaged in an activity for profit, in as much as its charter specifically
provides that it is a "non-profit organization." In any case, petitioner argues that the
accumulation of profit is merely incidental to its operation; all these profits are required by
law to be channeled for expansion and improvement of its facilities and services.
Petitioner also alleges that it is an instrumentality of the National Government, and as
such, may not be taxed by the respondent city government. It cites the doctrine in Basco
vs. Philippine Amusement and Gaming Corporation where this Court held that local
governments have no power to tax instrumentalities of the National Government, viz:
"Local governments have no power to tax instrumentalities of the National Government.
PAGCOR has a dual role, to operate and regulate gambling casinos. The latter role is
governmental, which places it in the category of an agency or instrumentality of the
Government. Being an instrumentality of the Government, PAGCOR should be and actually
is exempt from local taxes. Otherwise, its operation might be burdened, impeded or
subjected to control by a mere local government.
'The states have no power by taxation or otherwise, to retard, impede, burden or in any
manner control the operation of constitutional laws enacted by Congress to carry into
execution the powers vested in the federal government. (MC Culloch v. Maryland, 4 Wheat
316, 4 L Ed. 579)'
This doctrine emanates from the 'supremacy' of the National Government over local
governments.
'Justice Holmes, speaking for the Supreme Court, made reference to the entire absence of
power on the part of the States to touch, in that way (taxation) at least, the
instrumentalities of the United States (Johnson v. Maryland, 254 US 51) and it can be
agreed that no state or political subdivision can regulate a federal instrumentality in such a
way as to prevent it from consummating its federal responsibilities, or even seriously
burden it from accomplishment of them.' (Antieau, Modern Constitutional Law, Vol. 2, p.
140, italics supplied)
Otherwise, mere creatures of the State can defeat National policies thru extermination of
what local authorities may perceive to be undesirable activities or enterprise using the
power to tax as 'a tool regulation' (U.S. v. Sanchez, 340 US 42).
The power to tax which was called by Justice Marshall as the 'power to destroy' (Mc Culloch
v. Maryland, supra) cannot be allowed to defeat an instrumentality or creation of the very
entity which has the inherent power to wield it."
Petitioner contends that Section 193 of Rep. Act No. 7160, withdrawing the tax privileges of
government-owned or controlled corporations, is in the nature of an implied repeal. A
special law, its charter cannot be amended or modified impliedly by the local government
code which is a general law. Consequently, petitioner claims that its exemption from all
taxes, fees or charges under its charter subsists despite the passage of the LGC, viz:
"It is a well-settled rule of statutory construction that repeals of statutes by implication are
not favored and as much as possible, effect must be given to all enactments of the
legislature. Moreover, it has to be conceded that the charter of the NPC constitutes a special
law. Republic Act No. 7160, is a general law. It is a basic rule in statutory construction that
the enactment of a later legislation which is a general law cannot be construed to have
repealed a special law. Where there is a conflict between a general law and a special
statute, the special statute should prevail since it evinces the legislative intent more clearly
than the general statute.
Finally, petitioner submits that the charter of the NPC, being a valid exercise of police
power, should prevail over the LGC. It alleges that the power of the local government to
impose franchise tax is subordinate to petitioner's exemption from taxation; "police power
being the most pervasive, the least limitable and most demanding of all powers, including
the power of taxation."
The petition is without merit.
Taxes are the lifeblood of the government, for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives
its source from the very existence of the state whose social contract with its citizens obliges
it to promote public interest and common good. The theory behind the exercise of the
power to tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.
In recent years, the increasing social challenges of the times expanded the scope of state
activity, and taxation has become a tool to realize social justice and the equitable
distribution of wealth, economic progress and the protection of local industries as well as
public welfare and similar objectives. Taxation assumes even greater significance with the
ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested
exclusively on Congress; local legislative bodies are now given direct authority to levy
taxes, fees and other charges pursuant to Article X, Section 5 of the 1987 Constitution, viz:
"Section 5.
Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the Local Governments."
This paradigm shift results from the realization that genuine development can be achieved
only by strengthening local autonomy and promoting decentralization of governance. For a
long time, the country's highly centralized government structure has bred a culture of
dependence among local government leaders upon the national leadership. It has also
"dampened the spirit of initiative, innovation and imaginative resilience in matters of local
development on the part of local government leaders." The only way to shatter this culture
of dependence is to give the LGUs a wider role in the delivery of basic services, and confer
them sufficient powers to generate their own sources for the purpose. To achieve this goal,
Section 3 of Article X of the 1987 Constitution mandates Congress to enact a local
government code that will, consistent with the basic policy of local autonomy, set the
guidelines and limitations to this grant of taxing powers, viz:
"Section 3.
The Congress shall enact a local government code which shall provide for a
more responsive and accountable local government structure instituted through a system of
decentralization with effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers, responsibilities, and resources,
and provide for the qualifications, election, appointment and removal, term, salaries,
powers and functions and duties of local officials, and all other matters relating to the
organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the Local
Government Code of 1991 (LGC), various measures have been enacted to promote local
autonomy. These include the Barrio Charter of 1959, the Local Autonomy Act of 1959, the
Decentralization Act of 1967 and the Local Government Code of 1983. Despite these
initiatives, however, the shackles of dependence on the national government remained.
Local government units were faced with the same problems that hamper their capabilities to
participate effectively in the national development efforts, among which are: (a) inadequate
tax base, (b) lack of fiscal control over external sources of income, (c) limited authority to
prioritize and approve development projects, (d) heavy dependence on external sources of
income, and (e) limited supervisory control over personnel of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the LGC
effectively deals with the fiscal constraints faced by LGUs. It widens the tax base of LGUs to
include taxes which were prohibited by previous laws such as the imposition of taxes on
forest products, forest concessionaires, mineral products, mining operations, and the like.
The LGC likewise provides enough flexibility to impose tax rates in accordance with their
needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the
minimum and maximum tax rates and leaves the determination of the actual rates to the
respective sanggunian.
One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the national government from the coverage of local
taxation. Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind
on the National Government, its agencies and instrumentalities, this rule now admits an
exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes,
fees or charges on the aforementioned entities, viz:
"Section 133. Common Limitations on the Taxing Powers of the Local Government Units.
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
xxx
xxx
xxx
(o)
Taxes, fees, or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units." (emphasis supplied)
In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. Philippine
Amusement and Gaming Corporation relied upon by the petitioner to support its claim no
longer applies. To emphasize, the Basco case was decided prior to the effectivity of the
LGC, when no law empowering the local government units to tax instrumentalities of the
National Government was in effect. However, as this Court ruled in the case of Mactan Cebu
International Airport Authority (MCIAA) vs. Marcos, nothing prevents Congress from
decreeing that even instrumentalities or agencies of the government performing
governmental functions may be subject to tax. In enacting the LGC, Congress exercised its
prerogative to tax instrumentalities and agencies of government as it sees fit. Thus, after
reviewing the specific provisions of the LGC, this Court held that MCIAA, although an
instrumentality of the national government, was subject to real property tax, viz:
"Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that as a
general rule, as laid down in Section 133, the taxing power of local governments cannot
extend to the levy of inter alia, 'taxes, fees and charges of any kind on the national
government, its agencies and instrumentalities, and local government units'; however,
pursuant to Section 232, provinces, cities and municipalities in the Metropolitan Manila Area
may impose the real property tax except on, inter alia, 'real property owned by the Republic
of the Philippines or any of its political subdivisions except when the beneficial use thereof
has been granted for consideration or otherwise, to a taxable person as provided in the item
(a) of the first paragraph of Section 12.'"
In the case at bar, Section 151 in relation to Section 137 of the LGC clearly authorizes the
respondent city government to impose on the petitioner the franchise tax in question.
In its general signification, a franchise is a privilege conferred by government authority,
which does not belong to citizens of the country generally as a matter of common right. In
its specific sense, a franchise may refer to a general or primary franchise, or to a special or
secondary franchise. The former relates to the right to exist as a corporation, by virtue of
duly approved articles of incorporation, or a charter pursuant to a special law creating the
corporation. The right under a primary or general franchise is vested in the individuals who
compose the corporation and not in the corporation itself. On the other hand, the latter
refers to the right or privileges conferred upon an existing corporation such as the right to
use the streets of a municipality to lay pipes of tracks, erect poles or string wires. The
rights under a secondary or special franchise are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted to a corporation to
dispose of its property, except such special or secondary franchises as are charged with a
public use.
In Section 131 (m) of the LGC, Congress unmistakably defined a franchise in the sense of a
secondary or special franchise. This is to avoid any confusion when the word franchise is
used in the context of taxation. As commonly used, a franchise tax is "a tax on the privilege
of transacting business in the state and exercising corporate franchises granted by the
state." It is not levied on the corporation simply for existing as a corporation, upon its
property or its income, but on its exercise of the rights or privileges granted to it by the
government. Hence, a corporation need not pay franchise tax from the time it ceased to do
business and exercise its franchise. It is within this context that the phrase "tax on
businesses enjoying a franchise" in Section 137 of the LGC should be interpreted and
understood. Verily, to determine whether the petitioner is covered by the franchise tax in
question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges
under this franchise within the territory of the respondent city government.
Petitioner fulfills the first requisite. Commonwealth Act No. 120, as amended by Rep. Act
No. 7395, constitutes petitioner's primary and secondary franchises. It serves as the
petitioner's charter, defining its composition, capitalization, the appointment and the
specific duties of its corporate officers, and its corporate life span. As its secondary
franchise, Commonwealth Act No. 120, as amended, vests the petitioner the following
powers which are not available to ordinary corporations, viz:
"xxx
xxx
xxx
(e)
To conduct investigations and surveys for the development of water power in any
part of the Philippines;
(f)
To take water from any public stream, river, creek, lake, spring or waterfall in the
Philippines, for the purposes specified in this Act; to intercept and divert the flow of waters
from lands of riparian owners and from persons owning or interested in waters which are or
may be necessary for said purposes, upon payment of just compensation therefor; to alter,
straighten, obstruct or increase the flow of water in streams or water channels intersecting
or connecting therewith or contiguous to its works or any part thereof. Provided, That just
compensation shall be paid to any person or persons whose property is, directly or
indirectly, adversely affected or damaged thereby;
(g)
To construct, operate and maintain power plants, auxiliary plants, dams, reservoirs,
pipes, mains, transmission lines, power stations and substations, and other works for the
purpose of developing hydraulic power from any river, creek, lake, spring and waterfall in
the Philippines and supplying such power to the inhabitants thereof, to acquire, construct,
install, maintain, operate, and improve gas, oil, or steam engines, and/or other prime
movers, generators and machinery in plants and/or auxiliary plants for the production of
electric power; to establish, develop, operate, maintain and administer power and lighting
systems for the transmission and utilization of its power generation; to sell electric power in
bulk to (1) industrial enterprises, (2) city, municipal or provincial systems and other
government institutions, (3) electric cooperatives, (4) franchise holders, and (5) real estate
subdivisions . . .;
(h)
To acquire, promote, hold, transfer, sell, lease, rent, mortgage, encumber and
otherwise dispose of property incident to, or necessary, convenient or proper to carry out
the purposes for which the Corporation was created: Provided, That in case a right of way is
necessary for its transmission lines, easement of right of way shall only be sought:
Provided, however, That in case the property itself shall be acquired by purchase, the cost
thereof shall be the fair market value at the time of the taking of such property;
(i)
To construct works across, or otherwise, any stream, watercourse, canal, ditch,
flume, street, avenue, highway or railway of private and public ownership, as the location of
said works may require . . .;
(j)
To exercise the right of eminent domain for the purpose of this Act in the manner
provided by law for instituting condemnation proceedings by the national, provincial and
municipal governments;
xxx
xxx
xxx
(m)
To cooperate with, and to coordinate its operations with those of the National
Electrification Administration and public service entities;
(n)
To exercise complete jurisdiction and control over watersheds surrounding the
reservoirs of plants and/or projects constructed or proposed to be constructed by the
Corporation. Upon determination by the Corporation of the areas required for watersheds
for a specific project, the Bureau of Forestry, the Reforestation Administration and the
Bureau of Lands shall, upon written advice by the Corporation, forthwith surrender
jurisdiction to the Corporation of all areas embraced within the watersheds, subject to
existing private rights, the needs of waterworks systems, and the requirements of domestic
water supply;
(o)
In the prosecution and maintenance of its projects, the Corporation shall adopt
measures to prevent environmental pollution and promote the conservation, development
and maximum utilization of natural resources . . ."
With these powers, petitioner eventually had the monopoly in the generation and
distribution of electricity. This monopoly was strengthened with the issuance of Pres. Decree
No. 40, nationalizing the electric power industry. Although Exec. Order No. 215 thereafter
allowed private sector participation in the generation of electricity, the transmission of
electricity remains the monopoly of the petitioner.
Petitioner also fulfills the second requisite. It is operating within the respondent city
government's territorial jurisdiction pursuant to the powers granted to it by Commonwealth
Act No. 120, as amended. From its operations in the City of Cabanatuan, petitioner realized
a gross income of P107,814,187.96 in 1992. Fulfilling both requisites, petitioner is, and
ought to be, subject of the franchise tax in question.
Petitioner, however, insists that it is excluded from the coverage of the franchise tax simply
because its stocks are wholly owned by the National Government, and its charter
characterized it as a "non-profit" organization.
These contentions must necessarily fail.

To stress, a franchise tax is imposed based not on the ownership but on the exercise by the
corporation of a privilege to do business. The taxable entity is the corporation which
exercises the franchise, and not the individual stockholders. By virtue of its charter,
petitioner was created as a separate and distinct entity from the National Government. It
can sue and be sued under its own name, and can exercise all the powers of a corporation
under the Corporation Code.
To be sure, the ownership by the National Government of its entire capital stock does not
necessarily imply that petitioner is not engaged in business. Section 2 of Pres. Decree No.
2029
classifies government-owned or controlled corporations (GOCCs) into those
performing governmental functions and those performing proprietary functions, viz:
"A government-owned or controlled corporation is a stock or a non-stock corporation,
whether performing governmental or proprietary functions, which is directly chartered by
special law or if organized under the general corporation law is owned or controlled by the
government directly, or indirectly through a parent corporation or subsidiary corporation, to
the extent of at least a majority of its outstanding voting capital stock . . .." (emphases
supplied)
Governmental functions are those pertaining to the administration of government, and as
such, are treated as absolute obligation on the part of the state to perform while proprietary
functions are those that are undertaken only by way of advancing the general interest of
society, and are merely optional on the government. Included in the class of GOCCs
performing proprietary functions are "business-like" entities such as the National Steel
Corporation (NSC), the National Development Corporation (NDC), the Social Security
System (SSS), the Government Service Insurance System (GSIS), and the National Water
Sewerage Authority (NAWASA), among others.
Petitioner was created to "undertake the development of hydroelectric generation of power
and the production of electricity from nuclear, geothermal and other sources, as well as the
transmission of electric power on a nationwide basis." Pursuant to this mandate, petitioner
generates power and sells electricity in bulk. Certainly, these activities do not partake of the
sovereign functions of the government. They are purely private and commercial
undertakings, albeit imbued with public interest. The public interest involved in its activities,
however, does not distract from the true nature of the petitioner as a commercial
enterprise, in the same league with similar public utilities like telephone and telegraph
companies, railroad companies, water supply and irrigation companies, gas, coal or light
companies, power plants, ice plant among others; all of which are declared by this Court as
ministrant or proprietary functions of government aimed at advancing the general interest
of society.
A closer reading of its charter reveals that even the legislature treats the character of the
petitioner's enterprise as a "business," although it limits petitioner's profits to twelve
percent (12%), viz:
"(n)
When essential to the proper administration of its corporate affairs or necessary for
the proper transaction of its business or to carry out the purposes for which it was
organized, to contract indebtedness and issue bonds subject to approval of the President
upon recommendation of the Secretary of Finance;
(o)
To exercise such powers and do such things as may be reasonably necessary to
carry out the business and purposes for which it was organized, or which, from time to
time, may be declared by the Board to be necessary, useful, incidental or auxiliary to
accomplish the said purpose . . . ."(emphasis supplied)
It is worthy to note that all other private franchise holders receiving at least sixty percent
(60%) of its electricity requirement from the petitioner are likewise imposed the cap of
twelve percent (12%) on profits. The main difference is that the petitioner is mandated to
devote "all its returns from its capital investment, as well as excess revenues from its
operation, for expansion" while other franchise holders have the option to distribute their
profits to its stockholders by declaring dividends. We do not see why this fact can be a
source of difference in tax treatment. In both instances, the taxable entity is the
corporation, which exercises the franchise, and not the individual stockholders.
We also do not find merit in the petitioner's contention that its tax exemptions under its
charter subsist despite the passage of the LGC.
As a rule, tax exemptions are construed strongly against the claimant. Exemptions must be
shown to exist clearly and categorically, and supported by clear legal provisions. In the
case at bar, the petitioner's sole refuge is Section 13 of Rep. Act No. 6395 exempting from,
among others, "all income taxes, franchise taxes and realty taxes to be paid to the National
Government, its provinces, cities, municipalities and other government agencies and
instrumentalities." However, Section 193 of the LGC withdrew, subject to limited
exceptions, the sweeping tax privileges previously enjoyed by private and public
corporations. Contrary to the contention of petitioner, Section 193 of the LGC is an express,
albeit general, repeal of all statutes granting tax exemptions from local taxes. It reads:
"Sec. 193.
Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or controlled corporations, except local
water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn upon the effectivity of this
Code." (emphasis supplied)
It is a basic precept of statutory construction that the express mention of one person, thing,
act, or consequence excludes all others as expressed in the familiar maxim expressio unius
est exclusio alterius. Not being a local water district, a cooperative registered under R.A.
No. 6938, or a non-stock and non-profit hospital or educational institution, petitioner clearly
does not belong to the exception. It is therefore incumbent upon the petitioner to point to
some provisions of the LGC that expressly grant it exemption from local taxes.
But this would be an exercise in futility. Section 137 of the LGC clearly states that the LGUs
can impose franchise tax "notwithstanding any exemption granted by any law or other
special law." This particular provision of the LGC does not admit any exception. In City
Government of San Pablo, Laguna v. Reyes, MERALCO's exemption from the payment of
franchise taxes was brought as an issue before this Court. The same issue was involved in
the subsequent case of Manila Electric Company v. Province of Laguna. Ruling in favor of
the local government in both instances, we ruled that the franchise tax in question is
imposable despite any exemption enjoyed by MERALCO under special laws, viz:
"It is our view that petitioners correctly rely on provisions of Sections 137 and 193 of the
LGC to support their position that MERALCO's tax exemption has been withdrawn. The
explicit language of Section 137 which authorizes the province to impose franchise tax
'notwithstanding any exemption granted by any law or other special law' is allencompassing and clear. The franchise tax is imposable despite any exemption enjoyed
under special laws.
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that
unless otherwise provided in this Code, tax exemptions or incentives granted to or presently
enjoyed by all persons, whether natural or juridical, including government-owned or
controlled corporations except (1) local water districts, (2) cooperatives duly registered
under R.A. 6938, (3) non-stock and non-profit hospitals and educational institutions, are
withdrawn upon the effectivity of this code, the obvious import is to limit the exemptions to
the three enumerated entities. It is a basic precept of statutory construction that the
express mention of one person, thing, act, or consequence excludes all others as expressed
in the familiar maxim expressio unius est exclusio alterius. In the absence of any provision
of the Code to the contrary, and we find no other provision in point, any existing tax
exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be
withdrawn.
Reading together Sections 137 and 193 of the LGC, we conclude that under the LGC the
local government unit may now impose a local tax at a rate not exceeding 50% of 1% of
the gross annual receipts for the preceding calendar based on the incoming receipts realized
within its territorial jurisdiction. The legislative purpose to withdraw tax privileges enjoyed
under existing law or charter is clearly manifested by the language used on (sic) Sections
137 and 193 categorically withdrawing such exemption subject only to the exceptions
enumerated. Since it would be not only tedious and impractical to attempt to enumerate all
the existing statutes providing for special tax exemptions or privileges, the LGC provided for
an express, albeit general, withdrawal of such exemptions or privileges. No more
unequivocal language could have been used." (emphasis supplied).
It is worth mentioning that Section 192 of the LGC empowers the LGUs, through ordinances
duly approved, to grant tax exemptions, initiatives or reliefs. But in enacting Section 37 of
Ordinance No. 165-92 which imposes an annual franchise tax "notwithstanding any
exemption granted by law or other special law," the respondent city government clearly did
not intend to exempt the petitioner from the coverage thereof.
Doubtless, the power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities of the local government units for the delivery of basic
services essential to the promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. As this Court observed in the Mactan case, "the
original reasons for the withdrawal of tax exemption privileges granted to governmentowned or controlled corporations and all other units of government were that such privilege
resulted in serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises." 78 With the added burden of devolution, it is even more imperative for
government entities to share in the requirements of development, fiscal or otherwise, by
paying taxes or other charges due from them.
IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and Resolution
of the Court of Appeals dated March 12, 2001 and July 10, 2001, respectively, are hereby
AFFIRMED. SO ORDERED.
Local Franchise Tax on Govt Owned or Controlled Corp
Petitioner
NPC
is a government owned and controlled corporation created under
Commonwealth Act No. 120, as amended. For many years, petitioner sold electric power to
the residents of Cabanatuan City. Pursuant to a 1992 ordinance, the respondent assessed
the petitioner a franchise tax. In refusing to pay the tax assessment, petitioner argued that
the respondent had no authority to impose tax on government entities like itself and that it
was a tax exempt entity by express provisions of law. Hence, respondent filed a collection
suit demanding payment of the assessed tax due alleging that petitioner's exemption from
local taxes has been repealed. The trial court dismissed the case and ruled that the tax
exemption privileges granted to petitioner still subsists. On appeal, the Court of Appeals
reversed the trial court's order. Petitioner's motion for reconsideration was denied by the
appellate court. Hence, this petition for review filed before the Supreme Court.
The Supreme Court denied this petition and affirmed the decision of the Court of Appeals.
According to the Court, one of the most significant provisions of the Local Government Code
(LGC) is the removal of the blanket exclusion of instrumentalities and agencies of the
national government from the coverage of local taxation. Although as a general rule, Local
Government Units (LGU) cannot impose taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, this rule now admits an exception, i.e.,
when specific provisions of the LGC authorize the LGU to impose taxes, fees or charges on
the aforementioned entities ( GOCCs ). In the case at bar, Section 151 in relation to
Section 137 of the LGC clearly authorized the respondent city government to impose on the
petitioner the franchise tax in question.
NATIONAL POWER CORPORATION, vs. CITY OF CABANATUAN
G.R. No. 149110 April 9, 2003
Torio vs Fontanilla 85 SCRA 602
Peoples Homesite&Housing Corpvs Court of Industrial Relations
SCRA 296, 310
Municipality of San Fernando vs Timoteo Sta. Ana
30159 March 31, 1987
September 13, 2004
BIR RULING NO. 013-04 sec. 27 (D) (1) 32 (B) (7) (b) 000-00
Synex, Inc. 2/F PCCI Corporate Centre

Salcedo Village, Makati City
Attention: Mr. Rolando A. Castro
118 L.P. Leviste Street
150
GR L-
Gentlemen :
This refers to your letter dated October 12, 2001 requesting confirmation of your opinion
that the City of Makati, ("City") is not subject to the provisions of Chapter IV Tax on
Corporations of the Tax Code of 1997, including Section 27(D)(1) thereof on interest from
deposits and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements and royalties.
I.
The Facts Presented
The City is a political subdivision of the Republic of the Philippines. As a local government
unit, it serves as an instrumentality of the State in carrying out the functions of
government. As part of its essential government functions, the City collects taxes, fees and
other charges. It maintains deposit accounts with various banks as well as investments in
government securities, commercial papers and the like. The depository banks and other
financial institutions withhold the final tax of 20% on the interest earned from such deposits
and investments pursuant to Section 27(D)(1) and remit the same to this Office.
II.
Statement of Issue
Are the interest derived from City's bank deposits and yields from investments in
Government securities, commercial papers and other similar arrangements subject to
income tax, specifically, the final tax on passive incomes under Section 27(D)(1)?
III.
Provisions of the Tax Code of 1997
The following are the pertinent provisions of the Tax Code of 1997 under Title II on Tax on
Income.
A.
Sec. 27.
Rates of income tax on domestic corporations.
xxxxxxxxx
"(C)
Government-owned or -controlled corporations, agencies or instrumentalities. The
provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government, except
the Government Service Insurance System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the Philippine Charity Sweepstakes Office
(PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR) now revoked,
shall pay such rate of tax upon their taxable income as are imposed by this Section upon
corporations or associations engaged in a similar business, industry, or activity."
"(D)
Rates of taxes on certain passive incomes.
(1)
Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final tax at
the rate of twenty percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from deposit substitutes and
from trust funds and similar arrangements received by domestic corporations, and royalties,
derived from sources within the Philippines; Provided, however, That interest income
derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final tax at the rate of seven and one half
percent (7 1/2%) of such interest income." (emphasis supplied.)
xxxxxxxxx
B.
Sec. 32.
Gross Income.
xxxxxxxxx
"(B)
Exclusions from gross income. The following items shall not be included in gross
income and shall be exempt from taxation under this Title:
xxxxxxxxx
"(7)
Miscellaneous Items.
xxxxxxxxx
(b)
Income Derived by the Government or its Political Subdivisions. Income derived
from any public utility or from the exercise of essential governmental function accruing to
the Government of the Philippines or to any political subdivision thereof.
IV.
Argument
It is your proposition that the interest earned by the City from its bank deposits and other
investments is not subject to income tax, including the final tax on passive incomes. Your
position is based on the following reasons:
1.
It is an established principle of taxation that agencies and instrumentalities of the
government are exempt from taxation.
i.
It is folly for the government to tax itself; otherwise, a vicious cycle will be created
whereby it should produce more taxes to pay its own tax liability.
ii.
To tax the government would create the ridiculous situation of taking money from
one of its pockets and placing it in the other pocket [E.P. Castaeda, Analyses and
Jurisprudence on the NIRC, (1985)].
iii.
Since local government units are representatives of the State, created by the State
to exercise a limited portion of its powers of government, its revenues, like those of the
State itself, are also not taxable.
2.
Section 32(B)(7)(b) excludes from gross income and exempts from taxation the
income derived from the exercise of any essential government function accruing to the
Government of the Philippines or to any of the political subdivision thereof.
i.
It is both a duty and essential function of the local government unit to preserve its
own funds. In furtherance of this duty and function, the City must of necessity maintain
deposit and investments in government securities, commercial papers and the like with
various banks and other financial institutions where the City's funds derived from its
collection of taxes, fees and other charges are deposited and invested.
ii.
Since the act of depositing and investing these funds to preserve the same is an act
that is so intimately connected with the essential functions of the government, it should
follow that the income derived therefrom is also not subject to tax.
V.
Discussion
In the previous rulings of this Office, it was established that provincial, city and municipal
governments are liable for income tax on the interest on their bank deposits and yields from
deposit substitutes, trust funds and similar arrangements because the tax exemption
privileges, including preferential tax treatment of all government units, i.e., the National
Government, its agencies and political subdivisions as well as government-owned or
controlled corporations, were withdrawn by Presidential Decree No. 1931 (1984) and
Executive Order No. 93 (1987) (BIR Ruling Nos. 069-84, 055-91 and 383-91). There is no
reason to depart from these rulings.
Government-owned or -controlled corporations, agencies or instrumentalities of the
government are no longer exempt from taxation and shall be liable to pay such rate of tax
upon their taxable income as are imposed upon corporations or associations engaged in
similar business, industry or activity (Sec. 27(C)). Based on an express provision of law, a
local government unit, as an instrumentality of the Government, is not exempt from income
taxation.
Moreover, the City's income from its depository accounts and investments in securities,
commercial papers and similar arrangements is not exempt from income tax on the ground
that it would be tantamount to the government taxing itself, which would create the
"ridiculous situation of taking money from one of its pockets and placing it in the other
pocket." First, the taxing authority involved in the collection of income tax is the National
Government. The tax due under the Tax Code of 1997 is payable to the National
Government through this Office and not to the City. Second, the City is allotted only a share
in the national internal revenue taxes (Local Government Code of 1991, Secs. 284 and
285). The final tax on income due on interest income of the City does not revert
automatically to the City. Thus, the situation adverted to does not obtain here.
Section 32 (B) (7) (b), however, excludes from the gross income and exempts from income
tax, including the final tax under Section 27 (D) (1), the income derived from the discharge
of any essential governmental functions accruing to the Government of the Philippines or to
any of its political subdivisions.
It is necessary then to determine whether the City, in maintaining depository accounts and
investing in government securities, commercial papers and other similar arrangements from
which it derives interest income, performs an essential government function.
There is no hard and fast rule for purposes of determining the true nature of an undertaking
or function of a municipal corporation. The surrounding circumstances of a particular case
are to be considered and would be decisive. "The basic element, however beneficial to the
public the undertaking may be, is that it is governmental in essence, otherwise the function
becomes private or proprietary in character" (Torio vs. Fontanilla, 85 SCRA 602 (1978)). It
has been established though that an instrumentality of the government which acts for the
purpose of accomplishing government policies and objectives and extending essential
services to the people performs governmental and not proprietary functions (Peoples'
Homesite and Housing Corporation vs. Court of Industrial Relations, 150 SCRA 296, 310
(1987)).
In Angat River Irrigation System, et al. vs. Angat River Workers' Union, et al., 102 Phil.
789, 796797 (1957), the Supreme Court made a distinction between acts in the
performance of a government function and those in the performance of a corporate or
proprietary function and held:
"As ordinarily constituted, municipal corporations (and this may be said of the National
Government) have dual character, the one governmental, legislative, or public; the other,
proprietary or private. In their public capacity, a responsibility exists in the performance of
acts for the public benefit, and in this respect they are merely a part of the machinery of
government of the sovereignty creating them, and the authority of the state is supreme.
But in their PROPRIETARY or private character their powers are supposed to be conferred
not from considerations of state, but for the private advantage of the particular corporation
as a distinct legal personality (Bouvier's Law Dictionary, 3rd revision, vol. II, p. 2270).
In its governmental or public character, the corporation is made by the state one of its
instruments, or the local depository of certain limited and prescribed political powers, to be
exercised for the public good in behalf of the state rather than for itself. But in its
proprietary or private character, the theory is that the powers were supposed not to be
conferred primarily or chiefly from considerations connected with the government of the
state at large, but for the private advantage of the compact community which is
incorporated as a distinct legal personality or corporate individual; and as to such powers,
and to property acquired and contracts made thereunder, the corporation is frequently
regarded as having the rights and obligations of a private rather than those of a public
corporation (Trenton vs. New Jersey, 262 US 182, 67 L Ed. 937, 29 ALR 1471).
The governmental functions of a municipal corporation are those conferred or imposed upon
it as a local agency, to be exercised not only in the interest of its inhabitants, but also in the
advancement of the public good and welfare as affecting the public generally (37 Am. Jur.
727).
The distinction between acts in the performance of a governmental function and those in
the performance of a corporate or proprietary function is that in the case of the former, the
municipal corporation is executing a legislative mandate with respect to a public duty
generally, while in the other, it is exercising its private rights as a corporate body (Loeb vs.
Jacksonville, 101 Fla. 429, 69 ALR 459).
A.
Depository Account
Sections 310 and 311 of the Local Government Code of 1991 require the local government
units to maintain depository accounts for their funds. The provisions state as follows:
"Sec. 310.
Separation of Books and Depository Accounts. Local accountants and
treasurers shall maintain separate books and depository accounts, respectively, for each
fund in their custody or administration, under such rules and regulations as the Commission
on Audit may prescribe.
Sec. 311.
Depository Accounts. Local treasurers shall maintain, depository accounts
in the name of their respective local government units with banks, preferably governmentowned, located in or nearest to their respective areas of jurisdiction. Earnings of each
depository account shall accrue exclusively thereto."
The obligation of the City to maintain depository accounts for its funds may not, however,
be construed as part of its essential governmental functions since this is not exercised by
the City in "administering the powers of the state and promoting the public welfare" nor is it
included among the "legislative, judicial, public or political" powers of the City. It is in the
nature of a function "for the special benefit and advantage of the City" and, hence,
proprietary in character (City of Manila vs. Intermediate Appellate Court, 179 SCRA 428,
434-435 (1989)). Moreover, in opening and maintaining these depository accounts, the City
will enter into contracts with the banks which involves the exercise of its proprietary
functions (Id., at p. 434).
B.
Investments
The City engages primarily in an economic activity with a view to obtaining profit when it
maintains investments. The City acts in its proprietary or private character since no
governmental or public policy of the state is involved (Torio vs. Fontanilla, supra at pp.
608609). As a corporation, the City enjoys full autonomy in the exercise of its economic
enterprises, subject to the limitations provided in the Local Government Code of 1991 and
other applicable laws (Local Government Code, Sec. 22 (d)). When the City acts in its
proprietary character, it is regarded as having the rights and obligations of a private
corporation (Angat River Irrigation System, et al. vs. Angat River Workers Union, supra, at
p. 796). Its income realized from its investment activities or received by it in the exercise of
its proprietary powers is subject to income tax in the same manner as other private
corporations similarly situated (Sison vs. Ancheta, 130 SCRA 654, 664 (1984)).
VI.
Conclusion
The City is subject to the 20% final tax on its interest income derived from its deposit
accounts and yield and other monetary benefit from its investments in government
securities, commercial papers and similar arrangements under Section 27(D)(1).
Very truly yours,
(SGD.) GUILLERMO L. PARAYNO, JR.
Commissioner of Internal Revenue
NAPOCOR vs. CENTRAL BOARD OF ASSESSMENT APPEALS, ET AL.

January 30, 2009.]
[G.R. No. 171470.
FACTS: First Private Power Corp. (FPPC) entered into a BOT agreement with National
Power Corp. (NAPOCOR) for the construction of a power plant in Bauang, La Union. The BOT
agreement provided, via an Accession Undertaking, for the creation of the Bauang Private
Power Corp. (BPPC) that will own, manage and operate the power plant/station, and
assume and perform FPPC's obligations under the BOT agreement. For a fee, BPPC will
convert NAPOCOR's supplied diesel fuel into electricity and deliver the product to NAPOCOR.
Initially, the Municipal Assessor's Office of Bauang declared BPPC's machineries and
equipment as tax-exempt. However, the Bureau of Local Government Finance (BLGF) ruled
that they are subject to real property tax prompting the Municipal Assessor to issue a Notice
of Assessment and Tax Bill to BPPC. NAPOCOR filed a petition with the Local Board of
Assessment Appeals which denied the same, ruling that the exemption provided by Sec.
234 (c) of the LGC applies only when a government-owned or controlled corporation like
NAPOCOR owns and/or actually uses machineries and equipment for the generation and
transmission of electric power.
On appeal, the Central Board of Assessment Appeals dismissed the appeal based on its
finding that the BPPC, and not NAPOCOR, is the actual, direct and exclusive user of the
equipment and machineries; thus, the exemption under Sec. 234 (c) does not apply. The
CTA ruled that NAPOCOR has no cause of action and no legal personality to question the
assessment, as it is not the registered owner of the machineries and equipment. Based on
the BOT agreement, the CTA noted that NAPOCOR shall have a right over the machineries
and equipment only after their transfer at the end of the 15-year co-operation period.
ISSUE: Whether or not NAPOCOR is the actual user of the machineries and equipment.
RULING: By the express terms of the BOT agreement, BPPC has complete ownership
both legal and beneficial of the project, including the machineries and equipment used,
subject only to the transfer of these properties without cost to NAPOCOR after the lapse of
the period agreed upon. As agreed upon, BPPC provided the funds for the construction of
the power plant, including the machineries and equipment needed for power generation;
thereafter, it actually operated and still operates the power plant, uses its machineries and
equipment, and receives payment for these activities and the electricity generated under a
defined compensation scheme. Notably, BPPC as owner-user is responsible for any
defect in the machineries and equipment. Consistent with the BOT concept and as
implemented, BPPC the owner-manager-operator of the project is the actual user of its
machineries and equipment. BPPC's ownership and use of the machineries and equipment
are actual, direct, and immediate, while NAPOCOR's is contingent and, at this stage of the
BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA
committed no reversible error in denying NAPOCOR's claim for tax exemption.
c. Government Educational Institutions
1) Property actually, directly and exclusively used for educational purposes is exempt from
property or real estate tax but income of whatever kind and character from any of their
properties, real or personal, regardless of the disposition, is taxable. (Sec. 30, last par.
NIRC)
2) income received by them as such educational activity is exempt from taxes. However,
their income from any of their activities conducted for profit regardless of the disposition is
taxable. (Sec. 30, last par., NIRC).
NON-DELEGABILITY OF THE TAXING POWER
NON DELEGABILITY OF THE TAXING POWER

General Rule; The power of taxation being purely, legislative, Congress cannot delegate the
power to others. This limitation arises from the doctrine of separation of powers among the
three branches of our government.
Exceptions:
a. Delegation to the President - The Constitution expressly allows Congress to authorize the
President to fix within specified limits and subject to such limitations and restrictions as it
may impose, tariff rates, import or export quotas, tonnage and wharfage dues and other
duties or imposts. (Sec. 28 [2] Art,VI )
b. Delegation to local governments - Each local government unit shall have the power to
create its own sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees and charges shall accrue exclusively to the local
government. (Sec. 5Art.X)
c. Delegation to administrative agencies also known as the power of subordinate legislation.
The delegation must comply with the completeness test and the existence of sufficiently
determinate standards test. (Pelaezvs Auditor Gen.) And subject to the completeness of
criteria and the standard rule and should only be for tax administration or implementation.
It should abide with the principle Verba legis non estrecedendumwhich means that from
the words of a statute there should be no departure. It is a cardinal rule that an
administrative agency such as the Bureau of Internal Revenue or even the Department of
Finance cannot amend an act of Congress. Whatever administrative regulations they may
adopt under legislative authority must be in harmony with the provisions of the law they are
intended to carry into effect. They cannot widen or diminish its scope.
The two classes of powers of the administrative agencies are:
(1) Quasi-legislative or rule-making power.
(2) Quasi-judicial or administrative adjudicatory powers
Quasi-legislative or rule making power is the power to make rules and regulations which
results in delegated legislation that is within the confines of the granting statute and the
doctrine of non-delegability and separability of powers.
Quasi-judicial or administrative adjudicatory power of the administrative agency is the
power of the administrative agency to adjudicate the rights of persons before it. It is the
power to hear and determine questions of fact to which the legislative policy is to apply and
to decide in accordance with the standards laid down by the law itself in enforcing and
administering the same law.
Commissioner of Internal Revenue v. Court of Appeals, Court of Tax Appeals and Fortune
Tobacco Corporation, 261 SCRA 236, 256-257
Force and Effect of Regulations
Such regulations once established and found to be consonance with the general purposes
and objects of the law have the force and effect of law and so they must be applied and
enforced. (De Guzman vs. Lontok)
Non-delegation, Uniformity of taxation
Fortune Tobacco Corp. is engaged in the manufacture of different brands
of cigarettes. The Philippine Patent Office issued to the corporation
certificates of trademark registration over "Champion/ "Hope," and "More"
cigarettes. Initially, the CIR classified the brands as foreign brands since they were listed in
the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco
changed the names as follows: Hope" to "Hope Luxury" and More to "Premium More,"
thereby removing them from the foreign brand category. A certification was presented to
show that "Champion" was an original Fortune Tobacco brand. The three brands were
therefore taxed ad valorem as local brands.
Subsequently, RA 7554 was passed, imposing a 55% tax on locally
manufactured cigarettes bearing a foreign brand. The rate for cigarettes
bearing a local brand was set at 45%. After the enactment of RA 7654 but before its
effectivity, the BIR issued a circular reclassifying the three brands as foreign brands.
Pursuant to RA 7654, the CIR assessed Fortune Tobacco for ad valorem tax deficiency
amounting to P9.5M. Fortune filed a petition for review with the CTA. The CTA upheld the
stand of Fortune, stating that at the time of the enactment of RA 7654, the three brands
were still classified as local brands. Therefore, they should not be assessed the 55% tax,
but only the 45% tax.
ISSUE: Whether the three brands should be taxed as local or as foreign
brands.
HELD: They are local brands. The BIR may issue rules in the exercise of its quasi
legislative powers, but these rules must be merely interpretative in nature. It cannot go
beyond providing for the means that can facilitate the implementation of the law. In this
case, the circular issued by the BIR reclassifying the three brands as foreign brands was
aimed precisely at placing them within the scope of RA 7654 and subjecting them to a new
tax rate. In issuing the circular, the BIR did not simply interpret the law; it legislated under
its quasi-legislative authority. The due process requirements of notice, hearing, and
publication should not have been then ignored. The circular might have also infringed on
uniformity of taxation. The Constitution requires taxation to be uniform and equitable.
Uniformity
requires that all subjects or objects of taxation, similarly situated, are to be treated alike or
put on equal footing both in privileges and liabilities.
Thus, all taxable articles or kinds of property of the same class must be
taxed at the same rate, and the tax must operate with the same force and
effect in every place where the subject may be found. In this case, other cigarettes bearing
foreign brands were not included within the scope of the circular. According to
Commissioner Chato, the reason for leaving out the other brands was because there was
not enough time to include them. The SC ruled that the circular was hastily promulgated, in
violation of the rule on uniformity of taxation.
Commissioner of Internal Revenue vs Court of Appeals
Delegation to Local Government Unit
The City of Butuan enacted an ordinance imposing on any agent and/or consignee of any
entity engaged in selling soft drinks a tax of 10 cents per case of 24 bottles. The tax shall
be based on any record showing the number of cases received within the month. Pepsi filed
an action to nullify the ordinance on the ground that it partakes of the nature of an import
tax and is highly unjust and discriminatory.
ISSUE: Whether the ordinance is valid.
HELD: The ordinance is null and void. The tax is levied only on those persons who are
agents or consignees of another dealer, who must be one engaged in business outside the
city. A seller without an agent engaged within the city would not be subject to the tax.
Moreover, the tax shall be based on the number of bottles received, not sold, by the
taxpayer. These circumstances show that the ordinance is limited in application to those
soft drinks brought into the City from outside thereof. The tax thus partakes of the nature
of an import duty, which is beyond the authority of the city to impose.
Moreover, the tax is discriminatory, and hence, violative of the uniformity required by the
Constitution, since only sales by agents or consignees of outside dealers would be subject to
the tax, while those by local dealers not acting for or on behalf of other merchants would be
exempt from the tax. There is no valid classification here because if the purpose of the law
were merely to levy a burden upon the sale of soft drinks, there is no reason why sales
thereof by dealers other than agents or consignees of producers or merchants outside the
city should be exempt from the tax.
Pepsi Cola Bottling Co. vs Municipality of Tanauan 69 SCRA 110
ADMINISTRATIVE DELEGATION
CIR VS CA AND COMMONWEALTH MANAGEMENT
GR N0. 125355 MARCH 30, 2000
SYSTEM PLUS COMPUTER COLLEGE VS. CALOOCAN CITY

NAPOCOR VS CITY OF CABANATUAN
GR NO. 149110
PAGCOR VS. BUREAU OF INTERNAL REVENUE

STA. LUCIA REALTY VS CITY OF PASIG
GR NO. 146382 AUG 7, 2003
APRIL 9, 2003
GR 172087 MARCH 15, 2011
GR 166838
JUNE 15, 2011
COMMISSIONER VS FILINVEST DEVELOPMENT CORP. GR 163653 JULY 19, 2011

APC GROUP INC. VS CIR
CTA CASE NO. 6155 MARCH 11, 2002
INTERNATIONAL COMITY
INTERNATIONAL COMITY
The property or income of a foreign state or government may not be the subject of taxation
by another country.
Reasons:
a. in parem non habet imperium. As between equals there is no sovereign.
b. The rule of international law that a foreign government may not be sued without its
consent so that it is useless to impose a tax which could not be collected.
c. The concept that when a foreign sovereign enters the territorial jurisdiction of another, it
does not subject itself to the jurisdiction of the other.
Thirty-First Infantry Post Exchange vs Posadas 54 PHIL 866
International Comity
Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi. Under the
Contract, Mitsubishi would lend Atlas $20M for the installation of a new concentrator for
copper production, and. in turn, Atlas would sell to Mitsubishi all the copper concentrates
produced from the machine for the next 15 years. Thereafter, Mitsubishi applied for a loan
with Eximbank of Japan so that it could comply with its obligations under the contract.
Mitsubishi also applied for a loan with a consortium of Japanese banks. The total amount of
both loans was $20M. Atlas made interest payments in favor of Mitsubishi totaling PBM. The
corresponding 15% tax on the interest in the amount of PLQM was withheld and remitted to
the Government. Subsequently, Mitsubishi and Atlas filed a claim for tax credit, requesting
that the P1.9M be applied against their existing tax liabilities on the ground that the interest
earned by Mitsubishi on the loan was exempt from tax.
ISSUE: Whether the interest is tax-exempt.
HELD: No, the interest is not exempt from tax.
The National Internal Revenue Code provides that income received from loans in the
Philippines extended by financing institutions owned, controlled, or financed by foreign
governments are exempt from tax.
Mitsubishi and Atlas claim that the interest earned from the loan falls under the above
exemption because Mitsubishi was merely acting as an agent of Eximbank, which is a
financing institution owned, controlled, and financed by the Japanese Government. They
alleged that Mitsubishi was merely the conduit between Atlas and Eximbank, and that the
ultimate creditor was really Eximbank.
The SC held that Mitsubishi was not a mere agent of Eximbank. It entered into the
agreement with Atlas in its own independent capacity. The transaction between Mitsubishi
and Atlas on the one hand, and between
Mitsubishi and Eximbank on the other were separate and distinct. No agency relationship
was established between Eximbank and Mitsubishi. Since the transaction was between
Mitsubishi and Atlas, the exemption that would have been applicable to Eximbank, does not
apply. The interest is therefore not exempt from tax.
CIR v. Mitsubishi Metal Corp.:
[G.R. No. L-24754. July 18, 1975.]
THE COMMISSIONER OF INTERNAL REVENUE, petitioner-appellant, vs. P. J. KIENER
COMPANY, LTD., INTERNATIONAL CONSTRUCTION CORPORATION, GAVINO T. UNCHUAN
AND THE COURT OF TAX APPEALS, respondents-appellees.
SYNOPSIS
Private respondents entered into a contract with the government for the construction of the
Mactan Airfield in Cebu. The "General Conditions" of the contract, adopting the tax
exemption clause of the Mutual Defense Agreement between the United States and the
Philippines, provided that "no tax of any kind or description will be levied on any material,
equipment or supplies which may be purchased or otherwise acquired in connection with
the project under contract, which material equipment or supplies are required solely for
such project." Thereafter, private respondents sought from petitioner a refund of the
amount of P21,478.31 paid by Caltex as taxes for the petroleum products sold to it which
amount had been included in the purchase price. Since no answer was forthcoming private
respondents instituted a petition for review before the Court of Tax Appeals. Petitioner
thereafter, denied the claim for return, but the Tax Court came up with a decision allowing
tax credit in the amount of P18,272.21 deducting from the amount claimed taxes for
petroleum products used in the demolition of the Opon Church in Mactan and taxes which
can no longer be claimed because of prescription.
Hence, this petition for review.

The Supreme Court held that the petroleum products acquired by private respondent are
not exempt for they did not go into the construction of the bases.
Judgment reversed.
SYLLABUS
1.
TAXATION EXEMPTION, PROVISION THEREFOR IN THE MUTUAL DEFENSE
AGREEMENT BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF THE
PHILIPPINES, CONSTRUED. The phrases "for exclusive use in the construction," "acquired
in connection with the construction," "acquired with the project" used in the tax exemption
provisions of the Military Bases Agreement, the Aide Memoire" and the stipulations in the
contract for the construction of a military air base could only mean, collectively,
"construction" materials or supplies which must necessarily be incorporated in the
construction of the airfield. For the terms "materials' and "supplies" refers to something
"going into or consumed" in the performance of the work such as mortar, cement, sand,
bricks, lumber or nails, glass, hardware, and a thousand other things that might be meant,
which are necessary to the completed erection of a building or structure.
2.
ID.; ID.; ID.; PETROLEUM PRODUCTS WHICH DO NOT GO INTO THE
CONSTRUCTION OF THE BASES, NOT TAX EXEMPT; REASON. The petroleum products
purchased by contractors "to run their machineries and equipment" used in the construction
of an air base cannot be categorized as such "materials" or "supplies" as are subject to tax
exemption under the Military Bases Agreement, since they do not go into or are consumed
in the construction, but in the machineries and equipment. Moreover, the stipulation in the
contract between the government and the contractor providing that "only equipment which
will be incorporated in the construction can be imported tax on certification of the
Engineer," deals centrally on the importation of equipment, for which the government had
conceded the privilege of exemption because the same may not be "economically
procurable in terms of price and quality in the Philippines." To assure however that the
privilege is not abused and to restrain against possible detour of the revenue and customs
laws, the government has stipulated that the equipment must be incorporated in the
construction.
3.
ID.; ID.; ID.; ID.; CASE OF COMMISSIONER OF CUSTOM VS. CALTEX PHILIPPINES
NOT APPLICABLE TO THE CASE AT BAR. In the case of Commissioner of Customs vs.
Caltex (Phil.) Inc., No. L-13067, December 29, 1959, gasoline and oil furnished to the
drivers during the constitution of the petroleum refinery came within the import of the
"materials" or "supplies" that are tax-exempt. This ruling cannot be applied where there is
an express provision in the treaties that the "materials" or "supplies" must be "for exclusive
use in the construction". Where it is explicitly provided that the "materials" and "supplies"
must be for exclusive use in, in connection with, and required solely for the construction of
an air base, they must be incorporated in the construction for the exemption to apply.
4.
ID.; ID.; ID.; RULING OF THE SECRETARY OF FINANCE IN A SIMILAR CASE
ENTITLED TO GREAT WEIGHT IN THE DETERMINATION OF THE PRESENT ISSUE. The
ruling of the Secretary of Finance that oils used by contractors in the operation of their
machines or other equipment are not materials to be used solely for military projects but
petroleum products to be used in the operation of the contractor's machine, and therefore
not exempt commands respect and weight, since it proceeds from the official of the
government called upon to execute or implement administrative laws it lays down a sound
rule on the matter.
5.
ID.; ID.; INTERPRETATION OF STIPULATIONS. If two meanings of a stipulation
are admissible, that which is least to the advantage of the party for whose benefit the
stipulation was inserted in the treaty should be preferred. Thus, an ambiguity in the tax
exemption provision in the Military Bases Agreement and in the "Aide Memoire" in a
accordance with which a contract was entered into, cannot be interpreted in favor of the
American Government or for that matter a party claiming under it, like a taxpayer,
especially when it is considered that for the Philippine Government "the exception contained
in tax statutes must be strictly construed against the one claiming exemption and that he
who would seek to be thus privileged must justify it by words too plain to be mistaken and
too categorical to be misinterpreted."
6.
ID.; ID.; ID.; FINDINGS OF COURT OF TAX APPEALS BINDING. The findings of the
Tax Court that the specific tax paid by Caltex (Phil.) Inc. has been shifted by it to private
respondents must be accorded deference, such being well-nigh conclusive upon the
Supreme Court.
DECISION
This is a case that draws Us to the tax exemption provision written in the Military Bases
Agreement celebrated by the Republic of the Philippines and the United States of America
on March 14, 1947, and pursued in the "Aide Memoire" between the two Governments on
April 27, 1955.
A quo a decision was rendered by respondent Court of Tax Appeals ordering the
Commissioner of Internal Revenue "to give tax credit to [private respondents] the amount
of P18,272.21, without pronouncement as to costs." The Tax Court modified the ruling of
the Commissioner of Internal Revenue denying the request of the private respondents for
tax credit amounting to P21,478.31, the total of specific taxes supposedly paid by them.
Petitioner seeks a review of said judgment.
Respondent P. J. Kiener Company, Ltd. is a domestic limited co-partnership, doing business
in the Philippines, while respondent International Construction Corporation is a domestic
corporation duly organized and existing under and by virtue of the laws of the Philippines,
likewise engaged in business in the Philippines. On or about December 14, 1957,
respondent companies entered into a joint venture with respondent Gavino T. Unchuan, a
licensed Filipino civil engineer, to bid for the construction of the Mactan Airfield in Mactan
Island, Municipality of Opon (now Lapu-lapu City), Cebu. Respondents won the bid. And so,
on February 19, 1958, the Republic of the Philippines, represented by Lt. Gen. Alfonso
Arellano, then Chief of Staff, Armed Forces of the Philippines, entered into a contract with
private respondents, Article I of which provides, inter alia, ". . . That the . . . general
conditions . . . are hereby made integral parts of this contract by incorporation and
reference respectively." Of these "General Conditions", Section 3-19 provides:
"3-19 Taxes In accordance with the Mutual defense Agreement between the United
States of America and the Republic of the Philippines, no tax of any kind or description will
be levied on any material, equipment or supplies which may be purchased or otherwise
acquired in connection with the project under contract, which material, equipment or
supplies are required solely for such project." (Emphasis supplied)
This is the root of the controversy.
Towards the middle of 1958, private respondents commenced construction of the Mactan
Airfield and started purchasing "petroleum products to run and maintain their machineries
and equipment" from Caltex (Phil.) Inc. During the period of February 1, 1960 through April
11, 1960, they likewise purchased motor gasoline, kerosene, lubricating and/or motor oil,
and diesel fuel from Caltex (Phil.) Inc. For these petroleum products, Caltex (Phil.) Inc. paid
the Bureau of Internal Revenue P21,478.31 of specific taxes. This amount was, in turn,
included in the prices of the petroleum products paid by private respondents to Caltex
(Phil.) Inc.
On 29 December 1960, private respondents wrote petitioner, requesting it to refund to
Caltex (Phil.) Inc. the amount of P21,478.31. Caltex (Phil.) Inc. followed the request with a
formal claim for tax credit on January 12, 1961. Since no answer was forthcoming, private
respondents instituted on January 31, 1962, a petition for review with the respondent Court
of Tax Appeals. They prayed that they be credited the amounts of P21,478.31 and P151.65,
specific and sales taxes, respectively, plus interest at the legal rate from that date until the
grant of the tax credit. However, before the trial of the case, the sales tax of P151.65 was
credited in favor of Caltex (Phil.) Inc.
Subsequently, or on 7 January 1963, petitioner formally denied the request of Caltex (Phil.)
Inc. stating that as per the ruling of the Department of Finance in its answer to the query of
the Philippine Electrical Supply, dated July 18, 1962:
"Oils used by contractors in the operation of their machines or other equipment in
pursuance of their contract are not materials to be used solely for the aforesaid military
projects but petroleum products to be used in the operation of contractor's machines or
equipment Consequently, the same cannot he exempted from local taxes as well as
customs duties and special import tax."
After trial, the Tax Court rendered the judgment appealed from. It deducted from the
P21,478.31 claimed for the specific tax of P908.40 (petroleum products used in the
demolition of the Opon Church in Mactan) and the specific tax of P2,297.74 paid on January
15, and 25, 1960 for being barred by prescription (claim for refund was filed only on
January 31, 1962.
Petitioner delimits its issue or question to the dispositive portion of the Tax Court decision
ordering petitioner "to give tax credit to [private respondents in the amount of P18,272.21 .
. ." and assigns that the Tax Court erred.
I
". . . IN HOLDING THAT UNDER THE MUTUAL DEFENSE AGREEMENT BETWEEN THE UNITED
STATES OF AMERICA AND THE REPUBLIC OF THE PHILIPPINES THE PETROLEUM PRODUCTS
IN QUESTION ARE EXEMPT FROM THE PAYMENT OF THE SPECIFIC TAX.
II
". . . IN HOLDING THAT UNDER THE 'AIDE MEMOIRE' OF APRIL 27, 1955, BETWEEN THE
PHILIPPINE REPUBLIC AND THE UNITED STATES OF AMERICA, THE PETROLEUM PRODUCTS
IN QUESTION ARE EXEMPT FROM THE PAYMENT OF SPECIFIC TAX.
III
". . . IN HOLDING THAT THE PETROLEUM PRODUCTS IN QUESTION COME WITHIN THE
PURVIEW OF THE WORDS 'MATERIAL' OR 'SUPPLIES' MENTIONED IN THE 'AIDE MEMOIRE'
OF APRIL 27, 1955, BETWEEN THE PHILIPPINE REPUBLIC AND THE UNITED STATES OF
AMERICA, AND OF SECTION 3-19 OF THE GENERAL CONDITIONS ATTACHED TO THE
SPECIFICATION FOR MACTAN AIRFIELD WHICH WAS MADE AN INTEGRAL PART OF THE
CONTRACT BETWEEN THE PHILIPPINE GOVERNMENT AND THE RESPONDENTS P.J. KIENER
COMPANY, LTD., INTERNATIONAL CONSTRUCTION CORPORATION AND GAVINO T.
UNCHUAN.
IV
". . . IN HOLDING THAT THE RESPONDENTS P. J. KIENER COMPANY LTD., INTERNATIONAL
CONSTRUCTION CORPORATION AND GAVINO T. UNCHUAN ARE ENTITLED TO CLAIM FOR
TAX CREDIT OF THE SPECIFIC TAXES WHICH THEY ALLEGEDLY PAID ON THE PETROLEUM
PRODUCTS IN QUESTION; AND.
V
". . . IN ORDERING THE HEREIN PETITIONER TO GIVE TAX CREDITS TO THE RESPONDENTS
IN THE AMOUNT OF P18,272.21.
The matrix of these imputations, however, is whether the petroleum products in question
are "materials" or "supplies" purchased or otherwise acquired "in connection with" the
construction of the Mactan Airfield and which "materials" or "supplies" are required "solely"
for such project.
Private respondents flawlessly narrate that when they began construction towards the
middle of 1958, they started purchasing the petroleum products from Caltex (Phil.) Inc. "to
run and maintain their machineries and equipment used in the construction." The
"equipment" refers to fuel pumping machineries, radar facilities, and the like. Purchase
went through April 11,1960, when months thereafter the conflict on the tax credit arose.
Private respondents would deliver the conclusion that these petroleum products are taxexempt since they have been ". . . purchased or otherwise acquired in connection with the
project . . ." The fact that they are not incorporated into the Mactan Air base would not
defeat the exemption.
The sense which private respondents proffer to attach to the terms "materials" and
"supplies" eludes the link welded into the Military Bases Agreement and "Aide Memoire" and
recognized in Section 3-19 of the "General Conditions". The Military Bases Agreement states
that 'No import, excise, consumption or other tax ... shall be charged on material,
equipment, supplies or goods, . . . for exclusive use in the construction . . . of the
bases . . ." (Art. V, footnote 1). The "Aide Memoire" provides: ". . . no internal taxes of any
kind or description, except income taxes, shall be levied on any materials, equipment,
supplies and/or services which may be purchased or otherwise acquired in connection with
the [construction of the Mactan Airfield] ..." (Sec. 6, Footnote 2). Section 13-9 of the
"General Condition" stipulates that ". . . no tax of any kind or description will be levied on
any material, equipment or supplies which may be purchased or otherwise acquired in
connection with the project . . ." Reduced into simple terms, the underscored phrases
continuously used in the two treaties and in the contract could only mean, collectively
"construction" materials or supplies which must necessarily be incorporated in the
construction of the airfield. For the terms "materials" and "supplies" refer to something
"going into or consumed" in the performance of the work such as mortar, cement, sand,
bricks, lumber or nails, glass, hardware, and a thousand other things that might be meant,
which are necessary to the completed erection of a building or structure. Thus, examined,
the petroleum products purchased by the private respondents "to run and maintain their
machineries and equipment" cannot be categorized as "materials" or "supplies" since they
do not go into or are consumed in the construction, but in the machineries and equipment.
Nonetheless, private respondents would unwrap a thesis that if Section 13-9 of the "General
Conditions" intended to refer only to "materials" or "supplies" which form part and/or
incorporated into the project, the said section would have so stated, just like when it
provided that "Only equipment which will be incorporated in the construction" are tax free.
They would thus seize the absence of such proviso as a recognition of the tax-exemption of
those "materials" or "supplies" not necessarily incorporated in the construction. The
argument misses the point. In its textual completeness, Section 13-9 provides: "Only
equipment which will be incorporated in the construction can be imported tax free on
certification of the Engineer." (Last sentence, 2nd par.) It deals centrally on the importation
of equipment. The Government had conceded the privilege of exemption to this item
because the same may not be "economically procurable in terms of price and quality within
the Philippines." (Sec. 2, "Aide Memoire"). To assure, however, that the privilege is not
abused or circumvented, the Government has stipulated in Section 13-9 of the "General
Conditions" that the equipment "[must] be incorporated in the construction . . ." It was
intended by the Government as an open restraint against possible detour of the revenue
and customs laws. The reason is easily discernible. There still pervaded even at that time
the sentiment of preference to local products, as can be plucked from the ultimate sentence
of Section 2, "Aide Memoire", thus:
"Locally produced materials, however, shall be used wherever such materials are of
satisfactory quality and are available at reasonable, comparable prices."
Under these circumstances, the contractual proviso in Section 13-9 (supra) cannot be
isolated and stretched to mean that "materials" and "supplies" need not be incorporated in
the construction to be tax-exempt. It is essentially non sequitur.
Private respondents would, however, seek a final refuge in the Commissioner of Customs
vs. Caltex (Phil.) Inc., No. L13067, December 29, 1959 ruling that "gasoline and oil
furnished [Caltex] drivers during the construction job come within the import of the
'material or supplies'". In that case, Caltex (Phil.) Inc. was granted by the Secretary of
Agriculture and Natural Resources a petroleum refining concession with the right to
establish and operate a petroleum refinery in the municipalities of Bauan and Batangas,
province of Batangas. The concession made the provisions of Republic Act No. 387 as an
integral part. In its operation, Caltex (Phil.) Inc. used as basic material crude oil imported
from abroad. Customs duties were imposed on this imported crude oil and so, Caltex sought
for refund. The Court of Tax Appeals ordered a refund. On petition for review, the Supreme
Court held that under Article 103 of the Act. the petroleum products imported by
respondent Caltex (Phil.) Inc. for its use during the construction of the refinery are exempt
from the customs duties and that gasoline and oil furnished its drivers during the
construction job come within the import of the words "material" or "supplies"
It bears emphasis, however, that the words "material" or "supplies" in that ruling were
interpreted in relation to the provisions of the Act, particularly Article 103. Unlike the
treaties and contract in the case at bar, no express provision is therein contained that the
"materials" or "supplies" must be "for exclusive use in the construction" (Art. V, Military
Bases Agreement) or "in connection with the [construction] . . . which materials . . .
supplies are required solely for such projects." (Cf. Sec. 6, "Aide Memoire" and Sec. 13-9 of
"General Conditions"). It is understandable why. At that time there was no Philippine crude
petroleum available for the use of any refinery in the Philippines, and so imported crude
petroleum was allowed so as not to defeat the objective of the Act which was to promote
and encourage the exploration, development, production and utilization of the petroleum
resources of the Philippines. Thus far, the importation of these "materials" and "supplies"
was only circumscribed by a liberal proviso that the exemption shall not be allowed on
"goods imported by the concessionaire for his personal use or that of any others." Beyond
that, the exemption operates. As far as the "materials" and "supplies" are concerned, they
need not be incorporated into the construction to fall within the province of the exemption.
The present case is situated on a different plane. Explicitly, the "materials" and "supplies"
must be for exclusive use in, in connection with, and required solely for the construction of
the Mactan Airfield. In short, the "materials" and "supplies" need be incorporated in the
construction for the exemption to apply. It, therefore, results that the Caltex ruling cannot
be invoked as it is to be interpreted within the context of Republic Act 387.
Anent this, the Secretary of Finance in its letter of July 18, 1962 to the Philippine Electrical
Supply Co., Inc. ruled that "Oils used by contractors in the operation of their machines or
other equipment . . . are not materials to be used solely for . . . military projects but
petroleum products to be used in the operation of the contractor's machines or equipment."
They are, consequently, not tax-exempt. The ruling commands much respect and weight,
since it proceeds from the official of the government called upon to execute or implement
administrative laws and it lays down a sound rule on the matter.
Nor could the ambiguity that thus sprang from the tax-exemption provision in the Military
Bases Agreement and in the "Aide Memoire" in accordance with which the contract in
question was entered into be interpreted in favor of the American Government or, for that
matter, any party claiming under it, like private respondents. Lauterpacht says that "if two
meanings of a stipulation are admissible, that which is least to the advantage of the party
for whose benefit the stipulation was inserted in the treaty should be preferred." Especially
when it is considered that for the Philippine Government, "the exception contained in the
tax statutes must be strictly construed against the one claiming the exemption" because the
law "does not look with favor on tax exemptions and that he who would seek to be thus
privileged must justify it by words too plain to be mistaken and too categorical to be
misinterpreted."
An error has been assigned by petitioner that while the petroleum products were all
purchased by private respondents from the Caltex (Phil.) Inc., for which the latter paid the
specific taxes and sales taxes, private respondents did not come up with proofs that the
specific taxes of P21,478.31 were included in the purchase price paid by them, and that the
phrase "Statement of Specific Tax Excluded from Sales to P. J. Kiener Co. Ltd." appearing in
both Exhibits A and B of private respondents means that the purchase price did not include
said taxes. The Court of Tax Appeals, however, found that the tax of P21,478.31 has been
shifted by Caltex (Phil.) Inc. to private respondents. This finding of the Tax Court must be
accorded deference, "being well-nigh conclusive" upon the Supreme Court.
IN VIEW OF THE FOREGOING, the judgment of the Court of Tax Appeals ordering petitioner
"to give tax credit to [private respondents] the amount of P18,272.21" is reversed and set
aside. In all other respects the judgment appealed from is affirmed. Without
pronouncement as to costs. SO ORDERED.
SITUS OF TAXATION
TERRITORIALITY OR SITUS OF TAXATION
Situs of taxation - is the place or authority that has the right to impose and collect taxes.
(CIR vs. Marubeni Corp. GR 137377 December 18, 2001) The state where the subject to be
taxed has a situs may rightfully levy and collect the tax. The situs is necessarily in the state
which has jurisdiction or which exercises dominion over the subject in question. It is based
on the principle of symbiotic relationship; that is, the jurisdiction, state or political unit that
gives protection has the right to demand support.
General Rule:
A state may not tax property lying outside its borders or lay an excise or privilege tax upon
the exercise or enjoyment of a right or privilege derived from the laws of another state and therein exercised or enjoyed. (51 Am, Jur: 87-88) Tax laws do not operate beyond the
jurisdictional limits of a country.
Reasons:
a. Taxation is an act of sovereignty which could only be exercised within a country's

territorial limits.
b. This is the result of the concept that taxes are paid for the protection and services
provided by the taxing authority which could not be provided outside the territorial
boundaries of the taxing state.
Territorial Jurisdiction
Marubeni was a Japanese corporation engaged in the import and export, trading, and
construction business. It completed two contracts in 1984, the income from which it did not
declare. One of the contracts was with the National Development Company (NDC) in
connection with the construction of a wharf in Leyte. The other contract was with the
Philippine Phosphate Fertilizer Corp (Philphos) for the construction of an ammonia storage
complex in Leyte. The projects were completed on a turnkey" basis (a job in which the
contractor agrees to complete the work of building and installation to the point of readiness
or occupancy; in other words, the products are brought to the client complete and ready for
use). The two contracts were divided into two parts - the offshore portion and the onshore
portion. All materials and equipment in the contract under the offshore portion were
manufactured and completed in Japan. After manufacture, these were transported to Leyte
and installed to the pier with the use of bolts. Marubeni claims that the income derived from
the offshore portion should be exempt from tax since it was derived outside of the
Philippine jurisdiction.
ISSUE: Whether the income of Marubeni is taxable even if it claims that it was earned
outside of the Philippines.
HELD: No, Marubeni is not taxable for the contractors tax. A contractors tax is in the
nature of an excise tax on the exercise of a privilege of selling services or labor. Like
property taxes, it cannot be imposed on an occupation or privilege outside the taxing
district in this case, the materials, machines, and equipment used in the construction
projects were all designed, engineered and fabricated in Japan. They were merely shipped
to Leyte and assembled there. While the construction and installation work were completed
within the Philippines, some pieces of equipment and supplies were completely designed
and engineered in Japan. Since these services were rendered outside the taxing Jurisdiction
of the Philippines, they are therefore not subject to the contractors tax.
C I R vs. Marubeni
COMMISSIONER
OF
INTERNAL
G.R. No. 137377. December 18, 2001
REVENUE
vs.
MARUBENI
CORPORATION
SYNOPSIS
Petitioner Commissioner of Internal Revenue assailed the decision of the CA and the Court
of Tax Appeals (CTA), ruling that respondent's deficiency tax liabilities are deemed
cancelled and extinguished upon the respondent's availment of tax amnesty under
Executive Orders Nos. 41 and 64. Petitioner claimed the respondent is disqualified from
availing of the amnesties because the latter falls under the exception in Sec. 4(b) of E.O.
No. 41.
On appeal, the Supreme Court held for a taxpayer not to be disqualified under Sec. 4(b) of
E.O. No. 41, there must have been no income tax cases filed in court against him when E.O.
No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning respondent's 1985
deficiency income and contractor's tax assessments was filed with the CTA on September
26, 1986. Insofar as respondent's deficiency income tax is concerned, respondent did not
fall under the exception in Sec. 4(b) of E.O. No. 41. However, insofar as the contractor's tax
which is a tax on business covered by E.O. No. 64 is concerned, respondent already fell
under the exception in Sec. 4(b) of E.O. Nos. 41 and 64 and was disqualified from availing
of the business tax amnesty granted therein.
SYLLABUS
1.
TAXATION; AMNESTY COVERAGE UNDER E.O. NOS. 41 & 64; PERSONS ENTITLED
THERETO; EXCEPTION; CASE AT BAR. Petitioner's claim cannot be sustained. Section
4(b) of E.O. No. 41 is very clear and unambiguous. It excepts from income tax amnesty
those taxpayers "with income tax cases already filed in court as of the effectivity hereof."
The point of reference is the date of effectivity of E.O. No. 41. The filing of income tax cases
in court must have been made before and as of the date of effectivity of E.O. No. 41. Thus,
for a taxpayer not to be disqualified under Section 4(b) there must have been no income
tax cases filed in court against him when E.O. No. 41 took effect. This is regardless of when
the taxpayer filed for income tax amnesty, provided of course he files it on or before the
deadline for filing. E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109
questioning the 1985 deficiency income, branch profit remittance and contractor's tax
assessments was filed by respondent with the Court of Tax Appeals on September 26,
1986. When E.O. No. 41 became effective on August 22, 1986, CTA Case No. 4109 had not
yet been filed in court. Respondent corporation did not fall under the said exception in
Section 4(b), hence, respondent was not disqualified from availing of the amnesty for
income tax under E.O. No. 41. The same ruling also applies to the deficiency branch profit
remittance tax assessment. A branch profit remittance tax is defined and imposed in
Section 24(b)(2)(ii), Title II, Chapter III of the National Internal Revenue Code. In the tax
code, this tax falls under Title II on Income Tax. It is a tax on income. Respondent
therefore did not fall under the exception in Section 4(b) when it filed for amnesty of its
deficiency branch profit remittance tax assessment.
2.
ID.; ID.; STATUTE AMENDING A TAX LAW IS NOT GENERALLY GIVEN RETROACTIVE
EFFECT; CASE AT BAR. By virtue of Section 8 of E.O. No. 64, the provisions of E.O. No.
41 not contrary to or inconsistent with the amendatory act were reenacted in E.O. No. 64.
Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty coverage also applied to E.O.
No. 64. With respect to Section 4(b) in particular, this provision excepts from tax amnesty
coverage a taxpayer who has "income tax cases already filed in court as of the effectivity
hereof." As to what Executive Order the exception refers to, respondent argues that
because of the words "income" and "hereof," they refer to Executive Order No. 41. In view
of the amendment introduced by E.O. No. 64, Section 4(b) cannot be construed to refer to
E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act operates
prospectively. While an amendment is generally construed as becoming a part of the
original act as if it had always been contained therein, it may not be given a retroactive
effect unless it is so provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired. There is nothing in E.O. No. 64 that provides
that it should retroact to the date of effectivity of E.O. No. 41, the original issuance. Neither
is it necessarily implied from E.O. No. 64 that it or any of its provisions should apply
retroactively. Executive Order No. 64 is a substantive amendment of E.O. No. 41. It does
not merely change provisions in E.O. No. 41. It supplements the original act by adding
other taxes not covered in the first. It has been held that where a statute amending a tax
law is silent as to whether it operates retroactively, the amendment will not be given a
retroactive effect so as to subject to tax past transactions not subject to tax under the
original act. In an amendatory act, every case of doubt must be resolved against its
retroactive effect.
3.
ID.; ID.; TERMS OF TAX AMNESTY MUST BE STRICTLY CONSTRUED AGAINST THE
TAXPAYER; CASE AT BAR. E.O. Nos. 41 and 64 are tax amnesty issuances. A tax
amnesty is a general pardon or intentional overlooking by the State of its authority to
impose penalties on persons otherwise guilty of evasion or violation of a revenue or tax law.
It partakes of an absolute forgiveness or waiver by the government of its right to collect
what is due it and to give tax evaders who wish to relent a chance to start with a clean
slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in law. If
granted, the terms of the amnesty, like that of a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. For the right of taxation is
inherent in government. The State cannot strip itself of the most essential power of taxation
by doubtful words. He who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state. In the instant case, the vagueness in Section
4(b) brought about by E.O. No. 64 should therefore be construed strictly against the
taxpayer. The term "income tax cases" should be read as to refer to estate and donor's
taxes and taxes on business while the word "hereof," to E.O. No. 64. Since Executive Order
No. 64 took effect on November 17, 1986, consequently, insofar as the taxes in E.O. No. 64
are concerned, the date of effectivity referred to in Section 4(b) of E.O. No. 41 should be
November 17, 1986. Respondent filed CTA Case No. 4109 on September 26, 1986. When
E.O. No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already filed and
pending in court. By the time respondent filed its supplementary tax amnesty return on
December 15, 1986, respondent already fell under the exception in Section 4(b) of E.O.
Nos. 41 and 64 and was disqualified from availing of the business tax amnesty granted
therein.
DECISION
In this petition for review, the Commissioner of Internal Revenue assails the decision dated
January 15, 1999 of the Court of Appeals in CA-G.R. SP No. 42518 which affirmed the
decision dated July 29, 1996 of the Court of Tax Appeals in CTA Case No. 4109. The tax
court ordered the Commissioner of Internal Revenue to desist from collecting the 1985
deficiency income, branch profit remittance and contractor's taxes from Marubeni
Corporation after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended.
Respondent Marubeni Corporation is a foreign corporation organized and existing under the
laws of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the Philippines and
maintains a branch office in Manila.
Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter

of authority to examine the books of accounts of the Manila branch office of respondent
corporation for the fiscal year ending March 1985. In the course of the examination,
petitioner found respondent to have undeclared income from two (2) contracts in the
Philippines, both of which were completed in 1984. One of the contracts was with the
National Development Company (NDC) in connection with the construction and installation
of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of
Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer
Corporation (Philphos) for the construction of an ammonia storage complex also at the
Leyte Industrial Development Estate.
On March 1, 1986, petitioner's revenue examiners recommended an assessment for
deficiency income, branch profit remittance, contractor's and commercial broker's taxes.
Respondent questioned this assessment in a letter dated June 5, 1986.
On August 27, 1986, respondent corporation received a letter dated August 15, 1986 from
petitioner assessing respondent several deficiency taxes. The assessed deficiency internal
revenue taxes, inclusive of surcharge and interest, were as follows:
I.
DEFICIENCY INCOME TAX
FY ended March 31, 1985

Undeclared gross income (Philphos
and NDC construction projects)
Less: Cost and expenses (50%)
P967,269,811.14
483,634,905.57
Net undeclared income
483,634,905.57
Income tax due thereon
169,272,217.00
Add:
84,636,108.50
50% surcharge
20% int. p.a. fr. 7-15-85

to 8-15-86
36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40

============
II.
DEFICIENCY BRANCH PROFIT REMITTANCE TAX
Undeclared gross income from

Philphos and NDC construction projects
Less: Income tax thereon
P483,634,905.57
169,272,217.00
Amount subject to Tax
314,362,688.57
Tax due thereon

Add:
47,154,403.00
50% surcharge
23,577,201.50
20% int. p.a. fr. 4-26-85

to 8-15-86
12,305,360.66

============
III.
DEFICIENCY CONTRACTOR'S TAX

Undeclared gross receipts/gross income from
Philphos and NDC construction projects
P967,269,811.14
Contractor's tax due thereon (4%) 38,690,792.00

Add:
50% surcharge for non-declaration 19,345,396.00

20% surcharge for late payment
9,672,698.00
Sub-total
Add:
67,708,886.00
20% int. p.a. fr. 4-21-85

to 8-15-86
17,854,739.46
============
IV.
DEFICIENCY COMMERCIAL BROKER'S TAX

Undeclared share from commission income
(denominated as "subsidy from Home
Office")
P24,683,114.50
Tax due thereon

Add:
1,628,569.00
50% surcharge for non-declaration 814,284.50

20% surcharge for late payment
407,142.25
Sub-total
Add:
2,849,995.75
20% int. p.a. fr. 4-21-85

to 8-15-86
751,539.98

============
The 50% surcharge was imposed for your client's failure to report for tax purposes the
aforesaid taxable revenues while the 25% surcharge was imposed because of your client's
failure to pay on time the above deficiency percentage taxes.
xxx
xxx
xxx."
Petitioner found that the NDC and Philphos contracts were made on a "turn-key" basis and
that the gross income from the two projects amounted to P967,269,811.14. Each contract
was for a piece of work and since the projects called for the construction and installation of
facilities in the Philippines, the entire income therefrom constituted income from Philippine
sources, hence, subject to internal revenue taxes. The assessment letter further stated that
the same was petitioner's final decision and that if respondent disagreed with it, respondent
may file an appeal with the Court of Tax Appeals within thirty (30) days from receipt of the
assessment.
On September 26, 1986, respondent filed two (2) petitions for review with the Court of Tax
Appeals. The first petition, CTA Case No. 4109, questioned the deficiency income, branch
profit remittance and contractor's tax assessments in petitioner's assessment letter. The
second, CTA Case No. 4110, questioned the deficiency commercial broker's assessment in
the same letter.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 41 2 declaring a one-time amnesty
covering unpaid income taxes for the years 1981 to 1985 was issued. Under this E.O., a
taxpayer who wished to avail of the income tax amnesty should, on or before October 31,
1986: (a) file a sworn statement declaring his net worth as of December 31, 1985; (b) file a
certified true copy of his statement declaring his net worth as of December 31, 1980 on
record with the Bureau of Internal Revenue (BIR), or if no such record exists, file a
statement of said net worth subject to verification by the BIR; and (c) file a return and pay
a tax equivalent to ten per cent (10%) of the increase in net worth from December 31,
1980 to December 31, 1985.
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty return dated
October 30, 1986 and attached thereto its sworn statement of assets and liabilities and net
worth as of Fiscal Year (FY) 1981 and FY 1986. The return was received by the BIR on
November 3, 1986 and respondent paid the amount of P2,891,273.00 equivalent to ten
percent (10%) of its net worth increase between 1981 and 1986.
The period of the amnesty in E.O. No. 41 was later extended from October 31, 1986 to
December 5, 1986 by E.O. No. 54 dated November 4, 1986.
On November 17, 1986, the scope and coverage of E.O. No. 41 was expanded by Executive
Order (E.O.) No. 64. In addition to the income tax amnesty granted by E.O. No. 41 for the
years 1981 to 1985, E.O. No. 64 included estate and donor's taxes under Title III and the
tax on business under Chapter II, Title V of the National Internal Revenue Code, also
covering the years 1981 to 1985. E.O. No. 64 further provided that the immunities and
privileges under E.O. No. 41 were extended to the foregoing tax liabilities, and the period
within which the taxpayer could avail of the amnesty was extended to December 15, 1986.
Those taxpayers who already filed their amnesty return under E.O. No. 41, as amended,
could avail themselves of the benefits, immunities and privileges under the new E.O. by
filing an amended return and paying an additional 5% on the increase in net worth to cover
business, estate and donor's tax liabilities.
The period of amnesty under E.O. No. 64 was extended to January 31, 1987 by E.O No. 95
dated December 17, 1986.
On December 15, 1986, respondent filed a supplemental tax amnesty return under the
benefit of E.O. No. 64 and paid a further amount of P1,445,637.00 to the BIR equivalent to
five percent (5%) of the increase of its net worth between 1981 and 1986.
On July 29, 1996, almost ten (10) years after filing of the case, the Court of Tax Appeals
rendered a decision in CTA Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the deficiency
taxes subject of said case as deemed cancelled and withdrawn. The Court of Tax Appeals
disposed of as follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue is hereby ORDERED to

DESIST from collecting the 1985 deficiency taxes it had assessed against petitioner and the
same are deemed considered [sic] CANCELLED and WITHDRAWN by reason of the proper
availment by petitioner of the amnesty under Executive Order No. 41, as amended."
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. 42518 with the
Court of Appeals.
On January 15, 1999, the Court of Appeals dismissed the petition and affirmed the decision
of the Court of Tax Appeals. Hence, this recourse.
Before us, petitioner raises the following issues:
"(1)
Whether or not the Court of Appeals erred in affirming the Decision of the Court of
Tax Appeals which ruled that herein respondent's deficiency tax liabilities were extinguished
upon respondent's availment of tax amnesty under Executive Orders Nos. 41 and 64.
(2)
Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor's taxes assessed by petitioner."
The main controversy in this case lies in the interpretation of the exception to the amnesty
coverage of E.O. Nos. 41 and 64. There are three (3) types of taxes involved herein
income tax, branch profit remittance tax and contractor's tax. These taxes are covered by
the amnesties granted by E.O. Nos. 41 and 64. Petitioner claims, however, that respondent
is disqualified from availing of the said amnesties because the latter falls under the
exception in Section 4 (b) of E.O. No. 41.
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the amnesty granted
thereunder, viz:
"Sec. 4.
Exceptions. The following taxpayers may not avail themselves of the
amnesty herein granted:
a)
Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b)
Those with income tax cases already filed in Court as of the effectivity hereof;
c)
Those with criminal cases involving violations of the income tax law already filed in
court as of the effectivity hereof;
d)
Those that have withholding tax liabilities under the National Internal Revenue Code,
as amended, insofar as the said liabilities are concerned;
e)
Those with tax cases pending investigation by the Bureau of Internal Revenue as of
the effectivity hereof as a result of information furnished under Section 316 of the National
Internal Revenue Code, as amended;
f)
Those with pending cases involving unexplained or unlawfully acquired wealth before
the Sandiganbayan;
g)
Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of the Revised
Penal Code, as amended."
Petitioner argues that at the time respondent filed for income tax amnesty on October 30,
1986, CTA Case No. 4109 had already been filed and was pending; before the Court of Tax
Appeals. Respondent therefore fell under the exception in Section 4 (b) of E.O. No. 41.
Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very clear and
unambiguous. It excepts from income tax amnesty those taxpayers "with income tax cases
already filed in court as of the effectivity hereof." The point of reference is the date of
effectivity of E.O. No. 41. The filing of income tax cases in court must have been made
before and as of the date of effectivity of E.O. No. 41. Thus, for a taxpayer not to be
disqualified under Section 4 (b) there must have been no income tax cases filed in court
against him when E.O. No. 41 took effect. This is regardless of when the taxpayer filed for
income tax amnesty, provided of course he files it on or before the deadline for filing.
E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning the 1985
deficiency income, branch profit remittance and contractor's tax assessments was filed by
respondent with the Court of Tax Appeals on September 26, 1986. When E.O. No. 41
became effective on August 22, 1986, CTA Case No. 4109 had not yet been filed in court.
Respondent corporation did not fall under the said exception in Section 4 (b), hence,
respondent was not disqualified from availing of the amnesty for income tax under E.O. No.
41.
The same ruling also applies to the deficiency branch profit remittance tax assessment. A
branch profit remittance tax is defined and imposed in Section 24 (b) (2) (ii), Title II,
Chapter III of the National Internal Revenue Code. 6 In the tax code, this tax falls under
Title II on Income Tax. It is a tax on income. Respondent therefore did not fall under the
exception in Section 4 (b) when it filed for amnesty of its deficiency branch profit
remittance tax assessment.
The difficulty herein is with respect to the contractor's tax assessment and respondent's
availment of the amnesty under E.O. No. 64. E.O. No. 64 expanded the coverage of E.O.
No. 41 by including estate and donor's taxes and tax on business. Estate and donor's taxes
fall under Title III of the Tax Code while business taxes fall under Chapter II, Title V of the
same. The contractor's tax is provided in Section 205, Chapter II, Title V of the Tax Code; it
is defined and imposed under the title on business taxes, and is therefore a tax on business.
When E.O. No. 64 took effect on November 17, 1986, it did not provide for exceptions to
the coverage of the amnesty for business, estate and donor's taxes. Instead, Section 8 of
E.O. No. 64 provided that:
"Section 8.
The provisions of Executive Orders Nos. 41 and 54 which are not contrary to
or inconsistent with this amendatory Executive Order shall remain in full force and effect."
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not contrary to or
inconsistent with the amendatory act were reenacted in E.O. No. 64. Thus, Section 4 of E.O.
No. 41 on the exceptions to amnesty coverage also applied to E.O. No. 64. With respect to
Section 4 (b) in particular, this provision excepts from tax amnesty coverage a taxpayer
who has "income tax cases already filed in court as of the effectivity hereof." As to what
Executive Order the exception refers to, respondent argues that because of the words
"income" and "hereof," they refer to Executive Order No. 41.
In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot be construed to
refer to E.O. No. 41 and its date of effectivity. The general rule is that an amendatory act
operates prospectively. While an amendment is generally construed as becoming a part of
the original act as if it had always been contained therein, it may not be given a retroactive
effect unless it is so provided expressly or by necessary implication and no vested right or
obligations of contract are thereby impaired.
There is nothing in E.O. No. 64 that provides that it should retroact to the date of effectivity
of E.O. No. 41, the original issuance. Neither is it necessarily implied from E.O. No. 64 that
it or any of its provisions should apply retroactively. Executive Order No. 64 is a substantive
amendment of E.O. No. 41. It does not merely change provisions in E.O. No. 41. It
supplements the original act by adding other taxes not covered in the first. It has been
held that where a statute amending a tax law is silent as to whether it operates
retroactively, the amendment will not be given a retroactive effect so as to subject to tax
past transactions not subject to tax under the original act. In an amendatory act, every
case of doubt must be resolved against its retroactive effect.
Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is a general
pardon or intentional overlooking by the State of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law. It partakes of an
absolute forgiveness or waiver by the government of its right to collect what is due it and to
give tax evaders who wish to relent a chance to start with a clean slate. A tax amnesty,
much like a tax exemption, is never favored nor presumed in law. If granted, the terms of
the amnesty, like that of a tax exemption, must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. For the right of taxation is inherent in
government. The State cannot strip itself of the most essential power of taxation by
doubtful words. He who claims an exemption (or an amnesty) from the common burden
must justify his claim by the clearest grant of organic or state law. It cannot be allowed to
exist upon a vague implication. If a doubt arises as to the intent of the legislature, that
doubt must be resolved in favor of the state.
In the instant case, the vagueness in Section 4 (b) brought about by E.O. No. 64 should
therefore be construed strictly against the taxpayer. The term "income tax cases" should be
read as to refer to estate and donor's taxes and taxes on business while the word "hereof,"
to E.O. No. 64. Since Executive Order No. 64 took effect on November 17, 1986,
consequently, insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity
referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. No. 64 took effect
on November 17, 1986, CTA Case No. 4109 was already filed and pending in court. By the
time respondent filed its supplementary tax amnesty return on December 15, 1986,
respondent already fell under the exception in Section 4 (b) of E.O. Nos. 41 and 64 and was
disqualified from availing of the business tax amnesty granted therein.
It is respondent's other argument that assuming it did not validly avail of the amnesty
under the two Executive Orders, it is still not liable for the deficiency contractor's tax
because the income from the projects came from the "Offshore Portion" of the contracts.
The two contracts were divided into two parts, i.e., the Onshore Portion and the Offshore
Portion. All materials and equipment in the contract under the "Offshore Portion" were
manufactured and completed in Japan, not in the Philippines, and are therefore not subject
to Philippine taxes.
Before going into respondent's arguments, it is necessary to discuss the background of the
two contracts, examine their pertinent provisions and implementation.
The NDC and Philphos are two government corporations. In 1980, the NDC, as the
corporate investment arm of the Philippine Government, established the Philphos to engage
in the large-scale manufacture of phosphatic fertilizer for the local and foreign markets.
The Philphos plant complex which was envisioned to be the largest phosphatic fertilizer
operation in Asia, and among the largest in the world, covered an area of 180 hectares
within the 435-hectare Leyte Industrial Development Estate in the municipality of Isabel,
province of Leyte.
In 1982, the NDC opened for public bidding a project to construct and install a modern,
reliable, efficient and integrated wharf/port complex at the Leyte Industrial Development
Estate. The wharf/port complex was intended to be one of the major facilities for the
industrial plants at the Leyte Industrial Development Estate. It was to be specifically
adapted to the site for the handling of phosphate rock, bagged or bulk fertilizer products,
liquid materials and other products of Philphos, the Philippine Associated Smelting and
Refining Corporation (Pasar), and other industrial plants within the Estate. The bidding was
participated in by Marubeni Head Office in Japan.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and respondent entered into
an agreement entitled "Turn-Key Contract for Leyte Industrial Estate Port Development
Project Between National Development Company and Marubeni Corporation." The Port
Development Project would consist of a wharf, berths, causeways, mechanical and liquids
unloading and loading systems, fuel oil depot, utilities systems, storage and service
buildings, offsite facilities, harbor service vessels, navigational aid system, fire-fighting
system, area lighting, mobile equipment, spare parts and other related facilities. The scope
of the works under the contract covered turn-key supply, which included grants of licenses
and the transfer of technology and know-how, and:
". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the WharfPort Complex as set forth in Annex I of this Contract, as well as the coordination of tie-ins
at boundaries and schedule of the use of a part or the whole of the Wharf/Port Complex
through the Owner, with the design and construction of other facilities around the site. The
scope of works shall also include any activity, work and supply necessary for, incidental to
or appropriate under present international industrial port practice, for the timely and
successful implementation of the object of this Contract, whether or not expressly referred
to in the abovementioned Annex I."
The contract price for the wharf/port complex was 12,790,389,000.00 and
P44,327,940.00. In the contract, the price in Japanese currency was broken down into two
portions: (1) the Japanese Yen Portion I; (2) the Japanese Yen Portion II, while the price in
Philippine currency was referred to as the Philippine Pesos Portion. The Japanese Yen
Portions I and II were financed in two (2) ways: (a) by yen credit loan provided by the
Overseas Economic Cooperation Fund (OECF); and (b) by supplier's credit in favor of
Marubeni from the Export-Import Bank of Japan. The OECF is a Fund under the Ministry of
Finance of Japan extended by the Japanese government as assistance to foreign
governments to promote economic development. The OECF extended to the Philippine
Government a loan of 7,560,000,000.00 for the Leyte Industrial Estate Port Development
Project and authorized the NDC to implement the same. The other type of financing is an
indirect type where the supplier, i.e., Marubeni, obtained a loan from the Export-Import
Bank of Japan to advance payment to its sub-contractors.
Under the financing schemes, the Japanese Yen Portions I and II and the Philippine Pesos
Portion were further broken down and subdivided according to the materials, equipment
and services rendered on the project. The price breakdown and the corresponding
materials, equipment and services were contained in a list attached as Annex III to the
contract.
A few months after execution of the NDC contract, Philphos opened for public bidding a
project to construct and install two ammonia storage tanks in Isabel. Like the NDC contract,
it was Marubeni Head Office in Japan that participated in and won the bidding. Thus, on May
2, 1982, Philphos and respondent corporation entered into an agreement entitled "Turn-Key
Contract for Ammonia Storage Complex Between Philippine Phosphate Fertilizer Corporation
and Marubeni Corporation." The object of the contract was to establish and place in
operating condition a modern, reliable, efficient and integrated ammonia storage complex
adapted to the site for the receipt and storage of liquid anhydrous ammonia and for the
delivery of ammonia to an integrated fertilizer plant adjacent to the storage complex and to
vessels at the dock. The storage complex was to consist of ammonia storage tanks,
refrigeration system, ship unloading system, transfer pumps, ammonia heating system,
fire-fighting system, area lighting, spare parts, and other related facilities. The scope of the
works required for the completion of the ammonia storage complex covered the supply,
including grants of licenses and transfer of technology and know-how, and:
". . . the design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning of the Ammonia
Storage Complex as set forth in Annex I of this Contract, as well as the coordination of tieins at boundaries and schedule of the use of a part or the whole of the Ammonia Storage
Complex through the Owner with the design and construction of other facilities at and
around the Site. The scope of works shall also include any activity, work and supply
necessary for, incidental to or appropriate under present international industrial practice, for
the timely and successful implementation of the object of this Contract, whether or not
expressly referred to in the abovementioned Annex I."
The contract price for the project was 3,255,751,000.00 and P17,406,000.00. Like the
NDC contract, the price was divided into three portions. The price in Japanese currency was
broken down into the Japanese Yen Portion I and Japanese Yen Portion II while the price in
Philippine currency was classified as the Philippine Pesos Portion. Both Japanese Yen
Portions I and II were financed by supplier's credit from the Export-Import Bank of Japan.
The price stated in the three portions were further broken down into the corresponding
materials, equipment and services required for the project and their individual prices. Like
the NDC contract, the breakdown in the Philphos contract is contained in a list attached to
the latter as Annex III.
The division of the price into Japanese Yen Portions I and II and the Philippine Pesos Portion
under the two contracts corresponds to the two parts into which the contracts were
classified the Foreign Offshore Portion and the Philippine Onshore Portion. In both
contracts, the Japanese Yen Portion I corresponds to the Foreign Offshore Portion.
Japanese Yen Portion II and the Philippine Pesos Portion correspond to the Philippine
Onshore Portion.
Under the Philippine Onshore Portion, respondent does not deny its liability for the
contractor's tax on the income from the two projects. In fact respondent claims, which
petitioner has not denied, that the income it derived from the Onshore Portion of the two
projects had been declared for tax purposes and the taxes thereon already paid to the
Philippine government. It is with regard to the gross receipts from the Foreign Offshore
Portion of the two contracts that the liabilities involved in the assessments subject of this
case arose. Petitioner argues that since the two agreements are turn-key, they call for the
supply of both materials and services to the client, they are contracts for a piece of work
and are indivisible. The situs of the two projects is in the Philippines, and the materials
provided and services rendered were all done and completed within the territorial
jurisdiction of the Philippines. Accordingly, respondent's entire receipts from the contracts,
including its receipts from the Offshore Portion, constitute income from Philippine sources.
The total gross receipts covering both labor and materials should be subjected to
contractor's tax in accordance with the ruling in Commissioner of Internal Revenue v.
Engineering Equipment & Supply Co.
A contractor's tax is imposed in the National Internal Revenue Code (NIRC) as follows:
"Sec. 205.
Contractors, proprietors or operators of dockyards, and others. A
contractor's tax of four percent of the gross receipts is hereby imposed on proprietors or
operators of the following business establishments and/or persons engaged in the business
of selling or rendering the following services for a fee or compensation:
(a)
General engineering, general building and specialty contractors, as defined in
Republic Act No. 4566;
xxx
xxx
xxx
(q)
Other independent contractors. The term "independent contractors" includes persons
(juridical or natural) not enumerated above (but not including individuals subject to the
occupation tax under the Local Tax Code) whose activity consists essentially of the sale of
all kinds of services for a fee regardless of whether or not the performance of the service
calls for the exercise or use of the physical or mental faculties of such contractors or their
employees. It does not include regional or area headquarters established in the Philippines
by multinational corporations, including their alien executives, and which headquarters do
not earn or derive income from the Philippines and which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in the
Asia-Pacific Region.
xxx
xxx
xxx."
Under the afore-quoted provision, an independent contractor is a person whose activity

consists essentially of the sale of all kinds of services for a fee, regardless of whether or not
the performance of the service calls for the exercise or use of the physical or mental
faculties of such contractors or their employees. The word "contractor" refers to a person
who, in the pursuit of independent business, undertakes to do a specific job or piece of work
for other persons, using his own means and methods without submitting himself to control
as to the petty details.
A contractor's tax is a tax imposed upon the privilege of engaging in business. It is
generally in the nature of an excise tax on the exercise of a privilege of selling services or
labor rather than a sale on products; and is directly collectible from the person exercising
the privilege. Being an excise tax, it can be levied by the taxing authority only when the
acts, privileges or business are done or performed within the jurisdiction of said authority.
Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing
district.
In the case at bar, it is undisputed that respondent was an independent contractor under
the terms of the two subject contracts. Respondent, however, argues that the work therein
were not all performed in the Philippines because some of them were completed in Japan in
accordance with the provisions of the contracts.
An examination of Annex III to the two contracts reveals that the materials and equipment
to be made and the works and services to be performed by respondent are indeed classified
into two. The first part, entitled "Breakdown of Japanese Yen Portion I" provides:
"Japanese Yen Portion I of the Contract Price has been subdivided according to discrete
portions of materials and equipment which will be shipped to Leyte as units and lots. This
subdivision of price is to be used by owner to verify invoice for Progress Payments under
Article 19.2.1 of the Contract. The agreed subdivision of Japanese Yen Portion I is as
follows:
xxx
xxx
xxx."
The subdivision of Japanese Yen Portion I covers materials and equipment while Japanese
Yen Portion II and the Philippine Pesos Portion enumerate other materials and equipment
and the construction and installation work on the project. In other words, the supplies for
the project are listed under Portion I while labor and other supplies are listed under Portion
II and the Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the
Industrial Plant Section II of the Industrial Plant Department of Marubeni Corporation in

Japan who supervised the implementation of the two projects, testified that all the
machines and equipment listed under Japanese Yen Portion I in Annex III were
manufactured in Japan. The machines and equipment were designed, engineered and
fabricated by Japanese firms sub-contracted by Marubeni from the list of sub-contractors in
the technical appendices to each contract. Marubeni sub-contracted a majority of the
equipment and supplies to Kawasaki Steel Corporation which did the design, fabrication,
engineering and manufacture thereof; Yashima & Co. Ltd. which manufactured the mobile
equipment; Bridgestone which provided the rubber fenders of the mobile equipment; and
B.S. Japan for the supply of radio equipment. The engineering and design works made by
Kawasaki Steel Corporation included the lay-out of the plant facility and calculation of the
design in accordance with the specifications given by respondent. All sub-contractors and
manufacturers are Japanese corporations and are based in Japan and all engineering and
design works were performed in that country.
The materials and equipment under Portion I of the NDC Port Project is primarily composed
of two (2) sets of ship unloader and loader; several boats and mobile equipment. The ship
unloader unloads bags or bulk products from the ship to the port while the ship loader loads
products from the port to the ship. The unloader and loader are big steel structures on top
of each is a large crane and a compartment for operation of the crane. Two sets of these
equipment were completely manufactured in Japan according to the specifications of the
project. After manufacture, they were rolled on to a barge and transported to Isabel, Leyte.
Upon reaching Isabel, the unloader and loader were rolled off the barge and pulled to the
pier to the spot where they were installed. Their installation simply consisted of bolting
them onto the pier.
Like the ship unloader and loader, the three tugboats and a line boat were completely
manufactured in Japan. The boats sailed to Isabel on their own power. The mobile
equipment, consisting of three to four sets of tractors, cranes and dozers, trailers and
forklifts, were also manufactured and completed in Japan. They were loaded on to a
shipping vessel and unloaded at the Isabel Port. These pieces of equipment were all on
wheels and self-propelled. Once unloaded at the port, they were ready to be driven and
perform what they were designed to do.
In addition to the foregoing, there are other items listed in Japanese Yen Portion I in Annex
III to the NDC contract. These other items consist of supplies and materials for five (5)
berths, two (2) roads, a causeway, a warehouse, a transit shed, an administration building
and a security building. Most of the materials consist of steel sheets, steel pipes, channels
and beams and other steel structures, navigational and communication as well as electrical
equipment.
In connection with the Philphos contract, the major pieces of equipment supplied by
respondent were the ammonia storage tanks and refrigeration units. The steel plates for
the tank were manufactured and cut in Japan according to drawings and specifications and
then shipped to Isabel. Once there, respondent's employees put the steel plates together to
form the storage tank. As to the refrigeration units, they were completed and assembled in
Japan and thereafter shipped to Isabel. The units were simply installed there. 65 Annex III
to the Philphos contract lists down under the Japanese Yen Portion I the materials for the
ammonia storage tank, incidental equipment, piping facilities, electrical and instrumental
apparatus, foundation material and spare parts.
All the materials and equipment transported to the Philippines were inspected and tested in
Japan prior to shipment in accordance with the terms of the contracts. The inspection was
made by representatives of respondent corporation, of NDC and Philphos. NDC, in fact,
contracted the services of a private consultancy firm to verify the correctness of the tests
on the machines and equipment while Philphos sent a representative to Japan to inspect
the storage equipment.
The sub-contractors of the materials and equipment under Japanese Yen Portion I were all
paid by respondent in Japan. In his deposition upon oral examination, Kenjiro Yamakawa,
formerly the Assistant General Manager and Manager of the Steel Plant Marketing
Department, Engineering & Construction Division, Kawasaki Steel Corporation, testified that
the equipment and supplies for the two projects provided by Kawasaki under Japanese Yen
Portion I were paid by Marubeni in Japan. Receipts for such payments were duly issued by
Kawasaki in Japanese and English. Yashima & Co. Ltd. and B.S. Japan were likewise paid
by Marubeni in Japan.
Between Marubeni and the two Philippine corporations, payments for all materials and
equipment under Japanese Yen Portion I were made to Marubeni by NDC and Philphos also
in Japan. The NDC, through the Philippine National Bank, established letters of credit in
favor of respondent through the Bank of Tokyo. The letters of credit were financed by
letters of commitment issued by the OECF with the Bank of Tokyo. The Bank of Tokyo, upon
respondent's submission of pertinent documents, released the amount in the letters of
credit in favor of respondent and credited the amount therein to respondent's account
within the same bank.
Clearly, the service of "design and engineering, supply and delivery, construction, erection
and installation, supervision, direction and control of testing and commissioning,
coordination. . . " of the two projects involved two taxing jurisdictions. These acts occurred
in two countries Japan and the Philippines. While the construction and installation work
were completed within the Philippines, the evidence is clear that some pieces of equipment
and supplies were completely designed and engineered in Japan. The two sets of ship
unloader and loader, the boats and mobile equipment for the NDC project and the ammonia
storage tanks and refrigeration units were made and completed in Japan. They were already
finished products when shipped to the Philippines. The other construction supplies listed
under the Offshore Portion such as the steel sheets, pipes and structures, electrical and
instrumental apparatus, these were not finished products when shipped to the Philippines.
They, however, were likewise fabricated and manufactured by the sub-contractors in Japan.
All services for the design, fabrication, engineering and manufacture of the materials and
equipment under Japanese Yen Portion I were made and completed in Japan. These
services were rendered outside the taxing jurisdiction of the Philippines and are therefore
not subject to contractor's tax.
Contrary to petitioner's claim, the case of Commissioner of Internal Revenue v. Engineering

Equipment & Supply Co is not in point. In that case, the Court found that Engineering
Equipment, although an independent contractor, was not engaged in the manufacture of air
conditioning units in the Philippines. Engineering Equipment designed, supplied and installed
centralized air-conditioning systems for clients who contracted its services. Engineering,
however, did not manufacture all the materials for the air-conditioning system. It imported
some items for the system it designed and installed. 74 The issues in that case dealt with
services performed within the local taxing jurisdiction. There was no foreign element
involved in the supply of materials and services.
With the foregoing discussion, it is unnecessary to discuss the other issues raised by the
parties.
IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No. 42518 is
affirmed.
SO ORDERED.
Factors that determine the situs

a. Kind or classification of the tax being levied
b. Situs of the thing or property taxed
c. Citizenship of the taxpayer
d. Residence of the taxpayer
e. Source of the income taxed
f. Situs of the excise, privilege, business
being taxed
or
occupation
There are instances where tax laws operate outside the territorial
jurisdiction such as taxation of resident citizens on their incomes
derived from abroad. However, there are also tax laws that do not
operate within the territorial jurisdiction of the state for reasons:
(1) They are exempted by treaty obligations; and
(2) They are exempted by international comity.
REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED INCOME FROM
PHILIPPINE SOURCES;PLACE OF ACTIVITY CREATING INCOME CONTROLLING
Reinsurance premiums on local risks ceded by domestic insurers to foreign reinsurers not
doing business in the Philippines are subject to withholding tax. Where the reinsurance
contracts show that the activities that constituted the undertaking to reinsure a domestic
insurer against losses arising from the original insurances in the Philippines were performed
in the Philippines, the reinsurance premiums are considered as coming from sources within
the Philippines and are subject to Philippine income tax.
Section 24 of the Tax Code does not require a foreign corporation to engage in business in
the Philippines in subjecting its income to tax. It suffices that the activity creating the
income is performed or done in the Philippines. What is controlling, therefore, is not the
place of business but the place of activity that created an income.
NO ESTOPPEL ON GOVERNMENT FOR MISTAKE OF ITS AGENTSThe defense of reliance in
good faith on rulings of the Commissioner of Internal Revenue requiring no withholding of
the tax due on reinsurance premiums may free the taxpayer from the payment of
surcharges or penalties imposed for failure to pay the corresponding withholding tax, but it
certainly would not exculpate it from liability to pay such withholding tax. The Government
is not estopped from collecting taxes by the mistakes or errors of its agents.
THE PHILIPPINE GUARANTY CO., INC. vs. COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, ET AL.,
G.R. No. L-22074 September 6, 1965
Situs of the Subject of Tax
a. Persons - poll, capitation or community taxes are based upon the residence of the
taxpayer, regardless of the source of income or location of the property of the taxpayer.
b. Property
1) Real property Real estate is subject to taxation in the state in which it is located
whether the owner is a resident or non-resident and is taxable only there. (51 Am. Jur. 458)
This is the principle of lex rei sitei.
Reasons:
a) The taxing authority has control because of the stationary and fixed character of the
property.
b) The place where the real property is situated gives protection to the real property, hence
the property or its owner should support the government of that place.
2) Tangible personal property the modern rule is that it is taxable in the
state where it has actual situs; where it is physically located although the
owner resides in another jurisdiction. (51 Am. Jur. 467) - - Reason: The place where the tangible personal property is found gives it
protection.
3) Intangible personal property
General rule- The situs is at the domicile of the owner. This is in accordance with the
principle of mobilis sequuntur personam or movables follow the person.
Exception
a) when the property has acquired a business situs in another jurisdiction
b) When the law provides for the situs of the subject of tax. Example; For purposes of
estate and donors taxes, the following intangible properties are deemed with a situs in the
Philippines:
(1) Franchise which must be exercised in the Philippines
(2) Shares, obligations or bonds issued by any corporation organized or constituted in the
Philippines in accordance with its laws;
(3) Shares, obligations or bonds by any foreign corporation eighty-five
percent (85%) of the business of which is located in the Philippines
(4) Shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines (5) Shares or rights in
any partnership, business or industry established in the Philippines.
4) income factors that determine the situs of income tax:
a) Nationality or citizenship of the taxpayer
b) Residence or domicile of the taxpayer
c) Source of the income
General Principles of Income Taxation in the Philippines - Except when otherwise provided in
this Code:
a. A citizen of the Philippines residing therein is taxable on all income. derived from sources
within and without the Philippines;
b. A nonresident citizen is taxable only on income derived from sources within the
Philippines;
c. An individual citizen of the Philippines who is working and deriving income from abroad as
an overseas contract worker ( Land-based ) is taxable only on income derived from sources
within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the complement of a
vessel
engaged exclusively in international trade shall be treated as overseas contract worker
d. An alien individual, whether a resident or not of the Philippines is taxable only on income
derived from sources within the Philippines;
e. A domestic corporation is taxable on all income derived from sources within and without
the Philippines and
f. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the
Philippines. (Sec. 23 NIRC)
5) Excise or Privilege the power to levy an excise upon the performance
of an act or the engaging in an occupation does not depend upon the
domicile of the person subject to the excise nor upon the physical location
of the property and in connection with the act or occupation taxed, but
depends upon the place in which the act is performed or occupation engaged in. (Allied
Thread vs. City Mayor of Manila GR 40296 November 21, 1984)
MODES OF APPRISING PUBLIC OF NEW LOCAL TAX ORDINANCE There was substantial
compliance of the requirements of the law on publication. Section 43 of the Local Tax Code
provides two modes of apprising the public of a new ordinance, either, (a) by means of
publication in a newspaper of general circulation or, (b) by means of posting of copies
thereof in the local legislative hall or premises and two other conspicuous places within the
territorial jurisdiction of the local government. Respondent LGU, having complied with the
second mode of notice the SC ruled that there is no legal infirmity to the validity of
Ordinance No. 7516 as amended.
EXCISE TAX; TAXABILITY UNDER QUESTIONED ORDINANCE DEPENDS UPON THE PLACE
WHERE SALE TRANSACTION IS PERFECTED Allied Thread Co., Inc. claims exclusion from
Ordinance No. 7516 as amended on the ground that it does not maintain an office or branch
office in the City of Manila, where the subject Ordinance only applies. This contention is
devoid of merit. Allied Thread Co., Inc. admits that it does business in the City of Manila
through a broker or agent, Ker & Company, Ltd. Doing business in the City of Manila is all
that is required to fall within the coverage of the Ordinance. It should be noted that
Ordinance No. 7516 as amended imposes a business tax on manufacturers, importers or
producers doing business in the City of Manila. The tax imposition here is upon the
performance of an act, enjoyment of a privilege, or the engaging in an occupation, and
hence is in the nature of an excise tax. The power to levy an excise upon the performance
of an act or the engaging in an occupation does not depend upon the domicile of the person
subject to the excise, nor upon the physical location of the property and in connection with
the act or occupation taxed, but depends upon the place in which the act is performed or
occupation engaged in. Thus, the gauge for taxability under the said Ordinance No. 7516 as
amended does not depend on the location of the office, but attaches upon the place where
the respective sale transaction(s) is perfected and consummated. Since Allied Thread Co.,
Inc. sells its products in the City of Manila through its broker, Ker & Company, Ltd., it
cannot escape the tax liability imposed by Ordinance No. 7516 as amended.
ALLIED THREAD CO., INC., and KER & COMPANY, LTD vs. HON. CITY MAYOR OF MANILA,
HON. CITY TREASURER OF MANILA, HON. LORENZO RELOVA, G.R. No. L-40296 November
21, 1984
SITUS OF ACTIVITIES
FACTS: Respondent JulianeBaier-Nickel, a non-resident German citizen, is the President of
JUBANITEX, Inc., a domestic corporation engaged in "manufacturing, marketing on
wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and
disposing embroidered textile products." Through JUBANITEX's General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent as commission
agent. It was agreed that respondent will receive 10% sales commission on all sales
actually concluded and collected through her efforts.
In 1995, respondent received the amount of P1,707,772.64, representing her sales
commission income from which JUBANITEX withheld the corresponding 10% withholding tax
amounting to P170,777.26, and remitted the same to the BIR. On October 17, 1997,
respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26. On April 14, 1998, respondent filed a claim to refund the
amount of P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR.
Respondent contended that her sales commission income is not taxable in the Philippines
because the same was a compensation for her services rendered in Germany and therefore
considered as income from sources outside the Philippines. Both the CTA and the CIR
contended that the commissions received by respondent were actually her remuneration in
the performance of her duties as President of JUBANITEX and not as a mere sales agent
thereof. The income derived by respondent is therefore an income taxable in the Philippines
because JUBANITEX is a domestic corporation.
ISSUE: Whether respondent's sales commission income is taxable in the Philippines.
HELD: Pursuant to Section 25 of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from
all sources within the Philippines. Thus, the keyword in determining the taxability of nonresident aliens is the income's "source." In construing the meaning of "source" in Section 25
of the NIRC, resort must be had on the origin of the provision. Both the petitioner and
respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways
Corporation in support of their arguments, but the correct interpretation of the said case
favors the theory of respondent that it is the situs of the activity that determines whether
such income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying principle of the law
on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v.
Collector of Internal Revenue. The divergence in opinion centered on whether the sale of
tickets in the Philippines is to be construed as the "activity" that produced the income, as
viewed by the majority, or merely the physical source of the income, as ratiocinated by
Justice Florentino P. Feliciano in his dissent. The majority, through Justice
AmeurfinaMelencio-Herrera, as ponente, interpreted the sale of tickets as a business
activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case
to support its view that source of income is the physical source of the money earned. If
such was the interpretation of the majority, the Court would have simply stated that source
of income is not the business activity of BOAC but the place where the person or entity
disbursing the income is located or where BOAC physically received the same. But such was
not the import of the ruling of the Court. It even explained in detail the business activity
undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its
conclusion that BOAC is subject to Philippine income taxation.
Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is
exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were
performed in Germany. Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital question posed in this
controversy.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimijuris against the taxpayer. To those therefore, who claim a refund rest
the burden of proving that the transaction subjected to tax is actually exempt from
taxation. In the instant case, the appointment letter of respondent as agent of JUBANITEX
stipulated that the activity or the service which would entitle her to 10% commission
income, are "sales actually concluded and collected through [her] efforts." What she
presented as evidence to prove that she performed income producing activities abroad,
were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as to
the sizes of, or designs and fabrics to be used in the finished products as well as samples of
sales orders purportedly relayed to her by clients. However, these documents do not show
whether the instructions or orders faxed ripened into concluded or collected sales in
Germany. At the very least, these pieces of evidence show that while respondent was in
Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly
concluded in Germany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
In sum, the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to
support the conclusion that it was in Germany where she performed the income producing
service which gave rise to the reported monthly sales in the months of March and May to
September of 1995. She thus failed to discharge the burden of proving that her income was
from sources outside the Philippines and exempt from the application of our income tax law.
Hence, the claim for tax refund should be denied. C I R vs. JulianeBaier-Nickel, as
represented by Marina Q. Guzman (Attorney-in-fact)G.R. No. 153793, August 29, 2006
The test of taxability is the source or that activity which produced the income
The test of taxability is the "source" or that activity which produced the income. The source
of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. The sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands here and payments for
fares were also made here in Philippine currency. The situs of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.
Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al., G.R. Nos. L65773-74, April 30, 1987
Commissioner of Internal Revenue vs. Air India, et al.,
G.R. No. L-72443, January 29, 1988
Commissioner of Internal Revenue vs. American Airlines, Inc., et al.,
G.R. No. 67938, December 19, 1989
CIR vs. Japan Air Lines, Inc. G.R No. 60714 October 4, 1991
South African Airways vs. CIR CTA 6760 June 09, 2005
National Dev. Co. vs. CIR G.R. No. L-53961 June 30, 1987
CIR vs. S.C. Jonhson and Sons, Inc. 309 SCRA 102
The absence of flight operations to and from the Philippines is not determinative of the
source of income or the situs of income taxation. The test of taxability is the "source"; and
the source of an income is that activity which produced the income. Unquestionably, the
passage documentations were sold in the Philippines and the revenue therefrom was
derived from a business activity regularly pursued within the Philippines. And even if the
tickets sold covered the "transport of passengers and cargo to and from foreign cities," it
cannot alter the fact that income from the sale of tickets was derived from the Philippines.
The word "source" conveys one essential idea, that of origin, and the origin of the income
herein is the Philippines.
Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al., G.R. Nos. L65773-74, April 30, 1987
Commissioner of Internal Revenue vs. Air India, et al., G.R. No. L-72443, January 29, 1988
Commissioner of Internal Revenue vs. American Airlines, Inc., et al., G.R. No. 67938,
December 19, 1989
6) Gratuitous Transfer the transmission of property from a donor to a donee or from a
decedent to his heirs may be subject to taxation in the state where the transferor is (was) a
citizen or resident, or where the property is located.
II B Constitutional Limitations of Taxation
ART. III BILL of RIGHTS
Section 1(Due Process and Equal Protection of the Law)
Section 4 (Freedom of the Press)
Section 5 (Freedom of Religion)
Section 10 (Non-Impairment Clause)
Section 20 (Non-Imprisonment for Non-Payment of Debt)
ART. VI LEGISLATIVE DEPARTMENT
Sec 24 (Bills should Originate in House of Representatives),
25 (APPROPRIATIONS),
26 (3 READINGS/SUBJ, TITLE OF BILLS),
27 (VETO POWER OF THE PRESIDENT),
28(UNIFORMITY; EQUAL PROTECTION and

SYSTEM OF TAXATION)
SubSections:
2 AUTHORITY OF PRES. TO FIX QUOTAS
3EXEMPTIONOFPROPERTIESOFCHARITABLE,
INSTITUTIONS
4(MAJORITY CONCURENCE ON TAX EXEMPTION),
Sec 29 ( NO DISBURSEMENT W/OUT APPROPRIATION)
PROGRESSIVE
RELIGIOUS & EDUCATIONAL
ART. VIII JUDICIARY DEPARTMENT

Sec 2 (NON-IMPAIRMENT/SC ON TAX CASES)
5 (SC REVIEW)
ART. X LOCAL GOVERNMENT UNITS
Sec 2 (LOCAL AUTONOMY)
5 (LGU TAX POWERS)
6 (INTERNAL REVENUE ALLOTMENT)
ART. XIV EXEMPTION OF NON-STOCK
NON-PROFIT EDUCATIONAL INSTITUTIONS FROM INCOME TAX
BILL OF RIGHTS
Sec 1 DUE PROCESS OF LAW (Art. III, Sec. 1, 1987 Constitution)
Any deprivation is with due process if it is done:
a) Under the authority of a law that is valid or of the Constitution itself the tax statute is
within the Constitutional authority of Congress to pass, and that it must be reasonable, fair
and just. This is Substantive Due Process which limits the governments law and rule making
powers.
b) After compliance with fair and reasonable methods of procedure prescribed by law, with
notice or hearing or at least an opportunity to be heard whenever necessary. This is
Procedural Due Process which limits the actions of judicial and quasi-judicial bodies.
Due process in taxation requires that:
(1) The tax must be for public purpose;
(2) Imposed within territorial jurisdiction; and
(3) No arbitrariness or oppression in the assessment and in collection of taxes [Pepsi-Cola
of the Philippines v. Municipality of Tanauan, 69 SCRA 480 (1976)].
However, due process in taxation does not require:
(1) Determination through judicial inquiry of property subject to tax or of the amount of tax
to be imposed;
(2) Notice and hearing as to amount of the tax and the manner of apportionment for
reason of lifeblood (necessity) theory.
Note: Take note of the following matters:
(a) There is no due process where a statute is so arbitrary that it finds no support in the
Constitution; however, There is no violation of due process although tax will result in injury
rather than benefit to a particular taxpayer with lifeblood theory justifying it.
(b) A tax assessment unsupported by unsubstantial evidence shall amount to deprivation of
property without due process of law (Ang Tibay et. al. v. CIR et. al. 59 Phil. 495).
(c) Compliance with strict procedural requirements must be followed effectively to avoid a
collision course between the state's power to tax and the individual's recognized rights
(Commissioner of Internal Revenue v. Algue, Inc 258 SCRA 9).
(d) In the observance of procedural due process the Supreme Court is always mindful that a
taxpayer being made liable with his property should be given an opportunity to be heard
which is one of its essential elements (Banco Espanol v. Palanca, 37 Phil. 921).
In the following instances due process clause may be invoked:
(1) When there is a clear contravention of inherent or constitutional limitations in the
exercise of tax power.
(2) Where tax measure becomes so unconscionable and unjust as to amount to confiscation
of property, courts will not hesitate to strike it down, for despite all its plenitude, the power
to tax cannot override constitutional prescriptions [Carag v. del Rosario 237 SCRA 324
(1994)].
Due Process
of an import duty, which is beyond the authority of the city to impose.
Moreover, the tax is discriminatory, and hence, violative of the uniformity required by the
Constitution, since only sales by agents or consignees of outside dealers would be subject to
the tax, while those by local dealers not acting for or on behalf of other merchants would be
exempt from the tax. There is no valid classification here because if the purpose of the law
were merely to levy a burden upon the sale of soft drinks, there is no reason why sales
thereof by dealers other than agents or consignees of producers or merchants outside the
city should be exempt from the tax.
Pepsi-Cola Bottling Co. of the Phil. v. City of Butuan
Substantive Due Process
FACTS: Chamber of Real Estate and Builders' Associations, an association of real estate
developers and builders, challenges the validity of the imposition of minimum corporate
income tax (MCIT) on corporations. Arguing that MCIT violates the due process clause
because it levies income tax even if there is no realized gain, petitioner explains that gross
income as defined under Section 27 (E) of RA 8424 only considers the cost of goods sold
and other direct expenses and does not take into account administrative and interest
expenses which are also necessary to produce gross income. Pegging the tax base of the
MCIT to a corporation's gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not "realized gain."
Petitioner further alleges that RR 9-98 is a deprivation of property without due process of
law because the MCIT is being imposed and collected even when there is actually a loss, or
a zero or negative taxable income.
ISSUES:
1. Whether or not the imposition of the MCIT on domestic corporations is
unconstitutional.
2. Whether or not the imposition of CWT on income from sales of real properties classified
as ordinary assets is unconstitutional.
RULING:
1. The MCIT is not a tax on capital. It is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods
and other direct expenses from gross sales. In addition, the MCIT is not an additional tax
imposition. It is imposed in lieu of the normal net income tax, and only if the normal income
tax is suspiciously low. The MCIT merely approximates the amount of net income tax due
from a corporation, pegging the rate at only 2% and uses as the base the corporation's
gross income. Besides, there is no legal objection to a broader tax base or taxable income
by eliminating all deductible items and at the same time reducing the applicable tax rate.
Thus, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduced rate of 2%, is not constitutionally objectionable.
2. The CWT is creditable against the tax due from the seller of the property at the end of
the taxable year. The seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no confiscation of property
repugnant to the constitutional guarantee of due process. More importantly, the due
process requirement applies to the power to tax. The CWT does not impose new taxes nor
does it increase taxes. It relates entirely to the method and time of payment. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and
validity of the CWT as a method of collecting the tax.
The real estate industry cannot be treated similarly as manufacturing enterprises because
what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of
their goods sold and the number of transactions involved. The income from the sale of a
real property is bigger and its frequency of transaction limited, making it less cumbersome
for the parties to comply with the withholding tax scheme.
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. vs. ALBERTO ROMULO,
ET AL [G.R. No. 160756, March 9, 2010]
Due Process
FACTS: On August 20, 2008, the Supreme Court rendered a Decision partially granting the
petition in this case. In said decision, the Court declared CONSTITUTIONAL, Section 145 of
the NIRC, as amended by R.A. No. 9334. It also declared Sec. 4(B)(e)(c), 2nd paragraph of
Rev. Reg. No. 1-97, as amended by Sec. 2 of Rev. Reg. 9-2003, and Sec. II(1)(b), II(4)
(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of RMO No. 6-2003,
insofar as pertinent to cigarettes packed by machine, INVALID insofar as they grant the BIR
the power to reclassify or update the classification of new brands every two years or earlier.
Hence, this Motion for Reconsideration.
ISSUES:
1.
Whether the assailed provisions violate the equal protection and uniformity of
taxation clauses of the Constitution
2.
Whether the assailed provisions contravene Section 19, Article XII of the
Constitution on unfair competition.
3.
Whether the assailed provisions infringe the constitutional provisions on regressive
and inequitable taxation.
4.
Whether petitioner is entitled to a downward reclassification of Lucky Strike from the
premium-priced to the high-priced tax bracket.
RULING:
1.
The instant case neither involves a suspect classification nor impinges on a
fundamental right. Consequently, the rational basis test was properly applied to gauge the
constitutionality of the assailed law in the face of an equal protection challenge. It has been
held that "in the areas of social and economic policy, a statutory classification that neither
proceeds along suspect lines nor infringes constitutional rights must be upheld against equal
protection challenge if there is any reasonably conceivable state of facts that could provide
a rational basis for the classification." Under the rational basis test, it is sufficient that the
legislative classification is rationally related to achieving some legitimate State interest.
Moreover, petitioner's contention that the assailed provisions violate the uniformity of
taxation clause is similarly unavailing. A tax "is uniform when it operates with the same
force and effect in every place where the subject of it is found." It does not signify an
intrinsic but simply a geographical uniformity. A levy of tax is not unconstitutional because
it is not intrinsically equal and uniform in its operation.
In the instant case, there is no question that the classification freeze provision meets the
geographical uniformity requirement because the assailed law applies to all cigarette brands
in the Philippines.
2.
The totality of the evidence presented by petitioner before the trial court failed to
convincingly establish the alleged violation of the constitutional prohibition on unfair
competition. It is a basic postulate that the one who challenges the constitutionality of a law
carries the heavy burden of proof for laws enjoy a strong presumption of constitutionality as
it is an act of a co-equal branch of government. Petitioner failed to carry this burden.
3.
The assailed provisions do not infringe the equal protection clause because the fourfold test is satisfied. In particular, the classification freeze provision has been found to
rationally further legitimate State interests consistent with rationality review. Anent the
issue of regressivity, it may be conceded that the assailed law imposes an excise tax on
cigarettes which is a form of indirect tax, and thus, regressive in character. While there was
an attempt to make the imposition of the excise tax more equitable by creating a fourtiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every
consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the
same tax rate. To this extent, the tax does not take into account the person's ability to pay.
Nevertheless, this does not mean that the assailed law may be declared unconstitutional for
being regressive in character because the Constitution does not prohibit the imposition of
indirect taxes but merely provides that Congress shall evolve a progressive system of
taxation.
4.
Petitioner is not entitled to a downward reclassification of Lucky Strike.
First, petitioner acknowledged that the initial tax classification of Lucky Strike may be
modified depending on the outcome of the survey which will determine the actual current
net retail price of Lucky Strike in the market.
Second, there was no upward reclassification of Lucky Strike because it was taxed based on
its suggested gross retail price from the time of its introduction in the market in 2001 until
the BIR market survey in 2003.
Third, the failure of the BIR to conduct the market survey within the three-month period
under the revenue regulations then in force can in no way make the initial tax classification
of Lucky Strike based on its suggested gross retail price permanent.
Last, the issue of timeliness of the market survey was never raised before the trial court
because petitioner's theory of the case was wholly anchored on the alleged
unconstitutionality of the classification freeze provision.
BRITISH AMERICAN TOBACCO vs. JOSE ISIDRO N. CAMACHO, ET AL. [G.R. No. 163583.
April 15, 2009.]
In addition as held in Pepsi Cola vs. Municipality of Tanauan GR L-31156 February 27, 1987
A). Due process in taxation requires:
1) Tax must be for public purpose .
2) imposed within the territorial jurisdiction of the taxing authority
3) No arbitrariness or oppression in
a) assessment
b) collection
4). must not infringe on inherent and constitutional limitations
B) Due process in taxation does NOT require:
1) Determination through judicial inquiry of
a) Property subject to tax
b) Amount of tax to be imposed
c) Manner of apportionment.
Gomez vs. Palomor 25 SCRA 827
Kilosbayan Inc. vs. Guingona 232 SCRA 110
City of Baguio vs De Leon L-24756 October 31, 1968
MODES OF APPRISING PUBLIC OF NEW LOCAL TAX ORDINANCE There was substantial
compliance of the requirements of the law on publication. Section 43 of the Local Tax Code
provides two modes of apprising the public of a new ordinance, either, (a) by means of
publication in a newspaper of general circulation or, (b) by means of posting of copies
thereof in the local legislative hall or premises and two other conspicuous places within the
territorial jurisdiction of the local government. Respondent LGU, having complied with the
second mode of notice the SC ruled that there is no legal infirmity to the validity of
Ordinance No. 7516 as amended.
EXCISE TAX; TAXABILITY UNDER QUESTIONED ORDINANCE DEPENDS UPON THE PLACE
WHERE SALE TRANSACTION IS PERFECTED Allied Thread Co., Inc. claims exclusion from
Ordinance No. 7516 as amended on the ground that it does not maintain an office or branch
office in the City of Manila, where the subject Ordinance only applies. This contention is
devoid of merit. Allied Thread Co., Inc. admits that it does business in the City of Manila
through a broker or agent, Ker & Company, Ltd. Doing business in the City of Manila is all
that is required to fall within the coverage of the Ordinance. It should be noted that
Ordinance No. 7516 as amended imposes a business tax on manufacturers, importers or
producers doing business in the City of Manila. The tax imposition here is upon the
performance of an act, enjoyment of a privilege, or the engaging in an occupation, and
hence is in the nature of an excise tax. The power to levy an excise upon the performance
of an act or the engaging in an occupation does not depend upon the domicile of the person
subject to the excise, nor upon the physical location of the property and in connection with
the act or occupation taxed, but depends upon the place in which the act is performed or
occupation engaged in. Thus, the gauge for taxability under the said Ordinance No. 7516 as
amended does not depend on the location of the office, but attaches upon the place where
the respective sale transaction(s) is perfected and consummated. Since Allied Thread Co.,
ALLIED THREAD CO., INC., and KER & COMPANY, LTD vs. HON. CITY MAYOR OF MANILA,
HON. CITY TREASURER OF MANILA, HON. LORENZO RELOVA, G.R. No. L-40296 November
21, 1984
[G.R. No. L-40296. November 21, 1984.]
ALLIED THREAD CO., INC., and KER & COMPANY, LTD., petitioners, vs. HON. CITY MAYOR
OF MANILA, HON. CITY TREASURER OF MANILA, HON. LORENZO RELOVA, in his capacity as
Presiding Judge, Branch II, CFI of Manila, respondents.
SYLLABUS
1.
ADMINISTRATIVE LAW; TAXATION; LOCAL TAX CODE AS AMENDED BY
PRESIDENTIAL DECREE NO. 426; VALIDITY OF ORDINANCE; SUBSEQUENT AMENDMENTS
THERETO DO NOT INVALIDATE NOR MOVE THE EFFECTIVITY DATE OF A LOCAL TAX
ORDINANCE; CASE AT BAR. Ordinance No. 7516 was enacted by the Municipal Board of
Manila on June 12. 1974 and approved by the City Mayor on June 15. 1974. Fifteen (15)
days thereafter, or on July 1, 1974. the said ordinance became effective pursuant to Sec.
42 of the Local Tax Code. It is clear therefore that Ordinance No. 7516 has fully conformed
with P.D. No. 426 and Local Tax Regulation No. 1-74 which require that "a local tax
ordinance intended to take effect on July 1, 1974 should be enacted by the Local Chief
Executive not later than June 15, 1974." The subsequent amendments to the basic
ordinance did not in any way invalidate it nor move the date of its effectivity. To hold
otherwise would limit the power of the defunct Municipal Board of Manila to amend an
existing ordinance as exigencies require.
2.
ID.; ID.; ID.; MODES OF APPRISING PUBLIC OF NEW LOCAL TAX ORDINANCE; CASE
AT BAR. We are persuaded that there was substantial compliance of the law on
publication. Section 43 of the Local Tax Code provides two modes of apprising the public of
a new ordinance, either, (a) by means of publication in a newspaper of general circulation
or, (b) by means of posting of copies thereof in the local legislative hall or premises and two
other conspicuous places within the territorial jurisdiction of the local government.
Respondents, having complied with the second mode of notice. We are of the opinion that
there is no legal infirmity to the validity of Ordinance No. 7516 as amended.
3.
ID.; ID.; ID.; EXCISE TAX; TAXABILITY UNDER QUESTIONED ORDINANCE DEPENDS
UPON THE PLACE WHERE SALE TRANSACTION IS PERFECTED. Finally, petitioner Allied
Thread Co., Inc. claims exclusion from Ordinance No. 7516 as amended on the ground that
it does not maintain an office or branch office in the City of Manila, where the subject
Ordinance only applies. This contention is devoid of merit. Allied Thread Co., Inc. admits
that it does business in the City of Manila through a broker or agent, Ker & Company, Ltd.
Doing business in the City of Manila is all that is required to fall within the coverage of the
Ordinance. It should be noted that Ordinance No. 7516 as amended imposes a business tax
on manufacturers, importers or producers doing business in the City of Manila. The tax
imposition here is upon the performance of an act, enjoyment of a privilege, or the
engaging in an occupation, and hence is in the nature of an excise tax. The power to levy
an excise upon the performance of an act or the engaging in an occupation does not depend
upon the domicile of the person subject to the excise, nor upon the physical location of the
property and in connection with the act or occupation taxed, but depends upon the place in
which the act is performed or occupation engaged in. Thus, the gauge for taxability under
the said Ordinance No. 7516 as amended does not depend on the location of the office, but
attaches upon the place where the respective sale transaction(s) is perfected and
consummated. (See Koppel (Phil.) vs. Yatco, 77 Phil. 496 [1946]) Since Allied Thread Co.,
DECISION
This is a Petition for Review challenging the decision of the then Court of First Instance of
Manila presided by then Judge, now Justice Lorenzo Relova, which upheld the validity of
Manila Ordinance No. 7516, as amended by Ordinance Nos. 7544, 7545 and 7556, and
adjudging petitioner Allied Thread Co., Inc. taxable thereunder considering that its products
are sold in Manila.
On June 12, 1974, the Municipal Board of the City of Manila enacted Ordinance No. 7516
imposing on manufacturers, importers or producers, doing business in the City of Manila,
business taxes based on gross sales on a graduated basis. The Mayor approved the said
Ordinance on June 15, 1974. In due time, the same ordinance underwent a series of
amendments, to wit: on June 19, 1974, by Ordinance No. 7544 approved by the Mayor on
the same date; Ordinance No. 7545 enacted by the Municipal Board on June 20, 1974 and
approved by the Mayor on June 27, 1974; and Ordinance No. 7556, enacted by the
Municipal Board on July 20, 1974 and approved by the Mayor on July 29, 1974.
Ordinance No. 7516 as amended, reads as follows:
"Sec. 1.
Business Tax. There is hereby imposed on the following business in the
City of Manila an annual tax collectible quarterly except on those for which fixed taxes are
already provided for as follows:
A.
On manufacturers, importers, or producers of any article of commerce of whatever
kind or nature, including brewers, distilled spirits and/or wines in accordance with the
following schedule:
xxx
xxx
xxx
"PROVIDED HOWEVER, that for purposes of collection of this tax, manufacturers and
producers maintaining or operating branch or sales offices elsewhere shall record the sale in
the branch or sales office making the sale and the tax thereon shall accrue to the City of
Manila if the branch of sales office is in Manila. In cases where there is no such branch or
sales office in the city, the sale shall be duly recorded in the principal office along with the
sales made in the principal office. Sixty percent of all sales recorded in the principal office
shall be taxable by the City of Manila if the principal office is in Manila, while the remaining
forty percent shall be deemed as sales made in the factory and shall be taxable by the local
government where the factory is located.
"In cases where a manufacturer or producer has factories in Manila and in different
localities, the forty per cent sales allocation mentioned in the preceding paragraph shall be
appropriated among the City of Manila and the localities where the factories are situated in
proportion to their respective volumes of production during the period for which the tax is
due."
The records show that petitioner Allied Thread Co., Inc. is engaged in the business of
manufacturing sewing thread and yarn under duly registered marks and labels. It operates
its factory and maintains an office in Pasig, Rizal. In order to sell its products in Manila and
in other parts of the Philippines, petitioner Allied Thread Co., Inc. engaged the services of a
sales broker, Ker & Company, Ltd. (co-petitioner herein), the latter deriving commissions
from every sale made for its principal.
Having been affected by the aforementioned Ordinance, being manufacturers and sales
brokers, on July 22, 1974, Allied Thread Co., Inc. and Ker & Co., Ltd. filed with the defunct
Court of First Instance of Manila, a petition for Declaratory Relief, contending that
Ordinance No. 7516, as amended, is not valid nor enforceable as the same is contrary to
Section 54 of Presidential Decree No. 426, as clarified by Local Tax Regulation No. 1-74
dated April 8, 1974 of the Department of Finance, reading as follows:
"J.
GENERAL PROVISIONS
1.
All existing tax ordinance of provinces, cities, municipalities and barrios shall be
deemed ipso facto nullified on June 30, 1974.
2.
The local boards or councils should enact their respective tax ordinances pursuant to
the provisions of the Local Tax Code, as amended by P.D. 426, to take effect not earlier
than July 1, 1974.
3.
Pursuant to the provisions of Section 42 of the Code, as amended by Section 18 of
the said Decree, a local tax ordinance shall go into effect on the 15th day after approved by
the local chief executives in accordance with Section 41 of the Code.
4.
In view hereof, and considering the provisions of Section 54 of the Code, regarding
the accrual of taxes a local tax ordinance intended to take effect on July 1, 1974 should be
enacted by the Local Chief Executive not later than June 15, 1974." (Emphasis supplied)
Otherwise stated, petitioners assert that due to the series of amendments to Ordinance No.
7516, the same Ordinance fell short of the deadline set by Sec. 54 of P.D. No. 426 that "for
an ordinance intended to take effect on July 1, 1974, it must be enacted on or before June
15, 1974." Necessarily, so it is asserted, the said Ordinance No. 7516 as amended, is not
valid nor enforceable.
Petitioners further contend that the questioned Ordinance did not comply with the
necessary publication requirement in a newspaper of general circulation as mandated by
Sec. 43 of the Local Tax Code. Petitioner Allied Thread Co., Inc. also claims that it should
not be subjected to the said Ordinance No. 7516 as amended, because it does not operate
or maintain a branch office in Manila and that its principal office and factory are located in
Pasig, Rizal.
We agree with the decision of the then Court of First Instance of Manila, upholding the
validity of Ordinance No. 7516 as amended, and finding petitioner Allied Thread Co., Inc.
the proper subject thereto.
There is no dispute that Ordinance No. 7516 was enacted by the Municipal Board of Manila
on June 12, 1974 and approved by the City Mayor on June 15, 1974. Fifteen (15) days
thereafter, or on July 1, 1974, the said ordinance became effective pursuant to Sec. 42 of
the Local Tax Code. It is clear therefore that Ordinance No. 7516 has fully conformed with
P.D. No. 426 and Local Tax Regulation No. 1-74 which require that "a local tax ordinance
intended to take effect on July 1, 1974 should be enacted by the Local Chief Executive not
later than June 15, 1974". The subsequent amendments to the basic ordinance did not in
any way invalidate it nor move the date of its effectivity. To hold otherwise would limit the
power of the defunct Municipal Board of Manila to amend an existing ordinance as
exigencies require.
Petitioners complain that they were not fully apprised of the enactment of Ordinance No.
7516 for the same was not duly published in a newspaper of general circulation.
Respondents argue however, that copies of Ordinance No. 7516 and its amendments were
posted in public buildings, government offices, and public places in lieu of publication in
newspaper of general circulation.
We are persuaded that there was substantial compliance of the law on publication. Section
43 of the Local Tax Code provides two modes of apprising the public of a new ordinance,
either, (a) by means of publication in a newspaper of general circulation or, (b) by means of
posting of copies thereof in the local legislative hall or premises and two other conspicuous
places within the territorial jurisdiction of the local government. Respondents, having
complied with the second mode of notice, We are of the opinion that there is no legal
infirmity to the validity of Ordinance No. 7516 as amended.
Finally, petitioner Allied Thread Co., Inc. claims exclusion from Ordinance No. 7515 as
amended on the ground that it does not maintain an office or branch office in the City of
Manila, where the subject Ordinance only applies. This contention is devoid of merit. Allied
Thread Co., Inc. admits that it does business in the City of Manila through a broker or
agent, Ker & Company, Ltd. Doing business in the City of Manila is all that is required to fall
within the coverage of the Ordinance.
It should be noted that Ordinance No. 7516 as amended imposes a business tax on
manufacturers, importers or producers doing business in the City of Manila. The tax
engaging in an occupation, and hence is in the nature of an excise tax. LLjur
The power to levy an excise upon the performance of an act or the engaging in an
occupation does not depend upon the domicile of the person subject to the excise, nor upon
the physical location of the property and in connection with the act or occupation taxed, but
depends upon the place in which the act is performed or occupation engaged in.
Thus, the gauge for taxability under the said Ordinance No. 7516 as amended does not
depend on the location of the office, but attaches upon the place where the respective sale
transaction(s) is perfected and consummated. (See Koppel (Phil) vs. Yatco, 77 Phil. 496
[1946].) Since Allied Thread Co., Inc. sells its products in the City of Manila through its
broker, Ker & Company, Ltd., it cannot escape the tax liability imposed by Ordinance No.
7516 as amended.
WHEREFORE, the petition is hereby dismissed for lack of merit, Costs against the
petitioners.
Tax laws must operate equally and uniformly on all persons under similar circumstances.
The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a spirit of hostility,
or at the very least discrimination that finds no support in reason. It suffices then that the
laws operate equally and uniformly on all persons under similar circumstances or that all
persons must be treated in the same manner, the conditions not being different both in the
privileges conferred and the liabilities imposed.
Jose B.L. Reyes vs. Pedro Almanzor, et al., G.R. Nos. 49839-46, April 26, 1991
Procedural Due Process
1. there must be reasonable procedures
2. notice and public hearing should be conducted as to
a) Amount of tax to be imposed
b) property subject to the tax
c) Manner of apportiontment.
3. allowed the opportunity to be heard
Power of taxation must be exercised reasonably and in accordance with prescribed

procedure.
Power of taxation must be exercised reasonably and in accordance with prescribed
procedure. But even as the inevitability and indispensability of taxation is conceded, it is a
requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the
courts will then come to his succor. For all the awesome power of the tax collector, he may
still be stopped in his tracks if the taxpayer can demonstrate . . . that the law has not been
observed. Thus while "taxes are the lifeblood of the government," the power to tax has its
limits, inspite of all its plenitude.
Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 119322, June 4, 1996
CIR vs. Central Luzon Drug GR No. 120324 Apr. 21, 1999
Domingo vs. Carlitos 8 SCRA 443
Gonzales vs. Marcos 65 SCRA 524
Pelaez vs. Auditor General 15 SCRA 569
Sec 1 EQUAL PROTECTION CLAUSE
Equal protection does not require equal rates on different classes of property, nor prohibit
unequal taxation so long as the inequality is not based upon arbitrary classification. It
merely requires that all persons subjected to such legislation shall be treated alike, under
like circumstances and conditions both in the privileges conferred and in the liabilities
imposed. (Sison vs. Ancheta)
The power to select subjects of taxation and apportion the public burden among them
includes the power to make classifications. For the classification to be valid, the following
must concur:
a. It must be based on substantial distinctions
b. It must apply both to the present and future conditions
c. It must be germane to the purposes of the law
d. It must apply equally to all members of the same class
(Ormoc Sugar Company vs Treasurer of Ormoc City 22 SCRA 603)
Is uniformity of taxation the same as equality of taxation?
(a) No. Uniformity of taxation requires that there should be no direct duplicate taxation
while equality of taxation means treating persons who are similarly situated in the same
manner.
Uniformity of taxation means that "all articles or properties of the same class shall be taxed
at the same rate" (Tan Kim v. CTA L-18080, April 22, 1963). Different articles or other
subjects like transactions, business, rights, etc. may be taxed at different rates provided
that the rate (not necessarily the amount) is uniform in the same class everywhere
(b) Equality of taxation means that all persons who are similarly situated should be treated
alike both in the privilege conferred and burdens imposed. Constitutional equality in taxation
means the application of the concept of equal protection of the laws which prohibits
discrimination other than those instances where there is valid classification. Thus, persons
who are similarly situated, or who belong to the same class, should be given by law the
same protection and privileges as well as imposed the same burdens and obligations (Tiu et.
al. v. CA GR No. 127410 January 20, 1999).
Equity of taxation implies that the amount of tax must be kept in the light of the taxpayer's
ability to pay. So taxation may be uniform but inequitable where the amount of tax imposed
is excessive or unreasonable. Taxation is equitable when its burden falls on those better able
to pay [Reyes v. Almanzor, 196 SCRA 322 (1991)].
ORMOC SUGAR COMPANY, INC., plaintiff-appellant, vs. THE TREASURER OF ORMOC CITY,
THE MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS, as Mayor of Ormoc
City and ORMOC CITY, defendants-appellees.
[G.R. No. L-23794. February 17, 1968.]
SYLLABUS
1.
MUNICIPAL CORPORATIONS; POWER TO IMPOSE EXPORT OR IMPORT TAX; REP.
ACT 2264, SEC. 2; EFFECT ON SEC. 2287 OF REVISED ADMINISTRATIVE CODE. Section
2 of Rep. Act 2264 which became effective on June 19, 1959, gave chartered cities,
municipalities and municipal districts authority to levy for public purposes just and uniform
taxes, licenses or fees. This provision of law has repealed Sec. 2287 of the Revised
Administrative Code (Nin Bay Mining Co. vs. Municipality of Roxas, L-20125, July 20, 1965),
which withheld from municipalities the power to impose an import or export tax upon such
goods in the guise of an unreasonable charge for wharfage.
2.
CONSTITUTIONAL
LAW;
EQUAL
PROTECTION
OF
LAW;
REASONABLE
CLASSIFICATION; REQUISITES. The equal protection clause applies only to persons or
things identically situated and does not bar a reasonable classification of the subject of
legislation. A classification is reasonable where (1) it is based on substantial distinctions
which make real differences; (2) these are germane to the purpose of the law; (3) the
classification applies not only to present conditions but also to future conditions which are
substantially identical to those of the present; (4) the classification applies only to those
who belong to the same class.
3.
ID.; ID.; ID.; TAX ORDINANCE SHOULD NOT BE SINGULAR AND EXCLUSIVE.
When the taxing ordinance was enacted, Ormoc Sugar Co,, Inc. was the only sugar central
in the City. A reasonable classification should be in terms applicable to future conditions as
well. The taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central.
4.
TAXATION; TAX, REFUND OF; NO INTEREST CAN BE CLAIMED; REASONS.
Appellant is not entitled to interest on the refund because the taxes were not arbitrarily
collected. There is sufficient basis to preclude arbitrariness. The constitutionality of the
statute is presumed until declared otherwise.
DECISION
On January 29, 1964, the Municipal Board of Ormoc City passed Ordinance No. 4, Series of
1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar
Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per
export sale to the United States of America and other foreign countries."
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March
20, 1964 for P7,087.50 and on April 20, 1964 for P5,000.00, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of
Leyte, with service of a copy upon the Solicitor General, a complaint against the City of
Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging that the afore-stated
ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1[1],
Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1], Art. VI,
Constitution), aside from being an export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor a license tax
which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act
2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the
tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of
Republic Act 2264 because the tax is on both the sale and export of sugar.
Answering, the defendants asserted that the tax ordinance was within defendant city's
power to enact under the Local Autonomy Act and that the same did not violate the aforecited constitutional limitations. After pre-trial and submission of the case on memoranda,
the Court of First Instance, on August 6, 1964, rendered a decision that upheld the
constitutionality of the ordinance and declared the taxing power of defendant chartered city
broadened by the Local Autonomy Act to include all other forms of taxes, licenses or fees
not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant
alleges the same statutory and constitutional violations in the aforesaid taxing ordinance
mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all
productions of centrifugal sugar milled at the Ormoc Sugar Company Incorporated, in
Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the
United States of America and other foreign countries." Though referred to as a "production
tax", the imposition actually amounts to a tax on the export of centrifugal sugar produced
at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time
the tax applies is when the sugar produced is exported.
Appellant questions the authority of the defendant Municipal Board to levy such an export
tax, in view of Section 2287 of the Revised Administrative Code which denies from
municipal councils the power to impose an export tax. Section 2287 in part states: "It shall
not be in the power of the municipal council to impose a tax in any form whatever, upon
goods and merchandise carried into the municipality, or out of the same, and any attempt
to impose an import or export tax upon such goods in the guise of an unreasonable charge
for wharfage, use of bridges or otherwise, shall be void."
Subsequently, however, Section 2 of Republic Act 2264, effective June 19, 1959, gave
chartered cities, municipalities and municipal districts authority to levy for public purposes
just and uniform taxes, licenses or fees. Anent the inconsistency between Section 2287 of
the Revised Administrative Code and Section 2 of Republic Act 2264, this Court, in Nin Bay
Mining Co. v. Municipality of Roxas, held the former to have been repealed by the latter.
And expressing Our awareness of the transcendental effects that municipal export or import
taxes or licenses will have on the national economy, due to Section 2 of Republic Act 2264,
We stated that there was no other alternative until Congress acts to provide remedial
measures to forestall any unfavorable results.
The point remains to be determined, however, whether constitutional limits on the power of
taxation, specifically the equal protection clause and rule of uniformity of taxation, were
infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal
protection of the laws." (Sec. 1[1], Art. III) In Felwa v. Salas We ruled that the equal
protection clause applies only to persons or things identically situated and does not bar a
reasonable classification of the subject of legislation, and a classification is reasonable
where (1) it is based on substantial distinctions which make real differences; (2) these are
germane to the purpose of the law; (3) the classification applies not only to present
conditions but also to future conditions which are substantially identical to those of the
present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet
them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar
Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc
Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the
classification, to be reasonable, should be in terms applicable to future conditions as well.
The taxing ordinance should not be singular and exclusive as to exclude any subsequently
established sugar central, of the same class as plaintiff, from the coverage of the tax. As it
is now, even if later a similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to Ormoc Sugar Company, Inc. as the entity to be levied
upon.
Appellant, however, is not entitled to interest on the refund because the taxes were not
arbitrarily collected (Collector of Internal Revenue v. Binalbagan). At the time of collection,
the ordinance provided a sufficient basis to preclude arbitrariness, the same being then
presumed constitutional until declared otherwise.
WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is
declared unconstitutional and the defendants- appellees are hereby ordered to refund the
P12,087.50 plaintiff- appellant paid under protest. No. costs. So ordered.
[G.R. No. L-59431. July 25, 1984.]
ANTERO M. SISON, JR., petitioner, vs. RUBEN B. ANCHETA, Acting Commissioner, Bureau of
Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue;
TOMAS TOLEDO, Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA,
Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR
E. A. VIRATA, Minister of Finance, respondents.
SYLLABUS
1.
CONSTITUTIONAL LAW; POWER OF THE STATE TO TAX; EXERCISE THEREOF
NECESSARY FOR THE PERFORMANCE OF ITS VITAL FUNCTIONS. It is manifest that the
field of state activity has assumed a much wider scope. Hence the need for more revenues.
The power to tax, an inherent prerogative, has to be availed of to assure the performance
of vital state functions. It is the source of the bulk of public funds. To paraphrase a recent
decision, taxes being the lifeblood of the government, their prompt and certain availability
is of the essence. (Cf. Vera v. Fernandez, L-31364, March 30, 1979, 89 SCRA 199)
2.
ID.; ID.; ID.; POWER TO TAX NOT WITHOUT RESTRICTIONS. The power to tax, to
borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the
powers of government." (Sarasola v. Trinidad, 40 Phil. 252, 262 [1919]) It is, of course, to
be admitted that for all its plenitude, the power to tax is not unconfined. There are
restrictions. The Constitution sets forth such limits. .Adversely affecting as it does property
rights, both the due process and equal protection clauses may properly be invoked, as
petitioner does, to invalidate in appropriate cases a revenue measure. If it were otherwise,
there would be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax
involves the power to destroy." (McCulloch vs. Maryland, 4 Wheaton 316)
3.
ID.; ID.; SECTION 1 BATAS PAMBANSA BLG. 135; NOT A TRANSGRESSION OF THE
DUE PROCESS IN THE ABSENCE OF A SHOWING OF ARBITRARINESS. Petitioner alleges
arbitrariness. A mere allegation does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner would condemn the provision as void on
its face, he has not made out a case. This is merely to adhere to the authoritative doctrine
that where the due process and equal protection clauses are invoked, considering that they
are not fixed rules but rather broad standards, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail.
4.
ID.; ID.; ID.; INEQUALITY RESULTING FROM THE CLASSIFICATION MADE, NOT A
TRANSGRESSION OF THE EQUAL PROTECTION CLAUSE AND THE RULE ON UNIFORMITY.
Classification, if rational in character, is allowable. In a leading case, Lutz v. Araneta, 98
Phil. 143 (1955), the Court went so far as to hold "at any rate, it is inherent in the power to
tax that a state be free to select the subject of taxation, and it has been repeatedly held
that 'inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.'" Petitioner likewise invoked the kindred
concept of uniformity. According to the Constitution: "The rule of taxation shall be uniform
and equitable." (Art. VIII, Sec. 17, par. 1) This requirement is met according to Justice
Laurel in Philippine Trust Company v: Yatco, 69 Phil. 420 (1940) when the tax "operates
with the same force and effect in every place where the subject may be found. The rule of
uniformity does not call for perfect uniformity or perfect equality, because this is hardly
attainable."
5.
ID.; ID.; ID.; AMPLE JUSTIFICATION EXISTS FOR THE ADOPTION OF THE GROSS
SYSTEM OF INCOME TAXATION TO COMPENSATION INCOME. In the case of the gross
income taxation embodied in Batas Pambansa Blg. 135, the discernible basis of
classification is the susceptibility of the income to the application of generalized rules
removing all deductible items for all taxpayers within the class and fixing a set of reduced
tax rates to be applied to all of them. Taxpayers who are recipients of compensation income
are set apart as a class. As there is practically no overhead expense, these taxpayers are
not entitled to make deductions for income tax purposes because they are in the same
situation more or less. On the other hand, in the case of professionals in the practice of
their calling and businessmen, there is no uniformity in the costs or expenses necessary to
produce their income. It would not be just then to disregard the disparities by giving all of
them zero deduction and indiscriminately impose on all alike the same tax rates on the
basis of gross income. There is ample justification for the Batasang Pambansa to adopt the
gross system of income taxation to compensation income, while continuing the system of
net income taxation as regards professional and business income.
DECISION
The success of the challenge posed in this suit for declaratory relief or prohibition
proceeding on the validity of Section 1 of Batas Pambansa Blg. 135 depends upon a
showing of its constitutional infirmity. The assailed provision further amends Section 21 of
the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or
residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes,
and other winnings, (d) interest from bank deposits and yield or any other monetary benefit
from deposit substitutes and from trust fund and similar arrangements, (e) dividends and
share of individual partner in the net profits of taxable partnership, (f) adjusted gross
income. Petitioner as taxpayer alleges that by virtue thereof, "he would be unduly
discriminated against by the imposition of higher rates of tax upon his income arising from
the exercise of his profession vis-a-vis those which are imposed upon fixed income or
salaried individual taxpayers." He characterizes the above section as arbitrary amounting
to class legislation, oppressive and capricious in character. For petitioner, therefore, there
is a transgression of both the equal protection and due process clauses of the Constitution
as well as of the rule requiring uniformity in taxation.
The Court, in a resolution of January 26, 1982, required respondents to file an answer
within 10 days from notice. Such an answer, after two extensions were granted the Office of
the Solicitor General, was filed on May 28, 1982. The facts as alleged were admitted but
not the allegations which to their mind are "mere arguments, opinions or conclusions on the
part of the petitioner, the truth [for them] being those stated [in their] Special and
Affirmative Defenses." The answer then affirmed: "Batas Pambansa Blg. 135 is a valid
exercise of the State's power to tax. The authorities and cases cited, while correctly quoted
or paraphrased, do not support petitioner's stand." The prayer is for the dismissal of the
petition for lack of merit.
This Court finds such a plea more than justified. The petition must be dismissed.
1.
It is manifest that the field of state activity has assumed a much wider scope. The
reason was so clearly set forth by retired Chief Justice Makalintal thus:
"The areas which used to be left to private enterprise and initiative and which the
government was called upon to enter optionally, and only 'because it was better equipped
to administer for the public welfare than is any private individual or group of individuals,'
continue to lose their well-defined boundaries and to be absorbed within activities that the
government must undertake in its sovereign capacity if it is to meet the increasing social
challenges of the times." Hence the need for more revenues. The power to tax, an inherent
prerogative, has to be availed of to assure the performance of vital state functions. It is the
source of the bulk of public funds. To paraphrase a recent decision, taxes being the lifeblood
of the government, their prompt and certain availability is of the essence.
2.
The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of
sovereignty. It is the strongest of all the powers of government." It is, of course, to be
admitted that for all its plenitude, the power to tax is not unconfined. There are restrictions.
The Constitution sets forth such limits. Adversely affecting as it does property rights, both
the due process and equal protection clauses may properly be invoked, as petitioner does,
to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be
truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power
to destroy." In a separate opinion in Graves v. New York, Justice Frankfurter, after
referring to it as an "unfortunate remark," characterized it as "a flourish of rhetoric
[attributable to] the intellectual fashion of the times [allowing] a free use of absolutes."
This is merely to emphasize that it is not and there cannot be such a constitutional
mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from
Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmes's pen: 'The
power to tax is not the power to destroy while this Court sits.'" So it is in the Philippines.
3.
This Court then is left with no choice. The Constitution as the fundamental law
overrides any legislative or executive act that runs counter to it. In any case therefore
where it can be demonstrated that the challenged statutory provision as petitioner here
alleges fails to abide by its command, then this Court must so declared and adjudge it
null. The inquiry thus is centered on the question of whether the imposition of a higher tax
rate on taxable net income derived from business or profession than on compensation is
constitutionally infirm.
4.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A
mere allegation, as here, does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision as
void on its face, he has not made out a case. This is merely to adhere to the authoritative
doctrine that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.
5.
It is undoubted that the due process clause may be invoked where a taxing statute
is so arbitrary that it finds no support in the Constitution. An obvious example is where it
can be shown to amount to the confiscation of property. That would be a clear abuse of
power. It then becomes the duty of this Court to say that such an arbitrary act amounted to
the exercise of an authority not conferred. That properly calls for the application of the
Holmes dictum. It has also been held that where the assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is
so harsh and unreasonable, it is subject to attack on due process grounds.
6.
Now for equal protection. The applicable standard to avoid the charge that there is a
denial of this constitutional mandate whether the assailed act is in the exercise of the police
power or the power of eminent domain is to demonstrate "that the governmental act
assailed, far from being inspired by the attainment of the common weal was prompted by
the spirit of hostility, or at the very least, discrimination that finds to support in reason. It
suffices then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not
being different, both in the privileges conferred and the liabilities imposed. Favoritism and
undue preference cannot be allowed. For the principle is that equal protection and security
shall be given to every person under circumstances, which if not identical are analogous. If
law be looks upon in terms of burden or charges, those that fall within a class should be
treated in the same fashion, whatever restrictions cast on some in the group equally binding
on the rest." That same formulation applies as well to taxation measures. The equal
protection clause is, of course, inspired by the noble concept of approximating the ideal of
the laws's benefits being available to all and the affairs of men being governed by that
serene and impartial uniformity, which is of the very essence of the idea of law. There is,
however, wisdom, as well as realism, in these words of Justice Frankfurter: "The equality at
which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth
Amendment enjoins 'the equal protection of the laws,' and laws are not abstract
propositions. They do not relate to abstract units A, B and C, but are expressions of policy
arising out of specific difficulties, addressed to the attainment of specific ends by the use of
specific remedies. The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same." Hence the constant reiteration
of the view that classification if rational in character is allowable. As a matter of fact, in a
leading case of Lutz V. Araneta, this Court, through Justice J.B.L. Reyes, went so far as to
hold "at any rate, it is inherent in the power to tax that a state be free to select the subjects
of taxation, and it has been repeatedly held that 'inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional limitation.'"
7.
Petitioner likewise invoked the kindred concept of uniformity. According to the
Constitution: "The rule of taxation shall be uniform and equitable." This requirement is met
according to Justice Laurel in Philippine Trust Company v. Yatco, decided in 1940, when the
tax "operates with the same force and effect in every place where the subject may be
found." He likewise added: "The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable." The problem of classification did not
present itself in that case. It did not arise until nine years later, when the Supreme Court
held: "Equality and uniformity in taxation means that all taxable articles or kinds of property
of the same class shall be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation, . . . As clarified by
Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates
of justice and equity" it "is not discriminatory within the meaning of this clause and is
therefore uniform." There is quite a similarity then to the standard of equal protection for
all that is required is that the tax "applies equally to all persons, firms and corporations
placed in similar situation."
8.
Further on this point. Apparently, what misled petitioner is his failure to take into
consideration the distinction between a tax rate and a tax base. There is no legal objection
to a broader tax base or taxable income by eliminating all deductible items and at the same
time reducing the applicable tax rate. Taxpayers may be classified into different categories.
To repeat, it is enough that the classification must rest upon substantial distinctions that
make real differences. In the case of the gross income taxation embodied in Batas
Pambansa Blg. 135, the discernible basis of classification is the susceptibility of the income
to the application of generalized rules removing all deductible items for all taxpayers within
the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who
are recipients of compensation income are set apart as a class. As there is practically no
overhead expense, these taxpayers are not entitled to make deductions for income tax
purposes because they are in the same situation more or less. On the other hand, in the
case of professionals in the practice of their calling and businessmen, there is no uniformity
in the costs or expenses necessary to produce their income. It would not be just then to
disregard the disparities by giving all of them zero deduction and indiscriminately impose on
all alike the same tax rates on the basis of gross income. There is ample justification then
for the Batasang Pambansa to adopt the gross system of income taxation to compensation
income, while continuing the system of net income taxation as regards professional and
business income.
9.
Nothing can be clearer, therefore, than that the petition is without merit, considering
the (1) lack of factual foundation to show the arbitrary character of the assailed provision;
(2) the force of controlling doctrines on due process, equal protection, and uniformity in
taxation and (3) the reasonableness of the distinction between compensation and taxable
net income of professionals and businessmen certainly not a suspect classification.
WHEREFORE, the petition is dismissed. Costs against petitioner.
Equal Protection of the Law
The NIRC exempts from VAT the sale of agricultural non-food products in
their original state if the sale is made by the primary producer or owner of
the land from which the same are produced. The sale made by any other person or entity,
like a trader or dealer, is not exempt from the tax. A revenue memorandum circular was
issued, reclassifying copra into an
agricultural non-food product. Petitioner is engaged in the buying and selling of copra, it
claims that the memorandum circular is discriminatory and violative of the equal protection
clause of the Constitution because
while coconut farmers and copra producers are exempt, traders and dealers are not,
although both sell copra in its original estate.
ISSUE: Whether there was a violation of equal protection.
HELD: No, there was no violation. There is a material or substantial difference between
coconut farmers and copra producers, on the one hand, and copra traders and dealers, on
the other. The former produce and sell copra, the latter merely sell copra. The Constitution
does not forbid the differential treatment of persons so long as there is a reasonable basis
for classifying them differently.
Misamis Oriental Association of Coconut Traders Association vs
Finance Secretary
MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC., petitioner, vs. DEPARTMENT
OF FINANCE SECRETARY, COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE (BIR),
AND REVENUE DISTRICT OFFICER, BIR MISAMIS ORIENTAL, respondents.
[G.R. No.
108524. November 10, 1994.]
SYLLABUS
1.
ADMINISTRATIVE LAW; ADMINISTRATIVE INTERPRETATION OF LAWS BY
GOVERNMENT AGENCY CHARGED WITH ITS ENFORCEMENT, ENTITLED TO GREAT WEIGHT.
Under 103(a) of the NIRC, the sale of agricultural non-food products in their original
state is exempt from VAT only if the sale is made by the primary producer or owner of the
land from which the same are produced. The sale made by any other person or entity, like a
trader or dealer, is not exempt from the tax. On the other hand, under 103(b) the sale of
agricultural food products in their original state is exempt from VAT at all stages of
production or distribution regardless of who the seller is. We agree with respondents. In
interpreting 103(a) and (b) of the NIRC, the Commissioner of Internal Revenue gave it a
strict construction consistent with the rule that tax exemptions must be strictly construed
against the taxpayer and liberally in favor of the state. Indeed, even Dr. Kintanar said that
his classification of copra food was based on "the broader definition of food which includes
agricultural commodities and other components used in the manufacture/processing of
food." Moreover, as the government agency charged with the enforcement of the law, the
opinion of the Commissioner of Internal Revenue, in the absence of any showing that it is
plainly wrong, is entitled to great weight. Indeed, the ruling was made by the Commissioner
of Internal Revenue in the exercise of his power under 245 of the NIRC to "make rulings
or opinions in connection with the implementation of the provisions of internal revenue
laws, including rulings on the classification of articles for sales tax and similar purposes."
2.
ID.; DISTINCTION BETWEEN LEGISLATIVE RULES AND INTERPRETATIVE RULES.
There is a distinction in administrative law between legislative rules and interpretative rules.
There would be force in petitioner's argument if the circular in question were in the nature
of a legislative rule. But it is not. It is a mere interpretative rule. In addition such rule must
be published. On the other hand, interpretative rules are designed to provide guidelines to
the law which the administrative agency is in charge of enforcing. Accordingly, in
considering a legislative rule a court is free to make three inquiries: (i) whether the rule is
within the delegated authority of the administrative agency; (ii) whether it is reasonable;
and (iii) whether it was issued pursuant to proper procedure. But the court is not free to
substitute its judgment as to the desirability or wisdom of the rule for the legislative body,
by its delegation of administrative judgment, has committed those questions to
administrative judgments and not to judicial judgments. In the case of an interpretative
rule, the inquiry is not into the validity but into the correctness or propriety of the rule. As a
matter of power a court, when confronted with an interpretative rule, is free to (i) give the
force of law to the rule; (ii) go to the opposite extreme and substitute its judgment; or (iii)
give some intermediate degree of authoritative weight to the interpretative rule.
3.
ID.; ID.; REASON. The reason for this distinction is that a legislative rule is in the
nature of subordinate legislation, designed to implement a primary legislation by providing
the details thereof. In the same way that laws must have the benefit of public hearing, it is
generally required that before a legislative rule is adopted there must be hearing.
4.
TAXATION; NATIONAL INTERNAL REVENUE CODE; COMMISSIONER OF INTERNAL
REVENUE; NOT BOUND BY THE RULING OF HIS PREDECESSOR; MAY CONSIDER COPRA AS
A NON-FOOD PRODUCT; CASE AT BAR. In the case at bar, we find no reason for holding
that respondent Commissioner erred in not considering copra as an "agricultural food

product" within the meaning of 103(b) of the NIRC. As the Solicitor General contends,
"copra per se is not food, that is, it is not intended for human consumption. Simply stated,
nobody eats copra for food." That previous Commissioners considered it so, is not reason
for holding that the present interpretation is wrong. The Commissioner of Internal Revenue
is not bound by the ruling of his predecessors. To the contrary, the overruling of decisions is
inherent in the interpretation of laws.
5.
CONSTITUTIONAL LAW; EQUAL PROTECTION CLAUSE; SUBSTANTIAL DIFFERENCE
BETWEEN COCONUT FARMER AND COPRA PRODUCERS, REASONABLE BASIS FOR
DIFFERENT CLASSIFICATION FOR PURPOSES OF TAXATION; CASE AT BAR. Petitioner
likewise claims that RMC No. 47-91 is discriminatory and violative of the equal protection
clause of the Constitution because while coconut farmers and copra producers are exempt,
traders and dealers are not, although both sell copra in its original state. Petitioners add
that oil millers do not enjoy tax credit out of the VAT payment of traders and dealers. The
argument has no merit. There is a material or substantial difference between coconut
farmers and copra producers, on the one hand, and copra traders and dealers, on the other.
The former produce and sell copra, the latter merely sell copra. The Constitution does not
forbid the differential treatment of persons so long as there is a reasonable basis for
classifying them differently. It is not true that oil millers are exempt from VAT. Pursuant to
102 of the NIRC, they are subject to 10% VAT on the sale of services. Under 104 of the
Tax Code, they are allowed to credit the input tax on the sale of copra by traders and
dealers, but there is no tax credit if the sale is made directly by the copra producer as the
sale is VAT exempt. In the same manner, copra traders and dealers are allowed to credit
the input tax on the sale of copra by other traders and dealers, but there is no tax credit if
the sale is made by the producer.
6.
TAXATION; NATIONAL INTERNAL REVENUE CODE; VAT; ALLEGATION OF COUNTER
PRODUCTIVITY OF CLASSIFICATION OF COPRAS AS AN AGRICULTURAL NON-FOOD, A
QUESTION OF WISDOM OR POLICY. The sale of agricultural non-food products is exempt
from VAT only when made by the primary producer or owner of the land from which the
same is produced, but in the case of agricultural food products their sale in their original
state is exempt at all stages of production or distribution. At any rate, the argument that
the classification of copra as agricultural non-food product is counterproductive is a question
of wisdom or policy which should be addressed to respondent officials and to Congress.
DECISION
This is a petition for prohibition and injunction seeking to nullify Revenue Memorandum
Circular No. 47-91 and enjoin the collection by respondent revenue officials of the Value
Added Tax (VAT) on the sale of copra by members of petitioner organization.
Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domestic corporation
whose members, individually or collectively, are engaged in the buying and selling of copra
in Misamis Oriental. The petitioner alleges that prior to the issuance of Revenue
Memorandum Circular 47-91 on June 11, 1991, which implemented VAT Ruling 190-90,
copra was classified as agricultural food product under 103(b) of the National Internal
Revenue Code and, therefore, exempt from VAT at all stages of production or distribution.
Respondents represent departments of the executive branch of government charged with
the generation of funds and the assessment, levy and collection of taxes and other imposts.
The pertinent provision of the NIRC states:
Sec. 103.
tax:
Exempt Transactions. The following shall be exempt from the value-added
(a)
Sale of nonfood agricultural, marine and forest products in their original state by the
primary producer or the owner of the land where the same are produced;
(b)
Sale or importation in their original state of agricultural and marine food products,
livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption, and breeding stock and genetic material therefor;
Under 103(a), as above quoted, the sale of agricultural non-food products in their original
state is exempt from VAT only if the sale is made by the primary producer or owner of the
land from which the same are produced. The sale made by any other person or entity, like a
trader or dealer, is not exempt from the tax. On the other hand, under 103(b) the sale of
agricultural food products in their original state is exempt from VAT at all stages of
production or distribution regardless of who the seller is.
The question is whether copra is an agricultural food or non-food product for purposes of
this provision of the NIRC. On June 11, 1991, respondent Commissioner of Internal
Revenue issued the circular in question, classifying copra as an agricultural non-food
product and declaring it "exempt from VAT only if the sale is made by the primary producer
pursuant to Section 103(a) of the Tax Code, as amended."
The reclassification had the effect of denying to the petitioner the exemption it previously
enjoyed when copra was classified as an agricultural food product under 103(b) of the
NIRC. Petitioner challenges RMC No. 47-91 on various grounds, which will be presently
discussed although not in the order raised in the petition for prohibition.
First. Petitioner contends that the Bureau of Food and Drug of the Department of Health and
not the BIR is the competent government agency to determine the proper classification of
food products. Petitioner cites the opinion of Dr. Quintin Kintanar of the Bureau of Food and
Drug to the effect that copra should be considered "food" because it is produced from
coconut which is food and 80% of coconut products are edible.
On the other hand, the respondents argue that the opinion of the BIR, as the government
agency charged with the implementation and interpretation of the tax laws, is entitled to
great respect.
We agree with respondents. In interpreting 103(a) and (b) of the NIRC, the Commissioner
of Internal Revenue gave it a strict construction consistent with the rule that tax
exemptions must be strictly construed against the taxpayer and liberally in favor of the
state. Indeed, even Dr. Kintanar said that his classification of copra as food was based on
"the broader definition of food which includes agricultural commodities and other
components used in the manufacture/processing of food." The full text of his letter reads:
10 April 1991
Mr. VICTOR A. DEOFERIO, JR.
Chairman VAT Review Committee
Bureau of Internal Revenue
Diliman, Quezon City
Dear Mr. Deoferio:
This is to clarify a previous communication made by this Office about copra in a letter dated
05 December 1990 stating that copra is not classified as food. The statement was made in
the context of BFAD's regulatory responsibilities which focus mainly on foods that are
processed and packaged, and thereby copra is not covered.
However, in the broader definition of food which include agricultural commodities and other
components used in the manufacture/processing of food, it is our opinion that copra should
be classified as an agricultural food product since copra is produced from coconut meat
which is food and based on available information, more than 80% of products derived from
copra are edible products.
Very truly yours,
QUINTIN L. KINTANAR, M.D., Ph.D.
Director
Assistant Secretary of Health
for Standards and Regulations
Moreover, as the government agency charged with the enforcement of the law, the opinion
of the Commissioner of Internal Revenue, in the absence of any showing that it is plainly
wrong, is entitled to great weight. Indeed, the ruling was made by the Commissioner of
Internal Revenue in the exercise of his power under 245 of the NIRC to "make rulings or
opinions in connection with the implementation of the provisions of internal revenue laws,
including rulings on the classification of articles for sales tax and similar purposes."
Second. Petitioner complains that it was denied due process because it was not heard
before the ruling was made. There is a distinction in administrative law between legislative
rules and interpretative rules. There would be force in petitioner's argument if the circular
in question were in the nature of a legislative rule. But it is not. It is a mere interpretative
rule.
The reason for this distinction is that a legislative rule is in the nature of subordinate
legislation, designed to implement a primary legislation by providing the details thereof. In
the same way that laws must have the benefit of public hearing, it is generally required that
before a legislative rule is adopted there must be hearing. In this connection, the
Administrative Code of 1987 provides:
Public Participation. If not otherwise required by law, an agency shall, as far as
practicable, publish or circulate notices of proposed rules and afford interested parties the
opportunity to submit their views prior to the adoption of any rule.
(2)
In the fixing of rates, no rule or final order shall be valid unless the proposed rates
shall have been published in a newspaper of general circulation at least two (2) weeks
before the first hearing thereon.
(3)
In case of opposition, the rules on contested cases shall be observed.
In addition such rule must be published. On the other hand, interpretative rules are
designed to provide guidelines to the law which the administrative agency is in charge of
enforcing.
Accordingly, in considering a legislative rule a court is free to make three inquiries: (i)
whether the rule is within the delegated authority of the administrative agency; (ii) whether
it is reasonable; and (iii) whether it was issued pursuant to proper procedure. But the court
is not free to substitute its judgment as to the desirability or wisdom of the rule for the
legislative body, by its delegation of administrative judgment, has committed those
questions to administrative judgments and not to judicial judgments. In the case of an
interpretative rule, the inquiry is not into the validity but into the correctness or propriety of
the rule. As a matter of power a court, when confronted with an interpretative rule, is free
to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute its
judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner erred in not
considering copra as an "agricultural food product" within the meaning of 103(b) of the
NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not intended
for human consumption. Simply stated, nobody eats copra for food." That previous
Commissioners considered it so, is not reason for holding that the present interpretation is
wrong. The Commissioner of Internal Revenue is not bound by the ruling of his
predecessors. To the contrary, the overruling of decisions is inherent in the interpretation
of laws.
Third. Petitioner likewise claims that RMC No. 47-91 is discriminatory and violative of the
equal protection clause of the Constitution because while coconut farmers and copra
producers are exempt, traders and dealers are not, although both sell copra in its original
state. Petitioners add that oil millers do not enjoy tax credit out of the VAT payment of
traders and dealers.
The argument has no merit. There is a material or substantial difference between coconut
farmers and copra producers, on the one hand, and copra traders and dealers, on the other.
The former produce and sell copra, the latter merely sell copra. The Constitution does not
forbid the differential treatment of persons so long as there is a reasonable basis for
classifying them differently.
It is not true that oil millers are exempt from VAT. Pursuant to 102 of the NIRC, they are
subject to 10% VAT on the sale of services. Under 104 of the Tax Code, they are allowed
to credit the input tax on the sale of copra by traders and dealers, but there is no tax credit
if the sale is made directly by the copra producer as the sale is VAT exempt. In the same
manner, copra traders and dealers are allowed to credit the input tax on the sale of copra
by other traders and dealers, but there is no tax credit if the sale is made by the producer.
Fourth. It is finally argued that RMC No. 47-91 is counterproductive because traders and
dealers would be forced to buy copra from coconut farmers who are exempt from the VAT
and that to the extent that prices are reduced the government would lose revenues as the
10% tax base is correspondingly diminished.
This is not so. The sale of agricultural non-food products is exempt from VAT only when
made by the primary producer or owner of the land from which the same is produced, but
in the case of agricultural food products their sale in their original state is exempt at all
stages of production or distribution. At any rate, the argument that the classification of
copra as agricultural non-food product is counterproductive is a question of wisdom or
policy which should be addressed to respondent officials and to Congress.
WHEREFORE, the petition is DISMISSED.
SO ORDERED.
Uniformity and Equitability, Equal Protection

President Aquino issued Executive Order
273, adopting the value-added tax (VAT),
Petitioners contend that EO 273 is unconstitutional on the grounds that the president had
no authority to issue it; that it is oppressive, discriminatory, unjust, and regressive.
ISSUE: Whether the EO 273, adopting the VAT, is valid.
HELD; The EO is valid and constitutional. The President had the authority to issue EOs
under both the Provisional and 1987 Constitutions until a legislature was officially convened.
In this case, the EO was enacted 2 days before Congress convened. Therefore, the EO was
still within the Presidents power to issue as an exercise of legislative functions under the
transition government.
KapatiranngmgaNaglilingkodsaPamahalaanngPilipinas v. Bienvenido Tan
GR L81311 June
30, 1988
What are the requisites for a valid classification?
Ans. The requisites are:
(1) It is based upon substantial distinctions which make real differences;
(2) It is germane or relevant to the purpose of the legislation or ordinance.
(3) It applies, not only to present conditions but also to future conditions substantially
identical to those of the present.
(4) It applies equally to all those who belong to the same class.
Sec 4 FREEDOM OF THE PRESS

TAXATION AND FREEDOM OF THE PRESS (Art. III, Sec. 4)
There is curtailment of press freedom and freedom of thought and expression if the tax is
levied in order to suppress this basic right and
impose a prior restraint. (Tolentino vs. Secretary of Finance, GR No. 115455, August 25,
1994) However, if the fee imposed is not for the
exercise of a privilege but only for the purpose of defraying part of the cost of registration,
the Constitution is not violated.
TAXATION AND FREEDOM OF THE PRESSSeveral parties filed complaints in the Supreme
Court questioning the legality of the Expanded VAT (EVAT) Law:
As a general proposition, the press is not exempt from the taxing power of the State and
that what the constitutional guarantee of free press prohibits are laws which single out the
press or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A. No.
7716 is none of these. Since the law granted the press a privilege, the law could take back
the privilege anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax
burden to which other businesses have long ago been subject. And VAT is not a license tax.
It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed
on the sale, barter, lease or exchange of goods or properties or the sale or exchange of
services and the lease of properties purely for revenue purposes. To subject the press to its
payment is not to burden the exercise of its right any more than to make the press pay
income tax or subject it to general regulation is not to violate its freedom under the
Constitution. The Philippine Press Institute contends that by removing the exemption of the
press from the VAT while maintaining those granted to others, the EVAT Law discriminates
against the press. It also contends that it is unconstitutional to tax a constitutionally
guaranteed freedom (Freedom of the Press).
HELD: Since the law granted the press a privilege, the law could take back the privilege
anytime without offense to the Constitution. By granting exemptions, the State does not
forever waive the exercise of its sovereign prerogative. In withdrawing the exemption, the
law merely subjects the press to the same tax burden to which other businesses have
already been subject. The case of Grosjean v. American Press Co. cited by the PPI is
different
because in that case, the tax was found to be discriminatory because it was imposed only
on newspapers whose weekly circulation was over20,000. These papers were critical of a
certain senator who controlled the state legislature. The censorial motivation of the law was
thus evident. In this case, the motivation was not to censor but merely to raise revenues.
What the legislature cannot impose the press is a license tax, which is mainly for regulation.
It is unconstitutional because it lays a prior restraint on the exercise of a right. In this
instant case, the VAT is not a license tax because it is not a tax on the exercise of a
privilege or of a constitutional right. It is imposed on the sale of goods purely for revenue
purposes.
Tolentino vs. Secretary of Finance
GR 115455 Aug. 25, 1994 235 SCRA 630
Sec 5 FREEDOM OF RELIGION
TAXATION AND FREEDOM OF RELIGION (Art. III, Sec. 5)
Free exercise of Religion
The American Bible Society was a missionary society engaged in the distribution and sale of
bibles in the Philippines. The City Treasurer of Manila informed the Society that it was
conducting the business of general merchandising without a Mayor's permit and municipal
license, in violation of Ordinances 3000 and 2529. The Society paid the fees in protest,
claiming that it never received any profit from the sale of the materials. It then filed a
complaint to declare the municipal ordinances in question unconstitutional for violating the
no-establishment and free exercise clause of the Constitution.
ISSUE: Whether the Society is required to pay the fees under the two ordinances.
HELD: No, the Society is NOT required to pay.
Ordinance 3000 requires one to obtain a Mayors permit before engaging in any business,
trade, or occupation, except those on which the city is not alIowed to impose a license or
tax. Ordinance 2529 requires the quarterly payment of license fees based on gross sales
from, among others, retail dealers in new merchandise, such as those engaged in the sale
of books. The constitutional guaranty of the free exercise and enjoyment of religious
profession and worship carries with it the right to disseminate religious information. Any
restraint of such right can only be justified on the grounds that there is a clear and present
danger of a substantive evil which the State has the right to prevent. The power to tax the
exercise of a privilege is the power to control or suppress its enjoyment. Those who can tax
the exercise of a religious practice can make its exercise so costly as to deprive it of the
resources necessary for its maintenance.
In this case, the act of selling bibles is purely religious and does not fall under the
provisions of the city ordinances. Even if the price asked for the bibles and other religious
pamphlets was sometimes a little bit higher than their actual cost, it cannot mean that the
Society was engaged in the business or occupation of selling merchandise for profit. For this
reason, Ordinance 2529, which imposes a license tax on the exercise of the right to sell
religious materials, cannot be applied to the Society, for in doing so, it would impair its free
exercise and enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs. On the other hand, Ordinance 3000, which does not
impose any charge upon the enjoyment of a right granted by the Constitution nor tax the
exercise or religious practices, cannot be considered unconstitutional even if applied to the
Society. However, since Ordinance 2529 is not applicable to the Society, the City of Manila
is powerless to license or tax the business of the Society. Hence, Ordinance 3000 is also
inapplicable to the business of the Society.
A Municipal license tax on the sale of bibles and religious articles by a non-stock, non-profit
missionary organization at minimal profit constitutes curtailment of religious freedom and
worship which is guaranteed by the Constitution. However the income of such organizations
from any activity conducted for profit or from any of their property, real or personal,
regardless of the disposition made of such income, not in pursuance to its religious activity
is taxable.
American Bible Society v. City of Manila 101 Phil 386
[G.R. No. L-9637. April 30, 1957.] AMERICAN BIBLE SOCIETY, plaintiff-appellant, vs. CITY
OF MANILA,
SYLLABUS
1.
STATUTES; SIMULTANEOUS REPEAL AND RE-ENACTMENT; EFFECT OF REPEAL UPON
RIGHTS AND LIABILITIES WHICH ACCRUED UNDER THE ORIGINAL STATUTE. Where the
old statute is repealed in its entirety and by the same enactment re-enacts all or certain
portions of the pre-existing law, the majority view holds that the rights and liabilities which
have accrued under the original statute are preserved and may be enforced, since the reenactment neutralizes the repeal, therefore continuing the law in force without interruption.
(Crawford, Statutory Construction, Sec. 322). In the case at bar, Ordinances Nos. 2529 and
3000 of the City of Manila were enacted by the Municipal Board of the City of Manila by
virtue of the power granted to it by section 2444, Subsection (m-2) of the Revised
Administrative Code, superseded on June 13, 1949, by section 13, Subsection (o) of
Republic Act No. 409, known as the Revised Charter of the City of Manila. The only essential
difference between these two provisions is that while Subsection (m-2) prescribes that the
combined total tax of any dealer or manufacturer, or both, enumerated under Subsections
(m-1) and (m-2), whether dealing in one or all of the articles mentioned therein, shall not
be in excess of P500 per annum, the corresponding Section 18, subsection (o) of Republic
Act No. 409, does not contain any limitation as to the amount of tax or license fee that the
retail dealer has to pay per annum. Hence, and in accordance with the weight of authorities
aforementioned, City ordinances Nos. 2529 and 3000 are still in force and effect.
2.
MUNICIPAL TAX; RETAIL DEALERS IN GENERAL MERCHANDISE; ORDINANCE
PRESCRIBING TAX NEED NOT BE APPROVED BY THE PRESIDENT TO BE EFFECTIVE. The
business of "retail dealers in general merchandise" is expressly enumerated in subsection
(o), section 18 of Republic Act No. 409: hence, an ordinance prescribing a municipal tax on
said business does not have to be approved by the President to be effective, as it is not
among those businesses referred to in subsection (ii) Section 18 of the same Act subject to
the approval of the President.
3.
CONSTITUTIONAL LAW; RELIGIOUS FREEDOM; DISSEMINATION OF RELIGIOUS
INFORMATION, WHEN MAY BE RESTRAINED; PAYMENT OF LICENSE FEE, IMPAIRS FREE
EXERCISE OF RELIGION. The constitutional guaranty of the free exercise and enjoyment
of religious profession and worship carries with it the right to disseminate religious
information. Any restraint of such right can only be justified like other restraints of freedom
of expression on the grounds that there is a clear and present danger of any substantive
evil which the State has the right to prevent." (Taada and Fernando on the Constitution of
the Philippines, Vol. I, 4th ed., p. 297). In the case at bar, plaintiff is engaged in the
distribution and sales of bibles and religious articles. The City Treasurer of Manila informed
the plaintiff that it was conducting the business of general merchandise without providing
itself with the necessary Mayor's permit and municipal license, in violation of Ordinance No.
3000, as amended, and Ordinance No. 2529, as amended, and required plaintiff to secure
the corresponding permit and license. Plaintiff protested against this requirement and
claimed that it never made any profit from the sale of its bibles. Held: It is true the price
asked for the religious articles was in some instances a little bit higher than the actual cost
of the same, but this cannot mean that plaintiff was engaged in the business or occupation
of selling said "merchandise" for profit. For this reasons, the provisions of City Ordinance
No. 2529, as amended, which requires the payment of license fee for conducting the
business of general merchandise, cannot be applied to plaintiff society, for in doing so, it
would impair its free exercise and enjoyment of its religious profession and worship, as well
as its rights of dissemination of religious beliefs. Upon the other hand, City Ordinance No.
3000, as amended, which requires the obtention of the Mayor's permit before any person
can engage in any of the businesses, trades or occupations enumerated therein, does not
impose any charge upon the enjoyment of a right granted by the Constitution, nor tax the
exercise of religious practices. Hence, it cannot be considered unconstitutional, even if
applied to plaintiff Society. But as Ordinance No. 2529 is not applicable to plaintiff and the
City of Manila is powerless to license or tax the business of plaintiff society involved herein,
for the reasons above stated, Ordinance No. 3000 is also inapplicable to said business,
trade or occupation of the plaintiff.
DECISION
Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly
registered and doing business in the Philippines through its Philippine agency established in
Manila in November, 1898, with its principal office at 636 Isaac Peral in said City. The
defendant-appellee is a municipal corporation with powers that are to be exercised in
conformity with the provisions of Republic Act No. 409, known as the Revised Charter of the
City of Manila.
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling
bibles and/or gospel portions thereof (except during the Japanese occupation) throughout
the Philippines and translating the same into several Philippine dialects. On May 29, 1953,
the acting City Treasurer of the City of Manila informed plaintiff that it was conducting the
business of general merchandise since November, 1945, without providing itself with the
necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as
amended, and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure,
within three days, the corresponding permit and license fees, together with compromise
covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the total
sum of P5,821.45 (Annex A).
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff
deposit and pay under protest the sum of P5,891.45, if suit was to be taken in court
regarding the same (Annex B). To avoid the closing of its business as well as further fines
and penalties in the premises, on October 24, 1953, plaintiff paid to the defendant under
protest the said permit and license fees in the aforementioned amount, giving at the same
time notice to the City Treasurer that suit would be taken in court to question the legality of
the ordinances under which the said fees were being collected (Annex C), which was done
on the same date by filing the complaint that gave rise to this action. In its complaint
plaintiff prays that judgment be rendered declaring the said Municipal Ordinance No. 3000,
as amended, and Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and
that the defendant be ordered to refund to the plaintiff the sum of P5,891.45 paid under
protest, together with legal interest thereon, and the costs, plaintiff further praying for such
other relief and remedy as the court may deem just and equitable.
Defendant answered the complaint, maintaining in turn that said ordinances were enacted
by the Municipal Board of the City of Manila by virtue of the power granted to it by section
2444, subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949,
by section 18, subsection (1) of Republic Act No. 409, known as the Revised Charter of the
City of Manila, and praying that the complaint be dismissed, with costs against plaintiff. This
answer was replied by the plaintiff reiterating the unconstitutionality of the often- repeated
ordinances.
Before trial the parties submitted the following stipulation of facts:
"COME NOW the parties in the above-entitled case, thru their undersigned attorneys and
respectfully submit the following stipulation of facts:
1.
That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac
Peral, Manila, Bibles, New Testaments, bible portions and bible concordance in English and
other foreign languages imported by it from the United States as well as Bibles, New
Testaments and bible portions in the local dialects imported and/or purchased locally; that
from the fourth quarter of 1945 to the first quarter of 1953 inclusive the sales made by the
plaintiff were as follows:
Quarter
Amount of Sales
4th quarter 1945
P1,244.21
1st quarter 1946
2,206.85
2nd quarter 1946
1,950.38
3rd quarter 1946
2,235.99
4th quarter 1946
3,256.04
1st quarter 1947
13,241.07
2nd quarter 1947
15,774.55
3rd quarter 1947
14,654.13
4th quarter 1947
12,590.94
1st quarter 1948
11,143.90
2nd quarter 1948
14,715.26
3rd quarter 1948
38,333.83
4th quarter 1948
16,179.90
1st quarter 1949
23,975.10
2nd quarter 1949
17,802.08
3rd quarter 1949
16,640.79
4th quarter 1949
15,961.38
1st quarter 1950
18,562.46
2nd quarter 1950
21,816.32
3rd quarter 1950
25,004.55
4th quarter 1950
45,287.92
1st quarter 1951
37,841.21
2nd quarter 1951
29,103.98
3rd quarter 1951
20,181.10
4th quarter 1951
22,968.91
1st quarter 1952
23,002.65
2nd quarter 1952
17,626.96
3rd quarter 1952
17,921.01
4th quarter 1952
24,180.72
1st quarter 1953
29,516.21
2.
That the parties hereby reserve the right to present evidence of other facts not
herein stipulated.
WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties
may present further evidence on their behalf (Record on Appeal, pp. 15-16)".
When the case was set for hearing, plaintiff proved, among other things, that it has been in
existence in the Philippines since 1899, and that its parent society is in New York, United
States of America; that its contiguous real properties located at Isaac Peral are exempt
from real estate taxes; and that it was never required to pay any municipal license fee or
tax before the war, nor does the American Bible Society in the United States pay any
license fee or sales tax for the sale of bible therein. Plaintiff further tried to establish that it
never made any profit from the sale of its bibles, which are disposed of for as low as one
third of the cost, and that in order to maintain its operating cost it obtains substantial
remittances from its New York office and voluntary contributions and gifts from certain
churches, both in the United States and in the Philippines, which are interested in its
missionary work. Regarding plaintiff's contention of lack of profit in the sale of bibles,
defendant retorts that the admissions of plaintiff-appellant's lone witness who testified on
cross-examination that bibles bearing the price of 70 cents each from plaintiff-appellant's
New York office are sold here by plaintiff- appellant at P1.30 each; those bearing the price
of $4.50 each are sold here at P10 each; those bearing the price of $7 each are sold here at
P15 each; and those bearing the price of $11 each are sold here at P22 each, clearly show
that plaintiff's contention that it never makes any profit from the sale of its bible, is
evidently untenable.
After hearing the Court rendered judgment, the last part of which is as follows:
"As may be seen from the repealed section (m-2) of the Revised Administrative Code and
the repealing portions (o) of section 18 of Republic Act No. 409, although they seemingly
differ in the way the legislative intent is expressed, yet their meaning is practically the same
for the purpose of taxing the merchandise mentioned in said legal provisions, and that the
taxes to be levied by said ordinances is in the nature of percentage graduated taxes (Sec. 3
of Ordinance No. 3000, as amended, and Sec. 1, Group 2, of Ordinance No. 2529, as
amended by Ordinance No. 3364).
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so holds
that this case should be dismissed, as it is hereby dismissed, for lack of merits, with costs
against the plaintiff."
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which
certified the case to Us for the reason that the errors assigned to the lower Court involved
only questions of law.
Appellant contends that the lower Court erred:
1.
In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not
unconstitutional;
2.
In holding that subsection m-2 of Section 2444 of the Revised Administrative Code
under which Ordinances Nos. 2529 and 3000 were promulgated, was not repealed by
Section 18 of Republic Act No. 409;
3.
In not holding that an ordinance providing for percentage taxes based on gross sales
or receipts, in order to be valid under the new Charter of the City of Manila, must first be
approved by the President of the Philippines; and
4.
In holding that, as the sales made by the plaintiff-appellant have assumed
commercial proportions, it cannot escape from the operation of said municipal ordinances
under the cloak of religious privilege.
The issues. As may be seen from the preceding statement of the case, the issues
involved in the present controversy may be reduced to the following: (1) whether or not the
ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and 3364, are
constitutional and valid; and (2) whether the provisions of said ordinances are applicable or
not to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines,
provides that:
"(7)
No law shall be made respecting an establishment of religion, or prohibiting the free
exercise thereof, and the free exercise and enjoyment of religious profession and worship,
without discrimination or preference, shall forever be allowed. No religion test shall be
required for the exercise of civil or political rights."
Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos.

2529 and 3000, as respectively amended, are unconstitutional and illegal in so far as its
society is concerned, because they provide for religious censorship and restrain the free
exercise and enjoyment of its religious profession, to wit: the distribution and sale of bibles
and other religious literature to the people of the Philippines.
Before entering into a discussion of the constitutional aspect of the case, We shall first
consider the provisions of the questioned ordinances in relation to their application to the
sale of bibles, etc. by appellant. The records show that by letter of May 29, 1953 (Annex A),
the City Treasurer required plaintiff to secure a Mayor's permit in connection with the
society's alleged business of distributing and selling bibles, etc. and to pay permit dues in
the sum of P35 for the period covered in this litigation, plus the sum of P35 for compromise
on account of plaintiff's failure to secure the permit required by Ordinance No. 3000 of the
City of Manila, as amended. This Ordinance is of general application and not particularly
directed against institutions like the plaintiff, and it does not contain any provisions
whatsoever prescribing religious censorship nor restraining the free exercise and enjoyment
of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:
"SEC. 1.
PERMITS NECESSARY. It shall be unlawful for any person or entity to
conduct or engage in any of the businesses, trades, or occupations enumerated in Section 3
of this Ordinance or other businesses, trades, or occupations for which a permit is required
for the proper supervision and enforcement of existing laws and ordinances governing the
sanitation, security, and welfare of the public and the health of the employees engaged in
the business specified in said section 3 hereof, WITHOUT FIRST HAVING OBTAINED A
PERMIT THEREFOR FROM THE MAYOR AND THE NECESSARY LICENSE FROM THE CITY
TREASURER."
The business, trade or occupation of the plaintiff involved in this case is not particularly
mentioned in Section 3 of the Ordinance, and the record does not show that a permit is
required therefor under existing laws and ordinances for the proper supervision and
enforcement of their provisions governing the sanitation, security and welfare of the public
and the health of the employees engaged in the business of the plaintiff. However, section 3
of Ordinance 3000 contains item No. 79, which reads as follows:
"79.
All other businesses, trades or occupations not mentioned in this Ordinance, except
those upon which the City is not empowered to license or to tax . . . P5.00".
Therefore, the necessity of the permit is made to depend upon the power of the City to
license or tax said business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required the society to pay
from the 4th quarter of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including
the sum of P50 as compromise, Ordinance No. 2529, as amended by Ordinances Nos. 2779,
2821 and 3028 prescribes the following:
"SEC. 1.
FEES. Subject to the provisions of section 578 of the Revised Ordinances of
the City of Manila, as amended, there shall be paid to the City Treasurer for engaging in any
of the businesses or occupations below enumerated, quarterly, license fees based on gross
sales or receipts realized during the preceding quarter in accordance with the rates herein
prescribed: PROVIDED, HOWEVER, That a person engaged in any business or occupation for
the first time shall pay the initial license fee based on the probable gross sales or receipts
for the first quarter beginning from the date of the opening of the business as indicated
herein for the corresponding business or occupation.
xxx
xxx
xxx
GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are not yet
subject to the payment of any municipal tax, such as (1) retail dealers in general
merchandise; (2) retail dealers exclusively engaged in the sale of . . . books, including
stationery.
xxx
xxx
xxx
As may be seen, the license fees required to be paid quarterly- in Section 1 of said
Ordinance No. 2529, as amended, are not imposed directly upon any religious institution
but upon those engaged in any of the business or occupations therein enumerated, such as
retail "dealers in general merchandise" which, it is alleged, cover the business or occupation
of selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m2) of said legal body, as amended by Act No. 3659, approved on December 8, 1929,
empowers the Municipal Board of the City of Manila:
"(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or
both, and (b) retail dealers in new (not yet used) merchandise, which dealers are not yet
subject to the payment of any municipal tax.
"For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in
general merchandise, and (2) retail dealers exclusively engaged in the sale of (a) textiles . .
. (e) books, including stationery paper and office supplies . . . PROVIDED, HOWEVER, That
the combined total tax of any debtor or manufacturer, or both, enumerated under these
subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned herein,
SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS PER ANNUM."
and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended,
were enacted in virtue of the power that said Act No. 3669 conferred upon the City of
Manila. Appellant, however, contends that said ordinances are no longer in force and effect
as the law under which they were promulgated has been expressly repealed by Section 102
of Republic Act No. 409 passed on June 18, 1949, known as the Revised Manila Charter.
Passing upon this point the lower Court categorically stated that Republic Act No. 409
expressly repealed the provisions of Chapter 60 of the Revised Administrative Code but in
the opinion of the trial Judge, although Section 244 (m-2) of the former Manila Charter and
section 18 (o) of the new seemingly differ in the way the legislative intent was expressed,
yet their meaning is practically the same for the purpose of taxing the merchandise
mentioned in both legal provisions and, consequently, Ordinances Nos. 2529 and 3000, as
amended, are to be considered as still in full force and effect uninterruptedly up to the
present.
"Often the legislature, instead of simply amending the preexisting statute, will repeal the
old statute in its entirety and by the same enactment re-enact all or certain portions of the
preexisting law. Of course, the problem created by this sort of legislative action involves
mainly the effect of the repeal upon rights and liabilities which accrued under the original
statute. Are those rights and liabilities destroyed or preserved? The authorities are divided
as to the effect of simultaneous repeals and re- enactments. Some adhere to the view that
the rights and liabilities accrued under the repealed act are destroyed, since the statutes
from which they sprang are actually terminated, even though for only a very short period of
time. Others, and they seem to be in the majority, refuse to accept this view of the
situation, and consequently maintain that all rights and liabilities which have accrued under
the original statute are preserved and may be enforced, since the re-enactment neutralizes
the repeal, therefore continuing the law in force without interruption". (Crawford-Statutory
Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No. 409 introduces a new and
wider concept of taxation and is so different from the provisions of Section 2444(m-2) that
the former cannot be considered as a substantial re-enactment of the provisions of the
latter. We have quoted above the provisions of section 2444 (m-2) of the Revised
Administrative Code and We shall now copy hereunder the provisions of Section 18,
subdivision (o) of Republic Act No. 409, which reads as follows:
"(o)
To tax and fix the license fee on dealers in general merchandise, including importers
and indentors, except those dealers who may be expressly subject to the payment of some
other municipal tax under the provisions of this section.
Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail
dealers. For purposes of the tax on retail dealers, general merchandise shall be classified
into four main classes: namely (1) luxury articles, (2) semi-luxury articles, (3) essential
commodities, and (4) miscellaneous articles. A separate license shall be prescribed for each
class but where commodities of different classes are sold in the same establishment, it shall
not be compulsory for the owner to secure more than one license if he pays the higher or
highest rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax as
such, as may be provided by ordinance.
For purposes of this section, the term 'General merchandise' shall include poultry and
livestock, agricultural products, fish and other allied products."
The only essential difference that We find between these two provisions that may have any
bearing on the case at bar, is that while subsection (m-2) prescribes that the combined
total tax of any dealer or manufacturer, or both, enumerated under subsections (m-1) and
(m- 2), whether dealing in one or all of the articles mentioned therein, shall not be in
excess of P500 per annum, the corresponding section 18, subsection (o) of Republic Act No.
409, does not contain any limitation as to the amount of tax or license fee that the retail
dealer has to pay per annum. Hence, and in accordance with the weight of the authorities
above referred to that maintain that "all rights and liabilities which have accrued under the
original statute are preserved and may be enforced, since the reenactment neutralizes the
repeal, therefore continuing the law in force without interruption", We hold that the
questioned ordinances of the City of Manila are still in force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be
approved by the President of the Philippines as per section 18, subsection (ii) of Republic
Act No. 409, which reads as follows:
"(ii) To tax, license and regulate any business, trade or occupation being conducted within
the City of Manila, not otherwise enumerated in the preceding subsections, including
percentage taxes based on gross sales or receipts, subject to the approval of the
PRESIDENT, except amusement taxes."
but this requirement of the President's approval was not contained in section 2444 of the
former Charter of the City of Manila under which Ordinance No. 2529 was promulgated.
Anyway, as stated by appellee's counsel, the business of "retail dealers in general
merchandise" is expressly enumerated in subsection (o), section 18 of Republic Act No.
409; hence, an ordinance prescribing a municipal tax on said business does not have to be
approved by the President to be effective, as it is not among those referred to in said
subsection (ii). Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the authority granted to it
by law.
The question that now remains to be determined is whether said ordinances are
inapplicable, invalid or unconstitutional if applied to the alleged business of distribution and
sale of bibles to the people of the Philippines by a religious corporation like the American
Bible Society, plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028,
appellant contends that it is unconstitutional and illegal because it restrains the free
exercise and enjoyment of the religious profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been spoken of
as 'a profession of faith to an active power that binds and elevates man to its Creator'
(Aglipay vs. Ruiz, 64 Phil., 201). It has reference to one's views of his relations to His
Creator and to the obligations they impose of reverence to His being and character, and
obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of the
free exercise and enjoyment of religious profession and worship carries with it the right to
disseminate religious information. Any restraint of such right can only be justified like other
restraints of freedom of expression on the grounds that there is a clear and present danger
of any substantive evil which the State has the right to prevent". (Taada and Fernando on
the Constitution of the Philippines, Vol. I, 4th ed., p. 297). In the case at bar the license fee
herein involved is imposed upon appellant for its distribution and sale of bibles and other
religious literature.
"In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a
license be obtained before a person could canvass or solicit orders for goods, paintings,
pictures, wares or merchandise cannot be made to apply to members of Jehovah's

Witnesses who went about from door to door distributing literature and soliciting people to
'purchase' certain religious books and pamphlets, all published by the Watch Tower Bible &
Tract Society. The 'price' of the books was twenty-five cents each, the 'price' of the
pamphlets five cents each. It was shown that in making the solicitations there was a
request for additional 'contribution' of twenty-five cents each for the books and five cents
each for the pamphlets. Lesser sum were accepted, however, and books were even donated
in case interested persons were without funds.
On the above facts the Supreme Court held that it could not be said that petitioners were
engaged in commercial rather than a religious venture. Their activities could not be
described as embraced in the occupation of selling books and pamphlets. Then the Court
continued:
'We do not mean to say that religious groups and the press are free from all financial
burdens of government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L.
ed. 660, 668, 56 S. Ct. 444. We have here something quite different, for example, from a
tax on the income of one who engages in religious activities or a tax on property used or
employed in connection with those activities. It is one thing to impose a tax on the income
or property of a preacher. It is quite another thing to exact a tax from him for the privilege
of delivering a sermon. The tax imposed by the City of Jeannette is a flat license tax,
payment of which is a condition of the exercise of these constitutional privileges. The power
to tax the exercise of a privilege is the power to control or suppress its enjoyment. . . .
Those who can tax the exercise of this religious practice can make its exercise so costly as
to deprive it of the resources necessary for its maintenance. Those who can tax the
privilege of engaging in this form of missionary evangelism can close all its doors to all
'those who do not have a full purse. Spreading religious beliefs in this ancient and
honorable manner would thus be denied the needy. . . .
It is contended however that the fact that the license tax can suppress or control this
activity is unimportant if it does not do so. But that is to disregard the nature of this tax. It
is a license tax a flat tax imposed on the exercise of a privilege granted by the Bill of
Rights . . . The power to impose a license tax on the exercise of these freedoms is indeed as
potent as the power of censorship which this Court has repeatedly struck down. . . . It is not
a nominal fee imposed as a regulatory measure to defray the expenses of policing the
activities in question. It is in no way apportioned. It is flat license tax levied and collected as
a condition to the pursuit of activities whose enjoyment is guaranteed by the constitutional
liberties of press and religion and inevitably tends to suppress their exercise. That is almost
uniformly recognized as the inherent vice and evil of this flat license tax.'
Nor could dissemination of religious information be conditioned upon the approval of an
official or manager even if the town were owned by a corporation as held in the case of
Marsh vs. State of Alabama (326 U.S. 501) or by the United States itself as held in the case
of Tucker vs. Texas (326 U.S. 517). In the former case the Supreme Court expressed the
opinion that the right to enjoy freedom of the press and religion occupies a preferred
position as against the constitutional right of property owners.
'When we balance the constitutional rights of owners of property against those of the people
to enjoy freedom of press and religion, as we must here, we remain mindful of the fact that
the latter occupy a preferred position. . . . In our view the circumstance that the property
rights to the premises where the deprivation of property here involved, took place, were
held by others than the public, is not sufficient to justify the State's permitting a corporation
to govern a community of citizens so as to restrict their fundamental liberties and the
enforcement of such restraint by the application of a State statute.'" (Taada and Fernando
on the Constitution of the Philippines, Vol. I, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal
Revenue Code, provides:
"SEC. 27.
EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations
shall not be taxed under this Title in respect to income received by them as such
"(e)
Corporations or associations organized and operated exclusively for religious,
charitable, . . . or educational purposes, . . Provided however, That the income of whatever
kind and character from any of its properties, real or personal, or from any activity
conducted for profit, regardless of the disposition made of such income, shall be liable to
the tax imposed under this Code;"
Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff
from this tax and says that such exemption clearly indicates that the act of distributing and
selling bibles, etc. is purely religious and does not fall under the above legal provisions.
It may be true that in the case at bar the price asked for the bibles and other religious
pamphlets was in some instances a little bit higher than the actual cost of the same, but
this cannot mean that appellant was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason We believe that the provisions of City of Manila
Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would
impair its free exercise and enjoyment of its religious profession and worship as well as its
rights of dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the obtention of the
Mayor's permit before any person can engage in any of the businesses, trades or
occupations enumerated therein, We do not find that it imposes any charge upon the
enjoyment of a right granted by the Constitution, nor tax the exercise of religious practices.
In the case of Coleman vs. City of Griffin, 189 S.E. 427, this point was elucidated as
follows:
"An ordinance by the City of Griffin, declaring that the practice of distributing either by hand
or otherwise, circulars, handbooks, advertising, or literature of any kind, whether said
articles are being delivered free, or whether same are being sold within the city limits of the
City of Griffin, without first obtaining written permission from the city manager of the City
of Griffin, shall be deemed a nuisance and punishable as an offense against the City of
Griffin, does not deprive defendant of his constitutional right of the free exercise and
enjoyment of religious profession and worship, even though it prohibits him from
introducing and carrying out a scheme or purpose which he sees fit to claim as a part of his
religious system."
It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional,
even if applied to plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as
amended, is not applicable to plaintiff-appellant and defendant-appellee is powerless to
license or tax the business of plaintiff Society involved herein for, as stated before, it would
impair plaintiff's right to the free exercise and enjoyment of its religious profession and
worship, as well as its rights of dissemination of religious beliefs, We find that Ordinance
No. 3000, as amended, is also inapplicable to said business, trade or occupation of the
plaintiff.
Wherefore, and on the strength of the foregoing considerations, We hereby reverse the
decision appealed from, sentencing defendant to return to plaintiff the sum of P5,891.45
unduly collected from it. Without pronouncement as to costs. It is so ordered.
Freedom of Religion
The Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived
from the sales are used to subsidize the cost of printing copies which are given free to those
who cannot afford to pay so that to tax the sales would be to increase the price, while
reducing the volume of sale. Granting that to be the case, the resulting burden on the
exercise of religious freedom is so incidental as to make it difficult to differentiate it from
any other economic imposition that might make the right to disseminate religious doctrines
costly. The registration fee imposed by Section 107 of the NIRC, as amended by R.A. No.
7716, although fixed in amount, is really just to pay for the expenses of registration and
enforcement of provisions such as those relating to accounting in Section 236 of the NIRC.
That the PBS distributes free bibles and therefore is not liable to pay the VAT does not
excuse it from the payment of this fee because it also sells some copies. At any rate
whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is
assessed this tax by the Commissioner of Internal Revenue.
The Philippine Bible Society claims that the imposition of VAT on the
sales of its bibles constitutes an infringement of its religious freedom because the tax
increases the price of the bibles while reducing the volume of sales. It also claims
exemption from the registration fee of P1,000.
HELD: The resulting burden on the exercise of religious freedom is so incidental as to make
it difficult to differentiate it from any other economic imposition that might make the right
to disseminate religious doctrines costly. Otherwise to follow petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible burden on the
right of the preacher to make a sermon. The registration fee is really just to pay for the
expenses of registration and enforcement of the provisions of the law. Even if PBS is
excused from paying taxes on those bibles that it distributes for free, it still has to pay the
registration fee since it also engages in the sale of bibles.
Tolentinovs Secretary of Finance GR 115455 Aug. 25, 1994 235 SCRA 630
Sec 10 NON-IMPAIRMENT CLAUSE (Art. III, sec 10)
The obligation of a contract is impaired when its terms or conditions are changed by law or
by a party without the consent of the other, thereby weakening the position or rights of the
latter. (Edwards vs Kearney, 96 US
607)
Examples:
a. When a tax exemption based on a contract is revoked by a later taxing statute

(Cassanova vs. Hord)
b. A taxpayer enters into a compromise with the Bureau of Internal Revenue; this cannot be
impaired without violating the Constitution.
Rationale:
When the state grants an exemption on the basis of a contract, consideration is presumed
to be paid to the State, and corollarily the public is supposed to receive the whole equivalent
therefore.
Rules:
a. When the exemption is bilaterally agreed upon between the government and the taxpayer
it cannot be withdrawn without violating the non-impairment clause.
b. When it is unilaterally granted by law and the same is withdrawn by virtue of another
law-there is no violation.
c. When the exemption is granted under a franchise it may be revoked because under the
Constitution, a franchise is "subject to amendment, "alteration, or repeal" by Congress. (Art.
XII, Sec. 11, 1987 Constitution)
This limitation is set by Sec. 10, Art. III 1987 Constitution. The obligation of a contract is
impaired when its terms or conditions are changed by law or by a party without consent of
the other thereby weakening the position or rights of the latter (Edwards v. Kearney, 96 US
607). Thus, there is impairment by law when a tax exemption based on a contract is
revoked by a later taxing statute ( Cassanova v. Hord,8 Phil. 126 ).
How can the constitutional prohibition against the impairment of the obligation of contracts
operate as a limitation on the power to tax.
To illustrate: Congress granted a franchise to ABC Shipping lines for the operation of a
passenger/cargo service between Cebu and Surigao subject to the condition that ABC
carries government mails free of charge. It then pays the franchise in lieu of other taxes.
Since the grant was for a valid consideration, it may be considered as a contract and any
withdrawal of such franchise or exemption would impair the obligations of contracts.
However, if there was no consideration, it would be a gratuitous grant and not a contractual
agreement and therefore the exemption could be withdrawn without impairing the
obligations of contracts.
Can impairment clause prevail over police power?
Ans. No. Non-impairment clause must yield to the police power of the state [Oposo v.
Factoran, et. al., 224 SCRA 792(1994)] because public welfare is paramount over
impairment to justify state interference through police power (Juarez v. Court of Appeals,
et. al., 214 SCRA 475 (1992)].
Non- Impairment clause; Delegation to LGUs
Pursuant to the Local Government Code of 1991, the province of Laguna
enacted an ordinance imposing on businesses enjoying a franchise a franchise tax of 50% of
1% of gross annual receipts. Meralco protested
payment on the ground that the franchise tax that it was paying to the
National Government already included the franchise tax imposed by the
province.
ISSUE: Whether the province of Laguna had the power to levy the
franchise tax.
HELD: Yes. Local governments do not have the inherent power to tax except to the extent
that such power might be delegated to them. Under the
Constitution specifically Article X, there has been a general delegation of that power in favor
of LGUs. In the present Constitution, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the
viability and self-sufficiency and autonomy of LGUs by directly granting them general and
broad tax powers.
Meralco v. Province of Laguna
Contractual tax exemptions should not be confused with tax exemptions granted under
franchises.
Contractual tax exemptions should not be confused with tax exemptions granted under
franchises.Contractual tax exemptions are those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in which the government,
acting in its private capacity, sheds its cloak of authority and waives its governmental
immunity. Tax exemptions of this kind may not be revoked without impairing the
obligations of contracts. On the other hand, a franchise partakes of the nature of a grant
which is always subject to amendment, alteration, or repeal by Congress when the common
good so requires.
PAGCOR VS Bureau of Internal Revenue GR172087 March 15, 2011
Smart Communications Inc. vs City of Davao GR 155491 Sept 16, 2008
Digital Telecom Phils Inc. vs Province of Pangasinan
GR 152543 February 23, 2007
La Bugal-Blaan Tribal AssnIncvs Victor Ramos December 1, 2004
TAXATION AND NON-IMPAIRMENT OF CONTRACTS
Authorities from numerous sources are cited by the plaintiffs, but none of them show that a
lawful tax on a new subject, or an increased tax on an old one, interferes with a contract or
impairs its obligation, within the meaning of the Constitution. Even though such taxation
may affect particular contracts, as it may increase the debt of one person and lessen the
security of another, or may impose additional burdens upon one class and release the
burdens of another, still the tax must be paid unless prohibited by the Constitution, nor can
it be said that it impairs the obligation of any existing contract in its true legal sense."
Indeed not only existing laws but also "the reservation of the essential attributes of
sovereignty, is read into contracts as a postulate of the legal order." Contracts must be
understood as having been made in reference to the possible exercise of the rightful
authority of the government and no obligation of contract can extend to the defeat of that
authority. Chamber of Real Estate Brokers Association (CREBA) claims that the law impairs
the obligations of contracts because the application of the tax to existing contracts of the
sale of real property by installment would result in substantial increases in monthly
amortizations, which the buyer did not anticipate at the time he entered into the contract. It
also claims that the law violates equal protection since the law exempts low-cost housing
from VAT but not middle class housing. It also claims that VAT being an indirect, regressive
tax, violates the constitutional mandate to provide a progressive system of taxation.
HELD: A tax on a new subject or an increased tax on an old one does not interfere with a
contract or impair its obligation. The essential attributes of sovereignty, such as the power
to tax are read into contracts. The obligation of contracts cannot defeat the rightful
authority of the government to tax by virtue of its sovereignty. As to the violation of equal
protection, the Court held that there was a substantial distinction between the homeless
poor and the middle class because the latter can afford to rent houses in the meantime that
they cannot yet buy their own. Hence there was a valid classification.
As to VAT being a regressive tax, the Constitution does not prohibit
regressive taxes. What it simply provides is that Congress shall evolve a progressive system
of taxation, which means that direct taxes are to be preferred and indirect taxes minimized.
VAT provides exemptions in favor of basic goods utilized by the lower income brackets and
its burden actually falls more on those goods that consumers from the higher income
bracket buy. Therefore, the tax is not repugnant to the Constitution.
THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL TREASURER, vs.
CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO)
[G.R. No. L45355. January 12, 1990.]
SYLLABUS
1.
TAXATION; FRANCHISE TAX; P.D. NO. 231, BEING A GENERAL LAW, DOES NOT
AMEND OR REPEAL SEC. 3 OF RA 6020; EXCEPTION. There is no provision in P.D. No.
231 expressly or impliedly amending or repealing Section 3 of R.A. No. 6020. The perceived
repugnancy between the two statutes should be very clear before the Court may hold that
the prior one has been repealed by the later, since there is no express provision to that
effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The rule is that a special and local
statute applicable to a particular case is not repealed by a later statute which is general in
its terms, provisions and application even if the terms of the general act are broad enough
to include the cases in the special law (id.) unless there is manifest intent to repeal or alter
the special law.
2.
ID.; ID.; PRESUMPTION. Republic Acts Nos. 3247, 3570 and 6020 are special laws
applicable only to CEPALCO, while P.D. No. 231 is a general tax law. The presumption is
that the special statutes are exceptions to the general law (P.D. No. 231) because they
pertain to a special charter granted to meet a particular set of conditions and
circumstances.
3.
ID.; ID.; EXEMPTING CLAUSE IN THE CONTRACT OF FRANCHISE; PURPOSE. The
provision "shall be in lieu of all taxes of every name and nature" in the franchise, this Court
pointed out that such exemption is part of the inducement for the acceptance of the
franchise and the rendition of public service by the grantee. As a charter is in the nature of
a private contract, the imposition of another franchise tax on the corporation by the local
authority would constitute an impairment of the contract between the government and the
corporation.
DECISION
The issue in this case is a legal one: whether or not a corporation whose franchise expressly
provides that the payment of the "franchise tax of three per centum of the gross earnings
shall be in lieu of all taxes and assessments of whatever authority upon privileges, earnings,
income, franchise, and poles, wires, transformers, and insulators of the grantee" (p. 20,
Rollo), is exempt from paying a provincial franchise tax.
Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a
franchise on June 17, 1961 under Republic Act No. 3247 to install, operate and maintain an
electric light, heat and power system in the City of Cagayan de Oro and its suburbs. Said
franchise was amended on June 21, 1963 by R.A. No. 3570 which added the municipalities
of Tagoloan and Opol to CEPALCO's sphere of operation, and was further amended on
August 4, 1969 by R.A. No. 6020 which extended its field of operation to the municipalities
of Villanueva and Jasaan.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
"Sec. 3.
In consideration of the franchise and rights hereby granted, the grantee shall
pay a franchise tax equal to three per centum of the gross earnings for electric current sold
under this franchise, of which two per centum goes into the National Treasury and one per
centum goes into the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan
and Cagayan de Oro City, as the case may be: Provided, That the said franchise tax of
three per centum of the gross earnings shall be in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee from which taxes and assessments the grantee
is hereby expressly exempted." (Emphasis supplied.)
On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which
provides:
"Sec. 9.
Franchise Tax. Any provision of special laws to the contrary
notwithstanding, the province may impose a tax on businesses enjoying franchise, based on
the gross receipts realized within its territorial jurisdiction, at the rate of not exceeding onehalf of one per cent of the gross annual receipts for the preceding calendar year.
In the case of newly started business, the rate shall not exceed three thousand pesos per
year. Sixty per cent of the proceeds of the tax shall accrue to the general fund of the
province and forty per cent to the general fund of the municipalities serviced by the
business on the basis of the gross annual receipts derived therefrom by the franchise
holder. In the case of a newly started business, forty per cent of the proceeds of the tax
shall be divided equally among the municipalities serviced by the business."
Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial
Revenue Ordinance No. 19, whose Section 12 reads:
"Sec. 12.
Franchise Tax. There shall be levied, collected and paid on businesses
enjoying franchise tax of one-half of one per cent of their gross annual receipts for the
preceding calendar year realized within the territorial jurisdiction of the province of Misamis
Oriental." (p. 27, Rollo.)
The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise
tax from CEPALCO. The company refused to pay, alleging that it is exempt from all taxes
except the franchise tax required by R.A. No. 6020. Nevertheless, in view of the opinion
rendered by the Provincial Fiscal, upon CEPALCO's request, upholding the legality of the
Revenue Ordinance, CEPALCO paid under protest on May 27, 1974 the sum of P4,276.28
and appealed the fiscal's ruling to the Secretary of Justice who reversed it and ruled in favor
of CEPALCO.
On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting
entirely the opinion of the Secretary of Justice.
On February 16, 1976, the Province filed in the Court of First Instance of Misamis Oriental a
complaint for declaratory relief praying, among others, that the Court exercise its power to
construe P.D. No. 231 in relation to the franchise of CEPALCO (R.A. No. 6020), and to
declare the franchise as having been amended by P.D. No. 231. The Court dismissed the
complaint and ordered the Province to return to CEPALCO the sum of P4,276.28 paid under
protest.
The Province has appealed to this Court, alleging that the lower court erred in holding that:
1)
CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was not
amended or repealed by P.D. No. 231;
2)
the imposition of the provincial franchise tax on CEPALCO would subvert the purpose
of P.D. No. 231;
3)
CEPALCO is exempt from paying the provincial franchise tax; and 4) petitioner
should refund CEPALCO's tax payment of P4,276.28.
We find no merit in the petition for review.
There is no provision in P.D. No. 231 expressly or impliedly amending or repealing Section 3
of R.A. No. 6020. The perceived repugnancy between the two statutes should be very clear
before the Court may hold that the prior one has been repealed by the later, since there is
no express provision to that effect (Manila Railroad Co. vs. Rafferty, 40 Phil. 224). The rule
is that a special and local statute applicable to a particular case is not repealed by a later
statute which is general in its terms, provisions and application even if the terms of the
general act are broad enough to include the cases in the special law (id.) unless there is
manifest intent to repeal or alter the special law.
Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO, while
P.D. No. 231 is a general tax law. The presumption is that the special statutes are
exceptions to the general law (P.D. No. 231) because they pertain to a special charter
granted to meet a particular set of conditions and circumstances.
The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of
whatever authority" except the three per centum (3%) tax on its gross earnings.
In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,
established by, or collected by any authority" found in the franchise of the Visayan Electric
Company was held to exempt the company from payment of the 5% tax on corporate
franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co. vs.
David, 49 O.G. [No. 4] 1385).
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and
nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510)
exempts the Manila Railroad from payment of internal revenue tax for its importations of
coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature
(Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No.
1497) justified the exemption of the Philippine Railway Company from payment of the tax
on its corporate franchise under Section 259 of the Internal Revenue Code, as amended by
R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal Revenue, 91 Phil. 35).
Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice
Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City of
Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it
was required to pay the corporate franchise tax under Section 259 of the Internal Revenue
Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal
Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such exemption is part of the
inducement for the acceptance of the franchise and the rendition of public service by the
grantee. As a charter is in the nature of a private contract, the imposition of another
franchise tax on the corporation by the local authority would constitute an impairment of
the contract between the government and the corporation.
Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen Gulf Electric
Power Company which provided that the company shall pay:
"tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and all
taxes . . . now or in the future . . . from which taxes . . . the grantee is hereby expressly
exempted and . . . no other tax . . . other than the franchise tax of 2% on the gross
receipts as provided for in the original franchise shall be collected."
exempts the company from paying the franchise tax under Section 259 of the National
Internal Revenue Code (Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power
Co., Inc., G.R. No. 23771, August 4, 1988).
On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc.,
Guagua Electric Company, Inc. were subjected to the 5% tax on corporate franchise under
Section 259 of the Internal Revenue Code, as amended, because Act No. 667 of the
Philippine Commission and the ordinance or resolutions granting their respective franchises
did not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs. Commissioner
of Internal Revenue, G.R. No. L-20499, June 30, 1965; Imus Electric Co. vs. Court of Tax
Appeals, G.R. No. L-22421, March 18, 1967; Guagua Electric Light vs. Collector of Internal
Revenue, G.R. No. L-23611, April 24, 1967).
Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has
made it crystal clear that the franchise tax provided in the Local Tax Code (P.D. No. 231,
Sec. 9) may only be imposed on companies with franchises that do not contain the
exempting clause. Thus it provides:
"The franchise tax imposed under local tax ordinance pursuant to Section 9 of the Local Tax
Code, as amended, shall be collected from businesses holding franchise but not from
business establishments whose franchise contain the 'in-lieu-of-all-taxes-proviso'."
Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is not applicable
here because what the Government sought to impose on Meralco in that case was not a
franchise tax but a compensating tax on the poles, wires, transformers and insulators which
it imported for its use.
WHEREFORE, the petition for review is denied, and the decision of the Court of First
Instance is hereby affirmed in toto. No costs. SO ORDERED.
Legislative Franchise
CEPALCO was the holder of a legislative franchise under which the 3% franchise tax on its
gross earning was "in lieu of all taxes and assessments of whatever authority upon
privileges, earnings, income, etc." from which the CEPALCO was expressly exempted. In
June 1965, a law was passed amending the Tax Code, making liable for income tax all
corporate taxpayers not specifically exempted under the tax code. Thus franchise
companies were subjected to income tax. In August 1969, the franchise of CEPALCO was
amended, reenacting the tax exemption of CEPALCO. The CIR assessed CEPALCO deficiency
income tax for the period June 1968-August 1969.
ISSUE: Whether CEPALCO enjoyed a tax exemption during the period of June 1968 to
August 1960.
HELD: No. Congress could impair CEPALCOs legislative franchise by passing a law making it
liable for income tax from which it was originally exempted. The constitution provides that a
franchise is subject to amendment, alteration, or repeal by Congress when the public
interest so requires. The law passed in June 1968 had the effect of withdrawing CEPALCO's
exemption from income tax, while the exemption was restored by the subsequent
amendment of CEPALCO's franchise, Hence, CEPALCO is liable for tax for the period in
which there was no exemption.
CEPALCO v. Commissioner of Internal Revenue
GR
L60126 September 25, 1985
Section 20 Non Imprisonment for Non-Payment of Debt
NON IMPRISONMENT FOR NON-PAYMENT OF POLL TAX
A poll tax is imposed on persons without any qualification. An example is the community tax
under Sec. 162 of the LGC which provides that a person or corporation who does not own
any real property, does not receive any income or even a minor may be permitted to pay
basic community tax and be issued a community tax certificate. One cannot be imprisoned
for non-payment of poll tax because payment thereof is not mandatory. Payment is merely
permissive; it cannot be imposed compulsorily upon taxpayers. While a person may not be
imprisoned for nonpayment of poll tax, he may be imprisoned for non- payment of other
kinds of taxes where the law so expressly provides.
This is constitutionally guaranteed and protected. Taxpayer's failure to pay the community
tax (formerly residence tax) will not cause imprisonment; however, he may be criminally
charged for committing falsification of community tax or for non-payment of other taxes if
the law so provides.
LEGISLATIVE DEPARTMENT
Art. VI sec 24 BILLS TO ORIGINATE FROM THE HOUSE OF REPRESENTATIVES
Tolentinovs Secretary of Finance GR 115525 October 30, 1995
Exclusive Origination from the House of Representatives

Section 24, Article VI of the Constitution provides:
SEC. 24.
All appropriations, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills shall originate exclusively in the House
of Representatives, but the Senate may propose or concur with amendments.
This Court expounded on the foregoing provision by holding that: "To begin with, it is not
the law but the revenue bill which is required by the Constitution to 'originate exclusively in
the House of Representatives. It is important to emphasize this, because a bill originating
the in the House may undergo such extensive changes in the Senate that the result may be
a rewriting of the whole. At this point, what is important to note is that, as a result of the
Senate action, a distinct bill may be produced. To insist that a revenue statute and not only
the bill which initiated the legislative process culminating in the enactment of the law must
substantially be the same as the House Bill would be to deny the Senate's power not only to
'concur with amendments: but also to 'propose amendments.' It would be to violate the coequality of the legislative power of the two houses of Congress and in fact, make the House
superior to the Senate."
It is not the law but the revenue bill which is required by the constitution
to originate
exclusively in the House of Representatives. A bill originating in the House may undergo
such extensive changes in the Senate that the result may be a rewriting of the whole bill.
The Constitution simply means that the initiative for filing the bills must come from the
House, on the theory that, elected as they are from the districts, the members of the House
can be expected to be more sensitive to the local needs and problems.
[G.R. No. 168056. October 18, 2005.] ABAKADA GURO PARTY LIST OFFICER SAMSON S.
ALCANTARA, ET AL., petitioners, vs. THE HON. EXECUTIVE SECRETARY EDUARDO R.
ERMITA, respondents.
[G.R. No. 168207. October 18, 2005.] AQUILINO Q. PIMENTEL, JR., ET AL., petitioners, vs.
EXECUTIVE SECRETARY EDUARDO R. ERMITA, ET AL., respondents.
[G.R. No. 168461. October 18, 2005.] ASSOCIATION OF PILIPINAS SHELL DEALERS, INC.,
ET AL., petitioners, vs. CESAR V. PURISIMA, ET AL., respondents.
[G.R. No. 168463. October 18, 2005.] FRANCIS JOSEPH G. ESCUDERO, ET AL., petitioners,
vs. CESAR V. PURISIMA, ET AL., respondents.
[G.R. No. 168730. October 18, 2005.] BATAAN GOVERNOR ENRIQUE T. GARCIA, JR.,
petitioner, vs. HON. SECRETARY EDUARDO R. ERMITA, ET AL., respondents.
RESOLUTION
Quoted hereunder, for your information, is a resolution of the Court of En Banc dated 18
October 2005
G.R. No. 168056 (ABAKADA Guro Party List Officer Samson S. Alcantara, et al. vs. The Hon.
Executive Secretary Eduardo R. Ermita); G.R. No. 168207 (Aquilino Q. Pimentel, Jr., et al.
vs. Executive Secretary Eduardo R. Ermita, et al.); G.R. No. 168461 (Association of Pilipinas
Shell Dealers, Inc., et al. vs. Cesar V. Purisima, et al.); G.R. No. 168463 (Francis Joseph G.
Escudero vs. Cesar V. Purisima, et al); and G.R. No. 168730 (Bataan Governor Enrique T.
Garcia, Jr. vs. Hon. Eduardo R. Ermita, et al.)
For resolution are the following motions for reconsideration of the Court's Decision dated
September 1, 2005 upholding the constitutionality of Republic Act No. 9337 or the VAT
Reform Act 1 :
1)
Motion for Reconsideration filed by petitioners in G.R. No. 168463, Escudero, et al.,
on the following grounds:
A.
THE DELETION OF THE "NO PASS ON PROVISIONS" FOR THE SALE OF PETROLEUM
PRODUCTS AND POWER GENERATION SERVICES CONSTITUTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION ON THE PART OF THE
BICAMERAL CONFERENCE COMMITTEE.
B.
REPUBLIC ACT NO. 9337 GROSSLY VIOLATES THE CONSTITUTIONAL IMPERATIVE
ON EXCLUSIVE ORIGINATION OF REVENUE BILLS UNDER 24, ARTICLE VI, 1987
PHILIPPINE CONSTITUTION.
C.
REPUBLIC ACT NO. 9337'S STAND-BY AUTHORITY TO THE EXECUTIVE TO INCREASE
THE VAT RATE, ESPECIALLY ON ACCOUNT OF THE EFFECTIVE RECOMMENDATORY POWER
GRANTED TO THE SECRETARY OF FINANCE, CONSTITUTES UNDUE DELEGATION OF
LEGISLATIVE AUTHORITY.
2)
Motion for Reconsideration of petitioner in G.R. No. 168730, Bataan Governor
Enrique T. Garcia, Jr., with the argument that burdening the consumers with significantly
higher prices under a VAT regime vis--vis a 3% gross tax renders the law unconstitutional
for being arbitrary, oppressive and inequitable.
and
3)
Motion for Reconsideration by petitioners Association of Pilipinas Shell Dealers, Inc.
in G.R. No. 168461, on the grounds that:
I.
This Honorable Court erred in upholding the constitutionality of Section 110(A)(2)
and Section 110(B) of the NIRC, as amended by the EVAT Law, imposing limitations on the
amount of input VAT that may be claimed as a credit against output VAT, as well as Section
114(C) of the NIRC, as amended by the EVAT Law, requiring the government or any of its
instrumentalities to withhold a 5% final withholding VAT on their gross payments on
purchases of goods and services, and finding that the questioned provisions:
A.
are not arbitrary, oppressive and confiscatory as to amount to a deprivation of
property without due process of law in violation of Article III, Section 1 of the 1987
Philippine Constitution;
B.
do not violate the equal protection clause prescribed under Article III, Section 1 of
the 1987 Philippine Constitution; and
C.
apply uniformly to all those belonging to the same class and do not violate Article VI,
Section 28(1) of the 1987 Philippine Constitution.
II.
This Honorable Court erred in upholding the constitutionality of Section 110(B) of the
NIRC, as amended by the EVAT Law, imposing a limitation on the amount of input VAT that
may be claimed as a credit against output VAT notwithstanding the finding that the tax is
not progressive as exhorted by Article VI, Section 28(1) of the 1987 Philippine Constitution.
Respondents filed their Consolidated Comment. Petitioner Garcia filed his Reply.
Petitioners Escudero, et al., insist that the bicameral conference committee should not even
have acted on the no pass-on provisions since there is no disagreement between House Bill
Nos. 3705 and 3555 on the one hand, and Senate Bill No. 1950 on the other, with regard to
the no pass-on provision for the sale of service for power generation because both the
Senate and the House were in agreement that the VAT burden for the sale of such service
shall not be passed on to the end-consumer. As to the no pass-on provision for sale of
petroleum products, petitioners argue that the fact that the presence of such a no pass-on
provision in the House version and the absence thereof in the Senate Bill means there is no
conflict because "a House provision cannot be in conflict with something that does not
exist."
Such argument is flawed. Note that the rules of both houses of Congress provide that a
conference committee shall settle the "differences" in the respective bills of each house.
Verily, the fact that a no pass-on provision is present in one version but absent in the other,
and one version intends two industries, i.e., power generation companies and petroleum
sellers, to bear the burden of the tax, while the other version intended only the industry of
power generation, transmission and distribution to be saddled with such burden, clearly
shows that there are indeed differences between the bills coming from each house, which
differences should be acted upon by the bicameral conference committee. It is incorrect to
conclude that there is no clash between two opposing forces with regard to the no pass-on
provision for VAT on the sale of petroleum products merely because such provision exists in
the House version while it is absent in the Senate version. It is precisely the absence of
such provision in the Senate bill and the presence thereof in the House bills that causes the
conflict. The absence of the provision in the Senate bill shows the Senate's disagreement to
the intention of the House of Representatives make the sellers of petroleum bear the
burden of the VAT. Thus, there are indeed two opposing forces: on one side, the House of
Representatives which wants petroleum dealers to be saddled with the burden of paying
VAT and on the other, the Senate which does not see it proper to make that particular
industry bear said burden. Clearly, such conflicts and differences between the no pass-on
provisions in the Senate and House bills had to be acted upon by the bicameral conference
committee as mandated by the rules of both houses of Congress.
Moreover, the deletion of the no pass-on provision made the present VAT law more in
consonance with the very nature of VAT which, as stated in the Decision promulgated on
September 1, 2005, is a tax on spending or consumption, thus, the burden thereof is
ultimately borne by the end-consumer.
Escudero, et al., then claim that there had been changes introduced in the Rules of the
House of Representatives regarding the conduct of the House panel in a bicameral
conference committee, since the time of Tolentino vs. Secretary of Finance 2 to act as
safeguards against possible abuse of authority by the House members of the bicameral
conference committee. Even assuming that the rule requiring the House panel to report
back to the House if there are substantial differences in the House and Senate bills had
indeed been introduced after Tolentino, the Court stands by its ruling that the issue of
whether or not the House panel in the bicameral conference committee complied with said
internal rule cannot be inquired into by the Court. To reiterate, "mere failure to conform to
parliamentary usage will not invalidate the action (taken by a deliberative body) when the
requisite number of members have agreed to a particular measure." 3
Escudero, et. al., also contend that Republic Act No. 9337 grossly violates the constitutional
imperative on exclusive origination of revenue bills under Section 24 of Article VI of the
Constitution when the Senate introduced amendments not connected with VAT.
The Court is not persuaded.
Article VI, Section 24 of the Constitution provides:
Sec. 24
All appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.
Section 24 speaks of origination of certain bills from the House of Representatives which
has been interpreted in the Tolentino case as follows:
. . . To begin with, it is not the law but the revenue bill which is required by the
Constitution to "originate exclusively" in the House of Representatives. It is important to
emphasize this, because a bill originating in the House may undergo such extensive
changes in the Senate that the result may be a rewriting of the whole . . . At this point,
what is important to note is that, as a result of the Senate action, a distinct bill may be
produced. To insist that a revenue statute and not only the bill which initiated the
legislative process culminating in the enactment of the law must substantially be the
same as the House bill would be to deny the Senate's power not only to "concur with
amendments" but also to "propose amendments." It would be to violate the coequality of
legislative power of the two houses of Congress and in fact make the House superior to the
Senate.
. . . Given, then, the power of the Senate to propose amendments, the Senate can propose
its own version even with respect to bills which are required by the Constitution to originate
in the House.
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Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or
tax bills, bills authorizing an increase of the public debt, private bills and bills of local
application must come from the House of Representatives on the theory that, elected as
they are from the districts, the members of the House can be expected to be more sensitive
to the local needs and problems. On the other hand, the senators, who are elected at large,
are expected to approach the same problems from the national perspective. Both views are
thereby made to bear on the enactment of such laws. 4
Clearly, after the House bills as approved on third reading are duly transmitted to the
Senate, the Constitution states that the latter can propose or concur with amendments. The
Court finds that the subject provisions found in the Senate bill are within the purview of
such constitutional provision as declared in the Tolentino case.
The intent of the House of Representatives in initiating House Bill Nos. 3555 and 3705 was
to solve the country's serious financial problems. It was stated in the respective explanatory
notes that there is a need for the government to make significant expenditure savings and a
credible package of revenue measures. These measures include improvement of tax
administration and control and leakages in revenues from income taxes and value added
tax. It is also stated that one opportunity that could be beneficial to the overall status of our
economy is to review existing tax rates, evaluating the relevance given our present
conditions. Thus, with these purposes in mind and to accomplish these purposes for which
the house bills were filed, i.e., to raise revenues for the government, the Senate introduced
amendments on income taxes, which as admitted by Senator Ralph Recto, would yield
about P10.5 billion a year.
Moreover, since the objective of these house bills is to raise revenues, the increase in
corporate income taxes would be a great help and would also soften the impact of VAT
measure on the consumers by distributing the burden across all sectors instead of putting it
entirely on the shoulders of the consumers.
As to the other National Internal Revenue Code (NIRC) provisions found in Senate Bill No.
1950, i.e., percentage taxes, franchise taxes, amusement and excise taxes, these
provisions are needed so as to cushion the effects of VAT on consumers. As we said in our
decision, certain goods and services which were subject to percentage tax and excise tax
would no longer be VAT exempt, thus, the consumer would be burdened more as they
would be paying the VAT in addition to these taxes. Thus, there is a need to amend these
sections to soften the impact of VAT. The Court finds no reason to reverse the earlier ruling
that the Senate introduced amendments that are germane to the subject matter and
purposes of the house bills.
Petitioners Escudero, et al., also reiterate that R.A. No. 9337's stand-by authority to the
Executive to increase the VAT rate, especially on account of the recommendatory power
granted to the Secretary of Finance, constitutes undue delegation of legislative power. They
submit that the recommendatory power given to the Secretary of Finance in regard to the
occurrence of either of two events using the Gross Domestic Product (GDP) as a benchmark
necessarily and inherently required extended analysis and evaluation, as well as policy
making.
There is no merit in this contention. The Court reiterates that in making his
recommendation to the President on the existence of either of the two conditions, the
Secretary of Finance is not acting as the alter ego of the President or even her subordinate.
He is acting as the agent of the legislative department, to determine and declare the event
upon which its expressed will is to take effect. The Secretary of Finance becomes the means
or tool by which legislative policy is determined and implemented, considering that he
possesses all the facilities to gather data and information and has a much broader
perspective to properly evaluate them. His function is to gather and collate statistical data
and other pertinent information and verify if any of the two conditions laid out by Congress
is present. Congress granted the Secretary of Finance the authority to ascertain the
existence of a fact, namely, whether by December 31, 2005, the value-added tax collection
as a percentage of GDP of the previous year exceeds two and four-fifth percent (2 4/5%) or
the national government deficit as a percentage of GDP of the previous year exceeds one
and one-half percent (1 1/2%). If either of these two instances has occurred, the Secretary
of Finance, by legislative mandate, must submit such information to the President. Then the
12% VAT rate must be imposed by the President effective January 1, 2006. Congress does
not abdicate its functions or unduly delegate power when it describes what job must be
done, who must do it, and what is the scope of his authority; in our complex economy that
is frequently the only way in which the legislative process can go forward. There is no
undue delegation of legislative power but only of the discretion as to the execution of a law.
This is constitutionally permissible. Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the VAT rate to 12% came from
Congress and the task of the President is to simply execute the legislative policy. That
Congress chose to use the GDP as a benchmark to determine economic growth is not within
the province of the Court to inquire into, its task being to interpret the law.
With regard to petitioner Garcia's arguments, the Court also finds the same to be without
merit. As stated in the assailed Decision, the Court recognizes the burden that the
consumers will be bearing with the passage of R.A. No. 9337. But as was also stated by the
Court, it cannot strike down the law as unconstitutional simply because of its yokes. The
legislature has spoken and the only role that the Court plays in the picture is to determine
whether the law was passed with due regard to the mandates of the Constitution. Inasmuch
as the Court finds that there are no constitutional infirmities with its passage, the validity of
the law must therefore be upheld.
Finally, petitioners Association of Pilipinas Shell Dealers, Inc. reiterated their arguments in
the petition, citing this time, the dissertation of Associate Justice Dante O. Tinga in his
Dissenting Opinion.
The glitch in petitioners' arguments is that it presents figures based on an event that is yet
to happen. Their illustration of the possible effects of the 70% limitation, while seemingly
concrete, still remains theoretical. Theories have no place in this case as the Court must
only deal with an existing case or controversy that is appropriate or ripe for judicial
determination, not one that is conjectural or merely anticipatory. 5 The Court will not
intervene absent an actual and substantial controversy admitting of specific relief through a
decree conclusive in nature, as distinguished from an opinion advising what the law would
be upon a hypothetical state of facts. 6
The impact of the 70% limitation on the creditable input tax will ultimately depend on how
one manages and operates its business. Market forces, strategy and acumen will dictate
their moves. With or without these VAT provisions, an entrepreneur who does not have the
ken to adapt to economic variables will surely perish in the competition. The arguments
posed are within the realm of business, and the solution lies also in business.
Petitioners also reiterate their argument that the input tax is a property or a property right.
In the same breath, the Court reiterates its finding that it is not a property or a property
right, and a VAT-registered person's entitlement to the creditable input tax is a mere
statutory privilege.
Petitioners also contend that even if the right to credit the input VAT is merely a statutory
privilege, it has already evolved into a vested right that the State cannot remove.
As the Court stated in its Decision, the right to credit the input tax is a mere creation of law.
Prior to the enactment of multi-stage sales taxation, the sales taxes paid at every level of
distribution are not recoverable from the taxes payable. With the advent of Executive Order
No. 273 imposing a 10% multi-stage tax on all sales, it was only then that the crediting of
the input tax paid on purchase or importation of goods and services by VAT-registered
persons against the output tax was established. This continued with the Expanded VAT Law
(R.A. No. 7716), and The Tax Reform Act of 1997 (R.A. No. 8424). The right to credit input
tax as against the output tax is clearly a privilege created by law, a privilege that also the
law can limit. It should be stressed that a person has no vested right in statutory privileges.
7
The concept of "vested right" is a consequence of the constitutional guaranty of due process
that expresses a present fixed interest which in right reason and natural justice is protected
against arbitrary state action; it includes not only legal or equitable title to the enforcement
of a demand but also exemptions from new obligations created after the right has become
vested. Rights are considered vested when the right to enjoyment is a present interest,
absolute, unconditional, and perfect or fixed and irrefutable. 8 As adeptly stated by
Associate Justice Minita V. Chico-Nazario in her Concurring Opinion, which the Court adopts,
petitioners' right to the input VAT credits has not yet vested, thus
It should be remembered that prior to Rep. Act No. 9337, the petroleum dealers' input VAT
credits were inexistent they were unrecognized and disallowed by law. The petroleum
dealers had no such property called input VAT credits. It is only rational, therefore, that
they cannot acquire vested rights to the use of such input VAT credits when they were
never entitled to such credits in the first place, at least, not until Rep. Act No. 9337.
My view, at this point, when Rep. Act No. 9337 has not yet even been implemented, is that
petroleum dealers' right to use their input VAT as credit against their output VAT unlimitedly
has not vested, being a mere expectancy of a future benefit and being contingent on the
continuance of Section 110 of the National Internal Revenue Code of 1997, prior to its
amendment by Rep. Act No. 9337.
The elucidation of Associate Justice Artemio V. Panganiban is likewise worthy of note, to
wit:
Moreover, there is no vested right in generally accepted accounting principles. These refer
to accounting concepts, measurement techniques, and standards of presentation in a
company's financial statements, and are not rooted in laws of nature, as are the laws of
physical science, for these are merely developed and continually modified by local and
international regulatory accounting bodies. To state otherwise and recognize such asset
account as a vested right is to limit the taxing power of the State. Unlimited, plenary,
comprehensive and supreme, this power cannot be unduly restricted by mere creations of
the State.
More importantly, the assailed provisions of R.A. No. 9337 already involve legislative policy
and wisdom. So long as there is a public end for which R.A. No. 9337 was passed, the
means through which such end shall be accomplished is for the legislature to choose so long
as it is within constitutional bounds. As stated in Carmichael vs. Southern Coal & Coke Co.:
If the question were ours to decide, we could not say that the legislature, in adopting the
present scheme rather than another, had no basis for its choice, or was arbitrary or
unreasonable in its action. But, as the state is free to distribute the burden of a tax without
regard to the particular purpose for which it is to be used, there is no warrant in the
Constitution for setting the tax aside because a court thinks that it could have distributed
the burden more wisely. Those are functions reserved for the legislature. 9
WHEREFORE, the Motions for Reconsideration are hereby DENIED WITH FINALITY. The
temporary restraining order issued by the Court is LIFTED.
SO ORDERED.
(The Justices who filed their respective concurring and dissenting opinions maintain their
respective positions. Justice Dante O. Tinga filed a dissenting opinion to the present
Resolution; while Justice Consuelo Ynares-Santiago joins him in his dissenting opinion.)
Separate Opinions
TINGA, J., dissenting:
Once again, the majority has refused to engage and refute in any meaningful fashion the
arguments raised by the petitioners in G.R. No. 168461. The de minimis appreciation
exhibited by the majority of the issues of 70% cap, the 60-month amortization period, and
5% withholding VAT on transactions made with the national government is regrettable, with
ruinous consequences for the nation. I see no reason to turn back from any of the views
expressed in my Dissenting Opinion, and I accordingly dissent from the denial of the Motion
for Reconsideration filed by the petitioners in G.R. No. 168461. 1
The reasons for my vote have been comprehensively discussed in my previous Dissenting
Opinion, and I do not see the need to replicate them herein. However, I wish to stress a few
points.
Tax Statutes May Be Invalidated If They Pose a Clear and Present Danger To the
Deprivation of Life, Liberty and Property Without Due Process of Law
The majority again dismisses the arguments of the petitioners as "theoretical", "conjectural"
or merely "anticipatory," notwithstanding that the injury to the taxpayers resulting from
Section 8 and 12 of the E-VAT Law is ascertainable with mathematical certainty. In support
of this view, the majority cites the Court's Resolution dated 15 June 2005 in Information
Technology Foundation v. COMELEC, 2 one of the rulings issued in that case subsequent to
the main Decision rendered on 13 January 2004. The reference is grievously ironic,
considering that in the 13 January 2004 Decision, the Court, over vigorous dissents, chose
anyway to intervene and grant the petition despite the fact that the petitioners therein did
not allege any violation of any constitutional provision or letter of statute. 3 In this case,
the petitioners have squarely invoked the violation of the Bill of Rights of the Constitution,
and yet the majority is suddenly timid, unlike in Infotech.
Still, the formulation of the majority unfortunately leaves the impression that any statute,
taxing or otherwise, is beyond judicial attack prior to its implementation. If the tax measure
in question provided that the taxpayer shall remit all income earned to the government
beginning 1 January 2008, would this mean that the Court can take cognizance of the legal
challenge only starting 2 January 2008?
I do not share the majority's penchant for awaiting the blood spurts before taking action
even when the knife's edge already dangles. As I maintained in my Dissenting Opinion, a
tax measure may be validly challenged and stricken down even before its implementation if
it poses a clear and present danger to the deprivation of life, liberty or property of the
taxpayer without due process of law. This is the expectation of every citizen who wishes to
maintain trust in all the branches of government. In the enforcement of the constitutional
rights of all persons, the commonsense expectation is that the Court, as guardian of these
rights, is empowered to step in even before the prospective violation takes place. Hence,
the evolution of the "clear and present danger" doctrine and other analogous principles,
without which, the Court would be seen as inutile in the face of constitutional violation.
Of course, not every anticipatory threat to constitutional liberties can be assailed prior to
implementation, hence the employment of the "clear and present danger" standard to
separate the wheat from the chaff. Still, the Court should not be so readily dismissive of the
petitioners' posture herein merely because it is anticipatory. There should have been a
meaningful engagement by the majority of the facts and formulae presented by the
petitioners before the reasonable conclusion could have been reached on the maturity of the
claim. That the majority has not bothered to do so is ultimately of tragic consequence.
70% Input VAT Credit
An Impaired Asset
The ponencia, joined by Justices Panganiban and Chico-Nazario, express the belief that no
property rights attach to the input VAT paid by the taxpayer. This is a bizarre view that
assumes that all income earned by private persons preternaturally belongs to the
government, and whatever is retained by the person after taxes is acquired as a matter of
privilege. This is the sort of thinking that has fermented revolutions throughout history,
such as the American Revolution of 1776.
I pointed out in my Dissenting Opinion that under current accepted international accounting
standards, the 30% prepaid input VAT would be recorded as a loss in the accounting books,
since the possibility of its recovery is improbable, considering that the E-VAT Law allows its
recovery only after the business has ceased to exist. Even the Bureau of Internal Revenue
itself has long recognized the unutilized input VAT as an asset.
The majority fails to realize that even under the new E-VAT Law, the State recognizes that
the persons who pre-pay that input VAT, usually the dealers or retailers, are not the
persons who are liable to pay for the tax. The VAT system, as implemented through the
previous VAT law and the new E-VAT Law, squarely holds the end consumer as the taxpayer
liable to shoulder the input VAT. Nonetheless, under the mechanism foisted in the new EVAT Law, the dealer or retailer who pre-pays the input VAT is virtually precluded from
recovering the pre-paid input VAT, since the law only allows such recovery upon the
cessation of the business. Indeed, the only way said class of taxpayers can recover this prepaid input VAT was if it were to cease operations at the end of every quarter.
The illusion that blinds the majority to this state of affairs is the claim that the pre-paid
input VAT may anyway be carried over into the succeeding quarter, a chimera enhanced by
the grossly misleading presentation of the Office of the Solicitor General. What this
deception fosters, and what the majority fails to realize, is that since the taxpayer is
perpetually obliged to remit the 30% input VAT every quarter, there would be a continuous
accumulation of excess input VAT. It is not true then that the input VAT prepaid for the first
quarter can be recovered in the second, third or fourth quarter of that year, or at any time
in the next year for that matter since the amount of prepaid input VAT accumulates with
every succeeding prepayment of input VAT. Moreover, the accumulation of the prepaid
input VAT diminishes the actual value of the refundable amounts, considering the
established principle of "time-value of money", as explained in my Dissenting Opinion.
Thus, the pre-paid input VAT, for which the petitioners and other similarly situated
taxpayers are not even ultimately liable in the first place, represents in tangible terms an
actual loss. To put it more succinctly, when the taxpayer prepays the 30% input VAT, there
is no chance for its recovery except until after the taxpayer ceases to be such. This point is
crucial, as it goes in the heart of the constitutional challenge raised by the petitioners. A
recognition that the input VAT is a property asset places it squarely in the ambit of the due
process clause.
The majority now stresses that prior to Executive Order No. 273 sales taxes paid by the
retailer or dealers were not recoverable. The nature of a sales tax precisely is that it is
shouldered by the seller, not the consumer. In that case, the clear legislative intent is to
encumber the retailer with the end tax. Under the VAT system, as enshrined under Rep. Act
No. 9337, the new E-VAT Law, there is precisely a legislative recognition that it is the end
user, not the seller, who shoulders the E-VAT. The problem with the new E-VAT law is that
it correspondingly imposes a defeatist mechanism that obviates this entitlement of the
seller by forcibly withholding in perpetua this pre-paid input VAT.
The majority cites with approval Justice Chico-Nazario's argument, as expressed in her
concurring opinion, that prior to the new E-VAT Law, the petroleum dealers in particular had
no input VAT credits to speak of, and therefore, could not assert any property rights to the
input VAT credits under the new law. Of course the petroleum dealers had no input VAT
credits prior to the E-VAT Law because precisely they were not covered by the VAT system
in the first place. What would now be classified as "input VAT credits" was, in real terms,
profit obtainable by the petroleum dealers prior to the new E-VAT Law. The E-VAT Law
stands to diminish such profit, not by outright taking perhaps, but by ad infinitum
confiscation with the illusory promise of eventual return. Obviously, there is a deprivation of
property in such case; yet is it seriously contended that such deprivation is ipso facto
sheltered if it is not classified as a taking, but instead reclassified as a "credit"?
It is highly distressful that the Court, in its haste to decree petitioners as bereft of any
vested property rights, rejects the notion that a person has a vested right to the earnings
and profits incurred in business. Before, no legal basis could be found to prop up such a
palpably outlandish claim; but the Decision, as affirmed by the majority's Resolution, now
enshrines a temerarious proposition with doctrinal status.
In the Decision, and also in Justice Panganiban's Separate Opinion therein, the case of
United Paracale Mining Co. v. De la Rosa was cited in support of the proposition that there
is no vested right to the input VAT credit. Justice Panganiban went as far as to cite that
case to support the contention that "[t]here is no vested right in a deferred input tax
account; it is a mere statutory privilege." Reliance on the case is quite misplaced. First, as
pointed out in my Dissenting Opinion, it does not even pertain to tax credits involving as it
does, questions on the jurisdiction of the Bureau of Mines. Second, the putative vested
rights therein pertained to mining claims, yet all mineral resources indisputably belong to
the State. Herein, the rights pertain to profit incurred by private enterprise, and certainly
the majority cannot contend that such profits actually belong to the State.
As stated in my Dissenting Opinion, the Constitution itself recognizes a right to income and
profit when it recognizes "the right of enterprises to reasonable returns on investments, and
to expansion and growth." Section 20, Article II of the Constitution further mandates that
the State recognize the indispensable role of the private sector, the encouragement of
private enterprise, and the provision of incentives to needed investments. 7 Indeed, there is
a fundamental recognition in any form of democratic government that recognizes a
capitalist economy that the enterprise has a right to its profits. Today, the Court instead
affirms that there is no such right. Should capital flight ensue, the phenomenom should not
be blamed on investors in view of our judicial system's rejection of capitalism's fundamental
precept.
Mainstream Denunciation of 70% Cap
The fact that petitioners are dealers of petroleum products may have left the impression
that the 70% cap singularly affects the petroleum industry; or that other classes of dealers
or retailers do not pose the same objections to these "innovations" in the E-VAT law. This is
far from the truth.
In fact, the clamor against the 70% cap has been widespread among the players and
components in the financial mainstream. Denunciations have been registered by the
Philippine Chamber of Commerce and Industry, the Joint Foreign Chambers of the
Philippines (comprising of the American Chamber of Commerce in the Philippines, the
Australian-New Zealand Chamber Commerce of the Philippines, Inc., the Canadian Chamber
of Commerce of the Philippines, Inc., the European Chamber of Commerce of the

Philippines, Inc., the Japanese Chamber of Commerce of the Philippines, Inc., the Korean
Chamber of Commerce and Industry of the Philippines, and the Philippine Association of
Multinational Companies Regional Headquarters, Inc.), the Filipino-Chinese Chamber of
Commerce and Industry, the Federation of Philippine Industries, the Consumer and Oil
Price Watch, the Association of Certified Public Accountants in Public Practice, the
Philippine Tobacco Institute, and the auditing firm of PricewaterhouseCooper.
Even newly installed Finance Secretary Margarito Teves has expressed concern that the
70% input VAT "may not work across all industries because of varying profit margins".
Other experts who have voiced concerns on the 70% input VAT are former NEDA Directors
Cielito Habito and Solita Monsod, Peter Wallace of the Wallace Business Forum, and Paul
R. Cooper, director of PricewaterhouseCooper.
In fact, Mr. Cooper published in the Philippine Daily Inquirer a lengthy disquisition on the
problems surrounding the 70% cap, portions of which I replicate below:
Policy concerns on the cap
When the idea of putting a cap was originally introduced on the floor of the Senate. The
idea was to address to some extent the under-reporting of output VAT by non-compliant
taxpayers. The original suggestion was a 90 percent cap, or effectively a 1-percent
minimum VAT. At that level, the rule should not impact adversely on complaint taxpayers,
but would result in non-compliant taxpayers having to account for closer to their true tax
liability.
As a general policy consideration, one should question why our legislators are penalizing
complaint taxpayers when the fundamental issue is at the apparent inability of the Bureau
of Internal Revenue (BIR) to implement tax law effectively.
At a 90-percent cap, the measure might still have been defensible as a rough proxy for VAT.
However, somewhere in the bicameral process, the rule has become even more punitive
with a 70-percent cap. As with most amendments introduced at the bicameral stage, there
is no public indication about what lawmakers were thinking when they put the travesty in
place.
xxx
xxx
xxx
One of the arguments in Senate debates for taxing the power and petroleum sectors was
that if it was good enough for mom-and-pop stores to have to account for the VAT, it was
good enough for the biggest companies in the country to do the same. A similar argument
here is that if small businesses have to pay a minimum 3-percent tax, why should larger
VAT-registered persons get away with paying less?
The problem with this thinking is threefold:
The percentage tax applies to small businesses in the hard-to-tax sector and a few
believe the BIR collects close to what it should from this. Nor should we be overly
concerned if this is the case the revenues are small, and the BIR's efforts would be a lot
better focused on larger taxpayers where more significant revenues will be at issue.
VAT-registered persons incur compliance costs. The 3-percent tax might be better
conceived as a slightly more expensive option to allow taxpayers to opt out of the VAT,
rather than a punitive rule for small businesses. (If the percentage tax is considered unduly
punitive, why is it not just repealed?)
Ironically, one of the new measures in the Senate bill was to allow taxpayers with
turnovers below, the registration threshold to register voluntarily for VAT if they believe the
3-percent tax imposition to be excessive. Without the minimum VAT, smaller taxpayers
might have been encouraged to enter the more formalized VAT sector.
Potential consequences of the cap
The minimum VAT will distort the way taxpayers conduct business. A 3-percent minimum
VAT is more likely to impact on sellers of goods than on sellers of services, as their
proportion of taxable inputs are lower (there is no VAT paid when using labor, but there is
VAT on the purchase of goods). Consequently, there will be a bias toward consuming
services over goods. Businesses may have an incentive to obtain goods from the informal
(and potentially tax-evading) sector as there will be no input tax paid for the purchase in
other words, the bill may actively encourage less tax compliant behavior. Business
structures may change; expect buy-sell distributors to convent into commission agents, as
this reduces the risk that they will need to pay more than should be paid under a VAT
system to cover the 3-percent minimum VAT.
These objections are voiced by members of the sensible center, and not those reflexively
against VAT or any tax imposition of the current administration. These objections are raised
by the people who stand to be directly affected on a daily punitive basis by the imposition of
the 70% cap, the 60-month amortization period and the 5% withholding VAT. Indeed,
Justice Chico-Nazario has expressed her disbelief over, or at least has asserted as
unproven, the claimed impact of the input VAT on the petroleum dealers. 21 Of course
there can be no tangible gauge as of yet on the impact of these changes in the VAT law,
since they have yet to be implemented. However, the prevalent adverse reaction within the
business sector should be sufficiently expressive of the actual fears of the people who
should know better. It is sad that the majority, by maintaining a blithely nave view of the
input VAT, perpetuates the disconnect between the Court and the business sector,
unnecessarily considering that in this instance, the concerns of the financial community can
be translated into a viable constitutional challenge.
Reliance on Legislative Amendments
An Abdication of the Court's Constitutional Duty
Justice Panganiban has already expressed the view that the remedy to the inequities caused
by the new input VAT system would be amending the law, and not an outright declaration of
unconstitutionality. I can only hazard a guess on how many members of the Court or the
legal community are similarly reliant on that remedy as a means of assuaging their fears on
the impact of the input VAT innovations.
As I stated in my Dissenting Opinion, it is this Court, and not the legislature, which has the
duty to strike down unconstitutional laws. Congress may amend unconstitutional laws to
remedy such legal infirmities, but it is under no constitutional or legal obligation to do so.
The same does not hold true with this Court. The essence of judicial review mandates that
the Court strike down unconstitutional laws.
Another corollary prospect has also arisen, that the Executive Department itself will mitigate
the implementation of the 70% cap by not fully implementing the law.
This prospect of course is speculative, the sort of speculation that is wholly dependent on
the whim of the officials of the executive branch and one that cannot be quantified by
mathematical formula. This cannot be the basis for any judicial action or vote. Moreover,
such resort may actually be illegal.
For one, Article 239 of the Revised Penal Code imposes the penalty of prision correccional
on public officers "who shall encroach upon the powers of the legislative branch of the
Government, either by making general rules or regulations beyond the scope of his
authority, or by attempting to repeal a law or suspending the execution thereof." Certainly,
the remedy to the inequities of the E-VAT Law cannot be left to administrative pussyfooting, considering that these officials may be jailed for refusing to implement the law, or
obfuscating the legislative will.
Second, it is a cardinal rule that an administrative agency such as the Bureau of Internal
Revenue or even the Department of Finance cannot amend an act of Congress. Whatever
administrative regulations they may adopt under legislative authority must be in harmony
with the provisions of the law they are intended to carry into effect. They cannot widen or
diminish its scope.
Finally, it must be remembered that one of the central doctrines enforced in the disposition
of the joint petitions is that the power to tax belongs solely to the legislative branch of
government. If the legislative will were to be frustrated by haphazard implementation by
the executive branch, all our disquisitions on this matter, as well as the key constitutional
principle on the inherent, non-delegable nature of the legislative power of taxation, will be
for naught.
Indeed, I truly fear the scenario when, after the deluge, the executive branch of
government suspends the implementation of the 70% cap, or increases the cap to a higher
amount such as 90%. Any taxpayer will have standing to attack such remedial measure,
considering that the net effect would be to diminish the government's collection of cash at
hand. Following the law, the proper judicial action would be to uphold the clear legislative
intent over the reengineering of the taxing provisions by the executive branch of
government. Yet if the courts instead uphold the power of the executive branch of
government to reinvent the tax statute, then the end concession would be that the power to
enact tax laws ultimately belongs to the executive branch of government.
I hesitate to say this, but there will be confusion, instability, and multiple fatalities within
the business sector with the enforcement of the amendments of Section 8 and 12 of the EVAT Law. It could have been stopped through the allowance of the petition in G.R. No.
168461, but regrettably the Court did not act.
I respectfully dissent."
AbakadaGuro Party List vs. Eduardo Ermita, G.R. No. 168056, September 1, 2005
Kilosbayan Inc., et al vs. Manuel Morato GR 118910 Jul 17, 1995
Raoul del Mar vs. PAGCOR, et al GR 138298 Nov. 29, 2000
Due Process; Non- Delegation; Uniformity; Constitutional Limitations
FACTS: R.A. No. 9337 entitled "An Act Amending Sections 27, 28, 34, 106, 107, 108, 109,
110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236, 237, and 288 of the National
Internal Revenue Code of 1997, as Amended and for Other Purposes," is a consolidation of
three legislative bills. It was enacted to meet mounting budget deficit, revenue generation,
inadequate fiscal allocation for education, increased emoluments for health workers, and
wider coverage for full value-added tax benefits. Various groups and individuals led by
ABAKADA GURO Party List, Sen. Aquilino Q. Pimentel, Jr., Association of Pilipinas Shell
Dealers, Inc., Rep. Francis Joseph G. Escudero and Governor Enrique T. Garcia questioned
the constitutionality of several portions of R.A. No. 9337.
PROCEDURAL ISSUES:
Whether R.A. No. 9337 violates the following provisions of the Constitution:
a.
Article VI, Section 24, and
b.
Article VI, Section 26(2)
SUBSTANTIVE ISSUES:
1.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108
of the NIRC, violate the following provisions of the Constitution:
a.
Article VI, Section 28(1), and
b.
Article VI, Section 28(2)
2.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the
NIRC; and Section 12 of R.A. No. 9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a.
Article VI, Section 28(1), and
b.
Article III, Section 1
RULING: R.A. No. 9337 is not unconstitutional.

Procedural Issues
A.
THE BICAMERAL CONFERENCE COMMITTEE
The Bicameral Conference Committee was created to address a situation where the two
houses of Congress disagree over changes or amendments introduced by the other house in
a bill. Under the Rules of the House of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences between the disagreeing
provisions in the House bill and the Senate bill. The term "settle" is synonymous to
"reconcile" and "harmonize." In the present case, the changes introduced by the Bicameral
Conference Committee on disagreeing provisions were meant only to reconcile and
harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly
foreign to the subject embraced by the original provisions. Thus, the Court does not see any
grave abuse of discretion amounting to lack or excess of jurisdiction committed by the
Bicameral Conference Committee.
The main purpose of the bills emanating from the House of Representatives is to bring in
sizeable revenues for the government to supplement our country's serious financial
problems, and improve tax administration and control of the leakages in revenues from
income taxes and value-added taxes. As these house bills were transmitted to the Senate,
the latter, approaching the measures from the point of national perspective, can introduce
amendments within the purposes of those bills. Since there is no question that the revenue
bill exclusively originated in the House of Representatives, the Senate was acting within its
constitutional power to introduce amendments to the House bill when it included provisions
in Senate Bill No. 1950 amending corporate income taxes, percentage, excise and franchise
taxes. Indeed, Article VI, Section 24 of the Constitution does not contain any prohibition or
limitation on the extent of the amendments that may be introduced by the Senate to the
House revenue bill.
B.
R.A. NO. 9337 DOES NOT VIOLATE ARTICLE VI, SECTION 26(2) OF THE
CONSTITUTION ON THE "NO-AMENDMENT RULE"
The "no-amendment rule" refers only to the procedure to be followed by each house of
Congress with regard to bills initiated in each of said respective houses, before said bill is
transmitted to the other house for its concurrence or amendment. To construe said
provision in a way as to proscribe any further changes to a bill after one house has voted on
it would lead to absurdity as this would mean that the other house of Congress would be
deprived of its constitutional power to amend or introduce changes to said bill. Thus, Article
VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the
Bicameral Conference Committee of amendments and modifications to disagreeing
provisions in bills that have been acted upon by both houses of Congress is prohibited.
Substantive Issues
I
A.
NO UNDUE DELEGATION OF LEGISLATIVE POWER
Giving the President the stand-by authority to raise the VAT rate from 10% to 12% when a
certain condition is met does not constitute a delegation of legislative power. It is simply a
delegation of ascertainment of facts upon which enforcement and administration of the
increase rate under the law is contingent. The legislature has made the operation of the
12% rate effective January 1, 2006, contingent upon a specified fact or condition. It leaves
the entire operation or non-operation of the 12% rate upon factual matters outside of the
control of the executive. No discretion would be exercised by the President.
The Secretary of Finance, in making his recommendation to the President on the existence
of certain conditions, is not acting as the alter ego of the President or even her subordinate.
In such instance, he is not subject to the power of control and direction of the President. He
is acting as the agent of the legislative department, to determine and declare the event
upon which its expressed will is to take effect. Thus, being the agent of Congress and not of
the President, the President cannot alter or modify or nullify, or set aside the findings of the
Secretary of Finance and to substitute the judgment of the former for that of the latter. If
either of the two instances has occurred, the Secretary of Finance, by legislative mandate,
must submit such information to the President. Then the 12% VAT rate must be imposed by
the President effective January 1, 2006. There is no undue delegation of legislative power
but only of the discretion as to the execution of a law. This is constitutionally permissible.
B.
THE 12% INCREASE VAT RATE DOES NOT IMPOSE AN UNFAIR AND UNNECESSARY
ADDITIONAL TAX BURDEN
Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two
conditions set forth therein are satisfied, the President shall increase the VAT rate to 12%.
The provisions of the law are clear. It does not provide for a return to the 10% rate nor
does it empower the President to so revert if, after the rate is increased to 12%, the VAT
collection goes below the 2 4/5 of the GDP of the previous year or that the national
government deficit as a percentage of GDP of the previous year does not exceed 1 1/2%.
There is no basis for petitioners' fear of a fluctuating VAT rate because the law itself does
not provide that the rate should go back to 10% if the conditions provided in Sections 4, 5
and 6 are no longer present.
II
A.
DUE PROCESS AND EQUAL PROTECTION CLAUSES
Petitioners claim that Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC
imposes limitations on the amount of input tax that may be claimed assumes that the input
tax exceeds 70% of the output tax, and therefore, the input tax in excess of 70% remains
uncredited. However, to the extent that the input tax is less than 70% of the output tax,
then 100% of such input tax is still creditable. Furthermore, unapplied/unutilized input tax
may be credited in the subsequent periods as allowed by the carry-over provision of Section
110(B) or may later on be refunded through a tax credit certificate under Section 112(B).
Section 8 of R.A. No. 9337, amending Section 110(A) of the NIRC imposes a 60-month
period within which to amortize the creditable input tax on purchase or importation of
capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT component.
Such spread out only poses a delay in the crediting of the input tax, and the taxpayer is not
permanently deprived of his privilege to credit the input tax. Whatever is the purpose of the
60-month amortization, this involves executive economic policy and legislative wisdom in
which the Court cannot intervene.
With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 12 of R.A. No. 9337 amending Section 114 of
the NIRC deleted the different rates of value-added taxes to be withheld. Instead, it now
provides for a uniform rate of 5% except for the 10% on lease or property rights payment
to non-residents. However, the law now uses the word final as opposed to creditable. As
applied to value-added tax, this means that taxable transactions with the government are
subject to a 5% rate, which constitutes as full payment of the tax payable on the
transaction. The Court need not explore the rationale behind the provision. It is clear that
Congress intended to treat differently taxable transactions with the government.
B.
UNIFORMITY AND EQUITABILITY OF TAXATION
R.A. No. 9337 is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods
and services. Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108,
respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and
properties, importation of goods, and sale of services and use or lease of properties. These
same sections also provide for a 0% rate on certain sales and transaction. The rule of
uniform taxation does not deprive Congress of the power to classify subjects of taxation,
and only demands uniformity within the particular class.
R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate
of 0% or 10% (or 12%) does not apply to sales of goods or services with gross annual sales
or receipts not exceeding P1,500,000.00. Also, basic marine and agricultural food products
in their original state are still not subject to the tax, thus ensuring that prices at the
grassroots level will remain accessible. While the law puts premium on businesses with low
profit margins and unduly favors those with high profit margins, it seeks to place taxpayers
on equal footing by imposing a 3% percentage tax on VAT-exempt persons. The law also
provides mitigating measures to cushion the impact of the imposition of the tax on those
previously exempt, and increases the income tax rates of corporations, in order to distribute
the burden of taxation.
C.
PROGRESSIVITY OF TAXATION
While the VAT is an antithesis of progressive taxation and by its very nature, regressive, the
Constitution does not really prohibit the imposition of indirect taxes. What it simply provides
is that Congress shall "evolve a progressive system of taxation."
April 15, 2009.]
ISSUES:
1.
2.
3.
4.
RULING:
1.
in the Philippines.
2.
3.
taxation.
4.
Sec 25 APPROPRIATIONS
Demetrio Demetriavs Hon. Manuel Alba
GR 71977 December 28, 1968
Sec 26 CONSTITUTIONAL REQUIREMENT ON SUBJECT AND TITLE OF BILLS

RA 7716 (EXPANDED VALUE-ADDED-TAX [VAT] LAW); REQUIREMENT THAT BILL SHALL
EMBRACE ONLY ONE (1) SUBJECT EXPRESSED IN THE TITLE THEREOF, NOT VIOLATED IN
CASE AT BAR; AMENDMENT OF SEC. 103 OF THE NATIONAL INTERNAL REVENUE CODE
EXEMPTING THE PHILIPPINE AIRLINES (PAL) AND OTHERS FROM PAYING VAT EXPRESSED
IN RA 7716, SUFFICIENT; A SEPARATE STATEMENT AMENDING FRANCHISE IS NOT
NECESSARY. Art. VI, 26 (1) of the Constitution provides that "Every bill passed by
Congress shall embrace only one subject which shall be expressed in the title thereof." PAL
contends that the amendment of its franchise by the withdrawal of its exemption from the
VAT is not expressed in the title of R.A. No. 7716. PAL was exempted from the payment of
the VAT along with other entities by 103 of the National Internal Revenue Code. Now, R.A.
No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
103. Such amendment of 103 is expressed in the title of R.A. No. 7716. Congress
thereby clearly expresses its intention to amend any provision of the NIRC which stands in
the way of accomplishing the purpose of the law. PAL asserts that the amendment of its
franchise must be reflected in the title of the law by specific reference to P.D. No. 1590. It
is unnecessary to do this in order to comply with the constitutional requirement, since it is

already stated in the title that the law seeks to amend the pertinent provisions of the NIRC,
among which is 103(q), in order to widen the base of the VAT. Actually, it is the bill which
becomes a law that is required to express in its title the subject of legislation. The titles of
H. No. 11197 and S. No. 1630 in fact specifically referred to 103 of the NIRC as among
the provisions sought to be amended. We are satisfied that sufficient notice had been given
of the pendency of these bills in Congress before they were enacted into what is now R.A.
No. 7716.
PRESIDENT'S CERTIFICATION IN RELATION TO THE REQUIREMENT OF THREE READINGS
ON SEPARATE DAYS BEFORE A BILL BECOMES A LAWThe President's certification had to be
made of the version of the same revenue bill which at the moment was being considered. It
is enough that he certifies the bill which, at the time he makes the certification, is under
consideration. Since on March 22, 1994 the Senate was considering S. No. 1630, it was that
bill which had to be certified. For that matter on June 1, 1993 the President had earlier
certified H. No. 9210 for immediate enactment because it was the one which at that time
was being considered by the House. This bill was later substituted, together with other bills,
by H. No. 11197. As to what Presidential certification can accomplish, we have already
explained in the main decision that the phrase "except when the President certifies to the
necessity of its immediate enactment, etc." in Art. VI, 26 (2) qualifies not only the
requirement that "printed copies [of a bill] in its final form [must be] distributed to the
members three days before its passage" but also the requirement that before a bill can
become a law it must have passed "three readings on separate days." There is not only
textual support for such construction but historical basis as well. This exception is based on
the prudential consideration that if in all cases three readings on separate days are required
and a bill has to be printed in final form before it can be passed, the need for a law may be
rendered academic by the occurrence of the very emergency or public calamity which it is
meant to address. The members of the Senate (including some of the petitioners in these
cases) believed that there was an urgent need for consideration of S. No. 1630, because
they responded to the call of the President by voting on the bill on second and third
readings on the same day.
[G.R. No. 115455. October 30, 1995.]

ARTURO M. TOLENTINO, petitioner, vs. THE SECRETARY
COMMISSIONER OF INTERNAL REVENUE, respondents.
OF
FINANCE
and
THE
[G.R. No. 115525. October 30, 1995.]

JUAN T. DAVID, petitioner, vs. TEOFISTO T. GUINGONA, JR., as Executive Secretary;
ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as
Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES,
respondents.
[G.R. No. 115543. October 30, 1995.]
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners, vs. THE
SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF
INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.
[G.R. No. 115544. October 30, 1995.]
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN
PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA
L. DIMALANTA, petitioners, vs. HON. LIWAYWAY V. CHATO, in her capacity as
Commissioner of Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as
Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of
Finance, respondents.
[G.R. No. 115754. October 30, 1995.]
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner, vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
[G.R. No. 115781. October 30, 1995.]
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C.
CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO,
JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR BROTHERHOOD,
INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC.,
and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAADA, petitioners, vs. THE
EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL
REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.
[G.R. No. 115852. October 30, 1995.]
PHILIPPINE AIRLINES, INC., petitioner, vs. THE
COMMISSIONER OF INTERNAL REVENUE, respondents.
SECRETARY
OF
FINANCE
and
[G.R. No. 115873. October 30, 1995.]

COOPERATIVE UNION OF THE PHILIPPINES, petitioner, vs. HON. LIWAYWAY V. CHATO, in
her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR.,
in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity
as Secretary of Finance, respondents.
[G.R. No. 115931. October 30, 1995.]
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF
PHILIPPINE BOOK SELLERS, petitioners, vs. HON. ROBERTO B. DE OCAMPO, as the
Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal
Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of
Customs, respondents.
SYLLABUS
1.
CONSTITUTIONAL LAW; LEGISLATURE; POWER OF THE SENATE TO PROPOSE
AMENDMENTS TO REVENUE BILLS; S. NO. 1630 AS A SUBSTITUTE MEASURE TO H. NO.
11197. The enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House,
passed its own version of a House revenue measure. Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments. The power of
the Senate to propose amendments must be understood to be full, plenary and complete
"as on other Bills." Because revenue bills are required to originate exclusively in the House
of Representatives, the Senate cannot enact revenue measures of its own without such
bills. After a revenue bill is passed and sent over to it by the House, however, the Senate
certainly can pass its own version on the same subject matter. This follows from the
coequality of the two chambers of Congress. The provision "but the Senate may propose or
concur with amendments" means the Senate may propose an entirely new bill as a
substitute measure. To except from the procedure (Re: bill referred to a committee) the
amendment of bills which are required to originate in the House by prescribing that the
number of the House bill and its other parts up to the enacting clause must be preserved
although the text of the Senate amendment may be incorporated in place of the original
body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing
this form. S. No. 1630, as a substitute measure, is therefore as much an amendment of H.
No. 11197 as any which the Senate could have made. In point of fact, in several instances
the provisions of S. No. 1630, clearly appear to be mere amendments of the corresponding
provisions of H. No. 11197. The very tabular comparison of the provisions thereof, while
showing differences between the two bills, at the same time indicates that the provisions of
the Senate bill were precisely intended to be amendments to the House bill. Without H. No.
11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere
amendment of the House bill, H. No. 11197 in its original form did not have to pass the
Senate on second and third readings. It was enough that after it was passed on first reading
it was referred to the Senate Committee on Ways and Means. Neither was it required that
S. No. 1630 be passed by the House of Representatives before the two bills could be
referred to the Conference Committee.
2.
ID.; ID.; PRESIDENT'S CERTIFICATION IN RELATION TO THE REQUIREMENT OF
THREE READINGS ON SEPARATE DAYS BEFORE A BILL BECOMES A LAW; CASE AT BAR.
The President's certification had to be made of the version of the same revenue bill which at
the moment was being considered. It is enough that he certifies the bill which, at the time
he makes the certification, is under consideration. Since on March 22, 1994 the Senate was
considering S. No. 1630, it was that bill which had to be certified. For that matter on June
1, 1993 the President had earlier certified H. No. 9210 for immediate enactment because it
was the one which at that time was being considered by the House. This bill was later
substituted, together with other bills, by H. No. 11197. As to what Presidential certification
can accomplish, we have already explained in the main decision that the phrase "except
when the President certifies to the necessity of its immediate enactment, etc." in Art. VI,
26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form
[must be] distributed to the members three days before its passage" but also the
requirement that before a bill can become a law it must have passed "three readings on
separate days." There is not only textual support for such construction but historical basis
as well. This exception is based on the prudential consideration that if in all cases three
readings on separate days are required and a bill has to be printed in final form before it
can be passed, the need for a law may be rendered academic by the occurrence of the very
emergency or public calamity which it is meant to address. The members of the Senate
(including some of the petitioners in these cases) believed that there was an urgent need
for consideration of S. No. 1630, because they responded to the call of the President by
voting on the bill on second and third readings on the same day. While the judicial
department is not bound by the Senate's acceptance of the President's certification, the
respect due coequal departments of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave abuse of discretion caution a stay
of the judicial hand. At any rate, we are satisfied that S. No. 1630 received thorough
consideration in the Senate where it was discussed for six days. Only its distribution in
advance in its final printed form was actually dispensed with by holding the voting on
second and third readings on the same day (March 24, 1994). Otherwise, sufficient time
between the submission of the bill on February 8, 1994 on second reading and its approval
on March 24, 1994 elapsed before it was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold:
(1) to inform the members of Congress of what they must vote on and (2) to give them
notice that a measure is progressing through the enacting process, thus enabling them and
others interested in the measure to prepare their positions with reference to it. These
purposes were substantially achieved in the case of R.A. No. 7716.
3.
ID.; ID.; CONFERENCE COMMITTEE; CLOSE-DOOR MEETING; CONSTITUTIONAL
RIGHT TO KNOW, NOT VIOLATED THEREOF IN LIEU OF REPORT SUBMITTED BY THE
COMMITTEE. The public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing
versions of the House and the Senate. These changes are shown in the bill attached to the
Conference Committee Report. The members of both houses could thus ascertain what
changes had been made in the original bills without the need of a statement detailing the
changes. Nor is there any doubt about the power of a conference committee to insert new
provisions as long as these are germane to the subject of the conference. As this Court held
in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by
then Justice Cruz, the jurisdiction of the conference committee is not limited to resolving
differences between the Senate and the House. It may propose an entirely new provision.
What is important is that its report is subsequently approved by the respective houses of
Congress. This Court ruled that it would not entertain allegations that, because new
provisions had been added by the conference committee, there was thereby a violation of
the constitutional injunction that "upon the last reading of a bill, no amendment thereto
shall be allowed." At all events, under Art. VI, 16(3) each house has the power "to
determine the rules of its proceedings," including those of its committees. Any meaningful
change in the method and procedures of Congress or its committees must therefore be
sought in that body itself.
4.
ID.; ID.; RA 7716 (EXPANDED VALUE-ADDED-TAX [VAT] LAW); REQUIREMENT THAT
BILL SHALL EMBRACE ONLY ONE (1) SUBJECT EXPRESSED IN THE TITLE THEREOF, NOT
VIOLATED IN CASE AT BAR; AMENDMENT OF SEC. 103 OF THE NATIONAL INTERNAL

REVENUE CODE EXEMPTING THE PHILIPPINE AIRLINES (PAL) AND OTHERS FROM PAYING
VAT EXPRESSED IN RA 7716, SUFFICIENT; SEPARATE STATEMENT AMENDING FRANCHISE,
NOT NECESSARY. Art. VI, 26 (1) of the Constitution provides that "Every bill passed by
VAT is not expressed in the title of R.A. No. 7716. PAL was exempted from the payment of
the VAT along with other entities by 103 of the National Internal Revenue Code. Now, R.A.
No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
103. Such amendment of 103 is expressed in the title of R.A. No. 7716. Congress
thereby clearly expresses its intention to amend any provision of the NIRC which stands in
the way of accomplishing the purpose of the law. PAL asserts that the amendment of its
franchise must be reflected in the title of the law by specific reference to P.D. No. 1590. It
is unneccesary to do this in order to comply with the constitutional requirement, since it is
already stated in the title that the law seeks to amend the pertinent provisions of the NIRC,
among which is 103(q), in order to widen the base of the VAT. Actually, it is the bill which
becomes a law that is required to express in its title the subject of legislation. The titles of
H. No. 11197 and S. No. 1630 in fact specifically referred to 103 of the NIRC as among
the provisions sought to be amended. We are satisfied that sufficient notice had been given
of the pendency of these bills in Congress before they were enacted into what is now R.A.
No. 7716.
5.
ID.; ID.; ID.; TAXATION AND FREEDOM OF THE PRESS, ELABORATED. As a
general proposition, the press is not exempt from the taxing power of the State and that
what the constitutional guarantee of free press prohibits are laws which single out the press
or target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A. No.
7716 is none of these. Since the law granted the press a privilege, the law could take back
the privilege anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative.
burden to which other businesses have long ago been subject. And VAT is not a license tax.
It is not a tax on the exercise of a privilege, much less a constitutional right. It is imposed
on the sale, barter, lease or exchange of goods or properties or the sale or exchange of
services and the lease of properties purely for revenue purposes. To subject the press to its
payment is not to burden the exercise of its right any more than to make the press pay
income tax or subject it to general regulation is not to violate its freedom under the
Constitution.
6.
ID.; ID.; ID.; TAXATION AND FREEDOM OF RELIGION IN CASE AT BAR. The
Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from
the sales are used to subsidize the cost of printing copies which are given free to those who
cannot afford to pay so that to tax the sales would be to increase the price, while reducing
the volume of sale. Granting that to be the case, the resulting burden on the exercise of
religious freedom is so incidental as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate religious doctrines costly.
The registration fee imposed by 107 of the NIRC, as amended by 7 of R.A. No. 7716,
although fixed in amount, is really just to pay for the expenses of registration and
enforcement of provisions such as those relating to accounting in 108 of the NIRC. That
the PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it
from the payment of this fee because it also sells some copies. At any rate whether the PBS
is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax
by the Commissioner of Internal Revenue.
7.
ID.; ID.; ID.; TAXATION AND NON-IMPAIRMENT OF CONTRACTS. "Authorities
from numerous sources are cited by the plaintiffs, but none of them show that a lawful tax
on a new subject, or an increased tax on an old one, interferes with a contract or impairs its
obligation, within the meaning of the Constitution. Even though such taxation may affect
particular contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the Constitution, nor can it be said
that it impairs the obligation of any existing contract in its true legal sense." Indeed not
only existing laws but also "the reservation of the essential attributes of sovereignty, is . . .
read into contracts as a postulate of the legal order." Contracts must be understood as
having been made in reference to the possible exercise of the rightful authority of the
government and no obligation of contract can extend to the defeat of that authority.
8.
ID.; ID.; ID.; ON REAL ESTATE TRANSACTIONS; EQUALITY AND UNIFORMITY OF
TAXATION; VALIDITY OF VAT. CREBA claims that real estate transactions of "the less
poor," i.e., the middle class, who are equally homeless, should be exempted. There is a
difference between the "homeless poor" and the "homeless less poor" in the example given
by petitioner, because the second group or middle class can afford to rent houses in the
meantime that they cannot yet buy their own homes. The two social classes are thus
differently situated in life. "It is inherent in the power to tax that the State be free to select
the subjects of taxation, and it has been repeatedly held that 'inequalities which result from
a singling out of one particular class for taxation, or exemption infringe no constitutional
limitation.'" Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class be taxed at the same rate. The taxing power has the authority to
make reasonable and natural classifications for purposes of taxation. To satisfy this
requirement it is enough that the statute or ordinance applies equally to all persons, forms
and corporations placed in similar situation. Indeed, the VAT was already provided in E.O.
No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716 merely expands the base of
the tax. The validity of the original VAT Law was questioned on grounds similar to those
made in these cases, namely, that the law was "oppressive, discriminatory, unjust and
regressive in violation of Art. VI, 28(1) of the Constitution." This Court held: EO 273
satisfies all the requirements of a valid tax. It is uniform. . . . The sales tax adopted in EO
273 is applied similarly on all goods and services sold to the public, which are not exempt,
at the constant rate of 0% or 10%. The disputed sales tax is also equitable. It is imposed
only on sales of goods or services by persons engaged in business with an aggregate gross
annual sales exceeding P200,000.00. Small corner sari-sari stores are consequently exempt
from its application. Likewise exempt from the tax are sales of farm and marine products,
so that the costs of basic food and other necessities, spared as they are from the incidence
of the VAT, are expected to be relatively lower and within the reach of the general public.
9.
ID.; ID.; ID.; VAT IS AN INDIRECT AND REGRESSIVE TAX WHICH IS NOT ACTUALLY
PROHIBITED BY THE CONSTITUTION. The Constitution does not really prohibit the
imposition of indirect taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall "evolve a progressive system of taxation." The constitutional provision
has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as
much as possible, indirect taxes should be minimized." Indeed, the mandate to Congress is
not to prescribe, but to evolve, a progressive tax system. Sales taxes, are form of indirect
taxes, and they are also regressive. Resort to indirect taxes should be minimized but not
avoided entirely because it is difficult, if not impossible, to avoid them by imposing such
taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes
the regressive effects of this imposition by providing for zero rating of certain transactions
(R.A. No. 7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other
transactions. (R.A. No. 7716, 4, amending 103 of the NIRC) Transactions involving
basic and essential goods and services are exempted from the VAT. On the other hand, the
transactions which are subject to the VAT are those which involve goods and services which
are used or availed of mainly by higher income groups.
10.
ID.; JUDICIARY; JUDICIAL POWER; CASE MUST BE ACTUAL FOR ADJUDICATION.
CREBA's petition claims constitutional violations at wholesale and in the abstract. There is
no fully developed record which can impart to adjudication the impact of actuality. There is
no factual foundation to show in the concrete the application of the law to actual contracts
and exemplify its effect on property rights. A test case may be presented provided, it is an
actual case and not an abstract or hypothetical one. Our duty under Art. VIII, 1 (2) to
decide whenever a claim is made that "there has been a grave abuse of discretion
amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of
the government" can only arise if an actual case or controversy is before us.
11.
ID.; LEGISLATION; RA NO. 7716; ON COOPERATIVES; NO VIOLATION OF
CONSTITUTIONAL POLICY TOWARDS THE SAME SIMPLY BECAUSE TAX EXEMPTION WAS
NOT GRANTED. The Constitution does not require that cooperatives be granted tax
exemptions in order to promote their growth and viability. There is no basis for petitioner's
assertion that the government's policy toward cooperatives had been one of vacillation, as
far as the grant of tax privileges was concerned, and that it was to put an end to this
indecision that the constitutional provisions under Art. XII, 1 and 15 were adopted.
Perhaps as a matter of policy cooperatives should be granted tax exemptions, but that is
left to the discretion of Congress. If Congress does not grant exemption and there is no
discrimination to cooperatives, no violation of any constitutional policy can be charged. That
electric cooperatives are exempted from the VAT, We say: The classification between
electric and other cooperatives apparently rests on a congressional determination that there
is greater need to provide cheaper electric power to as many people as possible, especially
those living in the rural areas, than there is to provide them with other necessities in life.
We cannot say that such classification is unreasonable.
12.
ID.; JUDICIARY; RULING ON THE ACTION OF CONSTITUTIONAL VALIDITY OF RA
NO. 7716. We have carefully read the various arguments raised against the constitutional
validity of R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its
enforcement pending resolution of these cases. We have now come to the conclusion that
the law suffers from none of the infirmities attributed to it by petitioners and that its
enactment by the other branches of the government does not constitute a grave abuse of
discretion. Any question as to its necessity, desirability or expediency must be addressed to
Congress as the body which is electorally responsible, remembering that, as Justice Holmes
has said, "legislators are the ultimate guardians of the liberties and welfare of the people in
quite as great a degree as are the courts." It is not right that we should enforce the public
accountability of legislators, that those who took part in passing the law in question by
voting for it in Congress should later thrust to the courts the burden of reviewing measures
in the flush of enactment. This Court does not sit as a third branch of the legislature, much
less exercise a veto power over legislation.
RESOLUTION
These are motions seeking reconsideration of our decision dismissing the petitions filed in
these cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as
the Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been
filed by the several petitioners in these cases, with the exception of the Philippines
Educational Publishers Association, Inc. and the Association of Philippine Booksellers,
petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to which
the Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press
Institute, Inc., petitioner in G.R. No. 115544, Juan T. David, petitioner in G.R. No. 115525,
each filed a reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's
reply.
On June 27, 1995 the matter was submitted for resolution.
I.
Power of the Senate to propose amendments to revenue bills. Some of the
petitioners (Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real
Estate and Builders Association [CREBA]) reiterate previous claims made by them that R.A.
No. 7716 did not "originate exclusively" in the House of Representatives as required by Art.
VI, 24 of the Constitution. Although they admit that H. No. 11197 was filed in the House
of Representatives where it passed three readings and that afterward it was sent to the
Senate where after first reading it was referred to the Senate Ways and Means Committee,
they complain that the Senate did not pass it on second and third readings. Instead what
the Senate did was to pass its own version (S. No. 1630) which it approved on May 24,
1994. Petitioner Tolentino adds that what the Senate committee should have done was to
amend H. No. 11197 by striking out the text of the bill and substituting it with the text of S.
No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just
becomes the text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at
least two occasions during the Eighth Congress, the Senate passed its own version of
revenue bills, which, in consolidation with House bills earlier passed, became the enrolled
bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the
President on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was
approved by the House on January 29, 1992, and S. No. 1920, which was approved by the
Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD
TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by
the President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was
approved by the House of Representatives on August 2, 1989, and S. No. 807, which was
approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of
the consolidation of House and Senate bills. These are the following, with indications of the
dates on which the laws were approved by the President and dates the separate bills of the
two chambers of Congress were respectively passed:
1.
R.A. No. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE
THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28,
1992)
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2.
R.A. No. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE

PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT
UNITS TO SHARE IN VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF
THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3.
R.A. No. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE

PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING
FOR THIS PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992

4.
R.A. No. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS,

INSTRUMENTALITIES OR AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS) TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT
THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF GOODS
AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY
CONTRACTORS (April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5.
R.A. No. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE

DIVIDENDS UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR
OTHER PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
6.
R.A. No. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE

DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC
PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
7.
R.A. No. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK

LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL
PUBLIC OFFERING, AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND REPEALING CERTAIN
SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House,
passed its own version of a House revenue measure. It is noteworthy that, in the particular
case of S. No. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to
approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner
Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in this case, a separate bill like S. No.
1630 is instead enacted as a substitute measure, "taking into consideration . . . H.B.
11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxxxxxxxx
Section 68.
considered.
Not more than one amendment to the original amendment shall be
No amendment by substitution shall be entertained unless the text thereof is submitted in

writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
Section 69.
No amendment which seeks the inclusion of a legislative provision foreign to
the subject matter of a bill (rider) shall be entertained.
xxxxxxxxx
Section 70-A. A bill or resolution shall not be amended by substituting it with another which
covers a subject distinct from that proposed in the original bill or resolution. (Emphasis
added.)
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine
Senate possesses less power than the U.S. Senate because of textual differences between
constitutional provisions giving them the power to propose or concur with amendments.
Art. I, Section 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but the Senate
may propose or concur with amendments as on other Bills.
Art. VI, Section 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of
local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop
the phrase "as on other Bills" in the American version, according to petitioners, shows the
intention of the framers of our Constitution to restrict the Senate's power to propose
amendments to revenue bills. Petitioner Tolentino contends that the word "exclusively" was
inserted to modify "originate" and "the words 'as in any other bills' (sic) were eliminated so
as to show that these bills were not to be like other bills but must be treated as a special
kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power
of the Senate. It will be recalled that the 1935 Constitution originally provided for a
unicameral National Assembly. When it was decided in 1939 to change to a bicameral
legislature, it became necessary to provide for the procedure for lawmaking by the Senate
and the House of Representatives. The work of proposing amendments to the Constitution
was done by the National Assembly, acting as a constituent assembly, some of whose
members, jealous of preserving the Assembly's lawmaking powers, sought to curtail the
powers of the proposed Senate. Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local application, and
private bills shall originate exclusively in the Assembly, but the Senate may propose or
concur with amendments. In case of disapproval by the Senate of any such bills, the
Assembly may repass the same by a two-thirds vote of all its members, and thereupon, the
bill so repassed shall be deemed enacted and may be submitted to the President for
corresponding action. In the event that the Senate should fail to finally act on any such
bills, the Assembly may, after thirty days from the opening of the next regular session of
the same legislative term, reapprove the same with a vote of two-thirds of all the members
of the Assembly. And upon such reapproval, the bill shall be deemed enacted and may be
submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was
approved by the National Assembly and embodied in Resolution No. 38, as amended by
Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 [1950]) The proposed
amendment was submitted to the people and ratified by them in the elections held on June
18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of
the present Constitution was derived. It explains why the word "exclusively" was added to
the American text from which the framers of the Philippine Constitution borrowed and why
the phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the
power of the Senate to propose amendments must be understood to be full, plenary and
complete "as on other Bills." Thus, because revenue bills are required to originate
exclusively in the House of Representatives, the Senate cannot enact revenue measures of
its own without such bills. After a revenue bill is passed and sent over to it by the House,
however, the Senate certainly can pass its own version on the same subject matter. This
follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to
concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is apparently without
restriction. It would seem that by virtue of this power, the Senate can practically re-write a
bill required to come from the House and leave only a trace of the original bill. For example,
a general revenue bill passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax. This was changed by the Senate into a
corporation tax. The amending authority of the Senate was declared by the United States
Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone
Tracy Company, 220 U.S. 107, 55 L. ed. 389]
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247 [1961])
The above-mentioned bills are supposed to be initiated by the House of Representatives
because it is more numerous in membership and therefore also more representative of the
people. Moreover, its members are presumed to be more familiar with the needs of the
country in regard to the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to propose or
concur with amendments to the bills initiated by the House of Representatives. Thus, in one
case, a bill introduced in the U.S. House of Representatives was changed by the Senate to
make a proposed inheritance tax a corporation tax. It is also accepted practice for the
Senate to introduce what is known as an amendment by substitution, which may entirely
replace the bill initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 [1993])
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate may
propose or concur with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a high
school text, a committee to which a bill is referred may do any of the following:
(1)
to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new bill as a
substitute, in which case it will be known as a committee bill; or (4) to make no report at
all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 [1950])
To except from this procedure the amendment of bills which are required to originate in the
House by prescribing that the number of the House bill and its other parts up to the
enacting clause must be preserved although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to insist on a mere technicality. At
any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is
therefore as much an amendment of H. No. 11197 as any which the Senate could have
made.
II.
S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they
assume that S. No. 1630 is an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate "in substitution of S.B. No.
1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there
is something substantially different between the reference to S. No. 1129 and the reference
to H. No. 11197. From this premise, they conclude that R.A. No. 7716 originated both in the
House and in the Senate and that it is the product of two "half-baked bills because neither
H. No. 11197 nor S. No. 1630 was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be
mere amendments of the corresponding provisions of H. No. 11197. The very tabular
comparison of the provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to
the basic petition of petitioner Tolentino, while showing differences between the two bills, at
the same time indicates that the provisions of the Senate bill were precisely intended to be
amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate
bill was a mere amendment of the House bill, H. No. 11197 in its original form did not have
to pass the Senate on second and third readings. It was enough that after it was passed on
first reading it was referred to the Senate Committee on Ways and Means. Neither was it
required that S. No. 1630 be passed by the House of Representatives before the two bills
could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No.
1630. When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the
disclosure of bank deposits), were referred to a conference committee, the question was
raised whether the two bills could be the subject of such conference, considering that the
bill from one house had not been passed by the other and vice versa. As Congressman
Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is
passed by the House but not passed by the Senate, and a Senate bill of a similar nature is
passed in the Senate but never passed in the House, can the two bills be the subject of a
conference, and can a law be enacted from these two bills? I understand that the Senate bill
in this particular instance does not refer to investments in government securities, whereas
the bill in the House, which was introduced by the Speaker, covers two subject matters: not
only investigation of deposits in banks but also investigation of investments in government
securities. Now, since the two bills differ in their subject matter, I believe that no law can
be enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is precisely in cases
like this where a conference should be had. If the House bill had been approved by the
Senate, there would have been no need of a conference; but precisely because the Senate
passed another bill on the same subject matter, the conference committee had to be
created, and we are now considering the report of that committee.
(2 CONG. REC. No. 13, JULY 27, 1955, pp. 3841-42 [emphasis added])
III.
The President's certification. The fallacy in thinking that H. No. 11197 and S. No.
1630 are distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's
and PAL's) contention that because the President separately certified to the need for the
immediate enactment of these measures, his certification was ineffectual and void. The
certification had to be made of the version of the same revenue bill which at the moment
was being considered. Otherwise, to follow petitioners' theory, it would be necessary for the
President to certify as many bills as are presented in a house of Congress even though the
bills are merely versions of the bill he has already certified. It is enough that he certifies the
bill which, at the time he makes the certification, is under consideration. Since on March 22,
1994 the Senate was considering S. No. 1630, it was that bill which had to be certified. For
that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the House.
This bill was later substituted, together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the main
decision that the phrase "except when the President certifies to the necessity of its
immediate enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that
"printed copies [of a bill] in its final form [must be] distributed to the members three days
before its passage" but also the requirement that before a bill can become a law it must
have passed "three readings on separate days." There is not only textual support for such
construction but historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2)
No bill shall be passed by either House unless it shall have been printed and copies
thereof in its final form furnished its Members at least three calendar days prior to its
passage, except when the President shall have certified to the necessity of its immediate
enactment. Upon the last reading of a bill, no amendment thereof shall be allowed and the
question upon its passage shall be taken immediately thereafter, and the yeas and nays
entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2)
No bill shall become a law unless it has passed three readings on separate days, and
printed copies thereof in its final form have been distributed to the Members three days
before its passage, except when the Prime Minister certifies to the necessity of its
immediate enactment to meet a public calamity or emergency. Upon the last reading of a
bill, no amendment thereto shall be allowed, and the vote thereon shall be taken
immediately thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26
(2) of the present Constitution, thus:
(2)
No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been distributed
to its Members three days before its passage, except when the President certifies to the
necessity of its immediate enactment to meet a public calamity or emergency. Upon the last
reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be
taken immediately thereafter, and the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on
separate days are required and a bill has to be printed in final form before it can be passed,
the need for a law may be rendered academic by the occurrence of the very emergency or
public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially
in a country like the Philippines where budget deficit is a chronic condition. Even if this were
the case, an enormous budget deficit does not make the need for R.A. No. 7716 any less
urgent or the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases)
believed that there was an urgent need for consideration of S. No. 1630, because they
responded to the call of the President by voting on the bill on second and third readings on
the same day. While the judicial department is not bound by the Senate's acceptance of the
President's certification, the respect due coequal departments of the government in matters
committed to them by the Constitution and the absence of a clear showing of grave abuse
of discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate
where it was discussed for six days. Only its distribution in advance in its final printed form
was actually dispensed with by holding the voting on second and third readings on the same
day (March 24, 1994). Otherwise, sufficient time between the submission of the bill on
February 8, 1994 on second reading and its approval on March 24, 1994 elapsed before it
was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold:
(1) to inform the members of Congress of what they must vote on and (2) to give them
notice that a measure is progressing through the enacting process, thus enabling them and
others interested in the measure to prepare their positions with reference to it. (1 J. G.
SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p. 282 [1972]). These
purposes were substantially achieved in the case of R.A. No. 7716.
IV.
Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and
the Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. [MABINI]) that
in violation of the constitutional policy of full public disclosure and the people's right to know
(Art. II, 28 and Art.III, 7) the Conference Committee met for two days in executive
session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold
such sessions with only the conferees and their staffs in attendance and it was only in 1975
when a new rule was adopted requiring open sessions. Unlike its American counterpart, the
Philippine Congress has not adopted a rule prescribing open hearings for conference
committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975,
at least staff members were present. These were staff members of the Senators and
Congressmen, however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the conference were excluded.
There is no showing that the conferees themselves did not take notes of their proceedings
so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic
negotiations involving state interest, conferees keep notes of their meetings. Above all, the
public's right to know was fully served because the Conference Committee in this case
submitted a report showing the changes made on the differing versions of the House and
the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports
must contain "a detailed, sufficiently explicit statement of the changes in or other
amendments." These changes are shown in the bill attached to the Conference Committee
Report. The members of both houses could thus ascertain what changes had been made in
the original bills without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400
(Land Reform Act of 1955) was reported by the Conference Committee. Congressman
Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the report of the
conference committee regarding House Bill No. 2557 by reason of the provision of Section
11, Article XII, of the Rules of this House which provides specifically that the conference
report must be accompanied by a detailed statement of the effects of the amendment on
the bill of the House. This conference committee report is not accompanied by that detailed
statement, Mr. Speaker. Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the
point of order raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the bill have
been amended. In this case before us an entire bill is presented; therefore, it can be easily
seen from the reading of the bill what the provisions are. Besides, this procedure has been
an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the
provisions of the Rules, and the reason for the requirement in the provision cited by the
gentleman from Pangasinan is when there are only certain words or phrases inserted in or
deleted from the provisions of the bill included in the conference report, and we cannot
understand what those words and phrases mean and their relation to the bill. In that case,
it is necessary to make a detailed statement on how those words and phrases will affect the
bill as a whole; but when the entire bill itself is copied verbatim in the conference report,
that is not necessary. So when the reason for the Rule does not exist, the Rule does not
exist.
(2 CONG. REC. No. 2, p. 4056. [emphasis added])
Congressman Tolentino was sustained by the chair. The record shows that when the ruling
was appealed, it was upheld by viva voce and when a division of the House was called, it
was sustained by a vote of 48 to 5. (Id., p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions
as long as these are germane to the subject of the conference. As this Court held in
Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then
Justice Cruz, the jurisdiction of the conference committee is not limited to resolving
differences between the Senate and the House. It may propose an entirely new provision.
What is important is that its report is subsequently approved by the respective houses of
Congress. This Court ruled that it would not entertain allegations that, because new
provisions had been added by the conference committee, there was thereby a violation of
the constitutional injunction that "upon the last reading of a bill, no amendment thereto
shall be allowed."
Applying these principles, we shall decline to look into the petitioners' charges that an
amendment was made upon the last reading of the bill that eventually became R.A. No.
7354 and that copies thereof in its final form were not distributed among the members of
each House. Both the enrolled bill and the legislative journals certify that the measure was
duly enacted, i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution. We are
bound by such official assurances from a coordinate department of the government, to
which we owe, at the very least, a becoming courtesy.
(Id. at 710. [emphasis added])
It is interesting to note the following description of conference committees in the Philippines
in a 1979 study:
Conference committees may be of two types: free or instructed. These committees may be
given instructions by their parent bodies or they may be left without instructions. Normally
the conference committees are without instructions, and this is why they are often critically
referred to as "the little legislatures." Once bills have been sent to them, the conferees have
almost unlimited authority to change the clauses of the bills and in fact sometimes
introduce new measures that were not in the original legislation. No minutes are kept, and
members' activities on conference committees are difficult to determine. One congressman
known for his idealism put it this way: "I killed a bill on export incentives for my interest
group [copra] in the conference committee but I could not have done so anywhere else."
The conference committee submits a report to both houses, and usually it is accepted. If
the report is not accepted, then the committee is discharged and new members are
appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND LEGISLATURES: A
COMPARATIVE ANALYSIS 163 [J. D. LEES AND M. SHAW, eds.])
In citing this study, we pass no judgment on the methods of conference committees. We

cite it only to say that conference committees here are no different from their counterparts
in the United States whose vast powers we noted in Philippine Judges Association v. Prado,
supra. At all events, under Art. VI, 16 (3) each house has the power "to determine the
rules of its proceedings," including those of its committees. Any meaningful change in the
method and procedures of Congress or its committees must therefore be sought in that
body itself.
V.
The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716
violates Art. VI, 26 (1) of the Constitution which provides that "Every bill passed by
VAT is not expressed in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in
lieu of all other taxes, duties, royalties, registration, license and other fees and charges of
any kind, nature, or description, imposed, levied, established, assessed or collected by any
municipal, city, provincial or national authority or government agency, now or in the
future."
PAL was exempted from the payment of the VAT along with other entities by 103 of the
National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxxxxxxxx
(q)
Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
xxxxxxxxx
(q)
Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590.
xxxxxxxxx
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE
AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND
REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES,"
Congress thereby clearly expresses its intention to amend any provision of the NIRC which
stands in the way of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by
specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the
constitutional requirement, since it is already stated in the title that the law seeks to amend
the pertinent provisions of the NIRC, among which is 103 (q), in order to widen the base
of the VAT. Actually, it is the bill which becomes a law that is required to express in its title
the subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically
referred to 103 of the NIRC as among the provisions sought to be amended. We are
satisfied that sufficient notice had been given of the pendency of these bills in Congress
before they were enacted into what is now R.A. No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by
PAL was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL
CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING
FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED
THEREWITH. It contained a provision repealing all franking privileges. It was contended that
the withdrawal of franking privileges was not expressed in the title of the law. In holding
that there was sufficient description of the subject of the law in its title, including the repeal
of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable but
would actually render legislation impossible. [Cooley, Constitutional Limitations, 8th Ed., p.
297] As has been correctly explained:
The details of the legislative act need not be specifically stated in its title, but matter
germane to the subject as expressed in the title, and adopted to the accomplishment of the
object in view, may properly be included in the act. Thus, it is proper to create in the same
act the machinery by which the act is to be enforced, to prescribe the penalties for its
infraction, and to remove obstacles in the way of its execution. If such matters are properly
connected with the subject as expressed in the title, it is unnecessary that they should also
have special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI.
Claims of press freedom and religious liberty. We have held that, as a general
proposition, the press is not exempt from the taxing power of the State and that what the
constitutional guarantee of free press prohibits are laws which single out the press or target
a group belonging to the press for special treatment or which in any way discriminate
against the press on the basis of the content of the publication, and R.A. No. 7716 is none
of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press. At any
rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom
is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the
press a privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
burden to which other businesses have long ago been subject. It is thus different from the
tax involved in the cases invoked by the PPI. The license tax in Grosjean v. American Press
Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be discriminatory because it was laid
on the gross advertising receipts only of newspapers whose weekly circulation was over
20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana.
These large papers were critical of Senator Huey Long who controlled the state legislature
which enacted the license tax. The censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460
U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although
it could have been made liable for the sales tax or, in lieu thereof, for the use tax on the
privilege of using, storing or consuming tangible goods, the press was not. Instead, the
press was exempted from both taxes. It was, however, later made to pay a special use tax
on the cost of paper and ink which made these items "the only items subject to the use tax
that were component of goods to be sold at retail." The U.S. Supreme Court held that the
differential treatment of the press "suggests that the goal of regulation is not unrelated to
suppression of expression, and such goal is presumptively unconstitutional." It would
therefore appear that even a law that favours the press is constitutionally suspect. (See the
dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn
"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as
those previously granted to PAL, petroleum concessionaires, enterprises registered with the
Export Processing Zone Authority, and many more are likewise totally withdrawn, in
addition to exemptions which are partially withdrawn, in an effort to broaden the base of
the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716.
An enumeration of some of these transactions will suffice to show that by and large this is
not so and that the exemptions are granted for purpose. As the Solicitor General says, such
exemptions are granted, in some cases, to encourage agricultural production and, in other
cases, for the personal benefit of the end-user rather than for profit. The exempt
transactions are:
(a)
Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).
(b)
Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional instruments
and implements, by persons coming to the Philippines to settle here.
(c)
Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to percentage
tax.
(d)
Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e)
Works of art and similar creations sold by the artist himself.
(f)
Transactions exempted under special laws, or international agreements.
(g)
Export-sales by persons not VAT-registered.
(h)
Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

The PPI asserts that it does not really matter that the law does not discriminate against the
press because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by
the First Amendment is not so restricted. A license tax certainly does not acquire
constitutional validity because it classifies the privileges protected by the First Amendment
along with the wares and merchandise of hucksters and peddlers and treats them all alike.
Such equality in treatment does not save the ordinance. Freedom of press, freedom of
speech, freedom of religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is
mainly for regulation. Its imposition on the press is unconstitutional because it lays a prior
restraint on the exercise of its right. Hence, although its application to others, such those
selling goods, is valid, its application to the press or to religious groups, such as the
Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets,
is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on
income or property of a preacher. It is quite another thing to exact a tax on him for
delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil.
386 (1957) which invalidated a city ordinance requiring a business license fee on those
engaged in the sale of general merchandise. It was held that the tax could not be imposed
on the sale of bibles by the American Bible Society without restraining the free exercise of
its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to burden
the exercise of its right any more than to make the press pay income tax or subject it to
general regulation is not to violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which are
given free to those who cannot afford to pay so that to tax the sales would be to increase
the price, while reducing the volume of sale. Granting that to be the case, the resulting
burden on the exercise of religious freedom is so incidental as to make it difficult to
differentiate it from any other economic imposition that might make the right to
disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible burden on the
right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as
amended by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the
expenses of registration and enforcement of provisions such as those relating to accounting
in 108 of the NIRC. That the PBS distributes free bibles and therefore is not liable to pay
the VAT does not excuse it from the payment of this fee because it also sells some copies.
At any rate whether the PBS is liable for the VAT must be decided in concrete cases, in the
event it is assessed this tax by the Commissioner of Internal Revenue.
VII.
Alleged violations of the due process, equal protection and contract clauses and the
rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts,
(2) classifies transactions as covered or exempt without reasonable basis and (3) violates
the rule that taxes should be uniform and equitable and that Congress shall "evolve a
progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to be paid because of the 10%
VAT. The additional amount, it is pointed out, is something that the buyer did not anticipate
at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a
new subject, or an increased tax on an old one, interferes with a contract or impairs its
obligation, within the meaning of the Constitution. Even though such taxation may affect
particular contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the Constitution, nor can it be said
that it impairs the obligation of any existing contract in its true legal sense." (La Insular v.
Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 [1919]) Indeed not only existing
laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor
General, 22 SCRA 135, 147 [1968]) Contracts must be understood as having been made in
reference to the possible exercise of the rightful authority of the government and no
obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and
Ohio R.R., 79 L. Ed. 885 [1935])
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale
of agricultural products, food items, petroleum, and medical and veterinary services, it
grants no exemption on the sale of real property which is equally essential. The sale of real
property for socialized and low-cost housing is exempted from the tax, but CREBA claims
that real estate transactions of "the less poor," i.e., the middle class, who are equally
homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services etc., which are essential
goods and services was already exempt under 103, pars. (b) (d) (1) of the NIRC before
the enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner to the payment of the
VAT. Moreover, there is a difference between the "homeless poor" and the "homeless less
poor" in the example given by petitioner, because the second group or middle class can
afford to rent houses in the meantime that they cannot yet buy their own homes. The two
social classes are thus differently situated in life. "It is inherent in the power to tax that the
State be free to select the subjects of taxation, and it has been repeatedly held that
'inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955).
Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA
654, 663 (1984); KapatiranngmgaNaglilingkodsaPamahalaanngPilipinas, Inc. v. Tan, 163
SCRA 371 [1988]).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art.
VI, 28 (1) which provides that "The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the
same class be taxed at the same rate. The taxing power has the authority to make
reasonable and natural classification for purposes of taxation. To satisfy this requirement it
is enough that the statute or ordinance applies equally to all persons, forms and
corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v.
Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was
enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT
Law was questioned in KapatiranngNaglilingkodsaPamahalaanngPilipinas, Inc. v. Tan, 163
SCRA 383 (1988) on grounds similar to those made in these cases, namely, that the law
was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, 28 (1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the
public, which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products, so that the costs of basic food and
other necessities, spared as they are from the incidence of the VAT, are expected to be
relatively lower and within the reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative
Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law
contravenes the mandate of Congress to provide for a progressive system of taxation
because the law imposes a flat rate of 10% and thus places the tax burden on all taxpayers
without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that Congress shall "evolve a progressive system
of taxation." The constitutional provision has been interpreted to mean simply that "direct
taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 Second ed.
[1977]) Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive
tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes,
would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973
Constitution from which the present Art. VI, 28 (1) was taken. Sales taxes are also
regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult,
if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability
to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of
the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4, amending
103 of the NIRC)
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a)
Goods for consumption or use which are in their original state (agricultural, marine
and forest products, cotton seeds in their original state, fertilizers, seeds, seedlings,
fingerlings, fish, prawn livestock and poultry feeds) and goods or services to enhance
agriculture (milling of palay, corn, sugar cane and raw sugar, livestock, poultry feeds,
fertilizer, ingredients used for the manufacture of feeds).
(b)
Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional instruments
and implements, by persons coming to the Philippines to settle here.
(c)
Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to percentage
tax.
(d)
Educational services, medical, dental, hospital and veterinary services, and services
rendered under employer-employee relationship.
(e)
Works of art and similar creations sold by the artist himself.
(f)
Transactions exempted under special laws, or international agreements.
(g)
Export-sales by persons not VAT-registered.
(h)
Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)

On the other hand, the transactions which are subject to the VAT are those which involve
goods and services which are used or availed of mainly by higher income groups. These
include real properties held primarily for sale to customers or for lease in the ordinary
course of trade or business, the right or privilege to use patent, copyright, and other similar
property or right, the right or privilege to use industrial, commercial or scientific equipment,
motion picture films, tapes and discs, radio, television, satellite transmission and cable
television time, hotels, restaurants and similar places, securities, lending investments,
taxicabs, utility cars for rent, tourist buses, and other common carriers, services of
franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional
violations by tendering issues not at retail but at wholesale and in the abstract. There is no
fully developed record which can impart to adjudication the impact of actuality. There is no
factual foundation to show in the concrete the application of the law to actual contracts and
exemplify its effect on property rights. For the fact is that petitioner's members have not
even been assessed the VAT. Petitioner's case is not made concrete by a series of
hypothetical questions asked which are no different from those dealt with in advisory
opinions.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here, does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a provision as
void on its face, he has not made out a case. This is merely to adhere to the authoritative
doctrine that where the due process and equal protection clauses are invoked, considering
that they are not fixed rules but rather broad standards, there is a need for proof of such
persuasive character as would lead to such a conclusion. Absent such a showing, the
presumption of validity must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may
be that postponement of adjudication would result in a multiplicity of suits. This need not be
the case, however. Enforcement of the law may give rise to such a case. A test case,
provided it is an actual case and not an abstract or hypothetical one, may thus be
presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does
not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, (2) to decide whenever a claim is made
that "there has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the government." This duty can only arise if
an actual case or controversy is before us. Under Art. VIII, 5 our jurisdiction is defined in
terms of "cases" and all that Art. VIII, 1 (2) can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of
discretion by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1 (2) is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the right to
sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559
[1912]), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the Constitution,
as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary Act of 1948
(R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus
apportioned constitutes the court's "jurisdiction," defined as "the power conferred by law
upon a court or judge to take cognizance of a case, to the exclusion of all others." (United
States v. Arceo, 6 Phil. 29 [1906]) Without an actual case coming within its jurisdiction, this
Court cannot inquire into any allegation of grave abuse of discretion by the other
departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative
Union of the Philippines (CUP), after briefly surveying the course of legislation, argues that
it was to adopt a definite policy of granting tax exemption to cooperatives that the present
Constitution embodies provisions on cooperatives. To subject cooperatives to the VAT would
therefore be to infringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175
was promulgated exempting cooperatives from the payment of income taxes and sales
taxes but in 1984, because of the crisis which menaced the national economy, this
exemption was withdrawn by P.D. No. 1955; that in 1986, P.D. No. 2008 again granted
cooperatives exemption from income and sales taxes until December 31, 1991, but, in the
same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the framers of the
Constitution "repudiated the previous actions of the government adverse to the interests of
the cooperatives, that is, the repeated revocation of the tax exemption to cooperatives and
instead upheld the policy of strengthening the cooperatives by way of the grant of tax
exemptions," by providing the following in Art. XII:
1.
The goals of the national economy are a more equitable distribution of opportunities,
income, and wealth; a sustained increase in the amount of goods and services produced by
the nation for the benefit of the people; and an expanding productivity as the key to raising
the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound agricultural
development and agrarian reform, through industries that make full and efficient use of
human and natural resources, and which are competitive in both domestic and foreign
markets. However, the State shall protect Filipino enterprises against unfair foreign
competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall
be given optimum opportunity to develop. Private enterprises, including corporations,
cooperatives, and similar collective organizations, shall be encouraged to broaden the base
of their ownership.
15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955
singled out cooperatives by withdrawing their exemption from income and sales taxes under
P.D. No. 175, 5. What P.D. No. 1955, 1 did was to withdraw the exemptions and
preferential treatments theretofore granted to private business enterprises in general, in
view of the economic crisis which then beset the nation. It is true that after P.D. No. 2008,
2 had restored the tax exemptions of cooperatives in 1986, the exemption was again
repealed by E.O. No. 93, 1, but then again cooperatives were not the only ones whose
exemptions were withdrawn. The withdrawal of tax incentives applied to all, including
government and private entities. In the second place, the Constitution does not really
require that cooperatives be granted tax exemptions in order to promote their growth and
viability. Hence, there is no basis for petitioner's assertion that the government's policy
toward cooperatives had been one of vacillation, as far as the grant of tax privileges was
concerned, and that it was to put an end to this indecision that the constitutional provisions
cited were adopted. Perhaps as a matter of policy cooperatives should be granted tax
exemptions, but that is left to the discretion of Congress. If Congress does not grant
exemption and there is no discrimination to cooperatives, no violation of any constitutional
policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are
exempt from taxation. Such theory is contrary to the Constitution under which only the
following are exempt from taxation: charitable institutions, churches and parsonages, by
reason of Art. VI, 28 (3), and non-stock, non-profit educational institutions, by reason of
Art.XIV, 4 (3). CUP's further ground for seeking the invalidation of R.A. No. 7716 is that
it denies cooperatives the equal protection of the law because electric cooperatives are
exempted from the VAT. The classification between electric and other cooperatives (farmers
cooperatives, producers cooperatives, marketing cooperatives, etc.) apparently rests on a
congressional determination that there is greater need to provide cheaper electric power to
as many people as possible, especially those living in the rural areas, than there is to
provide them with other necessities in life. We cannot say that such classification is
unreasonable.
We have carefully read the various arguments raised against the constitutional validity of
R.A. No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement
pending resolution of these cases. We have now come to the conclusion that the law suffers
from none of the infirmities attributed to it by petitioners and that its enactment by the
other branches of the government does not constitute a grave abuse of discretion. Any
question as to its necessity, desirability or expediency must be addressed to Congress as
the body which is electorally responsible, remembering that, as Justice Holmes has said,
"legislators are the ultimate guardians of the liberties and welfare of the people in quite as
great a degree as are the courts." (Missouri, Kansas & Texas Ry, Co. v. May, 194 U.S. 267,
270, 48 L. Ed. 971, 973 [1904]) It is not right, as petitioner in G.R. No. 115543 does in
arguing that we should enforce the public accountability of legislators, that those who took
part in passing the law in question by voting for it in Congress should later thrust to the
courts the burden of reviewing measures in the flush of enactment. This Court does not sit
as a third branch of the legislature, much less exercise a veto power over legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the temporary
restraining order previously issued is hereby lifted. SO ORDERED.
Sec 27 APPROVAL AND VETO POWER OF THE PRESIDENT
Sec 28
TAXATION SHALL BE UNIFORM AND EQUITABLE. CONGRESS SHALL
EVOLVE A PROGRESSIVE SYSTEM OF TAXATION
UNIFORMITY AND EQUITABILITY (Art.VI, Sec. 28 [1])
Uniformity - all taxable articles or properties of the same class shall be taxed at the same
rate. (City of Baguio vs. De Leon GR L-24756 October 31,1968) Different articles or other
subjects may be taxed at different rates provided that the rate is uniform on the same class
everywhere. (De Villata vs. Standley)
Equity requires that such apportionment be more or less just, in the light of the
taxpayers ability to shoulder the tax burden, usually measured in terms of wealth, and if
warranted, on the basis of the benefits he receives from the government. Taxation may be
uniform but inequitable where the amount is excessive or unreasonable.
A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall
be taxed alike. The Legislature has the inherent power not only to select the subjects of
taxation but to grant exemptions. Tax exemptions have never been deemed violative of the
equal protection clause.
Uniformity and Equitable
BP 135 amended Section 21 of the National Internal Revenue Code. The
amendment provided a different schedule of rates for taxable compensation income and for
taxable net income. It provided that the tax base for those earning compensation income at
fixed rates would be gross income, while the base for the income of businesses and
professionals would be based on the net income. Petitioner challenged the validity of the
amendment on the ground that he would be unduly discriminated against by the imposition
of higher rates of tax upon his income arising from the exercise of his profession as
compared to those which are imposed upon fixed income or salaried individual taxpayers.
He claims that the law amounts to class legislation, in violation of both the equal protection
and due process clauses and the rule on uniformity in taxation.
ISSUE: Whether the provision violates the rule on uniformity on taxation.
HELD: No. The rule of uniformity does not call for perfect uniformity or perfect equality, it
merely means that all taxable articles of kinds of property of the same class shall be taxed
at the same rate. The taxing power has the
authority to make reasonable and natural classifications for purposes of
taxation. In this case, there is a discernible basis of classification, which is the susceptibility
of the income to the application of generalized rules removing all deductible items for all
taxpayers within the class and fixing a
set of reduced tax rates to be applied to all of them. Taxpayers who are
recipients of compensation income are set apart as a class. As there are
practically no overhead expenses, these taxpayers are not entitled to make
deductions for income tax purposes because they are in the same situation more or less. On
the other hand, in the case of professionals in the practice of their calling and also the
businessmen there is no uniformity in the costs or expenses necessary to produce their
income. It would not be just to disregard the disparities by giving all of them zero deduction
and indiscriminately impose on all alike the same tax rates on the basis of gross income.
There is ample justification for the law to adopt gross system of income taxation to
compensation income, while continuing the system of net income taxation as regards the
professional and business income.
Sison v. Ancheta 103 SCRA 654
Uniformity and Equality
Lingayen Gulf was the grantee of a municipal franchise to supply electricity in Pangasinan.
It was subject to a 2% franchise tax under the municipal franchise. The CIR assessed the
power company deficiency franchise tax, computed at 5%, based on the rate prescribed by
the NIRC for franchises like Lingayen Gulf. Subsequently, a law was passed granting
Lingayen Gulf a legislative franchise to supply electric current to the public, subject to 2%
franchise tax, The CIR claimed that the law was unconstitutional for being violative of the
uniformity and equality of taxation clause of the Constitution since other similar franchises
were subject to a 5% franchise tax imposed by the Tax Code.
ISSUE: Whether the law violates the rule on uniformity and equality of
taxation.
HELD: No. A tax is uniform when it operates with the same force and effect in every place
where the subject of it is found. Uniformity means that all property belonging to the same
class shall be taxed alike. The Legislature has the inherent power not only to select the
subjects of taxation but to grant exemptions. Tax exemptions have never been deemed
violative of the equal protection clause. The law merely transferred Lingayens power plant
from its former class to which it belonged. All power plants belonging to this particular class
were subject to the same 2% tax. Therefore, the rule on uniformity of taxation was not
violated.
Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R. No. L23771, August 4, 1988
Uniformity and Equality
The Municipal Board of Manila passed an ordinance prohibiting an alien from being
employed or engaging in any position or occupation or business enumerated therein,
whether permanent, temporary, or casual, without first securing an employment permit
from the Mayor and paying the P50 permit fee. HiuChiongfiled an action to restrain the
enforcement of the ordinance and to have it declared null and void for being discriminatory
and violative of the rule on uniformity in taxation.
The Mayor argues that the ordinance cannot be declared null and void on the ground that it
violates the rule on uniformity of taxation because this rule applies only to purely tax or
revenue measures and not to regulatory measures, such as the ordinance.
ISSUE: Whether the ordinance is valid,
HELD: The ordinance is null and void.
The first part of the ordinance requiring an alien to secure an employment permit is
regulatory in character because it involves the exercise of discretion on the pad of the
Mayor in approving or disapproving the applications. However, the second part which
requires the payment of P50 as employees tee is not regulatory but a revenue measure.
There is no logic or justification in exacting P50 from aliens who have been cleared for
employment the obvious purpose of the ordinance is to raise money under the guise of
regulation. The P50 fee is unreasonable not only because it is excessive but because it fails
to consider valid substantial differences in situation among individual, aliens who are
required to pay it. The same amount is being collected from every employee lowly, whether
he is casual or permanent, part time or full time, or whether he is a lowly employee or a
highly paid executive.
Villegas v. Hiu Chiang TsiaPao Ho GR L29646 November 10, 1978
ORMOC SUGAR COMPANY, INC., plaintiff-appellant, vs. THE TREASURER OF ORMOC CITY,
THE MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS, as Mayor of Ormoc
City and ORMOC CITY, defendants-appellees.
[G.R. No. L-23794. February 17, 1968.]
SYLLABUS
1.
MUNICIPAL CORPORATIONS; POWER TO IMPOSE EXPORT OR IMPORT TAX; REP.
ACT 2264, SEC. 2; EFFECT ON SEC. 2287 OF REVISED ADMINISTRATIVE CODE. Section
2 of Rep. Act 2264 which became effective on June 19, 1959, gave chartered cities,
municipalities and municipal districts authority to levy for public purposes just and uniform
taxes, licenses or fees. This provision of law has repealed Sec. 2287 of the Revised
Administrative Code (Nin Bay Mining Co. vs. Municipality of Roxas, L-20125, July 20, 1965),
which withheld from municipalities the power to impose an import or export tax upon such
goods in the guise of an unreasonable charge for wharfage.
2.
CONSTITUTIONAL
LAW;
EQUAL
PROTECTION
OF
LAW;
REASONABLE
CLASSIFICATION; REQUISITES. The equal protection clause applies only to persons or
things identically situated and does not bar a reasonable classification of the subject of
legislation. A classification is reasonable where (1) it is based on substantial distinctions
which make real differences; (2) these are germane to the purpose of the law; (3) the
classification applies not only to present conditions but also to future conditions which are
substantially identical to those of the present; (4) the classification applies only to those
who belong to the same class.
3.
ID.; ID.; ID.; TAX ORDINANCE SHOULD NOT BE SINGULAR AND EXCLUSIVE.
When the taxing ordinance was enacted, Ormoc Sugar Co,, Inc. was the only sugar central
in the City. A reasonable classification should be in terms applicable to future conditions as
well. The taxing ordinance should not be singular and exclusive as to exclude any
subsequently established sugar central.
4.
TAXATION; TAX, REFUND OF; NO INTEREST CAN BE CLAIMED; REASONS.
Appellant is not entitled to interest on the refund because the taxes were not arbitrarily
collected. There is sufficient basis to preclude arbitrariness. The constitutionality of the
statute is presumed until declared otherwise.
DECISION
On January 29, 1964, the Municipal Board of Ormoc City passed Ordinance No. 4, Series of
1964, imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar
Company, Inc., in Ormoc City a municipal tax equivalent to one per centum (1%) per
export sale to the United States of America and other foreign countries."
Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March
20, 1964 for P7,087.50 and on April 20, 1964 for P5,000.00, or a total of P12,087.50.
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of
Leyte, with service of a copy upon the Solicitor General, a complaint against the City of
Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging that the afore-stated
ordinance is unconstitutional for being violative of the equal protection clause (Sec. 1[1],
Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1], Art. VI,
Constitution), aside from being an export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor a license tax
which Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act
2264, otherwise known as the Local Autonomy Act, is authorized to impose; and that the
tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of
Republic Act 2264 because the tax is on both the sale and export of sugar.
Answering, the defendants asserted that the tax ordinance was within defendant city's
power to enact under the Local Autonomy Act and that the same did not violate the aforecited constitutional limitations. After pre-trial and submission of the case on memoranda,
the Court of First Instance, on August 6, 1964, rendered a decision that upheld the
constitutionality of the ordinance and declared the taxing power of defendant chartered city
broadened by the Local Autonomy Act to include all other forms of taxes, licenses or fees
not excluded in its charter.
Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant
alleges the same statutory and constitutional violations in the aforesaid taxing ordinance
mentioned earlier.
Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all
productions of centrifugal sugar milled at the Ormoc Sugar Company Incorporated, in
Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the
United States of America and other foreign countries." Though referred to as a "production
tax", the imposition actually amounts to a tax on the export of centrifugal sugar produced
at Ormoc Sugar Company, Inc. For production of sugar alone is not taxable; the only time
the tax applies is when the sugar produced is exported.
Appellant questions the authority of the defendant Municipal Board to levy such an export
tax, in view of Section 2287 of the Revised Administrative Code which denies from
municipal councils the power to impose an export tax. Section 2287 in part states: "It shall
not be in the power of the municipal council to impose a tax in any form whatever, upon
goods and merchandise carried into the municipality, or out of the same, and any attempt
to impose an import or export tax upon such goods in the guise of an unreasonable charge
for wharfage, use of bridges or otherwise, shall be void."
Subsequently, however, Section 2 of Republic Act 2264, effective June 19, 1959, gave
chartered cities, municipalities and municipal districts authority to levy for public purposes
just and uniform taxes, licenses or fees. Anent the inconsistency between Section 2287 of
the Revised Administrative Code and Section 2 of Republic Act 2264, this Court, in Nin Bay
Mining Co. v. Municipality of Roxas, held the former to have been repealed by the latter.
And expressing Our awareness of the transcendental effects that municipal export or import
taxes or licenses will have on the national economy, due to Section 2 of Republic Act 2264,
We stated that there was no other alternative until Congress acts to provide remedial
measures to forestall any unfavorable results.
The point remains to be determined, however, whether constitutional limits on the power of
taxation, specifically the equal protection clause and rule of uniformity of taxation, were
infringed.
The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal
protection of the laws." (Sec. 1[1], Art. III) In Felwa v. Salas We ruled that the equal
protection clause applies only to persons or things identically situated and does not bar a
reasonable classification of the subject of legislation, and a classification is reasonable
where (1) it is based on substantial distinctions which make real differences; (2) these are
germane to the purpose of the law; (3) the classification applies not only to present
conditions but also to future conditions which are substantially identical to those of the
present; (4) the classification applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet
them, for it taxes only centrifugal sugar produced and exported by the Ormoc Sugar
Company, Inc. and none other. At the time of the taxing ordinance's enactment, Ormoc
Sugar Company, Inc., it is true, was the only sugar central in the city of Ormoc. Still, the
classification, to be reasonable, should be in terms applicable to future conditions as well.
The taxing ordinance should not be singular and exclusive as to exclude any subsequently
established sugar central, of the same class as plaintiff, from the coverage of the tax. As it
is now, even if later a similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to Ormoc Sugar Company, Inc. as the entity to be levied
upon.
Appellant, however, is not entitled to interest on the refund because the taxes were not
arbitrarily collected (Collector of Internal Revenue v. Binalbagan). At the time of collection,
the ordinance provided a sufficient basis to preclude arbitrariness, the same being then
presumed constitutional until declared otherwise.
WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is
declared unconstitutional and the defendants- appellees are hereby ordered to refund the
P12,087.50 plaintiff- appellant paid under protest. No. costs. So ordered.
Equal Protection
The Municipal Board of Ormoc City passed an ordinance imposing a municipal tax of 1% per
export sale of sugar milled at the Ormoc Sugar Company. Ormoc questioned the validity of
the ordinance on the ground that it violated the equal protection clause and the rule of
uniformity in taxation.
HELD: The ordinance is UNCONSTITUTIONAL. It is violative of the equal protection clause,
When the taxing ordinance was enacted, Ormoc Sugar Co. was the only sugar central in the
city. A reasonable classification should be in terms applicable to future conditions as well.
The taxing power should not be singular and exclusive as to exclude any subsequent
established sugar central from the coverage of the tax. A subsequently established sugar
central cannot be subject to tax because the ordinance expressly points to Ormoc Sugar
Company Inc. as the entity to be levied upon.
Ormoc Sugar Co. v. Treasurer of Ormoc City
Uniformity
A law was passed imposing an annual tax of P2 per square meter upon electric signs,
billboards, and spaces used for posting or displaying temporary signs and all signs displayed
on premises not occupied by buildings. Petitioners were owners of a billboard constructed
on private property in Manila, They were taxed PIO4. They paid under protest.
Subsequently, they assailed the validity of the tax for lack of uniformity because it was not
graded according to value and was classified arbitrarily without reasonable ground.
ISSUE: Whether the law violates the rule on uniformity.
HELD: No. uniformity in taxation means that all taxable articles or kinds of property of the
same class shall be taxed at the same rate. A tax is uniforms when it operates with the
same force and effect in every place where the subject is found. Uniformity does not signify
an intrinsic, but simply a geographical uniformity. In this case, the P2/sq. meter tax is
imposed on every electric sign or billboard wherever found in the Philippines. The rule of
uniformity does not require taxes to be graded according to the value of the subject, upon
which they are imposed, especially those levied as privilege or occupation taxes.
Francis Churchill v. VenancioConcepcion GR L 11572 September 22, 1916
Uniformity
The municipal board of Iloilo enacted an ordinance imposing license tax fees on persons
engaged in the business of operating tenement houses. Several owners of tenement houses
filed a complaint to declare the ordinance invalid because only the taxpayers of the City of
Iloilo are singled out to pay taxes on their tenement houses, while citizens of other cities,
where their councils do not enact a similar tax ordinance are permitted to escape such
imposition.
ISSUE: Whether the ordinance violates the rule on equality and uniformity in taxation.
HELD: No. This argument is without merit. The rule on equality and uniformity does not
require that taxes for the same purpose should be imposed in different territorial
subdivisions at the same time. So long as the burden of the tax falls equally and impartially
on all owners or operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.
Villanueva vs City of Iloilo GR 26521 December 28, 1968
REAL ESTATE TRANSACTIONS; EQUALITY AND UNIFORMITY OF TAXATION; VALIDITY OF
VAT
CREBA claims that real estate transactions of "the less poor," i.e., the middle class, who are
equally homeless, should be exempted. There is a difference between the "homeless poor"
and the "homeless less poor" in the example given by petitioner, because the second group
or middle class can afford to rent houses in the meantime that they cannot yet buy their
own homes. The two social classes are thus differently situated in life. "It is inherent in the
power to tax that the State be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one particular class for
taxation, or exemption infringe no constitutional limitation. "Equality and uniformity of
taxation means that all taxable articles or kinds of property of the same class be taxed at
the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the
statute or ordinance applies equally to all persons, forms and corporations placed in similar
situation. Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716
was enacted. R.A. No. 7716 merely expands the base of the tax. The validity of the original
VAT Law was questioned on grounds similar to those made in these cases, namely, that the
law was "oppressive, discriminatory, unjust and regressive in violation of Art. VI, sec 28(1)
of the Constitution." This Court held: EO 273 satisfies all the requirements of a valid tax. It
is uniform. . . . The sales tax adopted in EO 273 is applied similarly on all goods and
services sold to the public, which are not exempt, at the constant rate of 0% or 10%. The
disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales exceeding P200,000.00.
Small corner sari-sari stores are consequently exempt from its application. Likewise exempt
from the tax are sales of farm and marine products, so that the costs of basic food and
other necessities, spared as they are from the incidence of the VAT, are expected to be
relatively lower and within the reach of the general public.
Tolentino vs. Secretary of Finance
GR 115455 Aug. 25, 1994 235 SCRA 630
Equality and Uniformity
The City of Manila enacted an ordinance imposing a fee on the price of every admission
ticket sold by theaters. The plaintiffs argue that the ordinance violated the principle of
equality and uniformity of taxation because it did not tax other places of amusement, such
as racetracks, cabarets, circuses, etc.
ISSUE: Whether the ordinance violates the rule on equality and uniformity of taxation.
HELD: No, The fact that some places of amusement are not taxed while others are taxed is
no argument against the equality aria uniformity of the tax imposition. Equality and
uniformity in taxation means that all taxable articles or kinds of property of the same class
shall be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation.
Eastern Theatrical Co. Inc v. Alfonso GR L 1104 May 31, 1949
Uniformity
Several banks doing business in the Philippines assail the validity of a law imposing a tax on
capital, deposits, and circulation, while exempting the National City Bank of New York. They
argue that the law is discriminatory and violates the rule of uniformity in taxation.
ISSUE: Whether the law violates the rule of uniformity in taxation.
HELD: No, The exemption of an instrumentality of the Federal Government (NCBNY) does
not deprive the Commonwealth of the Philippines of the power to tax the competitors of
NCBNY. And the lack of uniformity in the result furnishes no ground for complaint.
A tax is considered uniform when it operates with the same force and effect in every place
where the subject may be found. The questioned statute applies uniformly to all banks in
the Philippines without distinction and discrimination. If the NCBNY is exempted from its
operation because it is a federal instrumentality subject only to the authority of Congress,
that alone could not have the effect of rendering it violative of the rule of uniformity. The
rule of uniformity does not call for perfect uniformity or perfect equality, because this is
hardly attainable.
Phil. Trust Co. vs.A.L.Yatco 069 PHIL 420
Equitability
CEPALCO was the holder of a legislative franchise under which the 3% franchise tax on its
gross earning was "in lieu of all taxes and assessments of whatever authority upon
privileges, earnings, income, etc." from which the CEPALCO was expressly exempted. In
June 1965, a law was passed amending the Tax Code, making liable for income tax all
corporate taxpayers not specifically exempted under the tax code. Thus franchise
companies were subjected to income tax. In August 1969, the franchise of CEPALCO was
amended, reenacting the tax exemption of CEPALCO. The CIR assessed CEPALCO deficiency
income tax for the period June 1968-August 1969.
ISSUE: Whether CEPALCO enjoyed a tax exemption during the period of June 1968 to
August 1960.
HELD: No. Congress could impair CEPALCOs legislative franchise by passing a law making it
liable for income tax from which it was originally exempted. The constitution provides that a
franchise is subject to amendment, alteration, or repeal by Congress when the public
interest so requires. The law passed in June 1968 had the effect of withdrawing CEPALCO's
exemption from income tax, while the exemption was restored by the subsequent
amendment of CEPALCO's franchise, Hence, CEPALCO is liable for tax for the period in
which there was no exemption.
CEPALCO v. Commissioner of Internal Revenue
GR
L60126 September 25, 1985
BENJAMIN P. GOMEZ, petitioner-appellee, vs. ENRICO PALOMAR, in his capacity as
Postmaster General; HON. BRIGIDO R. VALENCIA, in his capacity as Secretary of Public
Works and Communications and DOMINGO GOPEZ, in his capacity as Acting Postmaster of
San Fernando, Pampanga, respondents-appellants. [G.R. No. L-23645. October 29, 1968.]
SYLLABUS
1.
REMEDIAL LAW; PROVISIONAL REMEDIES; DECLARATORY RELIEF IS NOT
AVAILABLE WHEN THERE IS BREACH OF STATUTE BEFORE FILING OF ACTION. The
prime specification of an action for declaratory relief is that it must be brought "before
breach or violation" of the statute has been committed. Rule 64, Section 1 so provides.
Section 6 of the same rule, which allows the court to treat an action for declaratory relief as
an ordinary action, applies only if the breach or violation occurs after the filing of this action
but before the termination thereof. Hence, if, as the trial court itself admitted, there had
been a breach of statute before the filing of this action, then indeed the remedy of
declaratory relief cannot be availed of, much less can the suit be converted into an ordinary
action.
2.
CONSTITUTIONAL LAW; LEGISLATURE; INHERENT POWER OF; CLASSIFICATION IN
TAXATION AND GRANTING EXEMPTIONS; ANTI-TB STAMP LAW, CONSTITUTIONAL. The
five centavo charge levied by Republic Act 1635, as amended, is in the nature of an excise
tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As such,
the objections levelled against it must be viewed in the light of applicable principles of
taxation. It is settled that the legislature has the inherent power to select the subjects of
taxation and to grant exemptions. This power has aptly been described as "of wide range
and flexibility." Indeed, it is said that in the field of taxation, more than in other areas, the
legislature possesses the greatest freedom in classification. The reason for this is that,
classification has been a device for fitting tax programs to local needs and usages in order
to achieve an equitable distribution of the tax burden. The classification is likewise based on
considerations of administrative convenience. For it is now a settled principle of law that
"considerations of practical administrative convenience and cost in the administration of tax
laws afford adequate grounds for imposing a tax on a well recognized and defined class." In
the case of the anti- TB stamp, undoubtedly, the single most important and influential
consideration that led the legislature to select mail users as subjects of the tax is the
relative ease and convenience of collecting the tax through the post offices. The small
amount of five centavo does not justify the great expense and inconvenience of collecting
through the regular means of collection.
3.
ID.; ID.; ID.; ID.; PASSED AND LEVIED FOR PUBLIC PURPOSE. The eradication of
a dreaded disease is a public purpose, but if by public purpose the petitioner means benefit
to a taxpayer as a return for what he pays, then it is sufficient answer to say that the only
benefit to which the taxpayer is constitutionally entitled is that derived from his enjoyment
of the privileges of living in an organized society, established and safeguarded by the
devotion of taxes to public purposes.
4.
ID.; ID.; ID.; ID.; IMPOSITION OF FLAT RATE NOT VIOLATIVE OF RULE ON
EQUALITY AND UNIFORMITY OF TAXATION. The rule of uniformity and equality of
taxation is not infringed by the imposition of a flat rate rather than a graduated tax. A tax
need not be measured by the weight of the mail or the extent of the service rendered. We
have said that consideration of administrative convenience and cost afford an adequate
ground for classification. The same considerations may induce the legislature to impose a
flat tax which in effect is a charge for the transaction, operating equally on all persons with
the class regardless of the amount involved.
5.
ID.; ID.; ID.; ID.; AUTHORITY GIVEN TO POSTMASTER GENERAL MUST BE
LIBERALLY CONSTRUED. It is true that the law does not expressly authorize the
collection of five centavos except through the sale of anti-TB stamps, but such authority
may be implied in so far as it may be necessary to prevent a failure of the undertaking. The
authority given to the Postmaster General to raise funds through the mails must be liberally
construed, consistent with the principle that where the end is required the appropriate
means are given.
6.
ID.; ID.; ID.; ID.; PROCEEDS FROM SALES OF ANTI-TB STAMPS NOT FOR BENEFIT
OF THE PHILIPPINE TUBERCULOSIS SOCIETY. The Society is not really the beneficiary
but only the agency through which the State acts in carrying out what is essentially a public
function. The money is treated as a special fund and as such need not be appropriated by
law.
1.
CONSTITUTIONAL LAW; REGULATORY POWER OF STATE; ANTI-TB STAMP ACT IS AN
EXERCISE OF REGULATORY POWER CONNECTED WITH PERFORMANCE OF PUBLIC SERVICE.
The statute in question is an exercise of the regulatory power connected with the
performance of the public service. The United States Constitution of 1787 vests in the
federal government acting through Congress the power to establish post offices. The first
act providing for the organization of government departments in the Philippines, approved
Sept. 6, 1901, provided for the bureau of Post Offices in the Department of Commerce and
Police. Its creation is thus a manifestation of one of the many services in which the
government may engage for public convenience and public interest. Such being the case, it
seems that any legislation that in effect would require increased cost of postage is well
within the discretionary authority of the government. It may not be acting in a proprietary
capacity but in fixing the fees that it collects for the use of the mails, the broad discretion
that it enjoys is undeniable.
2.
ID.; POWER OF JUDICIAL REVIEW; INFERIOR COURTS HAVE POWER TO PASS UPON
THE VALIDITY OF STATUTES. An expression of one's personal views both as to the
attitude and awareness that must be displayed by inferior tribunals when the "delicate and
awesome" power of passing on the validity of a statute would not be inappropriate. "The
Constitution is the supreme law, and statutes are written and enforced in submission to its
commands." It is likewise common place in constitutional law that a party adversely
affected could, again to quote from Cardozo, "invoke, when constitutional immunities are
threatened, the judgment of the courts." Since the power of judicial review flows logically
from the judicial function of ascertaining the facts and applying the law and since obviously
the Constitution is the highest law before which statutes must bend, then inferior tribunals
can, in the discharge of their judicial functions, nullify legislative acts. As a matter of fact, in
clear cases, such is not only their power but the duty. Nonetheless, the admonition of
Cooley, specially addressed to inferior tribunals, must ever be kept in mind. Thus: "It must
be evident to any one that the power to declare a legislative enactment void is one which
the judge, conscious of the fallibility of the human judgment, will shrink from exercising in
any case where he can conscientiously and with due regard to duty and official oath decline
the responsibility." There must be a caveat however to the above Cooley pronouncement.
Such should not be the case, to paraphrase Freund, when the challenged legislation imperils
freedom of the mind and of the person, for given such an undesirable situation, "it is
freedom that commands a momentum of respect." Here then, fidelity to the great ideal of
liberty enshrined in the constitution may require the judiciary to take an uncompromising
and militant stand.
3.
ID.; EQUAL PROTECTION CLAUSE; NO VIOLATION THEREOF WHERE AN ACT
PROMOTES PUBLIC WELFARE. It may not be amiss to recall to mind, however, the
language of Justice Laurel in the case of People vs. Vera, to the effect that the basic
individual right of equal protection "is a restraint on all the three departments of our
government and on the subordinate instrumentalities and subdivisions thereof, and on
many constitutional powers, like the police power, taxation and eminent domain." A similar
sense of realism was invariably displayed by Justice Frankfurter, as is quite evident from
the various citations from his pen found in the majority opinion. For him, it would be a
misreading of the equal protection clause to ignore actual conditions and settled practices.
4.
ID.; NON-DELEGATION OF LEGISLATIVE POWER; PRINCIPLE NOT INFRINGED
WHERE POWER DELEGATED WAS NOT LEGISLATIVE IN CHARACTER. It is to be admitted
that the problem of non-delegation of legislative power at times occasions difficulties. Its
strict view has been announced by Justice Laurel in People vs. Vera. "In testing whether a
statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of
the legislature so that nothing was left to the judgment of any other appointee or delegate
of the legislature." Only recently, the present Chief Justice reaffirmed the above view in
Pelaez vs. Auditor General, specially where the delegation deals not with an administrative
function but one essentially and eminently legislative in character. What could properly be
stigmatized though, to quote Justice Cardozo, is delegation of authority that is "unconfined
and vagrant, one not canalized within banks which keep it from overflowing." This is not the
situation as it presents itself to us. What was delegated was power not legislative in
character. "Accordingly, with the growing complexity of modern life, the multiplication of
the subjects of governmental regulation, and the increased difficulty of administering the
laws, there is a constantly growing tendency toward the delegation of greater powers by the
legislature, and toward the approval of the practice by the courts."
DECISION
This appeal puts in issue the constitutionality of Republic Act 1635,
Republic Act 2631, which provides as follows:
as amended by
"To help raise funds for the Philippine Tuberculosis Society, the Director of Posts shall order
for the period from August nineteen to September thirty every year the printing and issue
of semi-postal stamps of different denominations with face value showing the regular
postage charge plus the additional amount of five centavos for the said purpose, and during
the said period, no mail matter shall be accepted in the mails unless it bears such semipostal stamps: Provided, That no such additional charge of five centavos shall be imposed
on newspapers. The additional proceeds realized from the sale of the semi-postal stamps
shall constitute a special fund and be deposited with the National Treasury to be expended
by the Philippine Tuberculosis Society in carrying out its noble work to prevent and
eradicate tuberculosis."
The respondent Postmaster General, in implementation of the law, thereafter issued four
(4) administrative orders numbered 3 (June 20, 1958), 7 (August 9, 1958), 9 (August 28,
1958), and 10 (July 15, 1960). All these administrative orders were issued with the
approval of the respondent Secretary of Public Works and Communications.
The pertinent portions of Adm. Order 3 read as follows:
"Such semi-postal stamps could not be made available during the period from August 19 to
September 30, 1957, for lack of time. However, two denominations of such stamps, one at
'5 + 5' centavos and another at '10 + 5' centavos, will soon be released for use by the
public on their mails to be posted during the same period starting with the year 1958.
xxx
xxx
xxx
"During the period from August 19 to September 30 each year starting in 1958, no mail
matter of whatever class, and whether domestic or foreign, posted at any Philippine Post
Office and addressed for delivery in this country or abroad, shall be accepted for mailing
unless it bears at least one such semi postal stamp showing the additional value of five
centavos intended for the Philippine Tuberculosis Society.
"In the case of second-class mails and mails prepaid by means of mail permits or
impressions of postage meters, each piece of such mail shall bear at least one such semipostal stamp if posted during the period above stated starting with the year 1958, in
addition to being charged the usual postage prescribed by existing regulations. In the case
of business reply envelopes and cards mailed during said period, such stamp should be
collected from the addresses from the time of delivery. Mails entitled to franking privilege
like those from the office of the President, members of Congress, and other offices to which
such privilege has been granted, shall each also bear one such semi-postal stamp if posted
during the said period.
"Mails posted during the said period starting in 1958, which are found in street or postoffice mail boxes without the required semi- postal stamp, shall be returned to the sender,
if known, with a notation calling for the affixing of such stamp. If the sender is unknown,
the mail matter shall be treated as nonmailable and forwarded to the Dead Letter Office for
proper disposition."
Adm. Order 7, amending the fifth paragraph of Adm. Order 3, reads as follows:
"In the case of the following categories of mail matter and mails entitled to franking
privilege which are not exempted from the payment of the five centavos intended for the
Philippine Tuberculosis Society, such extra charge may be collected in cash, for which
official receipt (General Form No. 13, A) shall be issued, instead of affixing the semi-postal
stamp in the manner herein indicated:
" '1.
Second-class mails. Aside from the postage at the second- class rate, the extracharge of five centavos for the Philippine Tuberculosis Society shall be collected on each
separately-addressed piece of second-class mail matter, and the total sum thus collected
shall be entered in the same official receipt to be issued for the postage at the second-class
rate. In making such entry, the total number of pieces of second-class mail posted shall be
stated, thus: 'Total charge for TB Fund on 100 pieces . . . P5.00. The extra charge shall be
entered separate from the postage in both of the official receipt and the Record of
Collections.
" '2.
First-class and third-class mail permits. Mails to be posted without postage affixed
under permits issued by this Bureau shall each be charged the usual postage, in addition to
the five- centavo extra charge intended for said society. The total extra charge thus
received shall be entered in the same official receipt to be issued for the postage collected,
as in subparagraph 1.
" '3.
Metered mails. For each piece of mail matter impressed by postage meter under
metered mail permit issued by this Bureau, the extra charge of five centavos for said
society shall be collected in cash and an official receipt issued for the total sum thus
received, in the manner indicated in subparagraph 1.
" '4.
Business reply cards and envelopes. Upon delivery of business reply cards and
envelopes to holders of business reply permits, the five-centavo charge intended for said
society shall be collected in cash on each reply card or envelope delivered, in addition to the
required postage which may also be paid in cash. An official receipt shall be issued for the
total postage and total extra-charge received, in the manner shown in sub-paragraph 1.
" '5.
Mails entitled to franking privilege. Government agencies, officials, and other
persons entitled to the franking privilege under existing laws may pay in cash such extra
charge intended for said society, instead of affixing the semi-postal stamps to their mails,
provided that such mails are presented at the post-office window, where the five-centavo
extra charge for said society shall be collected on each piece of such mail matter. In such
case, an official receipt shall be issued for the total sum thus collected, in the manner
stated in subparagraph 1.
" 'Mails under permits, metered mails and franked mails not presented at the post-office
window shall be affixed with the necessary semi-postal stamps. If found in mail boxes
without such stamps, they shall be treated in the same way as herein provided for other
mails. ' "
Adm. Order 9, amending Adm. Order 3, as amended, exempts "Government and its
Agencies and Instrumentalities Performing Governmental Functions." Adm. Order 10,
amending Adm. Order 3, as amended, exempts "copies of periodical publications received
for mailing under any class of mail matter, including newspapers and magazines admitted
as second-class mails.'"
The FACTS. On September 15, 1963 the petitioner Benjamin P. Gomez mailed a letter at
the post office in San Fernando, Pampanga. Because this letter, addressed to a certain
Agustin Aquino of 1014 Dagohoy Street, Singalong, Manila did not bear the special anti-TB
stamp required by the statute, it was returned to the petitioner.
In view of this development, the petitioner brought this suit for declaratory relief in the
Court of First Instance of Pampanga, to test the constitutionality of the statute, as well as
the implementing administrative orders issued, contending that it violates the equal
protection clause of the Constitution as well as the rule of uniformity and equality of
taxation. The lower court declared the statute and the orders unconstitutional; hence this
appeal by the respondent postal authorities.
For the reasons set out in this opinion, the judgment appealed from must be reversed.
I.
Before reaching the merits, we deem it necessary to dispose of the respondents' contention
that declaratory relief is unavailing because this suit was filed after the petitioner had
committed a breach of the statute. While conceding that the mailing by the petitioner of a
letter without the additional anti-TB stamp was a violation of Republic Act 1635, as
amended, the trial court nevertheless refused to dismiss the action on the ground that
under Section 6 of Rule 64 of the Rules of Court, "If before the final termination of the case
a breach or violation of . . . a statute . . . should take place, the action may thereupon be
converted into an ordinary action."
The prime specification of an action for declaratory relief is that it must be brought "before
breach or violation" of the statute has been committed. Rule 64, Section 1 so provides.
Section 6 of the same rule, which allows the court to treat an action for declaratory relief as
an ordinary action, applies only if the breach or violation occurs after the filing of the action
but before the termination thereof.
Hence, if, as the trial court itself admitted, there had been a breach of the statute before
the filing of this action, then indeed the remedy of declaratory relief cannot be availed of,
much less can the suit be converted into an ordinary action.
Nor is there merit in the petitioner's argument that the mailing of the letter in question did
not constitute a breach of the statute because the statute appears to be addressed only to
postal authorities. The statute, it is true, in terms provides that "no mail matter shall be
accepted in the mails unless it bears such semi-postal stamps." It does not follow, however,
that only postal authorities can be guilty of violating it by accepting mails without the
payment of the anti-TB stamp. It is obvious that they can be guilty of violating the statute
only if there are people who use the mails without paying for the additional anti-TB stamp.
Just as in bribery the mere offer constitutes a breach of the law, so in the matter of the
anti-TB stamp the mere attempt to use the mails without the stamp constitutes a violation
of the statute. It is not required that the mail be accepted by postal authorities. That
requirement is relevant only for the purpose of fixing the liability of postal officials.
Nevertheless, we are of the view that the petitioner's choice of remedy is correct because
this suit was filed not only with respect to the letter which he mailed on September 15,
1963, but also with regard to any other mail that he might sent in the future. Thus, in his
complaint, the petitioner prayed that due course be given to "other mails without the semipostal stamps which he may deliver for mailing . . . if any, during the period covered by
Republic Act 1635, as amended, as well as other mails hereafter to be sent by or to other
mailers which bear the required postage, without collection of additional charge of five
centavos prescribed by the same Republic Act." As one whose mail was returned, the
petitioner is certainly interested in a ruling on the validity of the statute requiring the use of
additional stamps.
II.
We now consider the constitutional objections raised against the statute and the
implementing orders.
1.
It is said that the statute is violative of the equal protection clause of the
Constitution. More specifically the claim is made that it constitutes mail users into a class
for the purpose of the tax while leaving untaxed the rest of the population and that even
among postal patrons the statute discriminatorily grants exemption to newspapers while
Administrative Order 9 of the respondent Postmaster General grants a similar exemption to
offices performing governmental functions.
The five centavo charge levied by Republic Act 1635, as amended, is in the nature of an
excise tax, laid upon the exercise of a privilege, namely, the privilege of using the mails. As
such the objections levelled against it must be viewed in the light of applicable principles of
taxation.
To begin with, it is settled that the legislature has the inherent power to select the subjects
of taxation and to grant exemptions. This power has aptly been described as "of wide
range and flexibility." Indeed, it is said that in the field of taxation, more than in other
areas, the legislature possesses the greatest freedom in classification. The reason for this
is that traditionally, classification has been a device for fitting tax programs to local needs
and usages in order to achieve an equitable distribution of the tax burden.
That legislative classifications must be reasonable is of course undenied. But what the
petitioners asserts is that statutory classification to the end sought to be attained, and that
absent such relationship the selection of mail users is constitutionally impermissible. This is
altogether a different proposition. As explained in Commonwealth v. Life Assurance Co.
"While the principle that there must be a reasonable relationship between classification
made by the legislation and its purpose is undoubtedly true in some contexts, it has no
application to a measure whose sole purpose is to raise revenue . . . . So long as the
classification imposed is based upon some standard capable of reasonable comprehension,
be that standard based upon ability to produce revenue or some other legitimate
distinction, equal protection of the law has been afforded. See Allied Stores of Ohio, Inc. v.
Bowers, supra, 358 U.S. at 527, 79 S. Ct. at 441; Brown Forman Co. v. Commonwealth of
Kentucky, 2d U.S. 563, 573, 80 S. Ct. 578, 580 (1910)."
We are not wont to invalidate legislation on equal protection grounds except by the clearest
demonstration that it sanctions invidious discrimination, which is all that the Constitution
forbids. The remedy for unwise legislation must be sought in the legislature. Now, the
classification of mail users is not without any reason. It is based on ability to pay, let alone
the enjoyment of a privilege, and on administrative convenience. In the allocation of the tax
burden, Congress must have concluded that the contribution to the anti-TB fund case best
be assured by those who can afford the use of the mails.
The classification is likewise based on considerations of administrative convenience. For it is
now a settled principle of law that "considerations of practical tax laws afford adequate
grounds for imposing a tax on a well recognized and defined class." In the case of the antiTB stamps, undoubtedly, the single most important and influential consideration that led
the legislature to select mail users as subjects of the tax is the relative ease and
convenience of collecting the tax through the post offices. The small amount of five
centavos does not justify the great expense and inconvenience of collecting through the
regular means of collection. On the other hand, by placing the duty of collection on postal
authorities the tax was made almost self-enforcing, with as little cost and as little
inconvenience as possible.
And then of course it is not accurate to say that the statute constituted mail users into a
class. Mail users were already a class by themselves even before the enactment of the
statute and all that the legislature did was merely to select their class. Legislation is
essentially empiric and Republic Act 1635, as amended, no more than reflects a distinction
that exists in fact. As Mr. Justice Frankfurter said, "to recognize differences that exist in fact
is living law; to disregard [them] and concentrate on some abstract identities is lifeless
logic."
Granted the power to select the subject of taxation, the State's power to grant exemption
must likewise be conceded as a necessary corollary. Tax exemptions are to common in the
law; they have never been thought of as raising issues under the equal protection clause.
It is thus erroneous for the trial court to hold that because certain mail users are exempted
from the levy the law and administrative officials have sanctioned as invidious
discrimination offensive to the Constitution. The application of the lower court's theory
would require all mail users to be taxed, a conclusion that is hardly tenable in the light of
differences in status of mail users. The Constitution does not require this kind of equality.
As the United States Supreme Court has said, the legislature may withhold the burden of
the tax in order to foster what it conceives to be a beneficent enterprise. This is the case of
newspapers which, under the amendment introduced by Republic Act 2631, are exempt
from the payment of the additional stamp.
As for the Government and its instrumentalities, their exemption rests on the State's
sovereign immunity from taxation. The state cannot be taxed without its consent and such
consent, being in derogation of its sovereignty, is to strictly construed. Administrative
Order 9 of the respondent Postmaster General, which lists the various offices and
instrumentalities of the Government exempt from the payment of the anti-TB stamp, is but
a restatement of this well-known principle of constitutional law.
The trial court likewise held the law invalid on the ground that it singles out tuberculosis to
the exclusion of other diseases which, it is said, are equally a menace to public health. But
it is never a requirement of equal protection that all evils of the same genus be eradicated
or none at all. As this court has had occasion to say, "if the law presumably hits the evil
where it is most felt, it is not to be overthrown because there are other instances to which it
might have been applied."
2.
The petitioner further argues that the tax in question is invalid, first, because it is
not levied for a public purpose as no special benefits accrue to mail users as taxpayers, and
second, because it violates the rule of uniformity in taxation.
The eradication of a dreaded disease is a public purpose, but if by public purpose the
petitioner means benefit to a taxpayer as a return for what he pays, then it is sufficient
answer to say that the only benefit to which the taxpayer is constitutionally entitled is that
derived from his enjoyment of the privileges of living in an organized society, established
and safeguarded by the devotion of taxes to public purposes. Any other view would
preclude the levying of taxes except as they are used to compensate for the burden on
those who pay them and would involve the abandonment of the most fundamental principle
of government that it exists primarily to provide for the common good.
Nor is the rule of uniformity and equality of taxation infringed by the imposition of a flat
rate rather than a graduated tax. A tax need not be measured by the weight of the mail or
the extent of the service rendered. We have said that considerations of administrative
convenience and cost afford an adequate ground for classification. The same considerations
may induce the legislature to impose a flat tax which in effect is a charge for the
transaction, operating equally on all persons with the class regardless of the amount
involved. As Mr. Justice Holmes said in sustaining the validity of a stamp act which imposed
a flat rate of two cents on every $100 face value of stock transferred:.
"One of the stocks was worth $30.75 a share of the face value of $100, the other $172. The
inequality of the tax, so far as actual values are concerned, is manifest. But, here again
equality in this sense has to yield to practical considerations and usage. There must be a
fixed and indisputable mode of ascertaining a stamp tax. In another sense, moreover, there
is equality. When the taxes on two sales are equal, the same number of shares is sold in
each case; that is to say, the same privilege is used to same extent. Valuation is not the
only thing to be considered. As was pointed out by the court of appeals, the familiar stamp
tax of two cents on checks, irrespective of income or earning capacity, and many others,
illustrate the necessity and practice of sometimes substituting count for weight . . . . "
According to the trial court, the money raised from the sales of the anti-TB stamps is spent
for the benefit of the Philippine Tuberculosis Society, a private organization, without
appropriation by law. But as the Solicitor General points out, the Society is not really the
beneficiary but only the agency through which the State acts in carrying out what is
essentially a public function. The money is treated as special fund and as such need not be
appropriated by law.
3.
Finally, the claim is made that the statute is so broadly drawn that to execute it the
respondents had to issue administrative orders far beyond their powers. Indeed, this is one
of the grounds on which the lower court invalidated Republic Act 1631, as amended,
namely, that it constitutes an undue delegation of legislative power.
Administrative Order 3, as amended by Administrative Orders 7 and 10, provides that for
certain classes of mail matters (such as mail permits, metered mails, business reply cards,
etc.), the five-centavo charge may be paid in cash instead of the purchase of the anti-TB
stamp. It further states that mails deposited during the period August 19 to September 30
of each year in mail boxes without the stamp should be returned to the sender, if known,
otherwise they should be treated nonmailable.
It is true that the law does not expressly authorize the collection of five centavos except
through the sale of anti-TB stamps, but such authority may be implied in so far as it may be
necessary to prevent a failure of the undertaking. The authority given to the Postmaster
General to raise funds through the mails must be liberally construed, consistent with the
principle that where the end is required the appropriate means are given.
The anti-TB stamp is a distinctive stamp which shows on its face not only the amount of the
additional charge but also that of the regular postage. In the case of business reply cards,
for instance, it is obvious that to require mailers to affix the anti-TB stamp on their cards
would be to make them pay much more because the cards likewise bear the amount of the
regular postage.
It is likewise true that the statute does not provide for the disposition of mails which do not
bear the anti-TB stamp, but a declaration therein that "no mail matter shall be accepted in
the mails unless it bears such semi-postal stamp" is a declaration that such mail matter is
nonmailable within the meaning of Section 1952 of the Administrative Code. Administrative
Order 7 of the Postmaster General is but a restatement of the law for the guidance of postal
officials and employees. As for Administrative Order 9, we have already said that in listing
the offices and entities of the Government exempt from the payment of the stamp, the
respondent Postmaster General merely observed an established principle, namely, that the
Government is exempt from taxation.
ACCORDINGLY, the judgment a quo is reversed, and the complaint is dismissed, without
pronouncement as to costs..
Separate Opinions
FERNANDO, J ., concurring:
I join fully the rest of my colleagues in the decision upholding Republic Act No. 1635 as
amended by Republic Act No. 2631 and the majority opinion expounded with Justice
Castro's usual vigor and lucidity subject to one qualification. With all due recognition of its
inherently persuasive character, it would seem to me that the same result could be
achieved if reliance be had on police power rather than the attribute of taxation, as the
constitutional basis for the challenged legislation.
1.
For me, the statute in question is an exercise of the regulatory power connected with
the performance of the public service. I refer of course to the government postal function,
one of respectable and ancient lineage. The United States Constitution of 1787 vests in the
federal government acting through Congress the power to establish post offices. The first
act providing for the organization of government departments in the Philippines, approved
Sept. 6, 1901, provided for the Bureau of Post Offices in the Department of Commerce and
Police. Its creation is thus a manifestation of one of the many services in which the
government may engage for public convenience and public interest. Such being the case, it
seems that any legislation that in effect would require increased cost of postage is well
within the discretionary authority of the government.
It may not be acting in a proprietary capacity but in fixing the fees that it collects for the
use of the mails, the broad discretion that it enjoys is undeniable. In that sense, the
principle announced in Esteban v. Cabanatuan City, in an opinion by our Chief Justice,
while not precisely controlling furnishes for me more than ample support for the validity of
the challenged legislation. Thus: "Certain exactions, imposable under an authority other
than police power, are not subject, however, to qualification as to the amount chargeable,
unless the Constitution or the pertinent laws provide otherwise. For instance, the rates of
taxes, whether national or municipal, need not be reasonable, in the absence of such
constitutional or statutory limitation. Similarly, when a municipal corporation fixes the fees
for the use of its properties, such as public markets, it does not wield the police power, or
even the power of taxation. Neither does it assert governmental authority. It exercises
merely a proprietary function. And, like any private owner, it is in the absence of the
aforementioned limitation, which does not exist in the Charter of Cabanatuan City (Republic
Act No. 526) free to charge such sums as it may deem best, regardless of the
reasonableness of the amount fixed, for the prospective lessees are free to enter into the
corresponding contract of lease, if they are agreeable to the terms thereof, or, otherwise,
not enter into such contract."
2.
It would appear likewise that an expression of one's personal views both as to the
attitude and awareness that must be displayed by inferior tribunals when the "delicate and
awesome" power of passing on the validity of a statute would not be inappropriate. "The
Constitution is the supreme law, and statutes are written and enforced in submission to its
commands." It is likewise common place in constitutional law that a party adversely
affected could, again to quote from Cardozo, "invoke, when constitutional immunities are
threatened, the judgment of the courts."
Since the power of judicial review flows logically from the judicial function of ascertaining
the facts and applying the law and since obviously the Constitution is the highest law before
which statutes must bend, then inferior tribunals can, in the discharge of their judicial
functions, nullify legislative acts. As a matter of fact, in clear cases, such is not only their
power but their duty. In the language of the present Chief Justice: "In fact, whenever the
conflicting claims of the parties to a litigation cannot properly be settled without inquiring
into the validity of an act of Congress or of either House thereof, the courts have, not only
jurisdiction to pass upon said issue, but, also, the duty to do so, which cannot be evaded
without violating the fundamental law and paving the way to its eventual destruction."
Nonetheless, the admonition of Cooley, specially addressed to inferior tribunals, must ever
be kept in mind. Thus: "It must be evident to any one that the power to declare a
legislative enactment void is one which the judge, conscious of the fallibility of the human
judgment, will shrink from exercising in any case where he can conscientiously and with due
regard to duty and official oath decline the responsibility."
There must be a caveat however to the above Cooley pronouncement. Such should not be
the case, to paraphrase Freund, when the challenged legislation imperils freedom of the
mind and of the person, for given such an undesirable situation, "it is freedom that
commands a momentum of respect." Here then, fidelity to the great ideal of liberty
enshrined in the Constitution may require the judiciary to take an uncompromising and
militant stand. As phrased by us in a recent decision, "if the liberty involved were freedom
of the mind or the person, the standard for its validity of governmental acts is much more
rigorous and exacting."
So much for the appropriate judicial attitude. Now on the question of awareness of the
controlling constitutional doctrines.
There is nothing I can add to the enlightening discussion of the equal protection aspect as
found in the majority opinion. It may not be amiss to recall to mind, however, the language
of Justice Laurel in the leading case of People v. Vera, to the effect that the basic individual
right of equal protection "is a restraint on all the three grand departments of our
government and on the subordinate instrumentalities and subdivisions thereof, and on
many constitutional powers, like the police power, taxation and eminent domain."
Nonetheless, no jurist was more careful in avoiding the dire consequences to what the
legislative body might have deemed necessary to promote the ends of public welfare if the
equal protection guaranty were made to constitute an insurmountable obstacle.
A similar sense of realism was invariably displayed by Justice Frankfurter, as is quite
evident from the various citations from his pen found in the majority opinion. For him, it
would be a misreading of the equal protection clause to ignore actual conditions and settled
practices. Not for him the at times academic and sterile approach to constitutional problems
of this sort. Thus: "It would be a narrow conception of jurisprudence to confine the notion of
'laws' to what is found written on the statute books, and to disregard the gloss which life
has written upon it. Settled state practice cannot supplant constitutional guaranties, but it
can establish what is state law. The Equal Protection Clause did not write an empty
formalism into the Constitution. Deeply embedded traditional ways of carrying out state
policy, such as those of which petitioner complains, are often tougher and truer law than
the dead words of the written text." This too, from the same distinguished jurist: "The
Constitution does not require things which are different in fact or opinion to be treated in
law as though they were the same."
Now, as to non-delegation. It is to be admitted that the problem of non-delegation of
legislative power at times occasions difficulties. Its strict view has been announced by
Justice Laurel in the aforecited case in People v. Vera in this language. Thus: "In testing
whether a statute constitutes an undue delegation of legislative power or not, it is usual to
inquire whether the statute was complete in all its terms and provisions when it left the
hands of the legislature so that nothing was left to the judgment of any other appointee or
delegate of the legislature. . . . . In United States v. Ang Tang Ho . . . , this court adhered
to the foregoing rule it held an act of the legislature void in so far as it undertook to
authorize the Governor-General, in his discretion, to issue a proclamation fixing the price of
rice and to make the sale of it in violation of the proclamation a crime."
Only recently, the present Chief Justice reaffirmed the above view in Pelaez v. Auditor
General, specially where the delegation deals not with an administrative function but one
essentially and eminently legislative in character. What could properly be stigmatized

though, to quote Justice Cardozo, is delegation of authority that is "unconfined and vagrant,
one not canalized within banks which keep it from overflowing."
This is not the situation as it presents itself to us. What was delegated was power not
legislative in character. Justice Laurel himself, in a later case, People v. Rosenthal,
admitted that within certain limits, there being a need for coping with the more intricate
problems of society, the principle of "subordinate legislation" has been accepted, not only in
the United States and England, but, in practically all modern governments. This view was
reiterated by him in a 1940 decision, Pangasinan Transportation Co., Inc. v. Public Service
Commission.
Thus: "Accordingly, with the growing complexity of modern life, the
multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency toward the delegation of
greater powers by the legislature, and toward the approval of the practice by the courts."
In the light of the above views of eminent jurists, authoritative in character, of both the
equal protection clause and the non- delegation principle, it is apparent how far the lower
court departed from the path of constitutional orthodoxy in nullifying Republic Act No. 1635
as amended. Fortunately, the matter has been set right with the reversal of its decision, the
opinion of the Court, manifesting its fealty to constitutional law precepts, which have been
reiterated time and time again and for the soundest of reasons.
Sec 28 (1) PROGRESSIVE SYSTEM OF TAXATION (Art. VI, Sec 28 [1])
Progressive System of Taxation means that as the resources of the taxpayer becomes
higher; his tax rate likewise increases. This is exemplified by the income tax rate which
increases as the net taxable base increases. It is based on the ability to pay and in
implementation of the social justice principle that the more affluent should contribute more
to the community's benefit. The Constitution does not really prohibit regressive taxes. What
it simply provides is that Congress shall evolve a progressive system. This is a mere
directive upon Congress, not a justiciable right. (Tolentino vs. Secretary of Finance) 235
SCRA 630
In the leading case of Sison Jr. v. Ancheta, 139 SCRA 654 (July 25, 1984)." It has been
held: a distinction exists between a tax rate and a tax base. There is no legal objection to a
broader tax base or taxable income by eliminating all deductible items and at the same time
reducing the applicable tax rate. Taxpayers may be classified into different categories. It is
enough that the classification must rest upon substantial distinction that makes real
differences. In the case of the gross income taxation embodied in Batas Pambasa Blg. 135,
the discernible basis of classification is the susceptibility of the income to the application of
generalized rules, removing all deductible items for all taxpayers within the class and fixing
a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically not overhead expense,
these taxpayers are not entitled to make deductions for income tax purposes because they
are in the same situation more or less. On the other hand, in the case of professionals in the
practice of their calling and businessmen, there is no uniformity in the costs or expenses
necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same rates on
the basis of gross income. There is ample justification then for the Batasang Pambansa
(now Congress) to adopt the gross system of income taxation (i.e., without deductions) to
compensation income, while continuing the system of net income taxation as regards
professional and business income (Sison Jr. v. Ancheta, 139 SCRA 654).
VAT IS AN INDIRECT AND REGRESSIVE TAX WHICH IS NOT ACTUALLY PROHIBITED BY THE
CONSTITUTION. The Constitution does not really prohibit the imposition of indirect taxes
which, like the VAT, are regressive. What it simply provides is that Congress shall "evolve a
progressive system of taxation." The constitutional provision has been interpreted to mean
simply that "direct taxes are . . . to be preferred [and] as much as possible, indirect taxes
should be minimized." Indeed, the mandate to Congress is not to prescribe, but to evolve, a
progressive tax system. Sales taxes, are form of indirect taxes, and they are also
regressive. Resort to indirect taxes should be minimized but not avoided entirely because it
is difficult, if not impossible, to avoid them by imposing such taxes according to the
taxpayers' ability to pay. In the case of the VAT, the law minimizes the regressive effects of
this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3,
amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A.
No. 7716, 4, amending section 103 of the NIRC) Transactions involving basic and
essential goods and services are exempted from the VAT. On the other hand, the
transactions which are subject to the VAT are those which involve goods and services which
are
used
or
availed
of
mainly
by
higher
income
groups.
Tolentinovs Secretary of Finance 235 SCRA 630
Progressive System of Taxation
ISSUES:
1.
2.
3.
4.
RULING:
1.
in the Philippines.
2.
3.
taxation.
4.
April 15, 2009.]
Sec 28
SubSection 2 Authority of the President to fix quotas and rates
SubSection 3
Lands/Buildings of Charitable, Religious and Educational
Institutions Actually Directly and Exclusively USED for religious, charitable and
educational purposes shall be EXEMPT from Taxation
TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND _
EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES (Art VI,
Sec. 28 [3],1987 Constitution)
The foregoing provision exempts religious and educational institutions from real estate
taxes.
Test of Exemption: It is the use of the property and not ownership.
Nature of Use: The properties must be actually, directly and exclusively used for the
primary purposes mentioned in its articles of incorporation.
The word "exclusively" as used in the Constitution, means primarily" rather than solely".
(Hospital de San Juan de Dios vs Pasay City)
Scope of Exemption: The exemption is not limited to property actually indispensable for
religious, charitable or educational purpose. It extends to facilities which are incidental to or
reasonably necessary for the accomplishment of said purposes. (Abra Valley College vs
Aquino)
HOSPITAL DE SAN JUAN DE DIOS, INC., plaintiff-appellant, vs. PASAY CITY, PABLO
CUNETA,
R.
N.
ASCAO
and
G.
C.
FUENTES,
defendants-appellees.
[G.R. No. L-19371. February 28, 1966.]
SYLLABUS
1.
CHARITABLE INSTITUTIONS; BURDEN OF PROOF TO SHOW THAT CHARITABLE
INSTITUTION IS OPERATING OTHERWISE. It not being disputed that appellant was
organized as a charitable institution, the presumption is that it is operating as such, the
burden of proof being on appellees to show that it is operating otherwise. The record does
not show that they have satisfactorily discharged this burden.
2.
ID.; ID.; EXEMPTION FROM PAYMENT OF FEES AND TAXES; CASE AT BAR. The
Articles of Incorporation of the Hospital de San Juan de Dios, Inc. show that it has no
capital stock and that no part of its net income, if any, could inure to the benefit of any
private individual. There is also the ruling of the Workmen's Compensation Commission and
the Undersecretary of Labor that said hospital is a charitable institution, exempt from the
scope of the Workmen's Compensation Act. The hospital's cashier also issued a statement
to the effect that the hospital maintains two free wards of sixty beds each. Appellees admit
that in addition to the said free wards the hospital also maintains six free beds in the
Pediatric Section. There is, therefore, sufficient evidence that the hospital doles out charity,
and, hence, should be exempted from the payment of the inspection fees provided in
Section 5, Ordinance No. 7, series of 1945; as amended by Ordinance No. 22, series of
1947, and further amended by Ordinance No. 54, series of 1955, of the City of Pasay.
3.
ID.; ID.; ID.; MAKING OF PROFIT, EFFECT ON TAX EXEMPTION. The making of
profit does not destroy the tax exemption of a charitable, benevolent or educational
institution. (Jesus Sacred Heart College vs. Collector, L-6807, May 20, 1954)
4.
ID.; ID.; ID.; CHARGING FEES FOR PAYING BEDS. The fact that a hospital
charges fees for paying beds does not make it lose its character as a charitable institution if
the same were used to partly finance the expenses of the free wards maintained by the
hospital. (U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988,
May 24, 1952; Collector of Internal Revenue vs. St. Paul's Hospital in Iloilo, L-12127, May
25, 1959; San Juan de Dios Hospital vs. Metropolitan Water District, 54 Phil. 174.)
5.
ID.; ID.; ID.; CHARGING MEDICAL AND HOSPITAL FEES. The mere charging of
medical and hospital fees from those who can afford to pay does not make the institution
one established for profit or gain (Manila Sanitarium and Hospital vs. Gabuco, 117 Phil. 12,
January 31, 1963.)
DECISION
Appeal taken by the Hospital de San Juan de Dios, Inc. from the decision of the Court of
First Instance of Rizal in Civil Case No. 1775-P dismissing, its complaint against the City of
Pasay hereinafter referred to as the City Pablo Cuneta, R. N. Ascao and Ceferino
Fuentes, in their capacities as Mayor, City Engineer and City Treasurer, respectively, of said
city. It is admitted that on July 24, 1954 and May 27, 1957, appellant paid, under protest,
to the City the amounts of P829.60 and P879.90, respectively, representing electrical
inspection fees allegedly due it from appellant under Section 5, Ordinance No. 7, series of
1945, as amended by Ordinance No, 22 series of 1947, and further amended by Ordinance
No. 54, series of 1955, which reads as follows:
"That the City Electrician shall inspect all electric wires, poles, and other apparatus whether
electric crude oil charcoal or gasoline installed or used for generating, containing,
conducting or measuring electricity or telephone service, issue to the owner or user thereof
a statement of the result of such inspection . . . However, residential houses with outlets
not exceeding (8) in number shall be exempted from the payment of the corresponding
inspection fees. For the purpose of this ordinance, any accessoria, irrespective of the
number of doors or rooms it contains, is considered one buildings. Churches and such other
religious institutions and buildings housing charitable organizations, are likewise subject to
annual inspection but exempted from the payment of inspection fees."
Although appellant claimed that, as a charitable institution, it was exempted from the
payment of the inspection fees provided for in the above-quoted section, it found itself
compelled to pay the amounts mentioned heretofore by reason of the refusal of appellees
Pablo Cuneta, as Mayor, and R.N. Ascao, as City Engineer, to issue a building permit to
make additional construction applied for by appellant until after the full payment of the
electrical inspection fees assessed against it by appellee Ascao. As a result, appellant

commenced the present action in the Court of First Instance of Rizal ( Civil Case No. 1775P) to recover from appellees the above-mentioned amounts it had paid as electrical
inspection fees as well as the sum of P500.00 as attorney's fees and the costs of suit.
After due trial the court rendered the appealed judgment.
The issue determinative of the present appeal is whether or not appellant is a charitable
institution and, as such exempt, under the provisions of the last sentence of Section 5 of
the ordinance in question, from the payment of the inspection fees provided for therein.
The trial court, while admitting that appellant was organized for charitable purposes, held
that it "is not actually being managed and operated as a charitable institution but one for
profit" and, as such, "is not entitled to the relief sought in the present action." This, We
believe, is not correct.
It not being disputed that appellant was organized as a charitable institution, the
presumption is that it is operating as such, the burden of proof being on appellees to show
that it is operating otherwise. The record does not show that they have satisfactorily
discharged this burden.
But the lower court, disregarding the presumption mentioned above, claims that "plaintiff
failed to prove that it is actually engaged in charitable work" and that "No evidence
whatsoever was presented to show how it doles out charity, etc." This is also erroneous.
Aside from the appellant's Articles of Incorporation showing that it had no capital stock and
that no part of its net income, if any, could inure to the benefit of any private individual,
there is Exhibit D, a ruling of June 20, 1957 of the Workmen's Compensation Commissioner
and the Undersecretary of Labor to the effect that appellant is a charitable institution
exempted from the scope of the Workmen's Compensation Act; a written statement of
appellant's cashier that the latter maintains two free wards of Sixty beds each; an
admission by appellees to the effect that, in addition to the free wards just mentioned,
appellant also maintains six free beds in the Pediatrics Section (transcript of June 16, 1960,
pp. 2-4).
It is not therefore correct to say that there is no evidence whatsoever showing how
appellant doles out charity. Moreover, the question of whether or not appellant and other
institutions similarly situated and operated are charitable institutions has been decided both
here and in the United States. The American rule is summarized in 51 American
Jurisprudence, p. 607 as follows:
"636. Effect of Receipt of Pay from Patients.
The general rule that a charitable institution does not lose its charitable character and its
consequent exemption from taxation merely because recipients of its benefits who are able
to pay are required to do so, where funds derived in this manner are devoted to the
charitable purposes of the institution, applies to hospitals. A hospital owned and conducted
by a charitable organization, devoted for the most part to the gratuitous care of charity
patients, is exempted from taxation as a building used for 'purposes purely charitable',
notwithstanding it receives and cares for pay patients, where any profit thus derived is
applied to the purposes of the institution. An institution, established, maintained, and
operated for the purpose of taking care of the sick, without any profit or view to profit, but
at a loss, which is made up by benevolent contributions, the benefits of which are open to
the public generally, is a purely public charity within the meaning of a statute exempting
the property of institutions of purely public charity from taxation; the fact that patients who
are able to pay are charged for services rendered, according to their ability, being of no
importance upon the question of the character of the institution."
On the other hand, in Jesus Sacred Heart College vs. Collector, etc. G.R. No. L-6807, May
20, 1954, We overruled the contention of the Collector of Internal Revenue to the effect
that the fact that the appellant therein had a profit or net income was sufficient to show
that it was an institution "for profit and gain" and therefore no longer exempt from income
tax as follows:
"To hold that an educational institution is subject to income tax whenever it is so
administered as to reasonably assure that it will not incur a deficit, is to nullify and defeat
the aforementioned exemption. Indeed, the effect in general, of the interpretation
advocated by appellant would be to deny the exemption whenever there is a net income,
contrary to the tenor of said Section 27(e)which positively exempts from taxation those
corporations or associations which, otherwise, would be subject thereto, because of the
existence of said net income."
Explaining our view that the making of profit does not destroy the tax exemption of a
charitable, benevolent or educational institution, We said:
"Needless to say, every responsible organization must be so run as to, at least, insure its
existence, by operating within the limits of its own resources, especially its regular income.
In other words, it should always strive, whenever possible, to have a surplus. Upon the
other hand, appellant's pretense, would limit the benefits of the exemption, under said
Section 27(e) to institutions which do not hope or propose, to have such surplus. Under this
view, the exemption would apply only to schools which are on the verge of bankruptcy, for
unlike the United States, where a substantial number of institutions of learning are
dependent upon voluntary contributions and still enjoy economic stability, such as Harvard,
the trust fund of which has been steadily increasing with the years there are, and there
have always been very few educational enterprises in the Philippines which are supported
by donations, and those organizations usually have a very precarious existence. The final
result of appellant's contention, if adopted, would be to discourage the establishment of
colleges in the Philippines, which is precisely the opposite of the objective consistently
sought by our laws."
In U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, G.R. No. L6988 (May 24, 1952), it was argued that the fact that the aforesaid hospital charged fees
for 140 paying beds made it lose its character of a charitable institution. We likewise
rejected this view because the paying beds aforesaid were maintained to partly finance the
expenses of the free wards maintained by the hospital. We express the same view in
Collector of Internal Revenue vs. St. Paul's Hospital in Iloilo, G.R. No. L-12127 (May 25,
1959) where We said the following:
"In this connection, it should be noted that respondent therein is a corporation organized for
'charitable, educational and religious purposes; that no part of its net income inures to the
benefit of any private individual; that it is exempted from paying income tax; that it
operates a hospital in which medical assistance is given to destitute persons free of charge;
that it maintains a pharmacy department within the premises of said hospital, to supply
drugs and medicines only to charity and paying patients confined therein; and that only the
paying patients are required to pay the medicines supplied to them, for which they are
charged the cost of medicines, plus an additional 10% thereof, to partly offset the cost of
medicines supplied free of charge to charity patients. Under these facts, we are of the
opinion, and so hold, that the Hospital may not be regarded as engaged in 'business' by
reason of said sale of medicines to its paying patients.
"xxx
xxx
xxx
"In line with the foregoing, in U.S.T. Hospital Employees Association vs. Santo Tomas
University Hospital (G.R. No. L-6988, decided May 24, 1954), we held that the U.S.T.
Hospital was not established for profit-making purposes, despite the fact that it had 140
paying beds, because the same were maintained only to 'partly finance the expenses of the
free wards, containing 203 beds for charity patients. Although said case involved the
interpretation of Republic Act No. 772, it is patent from our decision therein that said
institution was not considered engaged in 'business.'
"It is trite to say that a tax on the limited revenue of charitable institutions of this kind
tends to hamper its operation, and accordingly, to discourage the establishment and
maintenance thereof. In the absence of a clear legal provision thereon, we must not so
construe our laws as to lead to such result. In other words, the second, third and fourth
assignments of error are untenable."
In San Juan de Dios Hospital (the same party appellant herein) vs. Metropolitan Water
District, 54 Phil. 174, this Court considered said hospital is a charitable institution in spite of
the fact that it maintained paying beds. From the decision in said case, We quote the
following:
"A hospital (referring to the San Juan de Dios Hospital) is generally considered to be a
charitable institution. It is good public policy to encourage works of charity. What Carriedo
did in his will was to make a beneficent grant not to a hospital thought of as a building, but
to a hospital thought of as an institution. The free water was for the good of the hospital in
this larger sense. Should the hospital be enlarged or rebuilt, the water concession would
continue just the same. But a hospital cannot function without personnel. And such
personnel must have a place to live, which is the reason why a home devoted exclusively to
the needs of the nurses was founded. Free water for a nurses home as an adjunct to a
hospital is as beneficial to the charitable purposes of the hospital as is free water for the
hospital proper."
Finally, in Manila Sanitarium and Hospital vs. Gabuco, G.R. No. L-14331, January 31, 1963,
We held that the mere charging of medical and hospital fees from those who could afford to
pay, did not make the institution one established for profit or gain.
Upon all the foregoing, the appealed decision is reversed, and another is hereby rendered
ordering appellees to pay appellant the amount of P1,709.50, with interest thereon at the
legal rate from the date of the filing of complaint in this case. With costs
[G.R. No. L-39086. June 15, 1988.]
ABRA VALLEY COLLEGE, INC. represented by PEDRO V. BORGONIA, petitioner, vs. HON.
JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS CF
PATERNO MILLARE, respondents.
DECISION
This is a petition for review on certiorari of the decision ** of the defunct Court of First
Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled
"Abra Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M.
Cariaga as Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of
Bangued, Abra and Paterno Millare, defendants," the decretal portion of which reads:
"IN VIEW OF ALL THE FOREGOING, the Court hereby declares:
"That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against the lot and building of the Abra Valley Junior
College, Inc., represented by Director Pedro Borgonia located at Bangued, Abra, is valid;
"That since the school is not exempt from paying taxes, it should therefore pay all back
taxes in the amount of P5,140.31 and back taxes and penalties from the promulgation of
this decision;
"That the amount deposited by the plaintiff in the sum of P6,000.00 before the trial, be
confiscated to apply for the payment of the back taxes and for the redemption of the
property in question, if the amount is less than P6,000.00, the remainder must be returned
to the Director of Pedro Borgonia, who represents the plaintiff herein;
"That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial
must be returned to said Municipal Treasurer of Bangued, Abra;
"And finally the case is hereby ordered dismissed with costs against the plaintiff.
"SO ORDERED." (Rollo, pp. 22-23)
Petitioner, an educational corporation and institution of higher learning duly incorporated
with the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of
Answer by the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in
the court a quo to annul and declare void the "Notice of Seizure" and the "Notice of Sale" of
its lot and building located at Bangued, Abra, for non-payment of real estate taxes and
penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building
covered by Original Certificate of Title No. Q-83 duly registered in the name of petitioner,
plaintiff below, on July 6, 1972, by respondents Municipal Treasurer and Provincial
Treasurer, defendants below, was issued for the satisfaction of the said taxes thereon. The
"Notice of Sale" was caused to be served upon the petitioner by the respondent treasurers
on July 8, 1972 for the sale at public auction of said college lot and building, which sale was
held on the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered
the highest bid of P6,000.00 which was duly accepted. The certificate of sale was
correspondingly issued to him.
On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counsel a
motion to dismiss the complaint.
On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through
then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the
respondents Heirs of Paterno Millare; Rollo, pp. 98-100) to the complaint this was followed
by an amended answer (Annex "3," ibid; Rollo, pp. 101-103) on August 31, 1972.
On September 1, 1972, the respondent Paterno Millare filed his answer (Annex "5," ibid;
Rollo, pp. 106-108).
On October 12, 1972, with the aforesaid sale of the school premises at public auction, the
respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I,
ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal
treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on
December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the
sum of P6,000.00 evidenced by PNB Check No. 904369.
On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by
the trial court in its questioned decision. Said Stipulations reads:
"STIPULATION OF FACTS
"COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully
enter into the following agreed stipulation of facts:
"1.
That the personal circumstances of the parties as stated in paragraph 1 of the
complaint is admitted; but the particular person of Mr. Armin M. Cariaga is to be
substituted, however, by anyone who is actually holding the position of Provincial Treasurer
of the Province of Abra;
"2.
That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings
thereon located in Bangued, Abra under Original Certificate of Title No. 0-83;
"3.
That the defendant Gaspar V. Bosque, as Municipal Treasurer of Bangued, Abra
caused to be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the
property of said school under Original Certificate of title No. 0-83 for the satisfaction of real
property taxes thereon, amounting to P5,140.31; the Notice of Seizure being the one
attached to the complaint as Exhibit A;
"4.
That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc.
was sold at public auction for the satisfaction of the unpaid real property taxes thereon and
the same was sold to defendant Paterno Millare who offered the highest bid of P6,000.00
and a Certificate of Sale in his favor was issued by the defendant Municipal Treasurer.
"5.
That all other matters not particularly and specially covered by this stipulation of
facts will be the subject of evidence by the parties.
WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this
stipulation of facts on the point agreed upon by the parties.
Aside from the Stipulation of Facts, the trial court among others, found the following: (a)
that the school is recognized by the government and is offering Primary, High School and
College Courses, and has a school population of more than one thousand students all in all;
(b) that it is located right in the heart of the town of Bangued, a few meters from the plaza
and about 120 meters from the Court of First Instance building; (c) that the elementary
pupils are housed in a two-storey building across the street; (d) that the high school and
college students are housed in the main building; (e) that the Director with his family is in
the second floor of the main building; and (f) that the annual gross income of the school
reaches more than one hundred thousand pesos.
From all the foregoing, the only issue left for the Court to determine and as agreed by the
parties, is whether or not the lot and building in question are used exclusively for
educational purposes. (Rollo, p. 20)
The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z.
Montero, filed a Memorandum for the Government on March 25, 1974, and a Supplemental
Memorandum on May 7, 1974, wherein they opined "that based on the evidence, the laws
applicable, court decisions and jurisprudence, the school building and school lot used for
educational purposes of the Abra Valley College, Inc., are exempted from the payment of
taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).
Nonetheless, the trial court disagreed because of the use of the second floor by the Director
of petitioner school for residential purposes. He thus ruled for the government and rendered
the assailed decision.
After having been granted by the trial court ten (10) days from August 6, 1974 within which
to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57)
petitioner instead availed of the instant petition for review on certiorari with prayer for
preliminary injunction before this Court, which petition was filed on August 17, 1974 (Rollo,
p. 2).
In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the
petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).
Petitioner raised the following assignments of error:
I
THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.
II
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY
BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.
III
THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO
PAY P5,140.31 AS REALTY TAXES.
IV
THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT
MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See
Brief for the Petitioner, pp. 1-2)
The main issue in this case is the proper interpretation of the phrase "used exclusively for
educational purposes."
Petitioner contends that the primary use of the lot and building for educational purposes,
and not the incidental use thereof, determines the exemption from property taxes under
Section 22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject
college lot and building, which are contrary thereto as well as to the provision of
Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal
basis and therefore void.
On the other hand, private respondents maintain that the college lot and building in
question which were subjected to seizure and sale to answer for the unpaid tax are used:
(1) for the educational purposes of the college; (2) as the permanent residence of the
President and Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws
and grandchildren; and (3) for commercial purposes because the ground floor of the college
building is being used and rented by a commercial establishment, the Northern Marketing
Corporation (See photograph attached as Annex "8" [Comment; Rollo, p. 90]).
Due to its time frame, the constitutional provision which finds application in the case at bar
is Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which
expressly grants exemption from realty taxes for "Cemeteries, churches and parsonages or
convents appurtenant thereto, and all lands, buildings, and improvements used exclusively
for religious, charitable or educational purposes . . . ."
Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by
Republic Act No. 409, otherwise known as the Assessment Law, provides:
"The following are exempted from real property tax under the Assessment Law:
xxx
xxx
xxx
(c)
churches and parsonages or convents appurtenant thereto, and all lands, buildings,
and improvements used exclusively for religious, charitable, scientific or educational
purposes.
xxx
xxx
xxx
In this regard petitioner argues that the primary use of the school lot and building is the
basic and controlling guide, norm and standard to determine tax exemption, and not the
mere incidental use thereof.
As early as 1916 in YMCA of Manila vs. Collector of Internal Revenue, 33 Phil. 217 [1916],
this Court ruled that while it may be true that the YMCA keeps a lodging and a boarding
house and maintains a restaurant for its members, still these do not constitute business in
the ordinary acceptance of the word, but an institution used exclusively for religious,
charitable and educational purposes, and as such, it is entitled to be exempted from
taxation.
In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352
[1972], this Court included in the exemption a vegetable garden in an adjacent lot and
another lot formerly used as a cemetery. It was clarified that the term "used exclusively"
considers incidental use also. Thus, the exemption from payment of land tax in favor of the
convent includes, not only the land actually occupied by the building but also the adjacent
garden devoted to the incidental use of the parish priest. The lot which is not used for
commercial purposes but serves solely as a sort of lodging place, also qualifies for
exemption because this constitutes incidental use in religious functions.
The phrase "exclusively used for educational purposes" was further clarified by this Court in
the cases of Herrera vs. Quezon City Board of Assessment Appeals, 3 SCRA 186 [1961] and
Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991
[1965], thus
"Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation,
Vol. 2, p. 1430), but extends to facilities which are incidental to and reasonably necessary
for the accomplishment of said purposes, such as in the case of hospitals, 'a school for
training nurses, a nurses' home, property used to provide housing facilities for interns,
resident doctors, superintendents, and other members of the hospital staff, and recreational
facilities for student nurses, interns, and residents' (84 CJS 6621), such as 'athletic fields'
including 'a firm used for the inmates of the institution.'" (Cooley on Taxation, Vol. 2, p.
1430).
The test of exemption from taxation is the use of the property for purposes mentioned in
the Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil. 547 [1941]).
It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes" as provided for in
Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis
has always been made that exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the
use of the school building or lot for commercial purposes is neither contemplated by law,
nor by jurisprudence. Thus, while the use of the second floor of the main building in the
case at bar for residential purposes of the Director and his family, may find justification
under the concept of incidental use, which is complimentary to the main or primary purpose
educational, the lease of the first floor thereof to the Northern Marketing Corporation
cannot by any stretch of the imagination be considered incidental to the purpose of
education.
It will be noted however that the aforementioned lease appears to have been raised for the
first time in this Court. That the matter was not taken up in the trial court is really apparent
in the decision of respondent Judge. No mention thereof was made in the stipulation of
facts, not even in the description of the school building by the trial judge, both embodied in
the decision nor as one of the issues to resolve in order to determine whether or not said
property may be exempted from payment of real estate taxes (Rollo, pp. 17-23). On the
other hand, it is noteworthy that such fact was not disputed even after it was raised in this
Court.
Indeed it is axiomatic that facts not raised in the lower court cannot be taken up for the first
time on appeal. Nonetheless, as an exception to the rule, this Court has held that although
a factual issue is not squarely raised below, still in the interest of substantial justice, this
Court is not prevented from considering a pivotal factual matter. "The Supreme Court is
clothed with ample authority to review palpable errors not assigned as such if it finds that
their consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals,
127 SCRA 645 [1984]).
Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the
school building as well as the lot where it is built, should be taxed, not because the second
floor of the same is being used by the Director and his family for residential purposes, but
because the first floor thereof is being used for commercial purposes. However, since only a
portion is used for purposes of commerce, it is only fair that half of the assessed tax be
returned to the school involved.
PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is
hereby AFFIRMED subject to the modification that half of the assessed tax be returned to
the petitioner.
TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND _
EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL PURPOSES
FACTS: The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the
registered owner of a parcel of land located at Quezon Avenue, Quezon City. Erected in the
middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines. A big
space at the ground floor is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their private
clinics for their patients whom they charge for their professional services. Almost one-half of
the entire area on the left side of the building along Quezon Avenue is vacant and idle,
while a big portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is
being leased for commercial purposes to a private enterprise known as the Elliptical Orchids
and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to
out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government. On June 7, 1993, both the land
and the hospital building of the petitioner were assessed for real property taxes by the City
Assessor of Quezon City.
Petitioner filed a Claim for Exemption from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. Petitioner contends that under
Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real property
taxes. It averred that a minimum of 60% of its hospital beds are exclusively used for
charity patients and that the major thrust of its hospital operation is to serve charity
patients. It argues that it is a charitable institution and, as such, exempt from real property
taxes.
ISSUES:
1.
Whether the petitioner is a charitable institution within the context of Presidential
Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act
No. 7160.
2.
Whether the real properties of petitioner are exempt from real property taxes.
HELD:
1.
Yes.
To determine whether an enterprise is a charitable institution/entity or not, the elements

which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject
to the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the Philippines.
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution. (Congregational Sunday School, etc. v. Board of Review; Lutheran
Hospital Association of South Dakota v. Baker)
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not
lose its character as a charitable institution simply because the gift or donation is in the
form of subsidies granted by the government. (Yorgason v. County Board of Equalization of
Salt Lake County)
In this case, the petitioner adduced substantial evidence that it spent its income, including
the subsidies from the government for 1991 and 1992 for its patients and for the operation
of the hospital. It even incurred a net loss in 1991 and 1992 from its operations.
2.
Notwithstanding the finding that petitioner is a charitable institution, those portions
of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for charitable purposes.
The settled rule is that laws granting exemption from tax are construed strictissimijuris
against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to an appropriation.
Hence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. (Salvation Army v. Hoehn)
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that petitioner shall enjoy tax exemptions and privileges. However, it is plain as
day that under the decree, petitioner does not enjoy any property tax exemption privileges
for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges
under Section 2.
It is a settled rule of statutory construction that the express mention of one person, thing,
or consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressiouniusestexclusioalterius.
The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution covers
property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes."
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act
No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
(Note the following substantial changes in the Constitution: Under the 1935 Constitution,
". . . all lands, buildings, and improvements used 'exclusively' for charitable . . . purposes
shall be exempt from taxation." However, under the 1973 and the present Constitutions, for
"lands, buildings, and improvements" of the charitable institution to be considered exempt,
the same should not only be "exclusively" used for charitable purposes; it is required that
such property be used "actually" and "directly" for such purposes.)
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed
to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is
defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is
used for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence to the Constitutions and
the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable purposes is
the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes.
The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals
for their clinics and a canteen. Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name "Elliptical Orchids and
Garden Center." Indeed, the petitioner's evidence shows that it collected P1,136,483.45 as
rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, the portions of the land leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from such taxes. On the other hand,
the portions of the land occupied by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from real property taxes.
LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS, as
City Assessor of Quezon City [G.R. No. 144104. June 29, 2004.]
BIR wins vs St. Lukes hospital ordered to pay P63.9M tax deficiency
Oct 25, 2012
The Supreme Court has ordered St. Lukes Medical Center Inc. to pay the Bureau of
Internal Revenue P63.9 million in deficiency income tax, value added tax and withholding
tax on compensation for 1998, based on the 10-percent preferential income tax as
stipulated in the 1997 Tax Code.
According to BIR head revenue executive assistant Claro Ortiz, this means that all hospitals
that claim to be non-profit but are proprietary will now have to pay income tax. In 2002, St.
Luke's disputed the BIRs assessment that it should be paying income taxes, saying that it
is a non-profit hospital. The case eventually reached the Supreme Court. In a decision
penned by Associate Justice Antonio Carpio on Sept. 26 and received by the BIR on Oct. 17,
the SC reversed an earlier decision by the Court of Tax Appeals, which dismissed the BIRs
assessment. The appellate court had argued that St. Lukes was not subject to income tax
because non-stock corporations are exempt from paying income tax.
However, the SC ruled that St. Lukes services that patients pay for are subject to income
tax.
St. Lukes Medical Center is ordered to pay the deficiency income tax in 1998 based on the
10 percent preferential income tax rate under Section 27(B) of the National Internal
Revenue Code [NIRC]. However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the NIRC, the decision stated. The
BIR claimed that St. Lukes had total revenues of P1.73 billion in 1998 alone. St. Lukes
refuted the assessment, saying that its free services to patients amounted to P218 million in
1998.
The Supreme Court ruled that while there is no dispute that St. Lukes is organized as a
non-stock and non-profit charitable institution, this does not automatically exempt it from
paying taxes. For a charitable institution to be exempt from income taxes, Section 30(E) of
the NIRC requires that [it] must be organized and operated exclusively for charitable
purposes, the SC said in its decision.
Taxation of non-stock, non-profit hospitals

17 October 2012
by Atty. Anthony G. Prestoza / Tax Law for Business
TAXATION of non-stock, non-profit organizations had always been a controversy. There are
a number of types or classes of organizations or associations exempted from income taxes
by the Tax Code. So these types of organizations are the usual channel through which
activities are pursued if the intention is not for profit. But despite the clear exemption from
income taxes, the number of cases pursued administratively and litigated in the courts
would indicate that the taxation of these class of organizations is not that clear after all.
Among the types of organizations exempted from income taxes are non-stock corporations
organized for charitable purposes and not for profit, but operated exclusively for the
promotion of the general welfare. For one to invoke exemption from income tax, it must be
organized as non-stock and operated for the purposes in which it was organized. That
classification itself had been an issue in the area of income taxation. The Court had
repeatedly defined what a non-stock organization is but its relevance crops up every time a
tax-related issue is involved. So what really constitutes a non-stock corporation? Once
again, the Supreme Court, in GR 195909 and 195960, September 26, 2012, referred to the
definition in the Corporation Code of a non-stock corporation as one where no part of its
income is distributable as dividends to its members, trustees, or officers and that any profit
obtained as an incident to its operations shall whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the corporation was organized.
That case involves the income taxation of a non-stock and non-profit hospital organized for
charitable and for social welfare purposes. The institution claims that it is exempt from
income taxation under Section 30 of the Tax Code, which exempts this kind of institution
from income taxation. The tax authority, on the other hand, claims that it should be subject
to income tax under Section 27(B) of the Tax Code, which imposes 10-percent income tax
on proprietary and nonprofit hospitals. As decided by the Court, a non-stock, non-profit
corporation is indeed exempt from income taxation. That exemption, however, is intended
solely for the activities of a non-stock, non-profit entity which are operated exclusively for
charitable or social welfare purposes. Any other income that may be generated by these
entities shall be subject to the 10-percent preferential tax rate the tax imposed on
proprietary non-profit hospitals.
Apparently, according to the Court, proprietary means private, and when applied to a
hospital means private hospital. On the other hand, non-profit means no net income or
asset accrues to or benefits any member or person, with all net income or asset devoted to
the institutions purposes and all its activities conducted not for profit.
Thus, if a hospital not organized for profit, generates income not in relation to its charitable
or social welfare purposes, it shall be taxed at the preferential rate of 10 percent. Simply
put, even if a hospital does not distribute income to its members or trustees and uses the
income proceeds from non-related activities in furtherance of its purposes, the same shall
still be taxable at a rate of 10 percent.
The implication of this is that a non-stock, non-profit organization, including a hospital,
organized for charitable and/or for purposes of promoting the general welfare is not subject
to income tax. The exemption, however, extends only to the activities pursued exclusively
for such purposes, that is, not-for-profit activities. That exemption is not lost even if said
entity involves itself in activities conducted for profit. But these revenues derived from
profit- generating activities will be subject to income tax. With respect to hospitals, that
income tax shall not be the regular income tax rate of 30 percent but the special income tax
rate of 10 percent imposed on proprietary and nonprofit hospitals
TAX EXEMPTIONS (Art.-VI Sec. 28[4],1987 Constitution)
Reason: The requirement is obviously intended to prevent indiscriminate grant of tax
exemptions.
The phrase a majority of all the members of the Congress" means at least 50 % plus 1 of
all the members voting separately. In granting tax exemptions, an absolute majority of the
members of Congress is required, while in cases of withdrawal of such tax exemption, a
relative majority is sufficient. Tax amnesties, condonations and refunds are in the nature of
tax exemptions, such being the case, a law granting them requires the vote of an absolute
majority. A constitutional grant of exemption may be self-executing or may require an act of
Congress for its operation. Where a Constitutional provision granting an exemption is selfexecuting, the legislature can neither add nor detract from it. It may, however prescribe a
procedure to determine whether a claimant is entitled to the Constitutional exemption.
Municipalities are empowered to impose, not only municipal license taxes
upon persons engaged in any business or occupation, but also to levy for
public purposes, just and uniform taxes.
Exemption of Government Instrumentalities from taxation
The SSS had an office building in Bacolod City. It failed to pay realty taxes for three
consecutive years. The City levied upon the property and forfeited it in its favor. SSS
protested the forfeiture on the ground that the SSS, being a government owned and
controlled corporation, is exempt from payment of real estate taxes.
ISSUE: Whether a government-owned or controlled corporation, performing proprietary
functions like the SSS, is exempt from paying realty taxes.
HELD: Yes. The SSS is exempt from paying realty taxes. The Charter of the City of Bacolod
provides that lands and buildings owned by the government are exempt from realty taxes.
In ruling that the SSS is not covered by the exemption, the CFI restricted the scope of the
exemption only to those properties owned by government agencies and instrumentalities
performing governmental or sovereign functions, It excluded from the coverage of the
exemption those performing proprietary functions, such as the SSS. It relied on the case of
NACOCO v. Bacani in which the Court held that government agencies performing
proprietary functions are not exempt from paying legal fees. The application of the NACOCO
v. Bacani case is incorrect, since that case was referring to legal fees and not to realty
taxes. For purposes of exemptions in the payment of realty taxes, the distinction between
government agencies performing constituent and ministrant function is not important. What
is decisive is merely that the properties possessed by the SSS are in fact owned by the
government of the Philippines. As such, they are exempt from realty taxes. To make such a
distinction would have the effect of taking money from one pocket and putting it in another
pocket. It would not serve the main purpose of taxation and would even tend to defeat it,
because of the paperwork, time, and administrative expenses that it would entail.
Social Security System vs City of Bacolod
Art. VI Sec. 29[2] APPROPRIATION OF PUBLIC MONEY
Reasons:
a. Requirement that taxes can only be levied for a public purpose.
b. It must be in consonance with the inviolable principle of separation of the Church and
State. What the Constitution prohibits is the use of public money or property for the benefit
of any priest, etc. as such. When so employed in
the armed forces, any penal institution, or government orphanage or leprosarium, they may
receive their corresponding compensations for services rendered in their non-religious
capacity without violating the
Constitutional prohibition.
Art VIII JUDICIAL DEPARTMENT
Sec 4 Authority of Supreme Court to decide on constitutionality of laws
Sec 5 Power of review of lower court decisions on legality or validity of laws,
ordinance or regulations
POWER OF JUDICIAL REVIEW IN TAXATION
As long as the legislature, in imposing a tax, does not violate applicable constitutional
limitations or restrictions, it is not within the province of the courts to inquire into the
wisdom or policy of the exaction, the motives behind it, the amount to be raised or the
persons, property or other privileges to be taxed. The courts power in taxation is limited
only to the application and interpretation of the law.
Art. X Sec. 5, 1987 Constitution MUNICIPAL TAXATION
Local Taxation
of an import duty, which is beyond the authority of the city to impose. Moreover, the tax is
discriminatory, and hence, violative of the uniformity required by the Constitution, since
only sales by agents or consignees of outside dealers would be subject to the tax, while
those by local dealers not acting for or on behalf of other merchants would be exempt from
the tax. There is no valid classification here because if the purpose of the law were merely
to levy a burden upon the sale of soft drinks, there is no reason why sales thereof by
dealers other than agents or consignees of producers or merchants outside the city should
be exempt from the tax.
Delegation of legislative taxing power to local governments is justified by the necessary
implication that the power to create political corporations for purposes of local selfgovernment carries with it the power to confer on such local government agencies the
authority to tax.
Pepsi-Cola Bottling Co. of the Phil. v. City of Butuan
LOCAL TAXATION
[G.R. No. L-40296. November 21, 1984.]
ALLIED THREAD CO., INC., and KER & COMPANY, LTD., petitioners, vs. HON. CITY MAYOR
OF MANILA, HON. CITY TREASURER OF MANILA, HON. LORENZO RELOVA, in his capacity as
Presiding Judge, Branch II, CFI of Manila, respondents.
SYLLABUS
1.
ADMINISTRATIVE LAW; TAXATION; LOCAL TAX CODE AS AMENDED BY
PRESIDENTIAL DECREE NO. 426; VALIDITY OF ORDINANCE; SUBSEQUENT AMENDMENTS
THERETO DO NOT INVALIDATE NOR MOVE THE EFFECTIVITY DATE OF A LOCAL TAX
ORDINANCE; CASE AT BAR. Ordinance No. 7516 was enacted by the Municipal Board of
Manila on June 12. 1974 and approved by the City Mayor on June 15. 1974. Fifteen (15)
days thereafter, or on July 1, 1974. the said ordinance became effective pursuant to Sec.
42 of the Local Tax Code. It is clear therefore that Ordinance No. 7516 has fully conformed
with P.D. No. 426 and Local Tax Regulation No. 1-74 which require that "a local tax
ordinance intended to take effect on July 1, 1974 should be enacted by the Local Chief
Executive not later than June 15, 1974." The subsequent amendments to the basic
ordinance did not in any way invalidate it nor move the date of its effectivity. To hold
otherwise would limit the power of the defunct Municipal Board of Manila to amend an
existing ordinance as exigencies require.
2.
ID.; ID.; ID.; MODES OF APPRISING PUBLIC OF NEW LOCAL TAX ORDINANCE; CASE
AT BAR. We are persuaded that there was substantial compliance of the law on
publication. Section 43 of the Local Tax Code provides two modes of apprising the public of
a new ordinance, either, (a) by means of publication in a newspaper of general circulation
or, (b) by means of posting of copies thereof in the local legislative hall or premises and two
other conspicuous places within the territorial jurisdiction of the local government.
Respondents, having complied with the second mode of notice. We are of the opinion that
there is no legal infirmity to the validity of Ordinance No. 7516 as amended.
3.
ID.; ID.; ID.; EXCISE TAX; TAXABILITY UNDER QUESTIONED ORDINANCE DEPENDS
UPON THE PLACE WHERE SALE TRANSACTION IS PERFECTED. Finally, petitioner Allied
Thread Co., Inc. claims exclusion from Ordinance No. 7516 as amended on the ground that
it does not maintain an office or branch office in the City of Manila, where the subject
Ordinance only applies. This contention is devoid of merit. Allied Thread Co., Inc. admits
that it does business in the City of Manila through a broker or agent, Ker & Company, Ltd.
Doing business in the City of Manila is all that is required to fall within the coverage of the
Ordinance. It should be noted that Ordinance No. 7516 as amended imposes a business tax
on manufacturers, importers or producers doing business in the City of Manila. The tax
engaging in an occupation, and hence is in the nature of an excise tax. The power to levy
an excise upon the performance of an act or the engaging in an occupation does not depend
upon the domicile of the person subject to the excise, nor upon the physical location of the
property and in connection with the act or occupation taxed, but depends upon the place in
which the act is performed or occupation engaged in. Thus, the gauge for taxability under
the said Ordinance No. 7516 as amended does not depend on the location of the office, but
attaches upon the place where the respective sale transaction(s) is perfected and
consummated. (See Koppel (Phil.) vs. Yatco, 77 Phil. 496 [1946]) Since Allied Thread Co.,
DECISION
This is a Petition for Review challenging the decision of the then Court of First Instance of
Manila presided by then Judge, now Justice Lorenzo Relova, which upheld the validity of
Manila Ordinance No. 7516, as amended by Ordinance Nos. 7544, 7545 and 7556, and
adjudging petitioner Allied Thread Co., Inc. taxable thereunder considering that its products
are sold in Manila.
On June 12, 1974, the Municipal Board of the City of Manila enacted Ordinance No. 7516
imposing on manufacturers, importers or producers, doing business in the City of Manila,
business taxes based on gross sales on a graduated basis. The Mayor approved the said
Ordinance on June 15, 1974. In due time, the same ordinance underwent a series of
amendments, to wit: on June 19, 1974, by Ordinance No. 7544 approved by the Mayor on
the same date; Ordinance No. 7545 enacted by the Municipal Board on June 20, 1974 and
approved by the Mayor on June 27, 1974; and Ordinance No. 7556, enacted by the
Municipal Board on July 20, 1974 and approved by the Mayor on July 29, 1974.
Ordinance No. 7516 as amended, reads as follows:
"Sec. 1.
Business Tax. There is hereby imposed on the following business in the
City of Manila an annual tax collectible quarterly except on those for which fixed taxes are
already provided for as follows:
A.
On manufacturers, importers, or producers of any article of commerce of whatever
kind or nature, including brewers, distilled spirits and/or wines in accordance with the
following schedule:
xxx
xxx
xxx
"PROVIDED HOWEVER, that for purposes of collection of this tax, manufacturers and
producers maintaining or operating branch or sales offices elsewhere shall record the sale in
the branch or sales office making the sale and the tax thereon shall accrue to the City of
Manila if the branch of sales office is in Manila. In cases where there is no such branch or
sales office in the city, the sale shall be duly recorded in the principal office along with the
sales made in the principal office. Sixty percent of all sales recorded in the principal office
shall be taxable by the City of Manila if the principal office is in Manila, while the remaining
forty percent shall be deemed as sales made in the factory and shall be taxable by the local
government where the factory is located.
"In cases where a manufacturer or producer has factories in Manila and in different
localities, the forty per cent sales allocation mentioned in the preceding paragraph shall be
appropriated among the City of Manila and the localities where the factories are situated in
proportion to their respective volumes of production during the period for which the tax is
due."
The records show that petitioner Allied Thread Co., Inc. is engaged in the business of
manufacturing sewing thread and yarn under duly registered marks and labels. It operates
its factory and maintains an office in Pasig, Rizal. In order to sell its products in Manila and
in other parts of the Philippines, petitioner Allied Thread Co., Inc. engaged the services of a
sales broker, Ker & Company, Ltd. (co-petitioner herein), the latter deriving commissions
from every sale made for its principal. cdasia
Having been affected by the aforementioned Ordinance, being manufacturers and sales
brokers, on July 22, 1974, Allied Thread Co., Inc. and Ker & Co., Ltd. filed with the defunct
Court of First Instance of Manila, a petition for Declaratory Relief, contending that
Ordinance No. 7516, as amended, is not valid nor enforceable as the same is contrary to
Section 54 of Presidential Decree No. 426, as clarified by Local Tax Regulation No. 1-74
dated April 8, 1974 of the Department of Finance, reading as follows:
"J.
GENERAL PROVISIONS
1.
All existing tax ordinance of provinces, cities, municipalities and barrios shall be
deemed ipso facto nullified on June 30, 1974.
2.
The local boards or councils should enact their respective tax ordinances pursuant to
the provisions of the Local Tax Code, as amended by P.D. 426, to take effect not earlier
than July 1, 1974.
3.
Pursuant to the provisions of Section 42 of the Code, as amended by Section 18 of
the said Decree, a local tax ordinance shall go into effect on the 15th day after approved by
the local chief executives in accordance with Section 41 of the Code.
4.
In view hereof, and considering the provisions of Section 54 of the Code, regarding
the accrual of taxes a local tax ordinance intended to take effect on July 1, 1974 should be
enacted by the Local Chief Executive not later than June 15, 1974." (Emphasis supplied)
Otherwise stated, petitioners assert that due to the series of amendments to Ordinance No.
7516, the same Ordinance fell short of the deadline set by Sec. 54 of P.D. No. 426 that "for
an ordinance intended to take effect on July 1, 1974, it must be enacted on or before June
15, 1974." Necessarily, so it is asserted, the said Ordinance No. 7516 as amended, is not
valid nor enforceable.
Petitioners further contend that the questioned Ordinance did not comply with the
necessary publication requirement in a newspaper of general circulation as mandated by
Sec. 43 of the Local Tax Code. Petitioner Allied Thread Co., Inc. also claims that it should
not be subjected to the said Ordinance No. 7516 as amended, because it does not operate
or maintain a branch office in Manila and that its principal office and factory are located in
Pasig, Rizal.
We agree with the decision of the then Court of First Instance of Manila, upholding the
validity of Ordinance No. 7516 as amended, and finding petitioner Allied Thread Co., Inc.
the proper subject thereto.
There is no dispute that Ordinance No. 7516 was enacted by the Municipal Board of Manila
on June 12, 1974 and approved by the City Mayor on June 15, 1974. Fifteen (15) days
thereafter, or on July 1, 1974, the said ordinance became effective pursuant to Sec. 42 of
the Local Tax Code. It is clear therefore that Ordinance No. 7516 has fully conformed with
P.D. No. 426 and Local Tax Regulation No. 1-74 which require that "a local tax ordinance
intended to take effect on July 1, 1974 should be enacted by the Local Chief Executive not
later than June 15, 1974". The subsequent amendments to the basic ordinance did not in
any way invalidate it nor move the date of its effectivity. To hold otherwise would limit the
power of the defunct Municipal Board of Manila to amend an existing ordinance as
exigencies require.
Petitioners complain that they were not fully apprised of the enactment of Ordinance No.
7516 for the same was not duly published in a newspaper of general circulation.
Respondents argue however, that copies of Ordinance No. 7516 and its amendments were
posted in public buildings, government offices, and public places in lieu of publication in
newspaper of general circulation.
We are persuaded that there was substantial compliance of the law on publication. Section
43 of the Local Tax Code provides two modes of apprising the public of a new ordinance,
either, (a) by means of publication in a newspaper of general circulation or, (b) by means of
posting of copies thereof in the local legislative hall or premises and two other conspicuous
places within the territorial jurisdiction of the local government. Respondents, having
complied with the second mode of notice, We are of the opinion that there is no legal
infirmity to the validity of Ordinance No. 7516 as amended.
Finally, petitioner Allied Thread Co., Inc. claims exclusion from Ordinance No. 7515 as
amended on the ground that it does not maintain an office or branch office in the City of
Manila, where the subject Ordinance only applies. This contention is devoid of merit. Allied
Thread Co., Inc. admits that it does business in the City of Manila through a broker or
agent, Ker & Company, Ltd. Doing business in the City of Manila is all that is required to fall
within the coverage of the Ordinance.
It should be noted that Ordinance No. 7516 as amended imposes a business tax on
manufacturers, importers or producers doing business in the City of Manila. The tax
engaging in an occupation, and hence is in the nature of an excise tax. LLjur
The power to levy an excise upon the performance of an act or the engaging in an
occupation does not depend upon the domicile of the person subject to the excise, nor upon
the physical location of the property and in connection with the act or occupation taxed, but
depends upon the place in which the act is performed or occupation engaged in.
Thus, the gauge for taxability under the said Ordinance No. 7516 as amended does not
depend on the location of the office, but attaches upon the place where the respective sale
transaction(s) is perfected and consummated. (See Koppel (Phil) vs. Yatco, 77 Phil. 496
[1946].) Since Allied Thread Co., Inc. sells its products in the City of Manila through its
broker, Ker & Company, Ltd., it cannot escape the tax liability imposed by Ordinance No.
7516 as amended.
WHEREFORE, the petition is hereby dismissed for lack of merit, Costs against the
petitioners.
Local Taxation
FACTS: Respondent Coca-Cola Bottlers Phil., Inc. had been paying the local business tax
only under Sec. 14 of Tax Ordinance No. 7794, being expressly exempted from the business
tax under Sec. 21 of the same ordinance. On Feb. 25, 2000, petitioner City of Manila,
approved Tax Ordinance No. 7988, amending certain sections of Tax Ordinance No. 7794,
particularly: (1) Section 14, by increasing the tax rates applicable to certain establishments
operating within the territorial jurisdiction of the City of Manila; and (2) Section 21, by
deleting the proviso: "that all registered businesses in the City of Manila that are already
paying the aforementioned tax shall be exempted from payment thereof". After a year,
petitioner also approved Tax Ordinance No. 8011, amending Tax Ordinance No. 7988.
Tax Ordinances No. 7988 and No. 8011 were later declared by the Supreme Court null and
void in Coca-Cola Bottlers Philippines, Inc. v. City of Manila (Coca-Cola case) for the
following reasons: (1) Tax Ordinance No. 7988 was enacted in contravention of the
provisions of the Local Government Code of 1991 and its implementing rules and
regulations; and (2) Tax Ordinance No. 8011 could not cure the defects of Tax Ordinance
No. 7988, which did not legally exist. However, before the Supreme Court could declare
both ordinances null and void, petitioner assessed respondent on the basis of Section 21 of
Tax Ordinance No. 7794, as amended, for deficiency local business taxes for the third and
fourth quarters of the year 2000.
Respondent then filed a protest on the ground that the said assessment amounted to
double taxation, as respondent was taxed twice, i.e., under Sections 14 and 21 of Tax
Ordinance No. 7794, as amended.
ISSUES:
1. Whether or not petitioners substantially complied with the reglementary period to timely
appeal the case for review before the CTA division.
2. Whether or not the ruling of the Supreme Court in the Coca-Cola case is doctrinal and
controlling in the instant case.
3. Whether or not petitioner can still assess taxes under Sections 14 and 21 of Tax
Ordinance No. 7794, as amended.
4. Whether or not the enforcement of Sec. 21 of Tax Ordinance No. 7794, as amended,
constitutes double taxation.
RULING:
1. Petitioners complied with the reglementary period for filing the petition.
From 20 April 2007, the date petitioners received a copy of the 4 April 2007 Order of the
RTC, denying their Motion for Reconsideration of the 16 November 2006 Order, petitioners
had 30 days, or until 20 May 2007, within which to file their Petition for Review with the
CTA. Hence, the Motion for Extension filed by petitioners on 4 May 2007 grounded on
their belief that the reglementary period for filing their Petition for Review with the CTA was
to expire on 5 May 2007, thus, compelling them to seek an extension of 15 days, or until 20
May 2007, to file said Petition was unnecessary and superfluous. Even without said
Motion for Extension, petitioners could file their Petition for Review until 20 May 2007, as it
was still within the 30-day reglementary period provided for under Section 11 of Republic
Act No. 9282; and implemented by Section 3 (a), Rule 8 of the Revised Rules of the CTA.
2. The Coca-Cola case is applicable to the instant case.
The pivotal issue raised therein was whether Tax Ordinance No. 7988 and Tax Ordinance
No. 8011 were null and void, which this Court resolved in the affirmative. Tax Ordinance
No. 7988 was declared by the DOJ Secretary as null and void and without legal effect due to
the failure of petitioner City of Manila to satisfy the requirement under the law that said
ordinance be published for three consecutive days. Petitioner City of Manila never appealed
said declaration of the DOJ Secretary; thus, it attained finality after the lapse of the period
for appeal of the same. The passage of Tax Ordinance No. 8011, amending Tax Ordinance
No. 7988, did not cure the defects of the latter, which, in any way, did not legally exist. By
virtue of the Coca-Cola case, Tax Ordinance No. 7988 and Tax Ordinance No. 8011 are null
and void and without any legal effect. Therefore, respondent cannot be taxed and assessed
under the amendatory laws Tax Ordinance No. 7988 and Tax Ordinance No. 8011.
3.
The Court infers that petitioners themselves believed that prior to Tax
Ordinance No. 7988 and Tax Ordinance No. 8011, respondent was exempt from the local
business tax under Section 21 of Tax Ordinance No. 7794. Hence, petitioners had to wait for
the deletion of the exempting proviso in Section 21 of Tax Ordinance No. 7794 by Tax
Ordinance No. 7988 and Tax Ordinance No. 8011 before they assessed respondent for the
local business tax under said section. Yet, with the pronouncement by this Court in the
Coca-Cola case that Tax Ordinance No. 7988 and Tax Ordinance No. 8011 were null and
void and without legal effect, then Section 21 of Tax Ordinance No. 7794, as it has been
previously worded, with its exempting proviso, is back in effect. Accordingly, respondent
should not have been subjected to the local business tax under Section 21 of Tax Ordinance
No. 7794 for the third and fourth quarters of 2000, given its exemption therefrom since it
was already paying the local business tax under Section 14 of the same ordinance.
4.
There is indeed double taxation if respondent is subjected to the taxes under both
Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the
same subject matter the privilege of doing business in the City of Manila; (2) for the
same purpose to make persons conducting business within the City of Manila contribute
to city revenues; (3) by the same taxing authority petitioner City of Manila; (4) within
the same taxing jurisdiction within the territorial jurisdiction of the City of Manila; (5) for
the same taxing periods per calendar year; and (6) of the same kind or character a
local business tax imposed on gross sales or receipts of the business.
When a municipality or city has already imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143
(a) of the LGC, said municipality or city may no longer subject the same manufacturers,
etc. to a business tax under Section 143 (h) of the same Code. Section 143 (h) may be
imposed only on businesses that are subject to excise tax, VAT, or percentage tax under
the NIRC, and that are "not otherwise specified in preceding paragraphs". In the same way,
businesses such as respondent's, already subject to a local business tax under Section 14 of
Tax Ordinance No. 7794 [which is based on Section 143 (a) of the LGC], can no longer be
made liable for local business tax under Section 21 of the same Tax Ordinance [which is
based on Section 143 (h) of the LGC].City of Manila vs. Coca-Cola Bottlers Phil., G.R. No.
181845, August 4, 2009
Local Taxation
CEPALCO was granted a franchise to operate an electric, light, heat, and power system in
Cagayan de Oro. The franchise imposed a 3% franchise tax which shall be in lieu of all taxes
and assessments of whatever authority upon the privileges, earnings, income, etc, from
which CEPALCO was expressly exempted, Subsequently the Local Tax Code was
promulgated allowing provinces to impose a tax of 1/2 of 1% on businesses enjoying
franchises. Pursuant to this, the Province of Misamis Oriental enacted an ordinance levying
the 1/2 of 1% tax on the gross annual receipts of CEPALCO realized within the province of
Misamis Oriental. CEPALCO refused to pay the additional tax, claiming the exemption
granted to it under its franchise.
ISSUE: Whether CEPALCO is exempt from paying the provincial franchise tax.
HELD: Yes. The franchise of CEPALCO expressly exempts it from payment of all taxes of
whatever authority, except the 3% tax on its earning. The franchise granting the exemption
is a special law applicable only to CEPALCO, while the Local Tax Code is a general tax law.
The presumption is that special statutes are exceptions to the general law because they
pertain to a special charter granted to meet a particular set of conditions and
circumstances. The franchise tax imposed under the local tax ordinance pursuant to the
Local Tax Code shall be imposed on businesses holding a franchise, but not from those
whose franchises contain the "in lieu of all taxes" proviso.
Province of MisamisOriental vs Cagayan Electric Power and Light Company GR L 45355
January 12, 1990
Local Taxation
FACTS: Petitioner Smart, averring that its telecenter in Davao City is exempt from paying
franchise tax to the city, filed a special civil action for declaratory relief for the
ascertainment of its rights and obligations under the Davao City Tax Code. The said Tax
Code imposes a franchise tax on businesses enjoying a franchise within the territorial
jurisdiction of Davao. The RTC denied the petition. Smart then filed a motion for
reconsideration, which was likewise denied. After a denial of an appeal filed before the
Supreme Court, Smart filed the instant motion for reconsideration.
ISSUES:
1. Whether or not the in lieu of all taxes clause in Smarts franchise (R.A. No. 7294)
covers local taxes.
2. Whether or not the in lieu of all taxes clause is rendered ineffective by the Expanded
VAT Law.
3.
Whether or not the imposition of a local franchise tax on Smart violates the
constitutional prohibition against impairment of the obligation of contracts.
RULING:
1. Pursuant to the rulings in Digitel v. Province of Pangasinan, and in PLDT v. Province of
Laguna, the franchisee is still liable to pay the local franchise tax, aside from the national
franchise tax, unless it is expressly and unequivocally exempted from the payment thereof
under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise
should categorically state that the exemption applies to both local and national taxes;
otherwise, the exemption claimed should be strictly construed against the taxpayer and
liberally in favor of the taxing authority.
2. The Expanded VAT Law (R.A. No. 7716) did not remove or abolish the payment of local
franchise tax. It merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in
accordance with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it
did not prohibit nor abolish the imposition of local franchise tax by cities or municipalities.
3. The power to tax by local government units emanates from Section 5, Article X of the
Constitution which empowers them to create their own sources of revenues and to levy
taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide. The imposition of local franchise tax is not inconsistent with the advent of the VAT,
which renders functus officio the franchise tax paid to the national government. VAT inures
to the benefit of the national government, while a local franchise tax is a revenue of the
local government unit.
SMART COMMUNICATIONS, INC. vs. CITY OF
DAVAO
[G.R. No. 155491.July 15, 2009.]
Local Taxation
Facts: In 1915, Bulaan Anson was granted a franchise to operate an electric light and power
plant in Legaspi and Daraga Albay. The franchise was transferred to several parties until it
was finally sold to Lealda Electric Co. Anson and his successors:ninterest regularly paid
the 2% franchise tax imposed on all franchises. in 1946, the NERC was amended,
increasing the franchise tax to 5%. Lealda paid at first, but later filed a petition for refund
contending that under its charter, it was liable to pay only 2% franchise tax. It argues that
the franchise was a private contract between its predecessorininterest on one hand and
the Government, on the other, and as such, cannot be amended by the Tax Code.
ISSUE: Whether Lealda should pay 5% franchise tax.
HELD: Yes, The franchise of Lealda contains an express provision to the effect that the
same may be altered or repealed by Congress. Differentiate this from the two other
previous cases: in the CEPALCO cases, the franchises were deemed exempt because the
contained the phrase "in lieu of all taxes of any kind levied now or in the future. There was
an express exemption in these cases, Lealda's franchise does not contain the same
exemption.
Lealda Electric Co. v. CIR GR L 16428 April 30, 1963
Local Taxation; Double Taxation
imposition. ISSUE: Whether the ordinance violates the rule on equality and uniformity
in taxation.
HELD; No. This argument is without merit. The rule on equality and uniformity does not
subdivisions at the same time. So long as
the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.
Despite the grant of taxing power, judicial admonition is given to the effect that the tax so
levied must be for a public purpose, uniform, and must not transgress any constitutional
provision nor repugnant to a controlling
statute Villanueva vs. City of Iloilo G.R. No. L-26521 December 28, 1968
Local Taxation; Uniformity
The Municipal Board of Manila passed an ordinance prohibiting an alien from being
employed or engaging in any position or occupation or business enumerated therein,
whether permanent, temporary, or casual, without first securing an employment permit
from the Mayor and paying the P50 permit fee. HiuChiong filed an action to restrain the
enforcement of the ordinance and to have it declared null and void for being discriminatory
and violative of the rule on uniformity in taxation. The Mayor argued that the ordinance
cannot be declared null and void on the ground that it violates the rule on uniformity of
taxation because this rule applies only to purely tax or revenue measures and not to
regulatory measures, such as the ordinance.
ISSUE: Whether the ordinance is valid,
HELD: The ordinance is null and void. The first part of the ordinance requiring an alien to
secure an employment permit is regulatory in character because it involves the exercise of
discretion on the pad of the Mayor in approving or disapproving the applications. However,
the second part which requires the payment of P50 as employees tee is not regulatory but a
revenue measure. There is no logic or justification in exacting P50 from aliens who have
been cleared for employment the obvious purpose of the ordinance is to raise money under
the guise of regulation. The P50 fee is unreasonable not only because it is excessive but
because it fails to consider valid substantial differences in situation among individual, aliens
who are required to pay it. The same amount is being collected from every employee lowly,
whether he is casual or permanent, part time or full time, or whether he is a lowly
employee or a highly paid executive.
Villegas v. Hiu Chiang Tsia Pao Ho GR L29646 November 10, 1978
Local Taxation
FACTS: NPC entered into a lease contract with Polar Energy, Inc. over 3x30 MW diesel
engine power barges moored at Balayan Bay in Calaca, Batangas. The contract stipulated
that NPC shall be responsible for the payment of, among others, "all real estate taxes and
assessments, rates and other charges in respect of the Power Barges".
Subsequently,
Polar Energy, Inc. assigned its rights under the Agreement to FELS. On August 7, 1995,
FELS received an assessment of real property taxes on the power barges from the Provincial
Assessor of Batangas City. FELS referred the matter to NPC, reminding it of its obligation
under the Agreement to pay all real estate taxes. It then gave NPC the full power and
authority to represent it in any conference regarding the real property assessment of the
Provincial Assessor. In a letter dated September 7, 1995, NPC sought reconsideration of
the Provincial Assessor's decision to assess real property taxes on the power barges. The
motion was denied on September 22, 1995, and the Provincial Assessor advised NPC to pay
the assessment.
NPC filed a petition with the Local Board of Assessment Appeals (LBAA) for the setting aside
of the assessment and the declaration of the barges as non-taxable items. In denying the
petition, the LBAA ruled that the power plant facilities, while they may be classified as
movable or personal property, are nevertheless considered real property for taxation
purposes because they are installed at a specific location with a character of permanency;
that the owner of the barges FELS, a private corporation is the one being taxed, not
NPC; that a mere agreement making NPC responsible for the payment of all real estate
taxes and assessments will not justify the exemption of FELS; such a privilege can only be
granted to NPC and cannot be extended to FELS; and, that the petition was filed out of
time.
ISSUES:
1.
Whether NPCs appeal to the LBAA is already barred by prescription
2.
Whether FELS is liable for real property tax on the power barges
HELD:
1.
Yes The LBAA acted correctly when it dismissed the petitioners' appeal for having
been filed out of time; the CBAA and the appellate court were likewise correct in affirming
the dismissal. Elementary is the rule that the perfection of an appeal within the period
therefor is both mandatory and jurisdictional, and failure in this regard renders the decision
final and executory.
Section 226 of R.A. No. 7160, otherwise known as the Local Government Code of 1991,
provides:
SECTION 226.
Local Board of Assessment Appeals. Any owner or person having
legal interest in the property who is not satisfied with the action of the provincial, city or
municipal assessor in the assessment of his property may, within sixty (60) days from the
date of receipt of the written notice of assessment, appeal to the Board of Assessment
Appeals of the province or city by filing a petition under oath in the form prescribed for the
purpose, together with copies of the tax declarations and such affidavits or documents
submitted in support of the appeal.
The Notice of Assessment which the Provincial Assessor sent to FELS on August 7, 1995,
contained the following statement:
"If you are not satisfied with this assessment, you may, within sixty (60) days from the
date of receipt hereof, appeal to the Board of Assessment Appeals of the province by filing a
petition under oath on the form prescribed for the purpose, together with copies of ARP/Tax
Declaration and such affidavits or documents submitted in support of the appeal."
Instead of appealing to the Board of Assessment Appeals (as stated in the notice), NPC
opted to file a motion for reconsideration of the Provincial Assessor's decision, a remedy
NOT sanctioned by law.
The remedy of appeal to the LBAA is available from an adverse ruling or action of the
provincial, city or municipal assessor in the assessment of the property. It follows then that
the determination made by the respondent Provincial Assessor with regard to the taxability
of the subject real properties falls within its power to assess properties for taxation
purposes subject to appeal before the LBAA.
In the case of Callanta v. Office of the Ombudsman, the Court held that under Section 226
of R.A. No 7160, the LAST ACTION of the local assessor on a particular assessment shall be
the notice of assessment; it is this last action which gives the owner of the property the
right to appeal to the LBAA. The procedure likewise does NOT permit the property owner
the remedy of filing a MOTION FOR RECONSIDERATION before the LOCAL ASSESSOR. To
allow this procedure would indeed invite corruption in the system of appraisal and
assessment. It conveniently courts a graft-prone situation where values of real property
may be initially set unreasonably high, and then subsequently reduced upon the request of
a property owner. In the latter, allusions of a possible covert, illicit trade-off cannot be
avoided, and in fact can conveniently take place. Such occasion for mischief must be
prevented and excised from our system.

Also, in CA-G.R. SP No. 67491, the Court
announced: Whenever the local assessor sends a notice to the owner or lawful possessor of
real property of its revised assessed value, the former shall NO longer have any jurisdiction
to entertain any request for a review or readjustment. The appropriate forum where the
aggrieved party may bring his appeal is the LBAA as provided by law.
To reiterate, if the taxpayer fails to appeal in due course, the right of the local government
to collect the taxes due with respect to the taxpayer's property becomes absolute upon the
expiration of the period to appeal. Taxpayer's failure to question the assessment in the
LBAA renders the assessment of the local assessor final, executory and demandable, thus,
precluding the taxpayer from questioning the correctness of the assessment, or from
invoking any defense that would reopen the question of its liability on the merits.
2.
Yes. Petitioners maintain nevertheless that the power barges are exempt from real
estate tax under Sec. 234 (c) of the LGC because they are actually, directly and exclusively
used by petitioner NPC, a government-owned and controlled corporation engaged in the
supply, generation, and transmission of electric power. Real property tax is a tax on
ownership. The OWNER of the taxable properties is petitioner FELS which is the entity being
taxed by the local government. It follows then that FELS cannot escape liability from the
payment of realty taxes by invoking the above-cited provision.
It is a basic rule that obligations arising from a contract have the force of law between the
parties. Not being contrary to law, morals, good customs, public order or public policy, the
parties to the contract are bound by its terms and conditions. Time and again, the Supreme
Court has stated that taxation is the rule and exemption is the exception. The law does not
look with favor on tax exemptions and the entity that would seek to be thus privileged must
justify it by words too plain to be mistaken and too categorical to be misinterpreted. Thus,
applying the rule of strict construction of laws granting tax exemptions, and the rule that
doubts should be resolved in favor of provincial corporations, FELS is considered a taxable
entity. The mere undertaking of petitioner NPC under the lease contract that it shall be
responsible for the payment of all real estate taxes and assessments, does not justify the
exemption. The privilege granted to petitioner NPC cannot be extended to FELS. The
covenant is between FELS and NPC and does not bind a third person not privy thereto, in
this case, the Province of Batangas.
FELS Energy, Inc. vs. Province of
Batangas, et al.,
G.R. No. 168557, February 16,
2007
Local Taxation
FACTS: First Private Power Corp. (FPPC) entered into a BOT agreement with National Power
Corp. (NAPOCOR) for the construction of a power plant in Bauang, La Union. The BOT
agreement provided, via an Accession Undertaking, for the creation of the Bauang Private
Power Corp. (BPPC) that will own, manage and operate the power plant/station, and
assume and perform FPPC's obligations under the BOT agreement. For a fee, BPPC will
convert NAPOCOR's supplied diesel fuel into electricity and deliver the product to NAPOCOR.
Initially, the Municipal Assessor's Office of Bauang declared BPPC's machineries and
equipment as tax-exempt. However, the Bureau of Local Government Finance (BLGF) ruled
that they are subject to real property tax prompting the Municipal Assessor to issue a Notice
of Assessment and Tax Bill to BPPC. NAPOCOR filed a petition with the Local Board of
Assessment Appeals which denied the same, ruling that the exemption provided by Sec.
234 (c) of the LGC applies only when a government-owned or controlled corporation like
NAPOCOR owns and/or actually uses machineries and equipment for the generation and
On appeal, the Central Board of Assessment Appeals dismissed the appeal based on its
finding that the BPPC, and not NAPOCOR, is the actual, direct and exclusive user of the
equipment and machineries; thus, the exemption under Sec. 234 (c) does not apply. The
CTA ruled that NAPOCOR has no cause of action and no legal personality to question the
assessment, as it is not the registered owner of the machineries and equipment. Based on
the BOT agreement, the CTA noted that NAPOCOR shall have a right over the machineries
and equipment only after their transfer at the end of the 15-year co-operation period.
ISSUE: Whether or not NAPOCOR is the actual user of the machineries and equipment.
RULING: By the express terms of the BOT agreement, BPPC has complete ownership
both legal and beneficial of the project, including the machineries and equipment used,
subject only to the transfer of these properties without cost to NAPOCOR after the lapse of
the period agreed upon. As agreed upon, BPPC provided the funds for the construction of
the power plant, including the machineries and equipment needed for power generation;
thereafter, it actually operated and still operates the power plant, uses its machineries and
equipment, and receives payment for these activities and the electricity generated under a
defined compensation scheme. Notably, BPPC as owner-user is responsible for any
defect in the machineries and equipment. Consistent with the BOT concept and as
implemented, BPPC the owner-manager-operator of the project is the actual user of its
machineries and equipment. BPPC's ownership and use of the machineries and equipment
are actual, direct, and immediate, while NAPOCOR's is contingent and, at this stage of the
BOT Agreement, not sufficient to support its claim for tax exemption. Thus, the CTA
committed no reversible error in denying NAPOCOR's claim for tax exemption.
NAPOCOR vs. CENTRAL BOARD OF ASSESSMENT APPEALS, ET AL. [G.R. No. 171470.
January 30, 2009.]
Local Taxation
FACTS:
Petitioner National Power Corp. (NPC), a government-owned and controlled
corporation, entered into an Energy Conversion Agreement (ECA) with Mirant Pagbilao Corp.
Under the agreement, Mirant will build and finance a thermal power plant in Pagbilao,
Quezon, and operate and maintain the same for 25 years, after which, Mirant will transfer
the power plant to the NPC without compensation. The NPC, in turn, will supply the
necessary fuel and use the power generated by Mirant to supply the countrys electric
power needs. NPC also undertook to pay all taxes that the government may impose on
Mirant. However, when the Municipality of Pagbilao assessed Mirant's real property taxes on
the power plant and its machineries, NPC objected to the same by filing a petition before
the Local Board of Assessment Appeals claiming that it (NPC) is entitled to the tax
exemptions provided in Sec. 234, paragraphs (c) and (e) of the LGC. The LBAA dismissed
the petition.
NPC then appealed the denial of its petition with the Central Board of Assessment Appeals
(CBAA) but to no avail. A motion for reconsideration was likewise denied by the CBAA,
prompting the NPC to institute an appeal before the CTA. Before the CTA, the NPC claimed
it was procedurally erroneous for the CBAA to exercise jurisdiction over its appeal because
the LBAA issued a sin perjuicio decision, that is, the LBAA pronounced a judgment without
any finding of fact. It argued that the CBAA should have remanded the case to the LBAA.
The CTA en banc dismissed the NPC's petition. From this ruling, the NPC filed the present
petition seeking the reversal of the CTA en banc's decision.
ISSUES:
1. Whether or not the CBAA can exercise jurisdiction over the case after the LBAA issued a
sin perjuicio decision.
2. Whether or not the NPC can claim tax exemption under Sec. 234 of the Local
Government Code for the taxes due from Mirant Pagbilao Corp. whose tax liabilities it has
assumed.
RULING:
1. The NPC can no longer divest the CBAA of the power to decide the appeal after invoking
and submitting itself to the board's jurisdiction. A basic jurisdictional rule is that a party
cannot invoke a court's jurisdiction to secure affirmative relief and, after failing to obtain
the requested relief, repudiate or question that same jurisdiction.
2. The NPC's claim of tax exemptions is completely without merit. To successfully claim
exemption under Section 234 (c) of the LGC, the claimant must prove two elements: a) the
machineries and equipment are actually, directly, and exclusively used by local water
districts and government-owned or controlled corporations; and b) the local water districts
and government-owned and controlled corporations claiming exemption must be engaged in
the supply and distribution of water and/or the generation and transmission of electric
power.
As applied to the present case, the government-owned or controlled corporation claiming
exemption must be the entity actually, directly, and exclusively using the real properties,
and the use must be devoted to the generation and transmission of electric power. Neither
the NPC nor Mirant satisfies both requirements. Although the plant's machineries are
devoted to the generation of electric power, Mirant, a private corporation, uses and
operates them. That Mirant operates the machineries solely in compliance with the will of
the NPC only underscores the fact that NPC does not actually, directly, and exclusively use
them. The machineries must be actually, directly, and exclusively used by the governmentowned or controlled corporation for the exemption under Section 234 (c) to apply. That it
utilizes all the power plant's generated electricity in supplying the power needs of its
customers is not a defense because it is the machineries that are exempted from the
payment of real property tax, not the water or electricity that these machineries generate
and distribute. Even the NPC's claim of beneficial ownership is unavailing. The test of
exemption is the use, not the ownership of the machineries devoted to generation and
Finally, from the viewpoint of fairness and the integrity of our tax system, it is wrong to
allow the NPC to assume in its BOT contracts the liability of the other contracting party for
taxes that the government can impose on that other party, and at the same time allow NPC
to turn around and say that no taxes should be collected because the NPC is tax-exempt as
a government-owned and controlled corporation. To allow it without congressional authority
is to intrude into the realm of policy and to debase the tax system that the Legislature
established. It would also be grossly unfair to the people of the Province of Quezon and the
Municipality of Pagbilao who, by law, stand to benefit from the tax provisions of the LGC.
National
Power
Corp.
vs.
Province
of
Quezon
G.R. No. 171586, July 15, 2009
MERALCO SECURITIES INDUSTRIAL CORPORATION, petitioner, vs. CENTRAL BOARD OF
ASSESSMENT APPEALS, BOARD OF ASSESSMENT APPEALS OF LAGUNA and PROVINCIAL
ASSESSOR OF LAGUNA [G.R. No. L-46245. May 31, 1982.]
SYNOPSIS
Petitioner, pursuant to a pipeline concession, installed a pipeline system from Batangas to
Manila consisting of cylindrical steel pipes joined together and buried not less than one
meter below the surface along the shoulder of the public highway. The pipes are embedded
in the soil and are firmly and solidly welded together. However, segments of the pipeline
can be moved from one place to another. The provincial assessor of Laguna treated the
pipeline as machinery or improvements under the Assessment Law, and issued
corresponding tax declarations containing the assessed values of portions of the pipeline.
The Board of Assessment Appeals of Laguna and the Central Board of Assessment Appeals
affirmed the ruling of the provincial assessor. Petitioner filed a motion for reconsideration
but the same was denied. Hence, this petition.
The Supreme Court held that the pipeline system, a construction adhering to the soil, is real
property under Article 415(1) and (3) of the Civil Code and a machinery within the meaning
of the Assessment Law and the Real Property Tax Code insofar as the pipeline uses valve,
pumps and control devices to maintain the flow of oil and therefore subject to realty tax.
Petition dismissed. Questioned decision and resolution affirmed.
SYLLABUS
1.
REMEDIAL LAW; SPECIAL CIVIL ACTION; CERTIORARI; POWER TO REVIEW
DECISION OF A BOARD OR OFFICER EXERCISING JUDICIAL OR QUASI-JUDICIAL
FUNCTIONS. Certiorari was properly assailed in this case. It is a writ issued by a superior
court to an inferior court, board or officer exercising judicial or quasi-judicial functions
whereby the record of a particular case ordered to be elevated for review and correction in
matters of law (14 C.J.S. 121.122; 14 Am Jur. 2nd 777). The rule is that as to
administrative agencies exercising quasi-judicial power there is an underlying power in the
courts to scrutinize the acts of such agencies on questions of law and jurisdiction even
though no right of review is given by the statute. (73 C.J.S. 506, note 56).
2.
ID.; ID.; ID.; PURPOSE OF JUDICIAL REVIEW. The purpose of judicial review is to
keep the administrative agency within its jurisdiction and protect substantial rights of
parties affected by its decisions (73 C.J.S. 507, Sec. 165). The review is part of the system
of checks and balances which is a limitation on the separation of powers and which for stalls
arbitrary and unjust adjudications.
3.
ADMINISTRATIVE LAW; TAXATION; REALTY TAX; PROPERTIES SUBJECT THERETO.
Section 2 of the Assessment Law provides that the realty tax is due "on real property,
including land, buildings, machinery and other improvements" not specifically exempted in
Section 3 thereof. This provision is reproduced with some modification in Section 38 of the
Real Property Tax Code which provides; "There shall be levied, assessed and collected in all
provinces, cities and municipalities an annual ad valorem tax on real property such as land,
buildings. machinery and other improvements affixed or attached to real property not
hereinafter specifically exempted."
4.
CIVIL LAW; PROPERTY; CLASSIFICATION; PIPELINE SYSTEM IS REAL PROPERTY.
Article 415(1) and (3) provides that real property may consist of constructions of all kinds
adhered to the soil and everything attached to an immovable in a fixed manner, in such a
way that it cannot be separated therefrom without breaking the material or deterioration of
the object. The pipeline in question is indubitably a construction adhering to the soil. It is
attached to the land in such a way that it cannot be separated therefrom without
dismantling the steel pipes which were welded to form the pipeline.
5.
ADMINISTRATIVE LAW; TAXATION; REALTY TAX; PROPERTIES SUBJECT THERETO;
PIPELINE SYSTEM HELD SUBJECT TO REALTY TAX IN CASE AT BAR. Pipeline means a line
of pipe connected to pumps, valves and control devices conveying liquids, gases or finely
divided solids. It is a line of the pipe running upon or in the earth, carrying with it the right
to the use of the soil in which it is placed (Note 21(10), 54 C.J.S. 561). Insofar as the
pipeline uses valves, pumps and control devices to maintain the flow of oil, it is in a sense
machinery within the meaning of the Real Property Tax Code. It is incontestable that the
pipeline of Meralco Securities does not fall within any of the classes of exempt real property
enumerated in Section 3 of the Assessment Law and Section 40 of the Real Property Tax
Code. A pipe-line for conveying petroleum has been regarded as real property for tax
purposes.
6.
ID.; ID.; ID.; A TAX OF GENERAL APPLICATION; MERALCO SECURITIES AS
CONCESSIONAIRE UNDER THE PETROLEUM ACT IS NOT EXEMPT FROM PAYMENT THEREOF.
Under Article 102 of the petroleum Act, Meralco Securities, as concessionaire thereunder,
is exempt from payment of local taxes or levies but not of such taxes as are of general
application. It is, however, untenable for Meralco Securities to argue that it is exempt from
payment of realty tax on the ground that said tax is a local tax or levy, because the realty
tax has always been imposed by the lawmaking body and later by the President of the
Philippines in the exercise of his lawmaking powers, as shown in Sections 342 et seq. of the
Revised Administrative Code, Act No. 3995, Commonwealth Act No. 470 and Presidential
Decree No. 464. The realty tax is enforced throughout the Philippines and not merely in a
particular municipality or city but the proceeds of the tax accrue to the province, city,
municipality and barrio where the realty taxed is situated (Sec. 186, P.D. No. 464). In
contrast, a local tax is imposed by the municipal or city council by virtue of the Local Tax
Code, Presidential Decree No. 231, which took effect on July 1, 1973 (69 O.G. 6197).
DECISION
In this special civil action of certiorari, Meralco Securities Industrial Corporation assails the
decision of the Central Board of Assessment Appeals (composed of the Secretary of Finance
as chairman and the Secretaries of Justice and Local Government and Community
Development as members) dated May 6, 1976, holding that Meralco Securities' oil pipeline
is subject to realty tax.
The record reveals that pursuant to a pipeline concession issued under the Petroleum Act of
1949, Republic Act No. 387, Meralco Securities installed from Batangas to Manila a pipeline
system consisting of cylindrical steel pipes joined together and buried not less than one
meter below the surface along the shoulder of the public highway. The portion passing
through Laguna is about thirty kilometers long.
The pipes for white oil products measure fourteen inches in diameter by thirty-six feet with
a maximum capacity of 75,000 barrels daily. The pipes for fuel and black oil measure
sixteen inches by forty-eight feet with a maximum capacity of 100,000 barrels daily.
The pipes are embedded in the soil and are firmly and solidly welded together so as to
preclude breakage or damage thereto and prevent leakage or seepage of the oil. The valves
are welded to the pipes so as to make the pipeline system one single piece of property from
end to end.
In order to repair, replace, remove or transfer segments of the pipeline, the pipes have to
be cold-cut by means of a rotary hard-metal pipe-cutter after digging or excavating them
out of the ground where they are buried. In points where the pipeline traversed rivers or
creeks, the pipes were laid beneath the bed thereof. Hence, the pipes are permanently
attached to the land.
However, Meralco Securities notes that segments of the pipeline can be moved from one
place to another as shown in the permit issued by the Secretary of Public Works and
Communications which permit provides that the government reserves the right to require
the removal or transfer of the pipes by and at the concessionaire's expense should they be
affected by any road repair or improvement.
Pursuant to the Assessment Law, Commonwealth Act No. 470, the provincial assessor of
Laguna treated the pipeline as real property and issued Tax Declarations Nos. 6535-6537,
San Pedro; 7473-7478, Cabuyao; 7967-7971, Sta. Rosa; 9882-9885, Bian and 1580615810, Calamba, containing the assessed values of portions of the pipeline.
Meralco Securities appealed the assessments to the Board of Assessment Appeals of Laguna
composed of the register of deeds as chairman and the provincial auditor as member. That
board in its decision of June 18, 1975 upheld the assessments (pp. 47-49, Rollo).
Meralco Securities brought the case to the Central Board of Assessment Appeals. As already
stated, that Board, composed of Acting Secretary of Finance Pedro M. Almanzor as
chairman and Secretary of Justice Vicente Abad Santos and Secretary of Local Government
and Community Development Jose Roo as members, ruled that the pipeline is subject to
realty tax (p. 40, Rollo).
A copy of that decision was served on Meralco Securities' counsel on August 27, 1976.
Section 36 of the Real Property Tax Code, Presidential Decree No. 464, which took effect on
June 1, 1974, provides that the Board's decision becomes final and executory after the
lapse of fifteen days from the date of receipt of a copy of the decision by the appellant.
Under Rule III of the amended rules of procedure of the Central Board of Assessment
Appeals (70 O.G. 10085), a party may ask for the reconsideration of the Board's decision
within fifteen days after receipt. On September 7, 1976 (the eleventh day), Meralco
Securities filed its motion for reconsideration.
Secretary of Finance Cesar Virata and Secretary Roo (Secretary Abad Santos abstained)
denied the motion in a resolution dated December 2, 1976, a copy of which was received by
appellant's counsel on May 24, 1977 (p. 4, Rollo). On June 6, 1977, Meralco Securities filed
the instant petition for certiorari.
The Solicitor General contends that certiorari is not proper in this case because the Board
acted within its jurisdiction and did not gravely abuse its discretion and Meralco Securities
was not denied due process of law.
Meralco Securities explains that because the Court of Tax Appeals has no jurisdiction to
review the decision of the Central Board of Assessment Appeals and because no judicial
review of the Board's decision is provided for in the Real Property Tax Code, Meralco
Securities' recourse is to file a petition for certiorari.
We hold that certiorari was properly availed of in this case. It is a writ issued by a superior
court to an inferior court, board or officer exercising judicial or quasi-judicial functions
whereby the record of a particular case is ordered to be elevated for review and correction
in matters of law (14 C.J.S. 121-122; 14 Am Jur. 2nd 777).
The rule is that as to administrative agencies exercising quasi-judicial power there is an
underlying power in the courts to scrutinize the acts of such agencies on questions of law
and jurisdiction even though no right of review is given by the statute (73 C.J.S. 506, note
56).
"The purpose of judicial review is to keep the administrative agency within its jurisdiction
and protect substantial rights of parties affected by its decisions" (73 C.J.S. 507, Sec. 165).
The review is a part of the system of checks and balances which is a limitation on the
separation of powers and which forestalls arbitrary and unjust adjudications.
Judicial review of the decision of an official or administrative agency exercising quasijudicial functions is proper in cases of lack of jurisdiction, error of law, grave abuse of
discretion, fraud or collusion or in case the administrative decision is corrupt, arbitrary or
capricious (Mafinco Trading Corporation vs. Ople, L-37790, March 25, 1976, 70 SCRA 139,
158; San Miguel Corporation vs. Secretary of Labor, L-39195, May 16, 1975, 64 SCRA 56,
60; Mun. Council of Lemery vs. Prov. Board of Batangas, 56 Phil. 260, 268).
The Central Board of Assessment Appeals, in confirming the ruling of the provincial assessor
and the provincial board of assessment appeals that Meralco Securities' pipeline is subject
to realty tax, reasoned out that the pipes are machinery or improvements, as contemplated
in the Assessment Law and the Real Property Tax Code; that they do not fall within the
category of property exempt from realty tax under those laws; that articles 415 and 416 of
the Civil Code, defining real and personal property, have no application to this case; that
even under article 415, the steel pipes can be regarded as realty because they are
constructions adhered to the soil and things attached to the land in a fixed manner and that
Meralco Securities is not exempt from realty tax under the Petroleum Law (pp. 36-40).
Meralco Securities insists that its pipeline is not subject to realty tax because it is not real
property within the meaning of article 415. This contention is not sustainable under the
provisions of the Assessment Law, the Real Property Tax Code and the Civil Code.
Section 2 of the Assessment Law provides that the realty tax is due "on real property,
including land, buildings, machinery, and other improvements" not specifically exempted in
section 3 thereof. This provision is reproduced with some modification in the Real Property
Tax Code which provides:
"SEC. 38.
Incidence of Real Property Tax. There shall be levied, assessed and
collected in all provinces, cities and municipalities an annual ad valorem tax on real
property, such as land, buildings, machinery and other improvements affixed or attached to
real property not hereinafter specifically exempted."
It is incontestable that the pipeline of Meralco Securities does not fall within any of the
classes of exempt real property enumerated in section 3 of the Assessment Law and section
40 of the Real Property Tax Code.
Pipeline means a line of pipe connected to pumps, valves and control devices for conveying
liquids, gases or finely divided solids. It is a line of pipe running upon or in the earth,
carrying with it the right to the use of the soil in which it is placed (Note 21[10], 54 C.J.S.
561).
Article 415[1] and [3] provides that real property may consist of constructions of all kinds
adhered to the soil and everything attached to an immovable in a fixed manner, in such a
way that it cannot be separated therefrom without breaking the material or deterioration of
the object.
The pipeline system in question is indubitably a construction adhering to the soil (Exh. B, p.
39, Rollo). It is attached to the land in such a way that it cannot be separated therefrom
without dismantling the steel pipes which were welded to form the pipeline.
Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of oil, it
is in a sense machinery within the meaning of the Real Property Tax Code.
It should be borne in mind that what are being characterized as real property are not the
steel pipes but the pipeline system as a whole. Meralco Securities has apparently two
pipeline systems.
A pipeline for conveying petroleum has been regarded as real property for tax purposes
(Miller County Highway, etc., Dist. vs. Standard Pipe Line Co., 19 Fed. 2nd 3; Board of
Directors of Red River Levee Dist. No. 1 of Lafayette County, Ark vs. R. F. C., 170 Fed. 2nd
430; 50 C. J. 750, note 86).
The other contention of Meralco Securities i8 that the Petroleum Law exempts it from the
payment of realty taxes. The alleged exemption is predicated on the following provisions of
that law which exempt Meralco Securities from local taxes and make it liable for taxes of
general application:
"ART. 102.
Work obligations, taxes, royalties not to be charged. Work obligations,
special taxes and royalties which are fixed by the provisions of this Act or by the concession
for any of the kinds of concessions to which this Act relates, are considered as inherent on
such concessions after they are granted, and shall not be increased or decreased during the
life of the concession to which they apply; nor shall any other special taxes or levies be
applied to such concessions, nor shall concessionaires under this Act be subject to any
provincial, municipal or other local taxes or levies; nor shall any sales tax be charged on
any petroleum produced from the concession or portion thereof, manufactured by the
concessionaire and used in the working of his concession. All such concessionaires,
however, shall be subject to such taxes as are of general application, in addition to taxes
and other levies specifically provided in this Act."
Meralco Securities argues that the realty tax is a local tax or levy and not a tax of general
application. This argument is untenable because the realty tax has always been imposed by
the lawmaking body and later by the President of the Philippines in the exercise of his
lawmaking powers, as shown in section 342 et seq. of the Revised Administrative Code, Act
No. 3995, Commonwealth Act No. 470 and Presidential Decree No. 464.
The realty tax is enforced throughout the Philippines and not merely in a particular
municipality or city but the proceeds of the tax accrue to the province, city, municipality
and barrio where the realty taxed is situated (Sec. 86, P.D. No. 464). In contrast, a local
tax is imposed by the municipal or city council by virtue of the Local Tax Code, Presidential
Decree No. 231, which took effect on July 1, 1973 (69 O.G. 6197).
We hold that the Central Board of Assessment Appeals did not act with grave abuse of
discretion, did not commit any error of law and acted within its jurisdiction in sustaining the
holding of the provincial assessor and the local board of assessment appeals that Meralco
Securities' pipeline system in Laguna is subject to realty tax.
WHEREFORE, the questioned decision and resolution are affirmed. The petition is dismissed.
No costs. SO ORDERED.
Footnotes
*
The Real Property Tax Code contains the following definitions in its section 3:
"k)
Improvements is a valuable addition made to property or an amelioration in its
condition, amounting to more than mere repairs or replacement of waste, costing labor or
capital and intended to enhance its value, beauty or utility or to adapt it for new or further
purposes."
"m)
Machinery shall embrace machines, mechanical contrivances, instruments,
appliances and apparatus attached to the real estate. It includes the physical facilities
available for production, as well as the installations and appurtenant service facilities,
together with all other equipment designed for or essential to its manufacturing, industrial
or agricultural purposes."
Art. XIV Sec. 4 [B][4],1987 Constitution
TAX EXEMPTION GRANTED TO NON-STOCK NON-PROFIT EDUCATIONAL INSTITUTIONS
Congress is authorized to grant similar exemptions to proprietary educational institutions
subject to limitations provided by law.
The exemption covers income, property and donors taxes and custom duties.
General Rule: To be exempt, the revenue and assets must be used actually, directly and
exclusively for educational purposes. However, as to income derived from activities
conducted by them for profit, there are different views
a. According to the first view, the exemption does not extend to income derived by these
educational institutions from their property or activities conducted by them for profit
regardless of the disposition made of such income because of the provision in the NIRC
treating such income taxable (Last par. Sec. 30 NIRC) But where the transaction is an
isolated one, the exemption still applies (Manila Polo Club vs. CTA) .
b. According to the second view, the Constitution has not made any distinction with respect
to the source of the revenues; it merely distinguished with respect to the utilization. Thus,
even if the income does proceed from any school- related activities, it may be subjected to
the exemption so long as it is actually, directly and exclusively used for educational
purposes. And as the Constitution is the basic and the paramount law to which all laws must
conform, the Tax Code provision( last par. Sec. 30) must yield to the former.
NOTE: The Sec. 30 of the NIRC speaks of the source of income while the 1987 Constitution
refers to the use of the income.
Exemption of Government Educational Institution
The Supreme Court resolved the issue of the instant case by stating:
'Otherwise stated, the use of the school building or lot for commercial purposes is neither
contemplated by law, nor by jurisprudence. Thus, while the use of the second floor of the
main building in the case at bar for residential purposes of the Director and his family, may
find justification under the concept of incidental use, which is complimentary to the main or
primary purpose educational. However the lease of the first floor thereof to the Northern
Marketing Corporation, by any stretch of the imagination cannot be considered incidental to
the purpose of education and should therefore be subjected to tax.'
Abra Valley College vs Hon. Juan Aquino Court of First Instance, AbraGR L39086 June 15,
1988
DOUBLE TAXATION
DOUBLE TAXATION - means taxing the same property twice when it should be taxed only
once (CIR vs. Solidbank Corp.)
KINDS OF DOUBLE TAXATION
1. Direct Duplicate Taxation -is obnoxious, double taxation in the objectionable or prohibited
sense. This violates the equal protection clause of the Constitution- hence prohibited.
Elements:
a. The same property or subject matter is taxed twice when it should be taxed only once
b. Both taxes are levied for the same purpose
c. Imposed by the same taxing authority
d. Imposed within the same jurisdiction
e. During the same taxing period
f. Covering the same kind or character of tax.
Villanueva vs City of Iloilo
Uniformity; Double Taxation
imposition. ISSUE: Whether the ordinance violates the rule on equality and uniformity
in taxation.
HELD; No. This argument is without merit. The rule on equality and uniformity does not
subdivisions at the same time. So long as
the burden of the tax falls equally and impartially on all owners or
operators of tenement houses similarly classified or situated, equality and
uniformity of taxation is accomplished.Villanueva vs. City of Iloilo
CEPALCO was granted a franchise to operate an electric, light, heat, and
power system in Cagayan de Oro. The franchise imposed a 3% franchise
tax which shall be in lieu of all faxes and assessments of whatever authority upon the
privileges, earnings, income, etc, from which CEPALCO was expressly exempted.
Subsequently the Local Tax Code was promulgated allowing provinces to impose a tax of
1/2 of 1% on businesses enjoying franchises. Pursuant to this, the Province of Misamis
Oriental enacted an ordinance levying the 1/2 of 1% tax on the gross annual receipts of
CEPALCO realized within the province of Misamis Oriental. CEPALCO refused to pay the
additional tax, claiming the exemption granted to it under its franchise.
ISSUE: Whether CEPALCO is exempt from paying the provincial franchise
tax.
HELD: Yes. The franchise of CEPALCO expressly EXEMPTS it from payment of all taxes of
whatever authority, except the 3% tax on its earning. The franchise granting the exemption
is a special law applicable only to
CEPALCO, while the Local Tax Code is a general tax law. The presumption
is that special statutes are exceptions to the general law because they pertain to a special
charter granted to meet a particular set of conditions and circumstances. The franchise tax
imposed under the local tax ordinance pursuant to the Local Tax Code shall be imposed on
businesses holding a franchise, but not from those whose franchises contain the in lieu of
all taxes" proviso in its charter.
Province of Misamis Oriental vs. Cagayan Electric Power and Light Company
The imposition of the 20% FWT and 5% GRT does not constitute double taxation. Double
taxation means taxing for the same tax period the same thing or activity twice, when it
should be taxed but once, for the same purpose and with the same kind of character of tax.
This is not the situation in the case at bar. The GRT is a percentage tax under Title V of the
Tax Code ([Section 121], Other Percentage Taxes), while the FWT is an income tax under
Title II of the Code (Tax on Income). The two concepts are different from each other. In
Solidbank Corporation, this Court defined that a percentage tax is a national tax measured
by a certain percentage of the gross selling price or gross value in money of goods sold,
bartered or imported; or of the gross receipts or earnings derived by any person engaged in
the sale of services. It is not subject to withholding. An income tax, on the other hand, is a
national tax imposed on the net or the gross income realized in a taxable year. It is subject
to withholding. Thus, there can be no double taxation here as the Tax Code imposes two
different kinds of taxes.
Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc.,
G.R. Nos. 139786-140857, September 27, 2006
2. Indirect Duplicate Taxation is permissible and it is allowed if the taxes
are of different
nature or character imposed by different taxing authorities.
Generally, it extends to all cases in which there is a burden of two or more pecuniary
impositions. The afore-mentioned elements makes the double taxation indirect.
International juridical double taxation"-is the imposition of comparable taxes in two or more
states on the same taxpayer in respect of the same subject matter and for identical periods
[Commissioner v. S. C. Johnson & Sons Inc. GR No. 127105, June 15, 1999)].
METHODS OF REDUCING THE RIGORS OF DOUBLE TAXATION
1. Tax credits - There is no exact legal definition of tax credits however it can be defined by
its ordinary usage based on existing laws to wit:
a. Tax credit is an alternative remedy to a refund of overpaid taxes which may be applied to
offset tax liabilities.
b. Tax credits shall mean credits against taxes and or duties equal to those actually paid on
raw materials used in manufacturing the export products.
c. A reward or incentive granted to certain taxpayers for satisfying certain requirements
prescribed by an incentive law. (dof.gov.ph)
In Blacks Legal Dictionary, Tax Credit is defined as an amount subtracted from an
individuals or entitys tax liability to arrive at the total tax liability.
Tax Credits are granted in lieu of the inability of the government to give cash refund to its
taxpayers. Tax Credit Certificates are given in lieu of cash which in turn can be used by the
holder thereof to settle his or her obligation with the government. (dof.gov.ph)
Examples:
a. For VAT purposes, the tax on inputs or items that go into the manufacture of finished
products (which are eventually sold) may be credited against or deducted from the output
tax or tax on the finished product.
b. In Income taxation, in the case of resident citizen or domestic corporation whose income
from the Philippine tax on the same income. (Sec.34 [C][4][a] and [b] NIRC)
2. Tax deductions , tax write-off or reduction in the gross amount on which a tax is
calculated
Example: Our estate tax law provides for the so-called vanishing deduction". (Sec. 86 [A]
[2] NIRC). This involves property previously taxed upon transfer from a prior decedent, and
the recipient (present decedent), dies within 5 years, who then transfers the same property
to another. Deduction is therefore allowed on the subsequent transfer.
3. Reduction of the Philippine income tax rate
Example: Tax Sparing Rule the dividend earned by a NRFC within the Phil. is reduced by
imposing a lower rate of 15% (in lieu of the 35%). on the condition that the country to
which the NRFC is domiciled shall allow a credit against the tax due from the NRFC, taxes
deemed to have been paid in the Phil. (Sec.28 B 5b) (CIR vs. Procter & Gamble)
4. Tax Exemptions a grant of immunity to particular persons or corporations from the

obligation to pay taxes.
Example: Exempt transfers under estate and donors taxes:
a. If the decedent at the time of his death or the donor-at the time of the donation was a
citizen and resident of a foreign country which at the time of his death or donation did not
impose a transfer tax of any character, in respect of intangible personal property of citizens
of the Philippines not residing in that foreign country, or
b. If the laws of the foreign country of which the decedent or donor was a citizen and
resident at the time of his death or donation allows a similar exemption from transfer or
death taxes of every character or description in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign country. (Sec 104 NIRC)
5. Tax treaties Agreement between two countries specifying what items of income will be
taxed by the authorities of the country where the income is earned.
Methods resorted to by a tax treaty in order to eliminate double taxation:
a. The tax treaty sets out the respective rights to tax by the state of source or situs and by
the state of residence with regard to certain classes of income or capital. In some cases, an
exclusive right to tax is conferred in one of the contracting states; however, for other items
of income or capital, given the right to tax although the amount of the tax that may be
imposed by the state of source is limited.
b. The state of source is given a full or limited right to tax together with the state of
residence. In this case the treaty makes it incumbent upon the state of residence to allow
relief in order to avoid double taxation. There are two ways under the 2 nd method.
1) The Exemption method- the income or capital which is taxable in the state of source or
situs is exempted in the state of residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the taxpayers remaining income or
capital. (This may be done using the tax deduction method which allows foreign income
taxes to be deducted from gross income, in effect exempting the payment from being
further taxed.) The focus here is on the income or capital itself.
2) The credit method - although the income or capital which is taxed in the state of source
is still taxable in the state of residence. The tax paid in the former is credited against the
tax, levied in the latter. (CIR- v. S.C Johnson and Son) The focus is on the tax.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and
COURT OF APPEALS, respondents. G.R. No. 127105. June 25, 1999
SYNOPSIS
Pursuant to the license agreement entered into by private respondent S.C. Johnson and
Son, U.S.A., the private respondent was granted, among others, the right to use the
trademark, patents and technology of SC Johnson and Son, U.S.A. and was obliged to pay
to the latter royalties based on a percentage of net sales. The said royalties were subjected
by the government to a 25% withholding tax. Consequently, from July, 1992 to May, 1993,
the private respondent paid a total withholding tax in the amount of P1,603,433.00.
However, on October 29, 1993 the private respondent filed before the International Tax
Affairs Division of the Bureau of Internal Revenue a claim for refund of the overpaid
withholding tax on royalties in the amount of P963,266.00. The Commissioner, not having
acted on the claim for refund, the private respondent then filed a petition for review before
the Court of Tax Appeals (CTA) wherein the latter rendered a decision in favor of tax
refund. The Court of Appeals affirmed in toto the CTA ruling. Hence, this petition.
The Court ruled that the RP-US and the RP-West Germany Tax Treaties do not contain
similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, expressly
allows crediting against German income and corporation tax of 20% of the gross amount of
royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US
Tax Treaty, which is the counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross amount of royalties paid. The
Court agreed with petitioner that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10%
percent rate granted under the latter treaty for the reason that there is no payment of
taxes on royalties under similar circumstances. It bears stress that tax refunds are in the
nature of tax exemptions. As such they are regarded as in derogation of sovereign authority
and to be construed strictissimi juris against the person or entry claiming the exemption.
The burden of proof is upon him who claims the exemption in his favor and he must be able
to justify his claim by the clearest grant of organic or statute law. Private respondent is
claiming for a refund of the alleged overpayment of tax on royalties; however, there is
nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is
paid under similar circumstances as the tax on royalties under the RP-West Germany Tax
Treaty. The petition was GRANTED.
SYLLABUS
1.
REMEDIAL LAW; SUPREME COURT CIRCULAR NO. 28-91; CERTIFICATE OF NONFORUM SHOPPING; NECESSARY IN PETITIONS FILED BEFORE THE SUPREME COURT AND
THE COURT OF APPEALS. The circular expressly requires that a certificate of non-forum
shopping should be attached to petitions filed before this Court and the Court of Appeals.
Petitioner's allegation that Circular No. 28-91 applies only to original actions and not to
appeals as in the instant case is not supported by the text nor by the obvious intent of the
Circular which is to prevent multiple petitions that will result in the same issue being
resolved by different courts.
2.
ID.; ID.; ID.; SUBSTANTIALLY COMPLIED BY CERTIFICATION EXECUTED BY OFFICE
OF THE SOLICITOR GENERAL REPRESENTING A GOVERNMENT AGENCY. Anent the
requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals
or any other tribunal or agency, we are inclined to accept petitioner's submission that since
the OSG is the only lawyer for the petitioner, which is a government agency mandated
under Section 35, Chapter 12, Title III, Book IV of the 1987 Administrative Code to be
represented only by the Solicitor General, the certification executed by the OSG in this case
constitutes substantial compliance with Circular No. 28-91.
3.
TAXATION; TAX TREATIES; PAYMENT OF ROYALTIES; TAX RATES ARE THE SAME
FOR ALL RECIPIENTS. We are not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which provides for the payment of
royalties under dissimilar circumstances. The tax rates on royalties and the circumstances
of payment thereof are the same for all the recipients of such royalties and there is no
disparity based on nationality in the circumstances of such payment.
4.
ID.; ID.; RP-US TAX TREATY; PURPOSE. The RP-US Tax Treaty is just one of a
number of bilateral treaties which the Philippines has entered into for the avoidance of
double taxation. The purpose of these international agreements is to reconcile the national
fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous
taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a
view towards the elimination of international juridical double taxation, which is defined as
the imposition of comparable taxes in two or more states on the same taxpayer in respect
of the same subject matter and for identical periods. The apparent rationale for doing away
with double taxation is to encourage the free flow of goods and services and the movement
of capital, technology and persons between countries, conditions deemed vital in creating
robust and dynamic economies. Foreign investments will only thrive in a fairly predictable
and reasonable international investment climate and the protection against double taxation
is crucial in creating such a climate.
5.
ID.; DOUBLE TAXATION; DEFINED. Double taxation usually takes place when a
person is resident of a contracting state and derives income from, or owns capital in, the
other contracting state and both states impose tax on that income or capital.
6.
ID.; TAX TREATIES; METHODS TO ELIMINATE DOUBLE TAXATION. In order to
eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the state of residence with
regard to certain classes of income or capital. In some cases, an exclusive right to tax is
conferred on one of the contracting states; however, for other items of income or capital,
both states are given the right to tax, although the amount of tax that may be imposed by
the state of source is limited. The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited right to tax together with the
state of residence. In this case, the treaties make it incumbent upon the state of residence
to allow relief in order to avoid double taxation.
7.
ID.; ID.; ID.; EXEMPTION METHOD AND CREDIT METHOD; ELUCIDATED. There
are two methods of relief the exemption method and the credit method. In the
exemption method, the income or capital which is taxable in the state of source or situs is
exempted in the state of residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the taxpayer's remaining income or
capital. On the other hand, in the credit method, although the income or capital which is
taxed in the state of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax.
8.
ID.; ID.; RATIONALE FOR REDUCING TAX RATE. In negotiating tax treaties, the
underlying rationale for reducing the tax rate is that the Philippines will give up a part of the
tax in the expectation that the tax given up for this particular investment is not taxed by
the other country. Thus the petitioner correctly opined that the phrase "royalties paid under
similar circumstances" in the most favored nation clause of the US-RP Tax Treaty
necessarily contemplated "circumstances that are tax-related."
9.
ID.; ID.; RP-US TAX TREATY; IMPOSABLE RATES ON TAX CREDITS. Under the RPUS Tax Treaty, the state of residence and the state of sources are both permitted to tax the
royalties, with a restraint on the tax that may be collected by the state of source.
Furthermore, the method employed to give relief from double taxation is the allowance of a
tax credit to citizens or residents of the United States (in an appropriate amount based
upon the taxes paid or accrued to the Philippines) against the United States tax, but such
amount shall not exceed the limitations provided by United States law for the taxable year.
Under Article 13 thereof, the Philippines may impose one of three rates 25 percent of the
gross amount of the royalties; 15 percent when the royalties are paid by a corporation
registered with the Philippine Board of Investments and engaged in preferred areas of
activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third state.
10.
ID.; ID.; RP-GERMANY TAX TREATY; 10 PERCENT CONCESSIONAL TAX RATE IS
APPLICABLE TO ROYALTIES PAID UNDER SIMILAR CIRCUMSTANCES. Given the purpose
underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply
only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany
Tax Treaty are paid under similar circumstances. This would mean that private respondent
must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United
States in respect of the taxes imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts under the RP-Germany Tax
Treaty.
11.
ID.; ID.; RP-US AND RP-WEST GERMANY TAX TREATIES DO NOT CONTAIN SIMILAR
PROVISIONS ON TAX CREDITING. The RP-US and the RP-West Germany Tax Treaties do
not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty,
supra, expressly allows crediting against German income and corporation tax of 20% of the
gross amount of royalties paid under the law of the Philippines. On the other hand, Article
23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for
double taxation, does not provide for similar crediting of 20% of the gross amount of
royalties paid.
12.
STATUTORY CONSTRUCTION; LAW NEEDS LIBERAL CONSTRUCTION TO
EFFECTUATE ITS PURPOSE. In one case, the Supreme Court pointed out that laws are
not just mere compositions, but have ends to be achieved and that the general purpose is a
more important aid to the meaning of a law than any rule which grammar may lay down. It
is the duty of the courts to look to the object to be accomplished, the evils to be remedied,
or the purpose to be subserved, and should give the law a reasonable or liberal construction
which will best effectuate its purpose.
13.
ID.; ID.; ID.; TREATIES TO BE INTERPRETED IN GOOD FAITH. The Vienna
Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context
and in the light of its object and purpose.
14.
TAXATION; TAX RELIEF; ENCOURAGES FOREIGN INVESTORS TO INVEST IN
PHILIPPINES. As stated earlier, the ultimate reason for avoiding double taxation is to
encourage foreign investors to invest in the Philippines a crucial economic goal for
developing countries. The goal of double taxation conventions would be thwarted if such
treaties did not provide for effective measures to minimize, if not completely eliminate, the
tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are
lowered by the state of source, in this case, by the Philippines, there should be a
concomitant commitment on the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or exemption. Otherwise, the tax which
could have been collected by the Philippine government will simply be collected by another
state, defeating the object of the tax treaty since the tax burden imposed upon the investor
would remain unrelieved. If the state of residence does not grant some form of tax relief to
the investor, no benefit would redound to the Philippines, i.e., increased investment
resulting from a favorable tax regime, should it impose a lower tax rate on the royalty
earnings of the investor, and it would be better to impose the regular rate rather than lose
much-needed revenues to another country.
15.
ID.; TAX TREATIES; MOST FAVORED NATION CLAUSE; PURPOSE. The purpose of
a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other
countries. The most favored nation clause is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of the most favored nation. The
essence of the principle is to allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of residence of such taxpayer
is also a party provided that the subject matter of taxation, in this case royalty income, is
the same as that in the tax treaty under which the taxpayer is liable.
16.
ID.; TAX REFUNDS; TAX EXEMPTIONS IN NATURE. It bears stress that tax refunds
are in the nature of tax exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption. The burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest grant of organic or statute
law.
DECISION
This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.
The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:
"[Respondent], a domestic corporation organized and operating under the Philippine laws,
entered into a license agreement with SC Johnson and Son, United States of America
(USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the
[respondent] was granted the right to use the trademark, patents and technology owned by
the latter including the right to manufacture, package and distribute the products covered
by the Agreement and secure assistance in management, marketing and production from
SC Johnson and Son, U.S.A.
The said License Agreement was duly registered with the Technology Transfer Board of the
Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration
No. 8064 (Exh. "A").
For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson
and Son, USA royalties based on a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid for the period covering July
1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. "B" to "L" and
submarkings).
On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD)
of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, 'the
antecedent facts attending [respondent's] case fall squarely within the same circumstances
under which said MacGeorge and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of 10% should apply
to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC
Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored
nation clause of the RP-US Tax Treaty [Article 13, paragraph 2(b)(iii)] in relation to the RPWest Germany Tax Treaty [Article 12(2)(b)]' (Petition for Review [filed with the Court of
Appeals], par. 12). [Respondent's] claim for the refund of P963,266.00 was computed as
follows:
Gross 25%
10%
Month /
Royalty
Withholding
Year
Tax Paid
Tax
July 1992
Fee
559,878
August 567,935
139,970
141,984
Withholding
Balance
55,98883,982
56,79485,190
September
595,956
148,989
59,59689,393
October
634,405
158,601
63,44195,161
November
620,885
155,221
62,08993,133
December
383,276
95,81936,32857,491
Jan 1993
602,451
170,630
68,245102,368
February
565,845
141,461
56,58584,877
March 547,253
136,813
54,72582,088
April
165,203
66,08199,122
660,810
May
603,076
150,769
60,30890,461
P6,421,770
P1,605,443
P642,177
P963,266
======== =========
=======
=======
The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &
Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals
(CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the
overpaid withholding tax on royalty payments from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the
amount of P963,266.00 representing overpaid withholding tax on royalty payments
beginning July, 1992 to May, 1993.
The Commissioner of Internal Revenue thus filed a petition for review with the Court of
Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no
merit in the petition and affirming in toto the CTA ruling.
This petition for review was filed by the Commissioner of Internal Revenue raising the
following issue:
THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS
ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS
PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX
TREATY.
Petitioner contends that under Article 13(2)(b)(iii) of the RP-US Tax Treaty, which is known
as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of the United States from sources within the
Philippines only if the circumstances of the resident of the United States are similar to those
of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit"
provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase "paid under
similar circumstances" refers to the payment of royalties, and not taxes, as held by the
Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason
that when a tax treaty contemplates circumstances attendant to the payment of a tax, or
royalty remittances for that matter, these must necessarily refer to circumstances that are
tax-related. Finally, petitioner argues that since S.C. Johnson's invocation of the "most
favored nation" clause is in the nature of a claim for exemption from the application of the
regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly
against it.
In its Comment, private respondent S.C. Johnson avers that the instant petition should be
denied (1) because it contains a defective certification against forum shopping as required
under SC Circular No. 28-91, that is, the certification was not executed by the petitioner
herself but by her counsel; and (2) that the "most favored nation" clause under the RP-US
Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to
tax in other treaties; that the phrase "paid under similar circumstances" does not refer to
payment of the tax but to the subject matter of the tax, that is, royalties, because the
"most favored nation" clause is intended to allow the taxpayer in one state to avail of more
liberal provisions contained in another tax treaty wherein the country of residence of such
taxpayer is also a party thereto, subject to the basic condition that the subject matter of
taxation in that other tax treaty is the same as that in the original tax treaty under which
the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid
under similar circumstances". S.C. Johnson also contends that the Commissioner is
estopped from insisting on her interpretation that the phrase "paid under similar
circumstances" refers to the manner in which the tax is paid, for the reason that said
interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was
already abandoned by the Commissioner's predecessor in 1993; and was expressly revoked
in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are
subject only to 10% withholding tax pursuant to Art. 13(2)(b)(iii) of the RP-US Tax Treaty
in relation to the RP-West Germany Tax Treaty. Said ruling should be given retroactive
effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National
Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification against forum shopping was
signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition
since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant
case. Moreover, the requirement that the certification should be signed by petitioner and
not by counsel does not apply to petitioner who has only the Office of the Solicitor General
as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar
circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers
to the payment of royalties and not taxes, still the presence or absence of a "matching
credit" provision in the said RP-US Tax Treaty would constitute a material circumstance to
such payment and would be determinative of the said clause's application.
We address first the objection raised by private respondent that the certification against
forum shopping was not executed by the petitioner herself but by her counsel, the Office of
the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.
SC Circular No. 28-91 provides:
"SUBJECT
:
ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME
COURT AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING
OF PETITIONS AND COMPLAINTS
TO
...
The attention of the Court has been called to the filing of multiple petitions and complaints
involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or
agencies, with the result that said courts, tribunals or agencies have to resolve the same
issues.
(1)
To avoid the foregoing, in every petition filed with the Supreme Court or the Court of
Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court
and existing circulars, must certify under oath to all of the following facts or undertakings:
(a) he has not theretofore commenced any other action or proceeding involving the same
issues in the Supreme Court, the Court of Appeals, or any tribunal or agency; . . .
(2)
Any violation of this revised Circular will entail the following sanctions: (a) it shall be
a cause for the summary dismissal of the multiple petitions or complaints; . . ."
The circular expressly requires that a certificate of non-forum shopping should be attached
to petitions filed before this Court and the Court of Appeals. Petitioner's allegation that
Circular No. 28-91 applies only to original actions and not to appeals as in the instant case
is not supported by the text nor by the obvious intent of the Circular which is to prevent
multiple petitions that will result in the same issue being resolved by different courts.
Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals
or any other tribunal or agency, we are inclined to accept petitioner's submission that since
the OSG is the only lawyer for the petitioner, which is a government agency mandated
under Section 35, Chapter 12, Title III, Book IV of the 1987 Administrative Code to be
represented only by the Solicitor General, the certification executed by the OSG in this case
constitutes substantial compliance with Circular No. 28-91.
With respect to the merits of this petition, the main point of contention in this appeal is the
interpretation of Article 13(2)(b)(iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-resident foreign corporation.
The provision states insofar as pertinent that
1)
Royalties derived by a resident of one of the Contracting States from sources within
the other Contracting State may be taxed by both Contracting States.
2)
However, the tax imposed by that Contracting State shall not exceed.
a)
and
In the case of the United States, 15 percent of the gross amount of the royalties,
b)
In the case of the Philippines, the least of:
(i)
25 percent of the gross amount of the royalties;
(ii)
15 percent of the gross amount of the royalties, where the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in preferred
areas of activities; and
(iii)
the lowest rate of Philippine tax that may be imposed on royalties of the same kind
paid under similar circumstances to a resident of a third State.
xxx
xxx
(emphasis supplied)
xxx
Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it
is entitled to the concessional tax rate of 10 percent on royalties based on Article 12(2)(b)
of the RP-Germany Tax Treaty which provides:
(2)
However, such royalties may also be taxed in the Contracting State in which they
arise, and according to the law of that State, but the tax so charged shall not exceed:
xxx
xxx
xxx
b)
10 percent of the gross amount of royalties arising from the use of, or the right to
use, any patent, trademark, design or model, plan, secret formula or process, or from the
use of or the right to use, industrial, commercial, or scientific equipment, or for information
concerning industrial, commercial or scientific experience.
For as long as the transfer of technology, under Philippine law, is subject to approval, the
limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the
Republic of the Philippines, only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent
of the gross amount of such royalties against German income and corporation tax for the
taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15
percent under such treaty. Article 24 of the RP-Germany Tax Treaty states
1)
Tax shall be determined in the case of a resident of the Federal Republic of Germany
as follows:
xxx
xxx
xxx
b)
Subject to the provisions of German tax law regarding credit for foreign tax, there
shall be allowed as a credit against German income and corporation tax payable in respect
of the following items of income arising in the Republic of the Philippines, the tax paid under
the laws of the Philippines in accordance with this Agreement on:
xxx
dd)
xxx
xxx
xxx
royalties, as defined in paragraph 3 of Article 12;

xxx
xxx
c)
For the purpose of the credit referred in subparagraph b) the Philippine tax shall be
deemed to be
xxx
xxx
xxx
cc)
in the case of royalties for which the tax is reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.
xxx
xxx
xxx
According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid
under circumstances similar to those in the RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in the former convention and private respondent
cannot invoke the concessional tax rate on the strength of the most favored nation clause in
the RP-US Tax Treaty. Petitioner's position is explained thus:
"Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid
on income from sources within the Philippines is allowed as a credit against German income
and corporation tax on the same income. In the case of royalties for which the tax is
reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany
Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the
royalty income of a German resident from sources within the Philippines arising from the
use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or
process, is taxed at 10% of the gross amount of said royalty under certain conditions. The
rate of 10% is imposed if credit against the German income and corporation tax on said
royalty is allowed in favor of the German resident. That means the rate of 10% is granted
to the German taxpayer if he is similarly granted a credit against the income and
corporation tax of West Germany. The clear intent of the 'matching credit' is to soften the
impact of double taxation by different jurisdictions.
The RP-US Tax Treaty contains no similar 'matching credit' as that provided under the RPWest Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not
paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty.
Therefore, the 'most favored nation' clause in the RP-West Germany Tax Treaty cannot be
availed of in interpreting the provisions of the RP-US Tax Treaty."
The petition is meritorious.
We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the
Court of Appeals, that the phrase "paid under similar circumstances" in Article 13(2)(b), (iii)
of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the
payment of the tax, for the reason that the phrase "paid under similar circumstances" is
followed by the phrase "to a resident of a third state." The respondent court held that
"Words are to be understood in the context in which they are used," and since what is paid
to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty
provision in question should refer to royalties of the same kind paid under similar
circumstances.
The above construction is based principally on syntax or sentence structure but fails to take
into account the purpose animating the treaty provisions in point. To begin with, we are not
aware of any law or rule pertinent to the payment of royalties, and none has been brought
to our attention, which provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances of payment thereof are the
same for all the recipients of such royalties and there is no disparity based on nationality in
the circumstances of such payment. On the other hand, a cursory reading of the various
tax treaties will show that there is no similarity in the provisions on relief from or avoidance
of double taxation as this is a matter of negotiation between the contracting parties. As
will be shown later, this dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has
entered into for the avoidance of double taxation. The purpose of these international
agreements is to reconcile the national fiscal legislations of the contracting parties in order
to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More
precisely, the tax conventions are drafted with a view towards the elimination of
international juridical double taxation, which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in respect of the same subject matter
and for identical periods. The apparent rationale for doing away with double taxation is to
encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and reasonable
international investment climate and the protection against double taxation is crucial in
creating such a climate.
Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states impose
tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to
several methods. First, it sets out the respective rights to tax of the state of source or situs
and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for
other items of income or capital, both states are given the right to tax, although the amount
of tax that may be imposed by the state of source is limited.
The second method for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of residence. In this
case, the treaties make it incumbent upon the state of residence to allow relief in order to
avoid double taxation. There are two methods of relief the exemption method and the
credit method. In the exemption method, the income or capital which is taxable in the state
of source or situs is exempted in the state of residence, although in some instances it may
be taken into account in determining the rate of tax applicable to the taxpayer's remaining
income or capital. On the other hand, in the credit method, although the income or capital
which is taxed in the state of source is still taxable in the state of residence, the tax paid in
the former is credited against the tax levied in the latter. The basic difference between the
two methods is that in the exemption method, the focus is on the income or capital itself,
whereas the credit method focuses upon the tax.
In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country. Thus the petitioner correctly
opined that the phrase "royalties paid under similar circumstances" in the most favored
nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are
tax-related."
In the case at bar, the state of source is the Philippines because the royalties are paid for
the right to use property or rights, i.e. trademarks, patents and technology, located within
the Philippines. The United States is the state of residence since the taxpayer, S. C.
Johnson and Son, U.S.A., is based there. Under the RP-US Tax Treaty, the state of
residence and the state of source are both permitted to tax the royalties, with a restraint on
the tax that may be collected by the state of source. Furthermore, the method employed to
give relief from double taxation is the allowance of a tax credit to citizens or residents of the
United States (in an appropriate amount based upon the taxes paid or accrued to the
Philippines) against the United States tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year. Under Article 13 thereof, the Philippines
may impose one of three rates 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; or the lowest rate of Philippine
tax that may be imposed on royalties of the same kind paid under similar circumstances to
a resident of a third state.
Given the purpose underlying tax treaties and the rationale for the most favored nation
clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty
should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the
RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of
the United States in respect of the taxes imposable upon royalties earned from sources
within the Philippines as those allowed to their German counterparts under the RP-Germany
Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting
against German income and corporation tax of 20% of the gross amount of royalties paid
under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty,
which is the counterpart provision with respect to relief for double taxation, does not
provide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23
reads:
"Article 23
Relief from double taxation
Double taxation of income shall be avoided in the following manner:
1)
In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the general
principle thereof), the United States shall allow to a citizen or resident of the United States
as a credit against the United States tax the appropriate amount of taxes paid or accrued to
the Philippines and, in the case of a United States corporation owning at least 10 percent of
the voting stock of a Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or accrued to the
Philippines by the Philippine corporation paying such dividends with respect to the profits
out of which such dividends are paid. Such appropriate amount shall be based upon the
amount of tax paid or accrued to the Philippines, but the credit shall not exceed the
limitations (for the purpose of limiting the credit to the United States tax on income from
sources within the Philippines or on income from sources outside the United States)
provided by United States law for the taxable year. . . . ."
The reason for construing the phrase "paid under similar circumstances" as used in Article
13(2)(b)(iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical
reading of the text in the light of the fundamental purpose of such treaty which is to grant
an incentive to the foreign investor by lowering the tax and at the same time crediting
against the domestic tax abroad a figure higher than what was collected in the Philippines.
In one case, the Supreme Court pointed out that laws are not just mere compositions, but
have ends to be achieved and that the general purpose is a more important aid to the
meaning of a law than any rule which grammar may lay down. It is the duty of the courts
to look to the object to be accomplished, the evils to be remedied, or the purpose to be
subserved, and should give the law a reasonable or liberal construction which will best
effectuate its purpose. The Vienna Convention on the Law of Treaties states that a treaty
shall be interpreted in good faith in accordance with the ordinary meaning to be given to
the terms of the treaty in their context and in the light of its object and purpose.
As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign
investors to invest in the Philippines a crucial economic goal for developing countries.
The goal of double taxation conventions would be thwarted if such treaties did not provide
for effective measures to minimize, if not completely eliminate, the tax burden laid upon the
income or capital of the investor. Thus, if the rates of tax are lowered by the state of
source, in this case, by the Philippines, there should be a concomitant commitment on the
part of the state of residence to grant some form of tax relief, whether this be in the form of
a tax credit or exemption. Otherwise, the tax which could have been collected by the
Philippine government will simply be collected by another state, defeating the object of the
tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the
state of residence does not grant some form of tax relief to the investor, no benefit would
redound to the Philippines, i.e., increased investment resulting from a favorable tax regime,
should it impose a lower tax rate on the royalty earnings of the investor, and it would be
better to impose the regular rate rather than lose much-needed revenues to another
country.
At the same time, the intention behind the adoption of the provision on "relief from double
taxation" in the two tax treaties in question should be considered in light of the purpose
behind the most favored nation clause.
The purpose of a most favored nation clause is to grant to the contracting party treatment
not less favorable than that which has been or may be granted to the "most favored"
among other countries. The most favored nation clause is intended to establish the
principle of equality of international treatment by providing that the citizens or subjects of
the contracting nations may enjoy the privileges accorded by either party to those of the
most favored nation. The essence of the principle is to allow the taxpayer in one state to
avail of more liberal provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the subject matter of taxation, in
this case royalty income, is the same as that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and Article 12(2)(b) of the RP-West Germany
Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the absence of a
matching credit (20% for royalties) would derogate from the design behind the most
favored nation clause to grant equality of international treatment since the tax burden laid
upon the income of the investor is not the same in the two countries. The similarity in the
circumstances of payment of taxes is a condition for the enjoyment of most favored nation
treatment precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a
matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as
allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed
entitled to the 10 percent rate granted under the latter treaty for the reason that there is no
payment of taxes on royalties under similar circumstances.
It bears stress that tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed strictissimi juris
against the person or entity claiming the exemption. The burden of proof is upon him who
claims the exemption in his favor and he must be able to justify his claim by the clearest
grant of organic or statute law. Private respondent is claiming for a refund of the alleged
overpayment of tax on royalties; however, there is nothing on record to support a claim
that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as
the tax on royalties under the RP-West Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May
7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court
of Appeals are hereby SET ASIDE. SO ORDERED.
EXAMPLE: "Take the case of a hundred pesos dividend to be remitted to, let us say a
stockholder of United States of America. The hundred peso dividend, if you apply the
withholding tax assuming that there is no sparing credit, we taxed 35%. So, out of
P100.00, you are taxed P35.00. The Philippines under this law is willing to tax him only at
P15.00 so his net dividends is P85.00. If the United States will tax the full P85.00, there is
no reason why we should reduce our tax. If we collected from him P35.00 tax out of the
P100.00 dividend, then his net dividend is only P65.00. So. instead of transferring the
collections from the Philippines Treasury to the U.S. Treasury, we might just as well retainer
tax because we need these revenues.
This is always true when it comes to a developing country such as ours entering into a
treaty with developed country like U.S., what do we do in tax treaties? One or two things.
First, we give consideration to investments especially where the investor controls either
10% of the voting shares of the company in the Philippines or 25% of its capital. When the
investment exceeds this proportion I've just mentioned, we reduce the rate of tax from 15
to 10% on condition that on the tax credit provision in the same treaty we asked the
developed country to credit this investor with the tax actually at a higher rate and was paid
in the Philippines. In other words, there would be some incentives on the part of the
foreigners to invest in the Philippines because the rates of tax are lowered and at the same
time they are credited against the domestic tax abroad a figure higher than what was
collected in the Philippines .
FORMS OF ESCAPE FROM TAXATION
There are six (6) basic forms of escape from Taxation :
1. SHIFTING -The transfer of the burden of a tax by the original payer or the one on whom
the tax was assessed (impact of taxation/statutory taxpayer) or imposed to another or
someone else (incidence of taxation).
Direct tax cannot be shifted - a tax cannot be shifted when it is purely personal or when it
has no relation to any business dealings of the taxpayer. (Schultz and Harris, American
Public Finance)
Impact of Taxation - point on which tax is originally imposed or the one on whom the tax is
formally assessed.
Incidence of Taxation -point on which the tax burden finally rests or settles down.
Illustration: Value added tax. The seller is required by-law to pay tax, but the burden is
actually shifted or passed onto the buyer
Kinds of shifting
a. Forward shifting -when burden of tax is transferred from a factor of production through
the factors of distribution until it finally settles on the ultimate purchaser or consumer
b. Backward shifting? When burden is transferred from consumer through factors of
distribution to the factors of production
c. Onward shifting- when the tax is shifted 2 or more times either forward or backward
2. CAPITALIZATION - The reduction in the price of the taxed object equal to the capitalized
value of future taxes which the purchaser expects to be called upon to pay.
3.TRANSFORMATION - The manufacturer or producer upon whom the tax has been
imposed, fearing the loss of his market if he should add the tax to the price, pays the tax
and endeavors to recoup himself by improving his process of production, thereby turning
out his units at a lower cost.
4. TAX AVOIDANCE -The exploitation by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income, in order to avoid or reduce tax
liability. Tax avoidance is the tax saving device within the means sanctioned by law. This
method should be used by the taxpayer in good faith and at arms length. (CIR vs. Estate of
Benigno Toda Jr.)
A taxpayer has legal right to decrease the amount of what would otherwise be his taxes or
altogether avoid them by means which the law permits. (Delpher Trades vs. IAC)
Example: Availing of all deductions allowed by law or refraining from engaging in activities
subject to tax.
5. TAX EVASION - A term that connotes fraud through the use of pretenses and forbidden
devices to lessen or defeat taxes. (Yutivo Sons Hardware vs. CTA)
A scheme used outside of those lawful means and when availed of, it usually subjects
the taxpayer to further additional civil or criminal liabilities. (CIR vs. Estate of Benigno Toda
Jr.)
Factors in Tax Evasion

a. The end to be achieved, i.e. payment of less than that known by the taxpayer to be
legally due, or paying no tax when is shown that the tax is due.
b. An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not coincidental.
c. A course of action which is unlawful.
Evidence to prove tax evasion
a. Failure to declare for taxation purposes true and actual income derived from business for
2 consecutive years (Republic vs. Gonzales, L -17962)
b. Substantial under declaration of income in the tax returns of the taxpayer for 4
consecutive years coupled with intentional overstatement of deduction (CIR vs. Reyes, 104
PHIL 1061)
Validity
Effect
TAX AVOIDANCE
TAX EVASION
Legal
and
not
subject to criminal
penalty
Minimization
of
taxes
Illegal and subject

to
criminal
penalty
Almost
always
results in absence
of tax payments
TAX AVOIDANCE & TAX EVASION

Tax evasion refers to the willful and deliberate attempt done by a taxpayer to reduce or
altogether eliminate his tax liability by unlawful means or device.
Tax avoidance refers to the action taken by a taxpayer to minimize the payment or
altogether eliminate his tax liability by lawful means.
Tax fraud means actual evil motive or intent to evade taxes which are legally due to the
government or willfully acting contrary to truth within the taxpayers knowledge. Fraud
denotes deceit, deception or trickery. Fraud is a generic term embracing the ways one
person can freely represent a fact to another in order to induce that person to surrender
something of value.
Negligence is the omission to do something to which a reasonable man, guided by those
ordinary considerations which ordinarily regulate human affair would do, or the doing of
something which a reasonable and prudent man would not do.
Tax fraud or evasion means the elimination or reduction of one's correct and proper tax by
fraudulent means. The fraud contemplated by law is actual and not constructive. It must
be intentional fraud, consisting of deception willfully and deliberately done or resorted to in
order to induce another to give some legal right.
In the realm of tax law, fraud constitutes deceit, trickery, intention perversion of the truth
for some evil motive or with intent to evade taxes, as the statute puts it. The Tax Code
contains no definition of the term fraud and evasion, although these terms are used in
many sections of the tax law. What constitutes fraud would depend upon the circumstances
of each case, a question of fact which requires nicely balanced judgment.
This is quite
significant for procedural purposes, since it has been the established policy not to disturb on
appeal the findings of fact of the Tax Court, unless such factual findings are clearly
erroneous or lack substantial basis in the evidence adduced.
Nature of fraud
Fraud with intent to evade tax involves a state of mind. What constitutes fraud is a
question of fact and the determination of which frequently requires nicely balanced
judgment. To be considered are all the facts and circumstances surrounding the conduct of
the taxpayers business and all facts incident to the preparation of the alleged fraudulent tax
return. The conclusion must be based not on isolated bits of testimony but on the basis of
conditions at the time and not in the light of the conditions many years afterwards.
Factors in Fraud or Evasion
To establish the existence of fraud, all the following elements must be proven by competent
evidence:
1. The end to be achieved.-The objective is to pay an amount of tax that is less than that
known by the taxpayer to be legally due.
One of the factors influencing tax evasion is the benefit of not paying taxes. A key
assumption underlying the study is that taxpayers have a free choice to pay or evade taxes,
or at least that all taxpayers are equally constrained in this decision. In fact, different
taxpayers have different opportunities to evade, and the level of evasion can be much more
easily explained by examining what these opportunities are. Remove the element of free
choice and you solve tax evasion. Clearly, one important determinant of the level of evasion
is whether withholding can effectively be applied in collecting a tax. Even if there is
collusion regarding withholding between wage-earner and employer, some amount of taxes
will probably has to be paid. An effective withholding scheme, however, requires a relatively
small number of easily identifiable payers of the income.
2.
The accompanying state of mind.-The state of mind is variously described as being
"evil," "in bad faith," "deliberate and not accident," or "willful". The exact term used is not
too important.
3. The overt act done or scheme used by the taxpayer.-The act or scheme must be tinged
with some elements of deceit, misrepresentation, trick, device, concealment or dishonesty.
ISSUANCES
Auditing Standards Board
Statement on Auditing Standards

SAS 99
Consideration of Fraud in a Financial Statement Audit
Responsibilities and Functions of the Independent Auditor" states "The auditor has a
responsibility to plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether caused by error or
fraud" This Statement establishes standards and provides guidance to auditors in fulfilling
that responsibility, as it relates to fraud, in an audit of financial statements conducted in

accordance with generally accepted auditing standards.
Evaluating audit evidence requires the auditor to assess the risks of material
misstatement due to fraud throughout the audit and to evaluate at the completion of the
audit whether the accumulated results of auditing procedures and other observations affect
the assessment. It also requires the auditor to consider whether identified misstatements
may be indicative of fraud and, if so, directs the auditor to evaluate their implications.
ESTABLISHING INTENT AND WILLFULNESS
A. Intent/Willfulness in Criminal Law
i.
Mens Rea - Mental element of the offense that accompanies the criminal act.
ii.
actus non facitreum nisi mens sit rea the act does not make a person guilty unless
the mind is also guilty.
iii.
Intent/willfulness is generally equated with malice, especially as regards crimes
under the Revised Penal Code.
1.
It has been said that while the word "willful" sometimes means little more than
intentionally or designedly, yet it is more frequently understood to extend a little further and
approximate the idea of the milder kind of legal malice; that is, it signifies an evil intent
without justifiable excuse. In one case it was said to mean, as employed in a statute in
contemplation, "wantonly" or "causelessly;" in another, "without reasonable grounds to
believe the thing lawful." And Shaw, C. J., once said that ordinarily in a statute it means
"not merely `voluntarily' but with a bad purpose; in other words, corruptly." In English and
the American statutes defining crimes "malice," "malicious," "maliciously," and "malice
aforethought" are words indicating intent, more purely technical than "willful" or willfully,"
but "the difference between them is not great;" the word "malice" not often being
understood to require general malevolence toward a particular individual, and signifying
rather the intent from our legal justification. [U.S. vs. Ah Chong, G.R. No. L-5272, 19 March
1910 (15 Phil. 488)
2. Generally, malice or intent is deemed irrelevant in special penal laws as the latter are
considered mala prohibita. Nevertheless, if specific intent is required, the same must be
proved.
iv.
Intent/Willfulness as an element of certain violations of the NIRC
1. Section 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in any
manner to evade or defeat any tax imposed under this Code or the payment thereof shall
be punished
2. Sec. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax,
Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. Any person
required under this Code or by rules and regulations promulgated thereunder to pay any
tax, make a return, keep any record, or supply correct and accurate information, who
willfully fails to pay such tax, make a such return, keep such record, or supply such correct
and accurate information, or withhold or remit taxes withheld, or refund excess taxes
withheld on compensation, at the time or times required by law or rules and regulations,
shall be punished
3. Sec. 257. Penal Liability for Making False Entries, Records or Reports, or Using Falsified
or Fake Accountable Forms
a.
b.
Willfully falsifies any report or statement bearing on any examination or audit

Willfully attempts in any manner to evade or defeat any tax imposed
B.
Philippine Jurisprudence on Intent/Willfulness in Tax Cases
i.
Supreme Court Decisions
1.
Aznar vs. CTA (G.R. No. L-20569, 23 August 1974, 58 SCRA 519)
a.
While this is not a criminal case, the Supreme Court (SC) had an opportunity to
discuss what constitutes fraudulent intent. The petitioner was questioning the assessment of
deficiency tax and imposition of surcharge. There was a substantial difference found
between the amounts of net income on the face of the returns as filed by petitioner in the
years 1946 to 1951 and the net income as determined by the inventory method utilized by
respondents for the same years.
b.
The Supreme Court ruled:
Such a basis [inventory method] for determining the existence of fraud (intent to evade
payment of tax) suffers from an inherent flaw when applied to this case. It was not only Mr.
Matias H. Aznar who committed mistakes in his report of his income but also the respondent
Commissioner of Internal Revenue who committed mistakes in his use of the inventory
method to determine the petitioner's tax liability. The mistakes committed by the
Commissioner of Internal Revenue which also involve very substantial amounts were also
repeated yearly, and yet we cannot presume therefrom the existence of any taint of official
fraud.
From the above exposition of facts, we cannot but emphatically reiterate the well
established doctrine that fraud cannot be presumed but must be proven. As a corollary
thereto, we can also state that fraudulent intent could not be deduced from mistakes
however frequent they may be, especially if such mistakes emanate from erroneous entries
or erroneous classification of items in accounting methods utilized for determination of tax
liabilities. The predecessor of the petitioner undoubtedly filed his income tax returns for "the
years 1946 to 1951 and those tax returns were prepared for him by his accountant and
employees. It also appears that petitioner in his lifetime and during the investigation of his
tax liabilities cooperated readily with the B.I.R. and there is no indication in the record of
any act of bad faith committed by him.
The lower court's conclusion regarding the existence of fraudulent intent to evade payment
of taxes was based merely on a presumption and not on evidence establishing a willful filing
of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The
fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by the law. It must amount to
intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a
mere mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making entries in the

returns and in the assessment, respectively, under the inventory method of determining tax
liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith.
2.
Ungab vs. Cusi (G.R. No. L-41919-24, 30 May 1980)
a.
This is a criminal case for filing a fraudulent tax return, failure to render a true and
complete return and engaging in business without first paying the annual fixed or privilege
tax. However, the case did not discuss the guilt or innocence of the accused, but tackled the
authority of the prosecutor and the jurisdiction of the court.
b.
The following are the relevant pronouncements of the Supreme Court on intent and
willfulness:
The contention is made, and is here rejected, that an assessment of the deficiency tax due
is necessary before the taxpayer can be prosecuted criminally for the charges preferred.
The crime is complete when the violator has, as in this case, knowingly and willfully filed
fraudulent returns with intent to evade and defeat a part or all of the tax.
An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt
to defeat and evade the income tax. A crime is complete when the violator has knowingly
and willfully filed a fraudulent return with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he
has made an inaccurate return, and the government's failure to discover the error and
promptly to assess has no connections with the commission of the crime.
3.
CIR vs. Javier (G.R. No. 78953, 31 July 1991, 199 SCRA 824)
a.
Again, this is not a criminal case. The controversy basically revolves around the
assessment of deficiency tax and imposition of surcharge. The taxpayer was the recipient of
some money from abroad which he presumed to be a gift but the amount was actually
erroneously remitted to his account. In his income tax return, the taxpayer put a footnote
stating the above and the fact that the amount is now subject to litigation.
b. The Supreme Court cited the ruling in the Aznar case as regards fraud and held:
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed
by the herein petitioner. The government was not induced to give up some legal right and
place itself at a disadvantage so as to prevent its lawful agents from proper assessment of
tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud.
The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly
commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified
by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by
spending most of the money he received, but the records lack a clear showing of fraud
committed because he did not conceal the fact that he had received an amount of money
although it was a "subject of litigation.
4. CIR vs. CA (G.R. No. 119322, 04 June 1996, 257 SCRA 200)
a.
A criminal case was filed against Fortune Tobacco (Fortune) for alleged fraudulent
tax evasion for supposed non-payment of the correct amount of income tax, ad valorem tax
and value-added tax for the year 1992. The fraudulent scheme allegedly adopted by Fortune
consisted of making fictitious and simulated sales of Fortunes cigarette products to nonexisting individuals and to entities incorporated and existing only for the purpose of such
fictitious sales by declaring registered wholesale prices with the BIR lower than Fortunes
actual wholesale prices, which are required for determination of Fortunes correct income
and tax liabilities. Fortune sought the injunction of the preliminary investigation.
b. The Supreme Court held:
Willful means pre-meditated; malicious; done with intent, or with bad motive or purpose,
or with indifference to the natural consequence x xx. Fraud in its general sense, is
deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which undue and unconscionable
advantage taken of another.
Fraud cannot be presumed. If there was fraud or willful attempt to evade payment of ad
valorem taxes by private respondents through the manipulation of the registered wholesale
price of cigarettes, it must have been with the connivance of cooperation of certain BIR
officials and employees who supervised and monitored Fortunes production activities to see
to it that the correct taxes were paid. But there is no allegation that, much less evidence, of
BIR personnels malfeasance.
c.
The SC further clarified the ruling in Ungab vs. Cusi, to wit:
In plain words, for criminal prosecution to proceed before assessment, there must be a
prima facie showing of a willful attempt to evade taxes. There was a willful attempt to
evade tax in Ungab because of the taxpayers failure to declare in his income tax return his
income derived from banana saplings. In the mind of the trial court and the Court of
Appeals, Fortunes situation is quite apart factually since the registered wholesale price of
the goods, approved by the BIR, is presumed to be the actual wholesale price, therefore,
not fraudulent and unless and until the BIR has made a final determination of what is
supposed to be the correct taxes, the taxpayer should not be placed in the crucible of
criminal prosecution.
ii.
Court of Tax Appeals (CTA) Decisions
1.
Pascual and Dragon vs. CIR (C.T.A. Case No. 3045, 29 December 1986)
a.
The case focuses on the propriety of the assessment of deficiency taxes and the
imposition of surcharge and is not actually a criminal case. Nonetheless, the CTA had the
opportunity to discuss what constitutes willful neglect in the filing of returns and payment of
taxes, as follows:
To our mind, there was willful neglect to file the corporate income tax returns required by
law on the part of petitioners because, as borne out by the records, both petitioners
Mariano P. Pascual and Renato P. Dragon did not file separate individual income tax returns
for 1968 reporting their respective share of the profits realized by them in said year from
their real estate transactions. (p. 28, Bureau of Internal Revenue records.) If petitioners did
not even bother to report their share of the profits derived by them from their buying and
selling transactions, why should they take the trouble of filing corporate income tax return
for their partnership? But assuming that for the year 1968 petitioners were not yet aware
that they are taxable as an unregistered partnership subject to corporate income tax, they
could at least have filed their separate individual income tax returns for this year. It seems
clear therefore that there was intentional wrongdoing with the object of avoiding the tax on
the part of petitioners.
2.
Sevilla, Son, Ruben Tiu, Ben Tiu and Jerry Tiu vs. CIR (C.T.A. Case No. 6211, 04
October 2004)
a.
This is likewise not a criminal case and is actually a suit questioning the assessment
of deficiency capital gains tax. Deeds of Assignment of shares were compared with capital
gains tax returns.
b.
The Court of Tax Appeals ruled:
Clearly from the foregoing, there was an overstatement of the acquisition cost in the sum
of P53,685,000.00 for which the capital gains tax due thereon was not paid by the
petitioners. Because of the deliberate overstatement of the cost of acquisition of the subject
shares of stocks by the petitioners, the tax base was lessened which ultimately led to a
lower capital gains tax due. In other words, when petitioners intentionally overstated the
cost of acquisition of the said shares in their capital gains tax returns, they willfully evaded
the payment of correct taxes thereby denying or depriving the government the right to
collect the exact taxes due from petitioners' stock transactions. Furthermore, it is
noteworthy that except for the objection that the Deeds of Assignment were not best
evidence nor secondary evidence, petitioners failed to rebut the allegation of overstatement
of the cost of acquisition in the capital gains tax return. Petitioners during the investigation
and during the trial of the case did not present evidence to justify their declaration of the
cost of acquisition in the capital gains tax returns filed with the Bureau of Internal
Revenue.
3.
People vs. Mallari (C.T.A. Crim. Case Nos. A-1 & A-2, 04 September 2006)
a.
This is a criminal case for failure to pay deficiency income tax and value added tax.
b.
According to the CTA:
The Supreme Court had ruled that the word willful in a statute means "not merely
voluntary but with a bad purpose; in other words, corruptly" and that a voluntary act is a
free, intelligent, and intentional act.
Having as premises the knowledge of the accused-appellant that there are assessment
notices issued against him (the existence of which was admitted by the accused during the
hearing held on December 7, 2000 32) which were proven to have been sent by registered
mail (Exhibit "J"); that he received the Warrant of Distraint and Levy (Exhibit "K") and the
Demand Letter (Exhibit "D") demanding payment of the deficiency taxes stated in the
assessment notices; and the fact that he admitted that he ignored the demand for payment
of the deficiency taxes, there is no other conclusion that can be drawn except that the
accused-appellant willfully did not pay his deficiency tax liabilities.
Furthermore, accused-appellant's admission that he paid P50,000 to two BIR Regional
District Office employees to settle his tax liabilities without asking for any receipt reveals a
conscious effort to evade his 1993 tax liabilities. The act of bribing the BIR employees
constitutes an overt act on the part of accused-appellant that showed his deliberate and
willful refusal to pay his deficiency tax liabilities to the government. He resorted to bribery
instead of fulfilling his legal obligation of paying his deficiency taxes.
AYALA HOTELS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

[C.T.A. CASE NO. 6002. January 10, 2002.]
DECISION
The case at bar seeks the cancellation and termination of alleged Petitioner's deficiency
income tax for the year 1993 in the amount of P19,779,385.50.
As represented, Petitioner is a corporation duly organized and existing under the laws of the
Republic of the Philippines, with principal business address at the Makati Stock Exchange
Building, Ayala Avenue, Makati City. It is registered with the Bureau of Internal Revenue
(BIR) with Tax Identification Number (TIN) 000-437-612.
Petitioner entered into two (2) separate contracts of lease with each of the two (2) Lessees,
namely, Manila Mandarin Hotel and Manila Peninsula Hotel, covering two (2) parcels of land
in Makati (Exhibits F & G; TSN of Mr. Leo D. Abot, July 5, 2000, pp. 28 to 31). Both lease
contracts similarly provide:
a)
that each of the Lessees, with the consent of Petitioner, will erect a building on the
parcels of land, to be used as a hotel;
b)
the duration of the contract is twenty-five (25) years starting from the date of actual
occupancy of the hotel by the first paying guest (paragraph 1);
c)
that the Petitioner represents that the leased property forms an essential part of a
commercial center in an integrated and controlled development project, and all buildings
and improvements thereon shall be exclusively used and occupied by commercial
businesses of a type and quality that will fit into the pattern of development of the
surrounding area (paragraph 2);
d)
that the Lessees have an option to renew the lease for an additional period of 25
years under the same terms and conditions as those obtaining during the last year of such
lease. In the event that the Lessees exercise such option and thereby renew the lease, the
Lessees agree to promptly notify the Petitioner in writing within ninety (90) days before the
termination of the original term of the lease (paragraph 21); and
e)
that the Lessees shall own the hotel building and all the improvements (paragraph
9) (Paragraph 10, Joint Stipulation of Facts and Issues; TSN of Mr. Leo D. Abot, July 5,
2000, pp. 28 to 31).
For the taxable year ending December 31, 1993, Petitioner duly filed on April 15, 1994
(Exhibit D-1) its Corporate Annual Income Tax Return (Exhibit D) with the Respondent's
Bureau of Internal Revenue (BIR) (Paragraph 11, Joint Stipulation of Facts; TSN of Mr. Leo
D. Abot, July 5, 2000, pp. 17 to 23).
On October 7, 1999 (Exhibit A-1, TSN of Mr. Leo D. Abot, July 5, 2000, p. 13), or 5 years
from the time Petitioner filed its Corporate Annual Income Tax Return, Petitioner received
from Respondent a Formal Assessment Notice (FAN) (Exhibit A) dated September 17, 1999,
which FAN alleged that Petitioner had deficiency income taxes due to the Government for
the taxable year 1993 in the total amount of P19,779,385.50, broken down as follows:
Net income per return
Add:
P59,297,967.00
Unreported income for the year 1993

on improvements by Lessees:
Manila Mandarin Hotel
P7,546,227.00
Manila Peninsula Hotel
8,600,210.00
16,146,437.00
Net income per investigation
P75,444,404.00
============
P26,405,541.00
Less: Income tax already paid
20,754,288.00
Deficiency income tax

Add:
5,651,253.00
50% Surcharge
2,825,626.50
25% Surcharge
1,412,813.25
9,889,692.75
Add:
20% interest per annum from

4-15-94 to 10-15-99
9,889,692.75
Total Amount Due
P19,779,385.50
============
(Paragraph 3, Petition for Review, as admitted in Paragraph 2 of the Answer)
The deficiency assessment arose from the finding of the Respondent that the Petitioner
should have reported as part of its income for taxable year 1993, the total amount of
P16,146,437.00 representing a portion of the total value of the leasehold improvements
introduced by the two lessees of the Petitioner, namely, Manila Mandarin Hotel and Manila
Peninsula Hotel (Paragraph 4, Petition for Review, admitted in Paragraph 2 of the Answer).
Respondent's findings were premised mainly on the application of Section 49 of Revenue
Regulations No. 2 (Income Tax Regulations) which provides:
"Section 49. Improvements by Lessees. When buildings are erected or improvements
made by a lessee in pursuance of an agreement with the lessor, and such buildings or
improvements are not subject to removal by the lessee, the lessor may at his option report
the income therefrom upon either of the following bases:
(a)
The lessor may report as income at the time when such buildings or improvements
are completed the fair market value of such buildings or improvements subject to the lease.
(b)
The lessor may spread over the life of the lease the estimated depreciated value of
such buildings or improvements at the termination of the lease and report as income for
each year of the lease an aliquot part thereof." (Emphasis supplied)
Specifically, Respondent posits that the improvements introduced by Petitioner's lessees are
not subject to removal and hence, must be reported by Petitioner as income based on either
of the two rules under Section 49; that is, to report the fair market value of the buildings or
improvements as income at the time when such buildings or improvements are completed,
or to report as income for each year of the lease an aliquot part of the estimated
depreciated value of such buildings or improvements at the termination of the lease
(Paragraph 5, Petition for Review, as admitted in Paragraph 2 of the Answer).
Pursuant to the Audit Report sent to the Petitioner by the Respondent through the revenue
officers who conducted the examination of the Petitioner's books, the following calculations
were made to establish the amounts alleged as "unreported income" subject of the instant
deficiency assessment:
Manila Mandarin
Manila Peninsula
Hotel (in Pesos)
Hotel (in Pesos)
COST OF IMPROVEMENTS
Site Improvement
4,084,259.00 314,905,352.00
Building and Building Equipment
APPRAISAL INCREASE
398,949,466.00
120,738,873.00
Site Improvement
329,005.00
Building and Building Equipment
121,320,807.00
99,719,098.00
16,382,293.00
Total Value
(Estimated useful life @ 40 years) (a)
NET BOOK VALUE AFTER 25 YEARS (b)
503,081,828.00
188,655,686.00
573,347,325.00
215,005,247.00
ANNUAL REPORTABLE INCOME

FOR 25 YEARS (c)
7,546,227.00 8,600,210.00
TAXABLE INCOME FOR 19937,546,227.00 8,600,210.00

The amount of alleged unreported income for 1993 was arrived at by
(i)
taking the total value of the improvements (including the building equipment) in (a)
above;
(ii)
dividing the same by 40 years representing the estimated useful life to arrive at the
annual depreciation over 40 years;
(iii)
multiplying the annual depreciation over 40 years by 25 years (representing the
original 25-year term of the lease) to arrive at the total depreciation expense to be claimed
by the lessee for the first 25-year term of the lease;
(iv)
deducting the total depreciation expense for 25 years arrived at in (iii) above from
the total value of the improvements in (a) above to arrive at the net depreciated value of
the improvements after 25 years in (b) above; and
(v)
dividing the net depreciated value after 25 years in (b) above by 25 years to arrive
at the aliquot part of the net depreciated value of the improvements at the end of the
original 25-year term of the lease which should allegedly be reported as income for each
year of the original 25-year term of the lease (Paragraph 12, Joint Stipulation of Facts and
Issues).
On November 5, 1999, Petitioner, through its external auditors, filed with the Respondent
its protest letter (Exhibit B) dated November 4, 1999, pursuant to Section 228 of the Tax
Code, as amended. Said protest letter specified the factual and legal bases of the protest
against said alleged deficiency income tax assessment, and further requested that the
deficiency tax assessment be withdrawn and cancelled (Paragraph 6, Joint Stipulation of

Facts and Issues; TSN of Mr. Leo D. Abot, July 5, 2000, pp. 14 to 16).
On December 27, 1999, Respondent's letter (Exhibit C), dated December 6, 1999, was
received by the Petitioner's external auditors, denying the protest filed on November 5,
1999 (Paragraph 7, Joint Stipulation of Facts and Issues; TSN of Mr. Leo D. Abot, July 5,
2000, pp. 15 to 16).
The denial of the Respondent of the Petitioner's protest, as clearly specified in the
Respondent's letter, dated December 6, 1999, and received by the Petitioner on December
27, 1999, is based on the following grounds:
(i)
the Petitioner's failure to report alleged rental income in the amount of
P16,146,437.00 can be legally considered a fraudulent act with intent to evade tax; hence,
the ten-year, and not the three-year, prescriptive period should apply;
(ii)
even granting that there was no willful intent on the part of the Petitioner to
understate its rental income for purpose of evading its corporate income tax, the Supreme
Court has held in the case of Aznar vs. Commissioner of Internal Revenue that the filing of a
false tax return, even without any intent to evade tax, is likewise embraced under the 10year statute of limitations;
(iii)
that Section 49 of Revenue Regulations No. 2, upon which the assessment issued
against the Petitioner is based, is legal and has the force and effect of law;
(iv)
that the 50% surcharge is being imposed in the assessment against the Petitioner by
reason of the finding of the Respondent that the Petitioner failed to report its income from
the leasehold improvements introduced by the Lessees which amounts were considered
substantial; and
(v)
that the imposition of the 25% surcharge in addition to the 50% surcharge is
justified considering that, since the assessment against the Petitioner pertains to calendar
year 1993, the provisions of the old National Internal Revenue Code should apply, and not
those of the Tax Reform Act of 1997 and Revenue Regulations No. 12-99 (Paragraph 13,
Joint Stipulation of Facts and Issues).
On January 26, 2000, Petitioner filed with this Court, the instant Petition for Review, which
prayed for the cancellation and termination of the alleged deficiency income tax assessment
against the Petitioner for taxable year 1993 in the amount of P19,779,385.50.
After presentation of its testimonial and documentary evidence, Petitioner filed its Formal
Offer of Evidence describing in detail the evidence presented as well as their respective
purposes. This Court, in its Resolution dated October 25, 2000, resolved to admit all the
exhibits formally offered in evidence by the Petitioner.
Based on the Parties' Joint Stipulation of Facts and Issues approved by this Court, the
specific issues in the instant case are the following:
1.
Whether or not the BIR's right to assess has prescribed under Section 203 of the Tax
Code;
2.
Whether or not Petitioner should have reported as part of its income for taxable year
1993 the total amount of P16,146,437.00 representing a portion of the total value of the
leasehold improvements introduced by its Lessees, namely Manila Mandarin Hotel and
Manila Peninsula Hotel.
3.
Whether or not Petitioner is liable for the amount of P19,779,385.50 representing
alleged deficiency income tax for the taxable year 1993; and
4.
Whether or not there is basis for the imposition of both the 25% and 50%
surcharges in the assessment against the Petitioner.
It is the principal submission of Petitioner that it is not liable for the alleged deficiency
income tax assessment issued by Respondent against it, as the same is without legal and
factual bases on the following grounds:
(1)
Section 49 of Revenue Regulations (RR) No. 2 was not intended to, and cannot
replace, the general rule provided in Section 44 of the Tax Code on the period for
recognition of income, because implementing rules like RR No. 2 cannot go beyond the law
which it seeks to implement, but was rather intended, by the very language of Section 49 of
RR No. 2 itself, to give the taxpayer-lessor like Petitioner the option as to when to report
income from leasehold improvements;
(2)
The leasehold improvements introduced by the lessees of Petitioner, who is an
accrual basis taxpayer, should be reported in the year it is earned. Thus, prior to its taking
actual possession and ownership of the leasehold improvements when the term of the lease
is finally terminated, it has not yet earned the value of the leasehold improvements, or even
an aliquot portion thereof, and as such, there is no basis to the Respondent's assessment
that Petitioner had unreported income equal to the value of leasehold improvements or a
portion thereof;
(3)
The provisions of the United States (US) income tax rules on leasehold
improvements, which was copied verbatim as our Section 49 of RR No. 2, have already
been invalidated by US Revenue Act of 1942, which excludes from gross income all income,
other than rent, derived by a lessor of real property upon termination of the lease,
attributable to buildings erected or other improvements made by the lessee;
(4)
Section 49 of RR No. 2 should be applied together with Section 44 of the Tax Code,
for to do otherwise, inequity and unfairness would result to the Petitioner who would be
required to report income and pay a tax on the value of the leasehold improvements prior
to actual or constructive receipt of any property or even any benefit therefrom; and
(5)
The method used by the BIR in computing for the alleged "unreported income" is
inequitable, unjust and impractical.
Further, Petitioner asseverated that considering that the assessment was issued beyond the
three-year period, as prescribed under Section 203 of the Tax Code, the assessment
becomes null and void, for the right to assessment has been barred by prescription. It said
that there is no "willful intention" to evade tax on the part of Petitioner and it did not file a
"false return", thus, there is no justification to impose the ten-year prescriptive period. And
finally, it asserted that there is no basis for the imposition of both the 50% and 25%
surcharges, hence, it prayed that the alleged deficiency tax assessments for the year 1993
be cancelled and terminated.
On the other hand, Respondent argued that Petitioner is liable to the subject assessment on
the following grounds:
(1)
Petitioner's failure to report in its 1993 corporate income tax return its rental
income, from improvements introduced by its lessees, is a fraudulent act with intent to
evade tax hence the applicable provision is Section 223(a) of the Tax Code, thus, the tax
assessment against petitioner is not barred by prescription since the same had been issued
within ten (10) years after the discovery of falsity, fraud or omission;
(2)
Section 49 of RR No. 2 is legal due to herein reasons: (a) Revenue Regulations have
the force and effect of law, (b) Despite the numerous amendments to the Income Tax Law,
no issue has been raised against the validity of Section 49 of RR No. 2, and (c) Section 49 is
clear and leaves no room for interpretation;
(3)
Since Section 49 of RR No. 2 is clear, the duty of the Commissioner is to enforce and
implement rather than to question its validity, thus, considering that RR No. 2 was
promulgated by the Secretary of Finance, the same may both be legally modified or revoked
by the Commissioner for lack of jurisdiction; and
(4)
The imposition of the 50% and 25% surcharges is with legal bases, hence, he
prayed for the dismissal of the case for lack of merit.
After a circumspect study of the first issue, the Court resolves to uphold herein Petitioner's
stance that Respondent's right to assess against Petitioner has already prescribed for
having been issued beyond the three-year prescriptive period and that there is no basis to
apply the extended ten-year prescriptive period.
Section 203 of the Tax Code, as amended, provides for the rule on the period within which
assessments must be made, viz:
Section 203. Period of limitation upon assessment and collection. Except as provided in
the succeeding section, internal revenue taxes shall be assessed within three years after the
last day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in case where the return is filed beyond the period prescribed by law,
the three year prescriptive period shall be counted from the day the return was filed. For
the purposes of this section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day.
Petitioner filed its 1993 income tax return on April 15, 1994. Thus, under the statutory 3year period of limitation, the tax assessment for taxable year 1993 should have been issued
by the Respondent on or before April 15, 1997. Since the Respondent received the FAN only
on September 17, 1999, or more than five (5) years from April 15, 1994 when Petitioner
filed its 1993 income tax return, the subject deficiency assessment is considered null and
void, as the same was issued beyond the three (3) year period to assess as provided for in
Section 203 of the Tax Code.
Respondent does not contest the allegation that the assessment was issued beyond the
three-year prescriptive period and has, thus, prescribed based on Section 203 of the Tax
Code, as amended. In fact, Respondent's position is that the applicable prescriptive period
for the assessment in question is that provided under Section 222 of the Tax Code, as
amended, which states:
"In case of a false or fraudulent return with intent to evade tax or of failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be filed
without assessment, at anytime within ten (10) years after the discovery of the falsity,
fraud, or omission . . ."
The application of Section 222 by the Respondent is premised on the theory that (1)
Petitioner's failure to report as income the amount of the improvements introduced by its
lessees, "can be legally considered as a fraudulent act with intent to evade tax"; and (2)
assuming the lack of willful intent on the part of the Petitioner to understate its rental
income, that "the filing of a 'false return', even without any intent to evade tax, is likewise
embraced under the aforementioned 10-year statute of limitation.
The Court finds that there is no basis for the application of the ten-year prescriptive period
based on the ground that there is no "willful intention to evade tax" on the part of the
Petitioner.
An indispensable ingredient that must be proven to exist for the 10-year prescriptive period
to apply is that there must be, apart from the element of mistake, a clear, unequivocal and
willful intention to evade tax.
In the case of B.F. Goodrich Philippines, Inc. vs. Commissioner of Internal Revenue, CAG.R. SP No. 25100, dated January 14, 1992, the Court of Appeals laid down the rule in
ascertaining the existence of fraud, viz:
"Obviously, there could have been no fraud, for fraud at the least implies and connotes
an active and deliberate intent as deceit, which is surely absent in this case. As the
Supreme Court puts it in Aznar vs. Court of Tax Appeals, et al., 58 SCRA 519, fraud is
"actual and constructive," in this wise:
"The lower court's conclusion regarding the existence of fraudulent intent to evade payment
of false and fraudulent returns so as to warrant the imposition of fraud penalty. The fraud
contemplated by law is actual and not constructive. It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted to in order to induce another to give
up some legal right. Negligence, whether slight or gross is not equivalent to the fraud with
intent to evade the tax contemplated by the law. It must amount to intentional wrongdoing
with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot
be considered as fraudulent intent, and if both Petitioner and Respondent Commissioner of

Internal Revenue committed mistakes in making entries in the returns and in the
assessment, respectively, under the inventory method of determining tax liability, it would
be unfair to treat the mistakes of the Petitioner as tainted with fraud and those of the
Respondent as made in good faith."
The aforesaid decision was affirmed by the Supreme Court in Commissioner of Internal
Revenue vs. B.F. Goodrich Philippines Inc., et al., G.R. No. 104171, February 24, 1999,
thus:
"Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent
return with the intent to evade tax, or that it had failed to file a return at all, the period for
assessments has obviously prescribed. Such instances of negligence or oversight on the
part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was
precisely intended to give them peace of mind."
In the case of Santiago S. Ong, et al. vs. Commissioner of Internal Revenue (CTA Case No.
4648, July 20, 1994), this Court held:
"Finally, with regard to the last issue, we hold that the respondent had failed to substantiate
his claim that the petitioners had fraudulently attempted to evade their tax liabilities. Fraud
is never presumed. Courts never sustain findings of fraud upon circumstances which create
only suspicions and even the understatement of a tax is not by itself proof of fraud for
purposes of tax evasion (Commissioner of Internal Revenue vs. Javier, Jr., 199 SCRA 824).
We are therefore inclined to adopt the admission and explanation of the petitioners that
their liability for deficiency income taxes arose from mere oversight and inadvertence."
Further, it was held in the case of Yulo vs. Araneta (CTA Case No. 84, dated July 8, 1958)
that:
"As to the first ground, the only allegation is that petitioner deliberately failed to report as
income the financing shares received by him as dividends. No allegation has been made
that the failure to report such income was due to any intention to evade payment of the
tax. The fraud penalty provided under (then) Section 72 of the Revenue Code cannot
therefore be imposed solely on the ground that petitioner deliberately failed to report the
value of the financing shares received by him as dividends. While it may be true that a
finding of fraud by the Commissioner of Internal Revenue is presumptively correct, yet
when the taxpayer has shown, as in this case, that the failure to report an income is due to
an honest belief that it is not taxable, it is incumbent upon respondent to prove the
existence of fraud."
Thus, considering that (1) the Respondent did not present any evidence supporting his
allegation of the existence of fraud; (2) existing rules and jurisprudence proved that the
existence of fraud can never be presumed; and (3) the Petitioner, through the testimony of
its Chief Financial Officer, Mr. Leo D. Abot, has sufficiently shown that the non-reporting of
the income representing a portion of the value of the leasehold improvements was based on
its reliance on several provisions, rulings and accepted principles of taxation and may thus
be considered, at the very least, an "honest belief", viz:
"ATTY. MONTERO:
Q.
Mr. Witness, you stated that the Gross Income of Petitioner Ayala Hotels, Inc.
reported P67,422,388.00 as Gross Income from rental payments which is cross referred as
Schedule No. 4 as Rental Income, did this amount include a portion of the total value of the
leasehold improvements introduced by the two (2) Lessees of the Petitioner?
MR. ABOT:
A.
No, the amount did not include the value of the leasehold improvements introduced
by the Lessee, Sir.
ATTY. MONTERO:
Q.
Why were these amounts not included, Mr. Witness, in short, what is the basis of the
company in not reporting as part of its Gross Income, the value of the leasehold
improvements?
MR. ABOT:
A.
Well, the company did not include in its Gross Income the value of the leasehold
improvements introduce(d) by the Lessees because this leasehold improvement is not one
among the items as part of the Gross Income as defined in the Tax Code. So, this is not one
of the items which have been included in the Gross Income as defined in the Tax Code, Sir.
ATTY. MONTERO:
Q.
Any other reason, Mr. Witness?
MR. ABOT:
A.
The company based this treatment on the 1975 Ruling by the BIR which ruled
categorically that:
"The Income on the Value of lease(hold) of (sic) improvement introduced by the
Lessees should be recognized by Lessor upon the termination of the Lease.";
And we have also the treatment for non-inclusion of these items is also based on the
General Accepted Test on Income Recognition because the value of lease(hold) of (sic)
improvements does not pass the Generally Accepted Test of Recognition of Income such as
the All Events Test and Economic Benefit Test and Constructive Receipt Test, Sir." (TSN of
Mr. Leo D. Abot, July 5, 2000, pp. 23 to 25)
From the above discussion, We can conclude that there is no basis to hold Petitioner's act as
being "legally considered as a fraudulent act with intent to evade tax."
The Petitioner did not file a "false return" to justify imposition of the ten-year prescriptive
period. Respondent's letter dated December 6, 1999 cites the 1974 Supreme Court case of
Aznar vs. Court of Tax Appeals, 58 SCRA 518 in arriving at the conclusion that the filing of a
false return even without intent to evade tax is sufficient to justify application of the tenyear prescriptive period. EaISTD
The Court agrees with Petitioner that the pronouncements in the Aznar case should not be
applied to the instant deficiency tax assessment.
In the case of Packaging Products Corporation vs. Commissioner of Internal Revenue, CTA
Case No. 4464, dated January 11, 1995, it was made clear that reliance on the Aznar case
must not be an exercise of unbridled discretion, to wit:
"To further bolster her contention, respondent quoted portions of the decisions handed
down by the Supreme Court in the case of Aznar vs. CTA and Collector, 58 SCRA 519.
"xxx
xxx
xxx
Moreover, the fact that the respondent and the petitioner differ in the interpretation of the
law with regard to the availment of tax credit on sales taxes does not necessarily make the
date contained in the return made by a taxpayer a "false return", within the meaning of the
original and amended section 2781 Rev. St., there must appear, if not a design to mislead
or deceive on the part of the taxpayer at least culpable negligence. A mistake, not culpable
in respect of its value would not constitute such false return (Words and Phrases, Volume
16, page 173).
We find that there is no clear showing that the return filed by petitioner is false. Therefore,
the ten-year period to assess deficiency taxes is not applicable to the case at bar. Hence,
the questioned assessment is null and void having been filed beyond the three-year period
prescribed by law. We are inclined to believe that the defense of falsity of return was a
mere afterthought conjured by respondent to rationalize the late assessment."
Thus, under the view which we have taken of in the first issue raised by the parties in this
appeal, we deem it unnecessary to resolve the other issues presented. We therefore hold
that Petitioner is not liable to pay the alleged deficiency tax assessment for the year 1993 in
the amount of P19,779,385.50, on the ground of prescription.
IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is hereby GRANTED.
Accordingly, the subject assessment issued by the Respondent against Petitioner for the
year 1993 is hereby ORDERED CANCELLED AND WITHDRAWN.
SO ORDERED.
[CA-G.R. SP No. 70025.
AYALA HOTELS, INC.
April 19, 2004.] COMMISSIONER OF INTERNAL REVENUE, vs.
DECISION
May the Bureau of Internal Revenue (BIR) still assess a taxpayer for alleged deficiency
income taxes despite the expiration of the three-year period provided for by law 1 as the
period of limitation for assessment of taxes?
The Case
Petitioner, as the official of the Republic of the Philippines charged with the duty of
assessing and collecting internal revenue taxes, seeks a review of the Decision, dated 10
January 2002, of the Court of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala
Hotels, Inc. vs. Commissioner of Internal Revenue, the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is hereby GRANTED.
Accordingly, the subject assessment issued by the Respondent against Petitioner for the
year 1993 is hereby ORDERED CANCELLED AND WITHDRAWN.
SO ORDERED.
and from the Resolution, dated 12 March 2002, denying petitioner's motion for
reconsideration of the above-mentioned Decision, the dispositive portion of which reads:
WHEREFORE, Motion for Reconsideration is hereby DENIED for lack of merit.
SO ORDERED.
The Facts
The facts are undisputed. 4 Private respondent Ayala Hotels, Inc. (hereinafter referred to as
respondent) entered into two (2) separate contracts of lease with two (2) lessees, namely,
Manila Mandarin Hotel and Manila Peninsula Hotel, covering two (2) parcels of land in
Makati. Both lease contracts similarly provide:
a)
that each of the Lessees, with the consent of Petitioner, will erect a building on the
parcels of land, to be used as a hotel;
b)
the duration of the contract is twenty-five (25) years starting from the date of actual
occupancy of the hotel by the first paying guest;
c)
that the Petitioner represents that the leased property forms an essential part of a
commercial center is an integrated and controlled development project, and all buildings
and improvements thereon shall be exclusively used and occupied by commercial
businesses of a type and quality that will fit into the pattern of development of the
surrounding area;
d)
that the Lessees have an option to renew the lease for an additional period of 25
years under the same terms and conditions as those obtaining during the last year of such
lease, the Lessees agree to promptly notify the Petitioner in writing within ninety (90) days
before the termination of the original term of the lease; and
e)
that the Lessees shall own the hotel building and all the improvements.
For the taxable year ending 31 December 1993, respondent duly filed on 15 April 1994 its
Corporate Annual Income Tax Return (ITR) with the BIR.
On 7 October 1999 or 5 years from the time respondent filed its ITR, respondent received
from petitioner a Formal Assessment Notice (FAN) dated 17 September 1999, which FAN
alleged that respondent had deficiency income taxes dues to the Government for the
taxable year 1993 total amount of P19,779,385.50, broken down as flows:
Net income per return
P59,297,967.00
Add: Unreported income for the year 1993

on improvements by Lessees:
Manila Mandarin Hotel:
P7,546,227.00
Manila Peninsula Hotel:
8,600,210.00
P16,146,437.00
Net income per investigation
P75,444,404.00
===========
P26,405,541.00
Less: Income tax already paid
20,754,288.00
Deficiency income tax
5,651,253.00
Add: 50% Surcharge
2,825,626.50
25% Surcharge
1,412,813.25
9,889,692.75
Add: 20% interest per annum from
4-15-94 to 10-15-99
9,889,692.75
Total Amount Due
P19,779,385.50
===========
The deficiency assessment arose from the finding of the petitioner that the respondent
should have reported as part of its income for taxable year 1993, the total amount of
P16,146,437.00 representing a portion of the total value of the leasehold improvements
introduced by the two lessees of respondent, namely, Manila Mandarin Hotel and Manila
Peninsula Hotel.
Petitioner's findings were premised mainly on the application of Section 49 of Revenue
Regulations No. 2 (Income Tax Regulations) which provides:
Section 49.
Improvements by Lessees. When buildings are erected or improvements
made by a lessee in pursuance of an agreement with the lessor, and such buildings or
improvements are not subject to removal by the lessee, the lessor may at his option report
the income therefrom upon either of the following bases:
(a)
The lessor may report as income at the time when such buildings or improvements
are completed the fair market value of such buildings or improvements subject to the lease.
(b)
The lessor may spread over the life of the lease the estimated depreciated value of
such buildings or improvements at the termination of the lease and report as income for
each year of the lease an aliquot part thereof.
Specifically, petitioner posits that the improvements introduced by respondent's lessees are
not subject to removal and hence, must be reported by respondent as income based on
either of the two rules under Section 49, that is, to report the fair market value of the
buildings or improvements as income at the time when such buildings or improvements are
completed, or to report as income for each year of the lease an aliquot part of the
estimated depreciated value of such buildings or improvements at the termination of the
lease.
Pursuant to the Audit Report sent to the respondent by petitioner through the revenue
officers who conducted the examination of respondent's books, the following calculations
were made to establish the amounts alleged as "unreported income" subject of the instant
deficiency assessment:
Manila Mandarin
Manila Peninsula
Hotel (in Pesos)
Hotel (in Pesos)
COST OF IMPROVEMENTS
Site Improvement
4,084,259.00 314,905,352.00
Building and Building

Equipment
398,949,466.00
120,738,873.00
APPRAISAL INCREASE
Site Improvement
329,005.00
121,320,807.00
Building and Building

Equipment
99,719,098.00
16,382,293.00
Total Value
(Estimated useful life
@ 40 years) (a)
503,081,828.00
573,347,325.00
AFTER 25 YEARS (b) 188,655,686.00
215,005,247.00
NET BOOK VALUE
ANNUAL REPORTABLE
INCOME FOR 25 YEARS (c) 7,546,227.00 8,600,210.00
TAXABLE INCOME
FOR 1993
7,546,227.00 8,600,210.00
The amount of alleged unreported income for 1993 was arrived at by

(i)
taking the total value of the improvements (including the building equipment) in (a)
above;
(ii)
dividing the same by 40 years representing estimated useful life to arrive at the
annual depreciation over 40 years;
(iii)
multiplying the annual depreciation over 40 years by 25 years (representing the
original 25-year term of the lease) to arrive at the total depreciation expense to be claimed
by the lessee for the first 25-year term of the lease;
(iv)
deducting the total depreciation expense for 25 years arrived at in (iii) above from
the total value of the improvements in (a) above to arrive at the net depreciated value of
the improvements after 25 years in (b) above; and
(v)
dividing the net depreciated value after 25 years in (b) above by 25 years to arrive
at the aliquot part of the net depreciated value of the improvements at the end of the
original 25-year term of the lease which should allegedly be reported as income for each
year of the original 25-year term of the lease.
On 5 November 1999, respondent, through its external auditors, filed with petitioner its
protest letter dated 4 November 1999, pursuant to Section 228 of the Tax Code, as
amended. Said protest letter specified the factual and legal bases of the protest against said
alleged deficiency income tax assessment, and further requested that the deficiency tax
assessment be withdrawn and cancelled.
On 27 December 1999, petitioner's letter, dated 6 December 1999, was received by
respondent's external auditors, denying the protest filed on 5 November 1999.
The denial of respondent's protest is based on the following grounds:
(i)
the respondent's failure to report alleged rental income in the amount of
P16,146,437.00 can be legally considered a fraudulent act with intent to evade tax; hence,
the ten-year and not the three-year, prescriptive period should apply;
(ii)
even granting that there was no willful intent on the part of the respondent to
understate its rental income for purpose of evading its corporate income, tax, the Supreme
case, of Aznar vs. Commissioner of Internal Revenues 5 that the filing of a false tax return,
even without any intent to evade tax, is likewise embraced under the ten-year statute of
limitations;
(iii)
that Section 49 of Revenue Regulations No. 2, upon which the assessment issued
against respondent is based, is legal and has the force and effect of law;
(iv)
that the 50% surcharge is being imposed in the assessment against the respondent
by reason of the finding of petitioner that respondent failed to report its income from the
leasehold improvements introduced by the lessees which amounts were considered
substantial; and
(v)
that the imposition of the 25% surcharge in addition to the 50% surcharge is
justified considering that, since the assessment against the Petitioner pertains to calendar
year 1993, the provisions of the old NIRC should apply, and not those of the Tax Reform Act
of 1997 and Revenue Regulations No. 12-99.
On 26 January 2000, respondent filed with the CTA a petition for review, which prayed for
the cancellation and termination of the alleged deficiency income tax assessment for the
taxable year 1993 in the amount of P19,779,385.50.
After the presentation of evidence by the parties, the CTA ruled in favor of respondents,
ordering the cancellation of the subject assessment issued by petitioner against respondent.
In upholding respondent's stance, the CTA ruled that petitioner's right to assess has already
prescribed for having been issued beyond the three-year prescriptive period and that there
is no basis to apply the extended ten-year prescriptive period considering that there was no
willful intention to evade tax on the part of respondent in failing to report as income the
amount of improvements introduced by its lessees.
The CTA is of the view that for the ten-year prescriptive period to apply, the must be, apart
from the element of mistake, a clear, unequivocal and willful intention to evade tax.
Considering that no evidence was presented to show the existence of fraud, no "false
return" was filed to justify the application of the ten-year period. Petitioner's reliance on the
Aznar Case, according to the CTA, was misplaced. Citing Packaging Products Corporation vs.
Commissioner of Internal Revenue, CTA Case No. 4464, dated 11 January 1995, the court
ruled that there must appear, if not a design to mislead or deceive on the part of the
taxpayer at least culpable negligence. A mistake, not culpable in respect of its value would
not constitute such false return.
From the said Decision of the CTA, petitioner filed a motion for reconsideration 6 which was
denied in a Resolution dated 12 March 2002 7. With regard to petitioner's argument that
Section 49 of Revenue Regulation No. 2 is still valid and applicable in the instant case, the
CTA ruled that Section 49 of Revenue Regulation No. 2, which served as basis for the
issuance of the subject assessment was declared without force and effect by the United
States Supreme Court (USSC). The BIR recognizes this fact when on 6 May 1975, it issued
a BIR Ruling addressed to Mr. Antonio M. de Ynchausti adopting the said ruling. Considering
that the interpretation of the USSC of our tax law carries great weight and respect, having
patterned our own law after the US Tax Code, the basis for which the subject assessment
was issued become doubtful.
The Petition
Petitioner is now before this Court seeking a review of the said Decision and Resolution
issued by the CTA.
Petitioner argues that respondent's failure to report in its 1993 income tax return the rental
income from improvements introduced by its lessees, although unintentional, makes the
1993 return a false return, therefore, the ten-year prescriptive period applies as prescribed
by Section 223 of the Tax Code (now Section 222 of the 1997 NIRC 8 ). Petitioner, again
cites the Aznar Case where the Supreme Court ruled that the law should be interpreted to
mean a separation of the three different situations of false return, fraudulent return with
intent to evade tax, and failure to file a return. This view is strengthened by the last portion
of the provision which segregates the situations into three different classes, namely
"falsity", "fraud" and "omission". That there is a difference between "false return" and
"fraudulent return" cannot be denied. While the first merely implies deviation from the
truth, whether intentional or not, the second implies intentional or deceitful entry with
intent to evade the taxes due.
Petitioner further argues that Section 49 of Revenue Regulation No. 2 has the force and
effect of law having been promulgated by the Secretary of Finance, upon recommendation
of the Commissioner of Internal Revenue, in the exercise of his power under Section 244 of
the 1997 NIRC to "promulgate all needful rules and regulations in connection with the
implementation of the provisions of internal revenue laws." Not having been modified or
revoked, it is still valid and legal until declared otherwise.
The surcharges thus imposed on the deficiency income tax assessment against respondent
finds basis in the fact that the said return was considered as a "false return," thus making
the respondent liable for the 50% surcharge. The 25% surcharge, on the other hand, was
imposed applying the old NIRC considering that the case pertains to deficiency income tax
for the calendar year 1993.
Respondent, on the other hand, maintains that petitioner's right to assess deficiency income
taxes has prescribed considering that the FAN was issued only after 5 years from the time
respondent filed its ITR, way beyond the three-year prescriptive period provided for under
Section 203 of the 1997 NIRC. To bolster its argument, respondent cites CTA case San
Miguel Corporation vs. Commissioner of Internal Revenue (6 January 1995) which ruled that
there is nothing in the Aznar Case which establishes a hard and fast rule that every
"deviation" from the truth necessarily brings a particular return under the coverage of
Section 223 of the Tax Code. It is only where the falsity or "deviation" would place the
government at a disadvantage so as to prevent the assessment and collection of the correct
amount of taxes that the ordinary prescriptive period provided under Section 331 (now
Section 203) of the Tax Code should not be applied.
Respondent further argues, by citing the case of Commissioner of Internal Revenue vs. B.F.
Goodrich Phils., Inc., 10 that mere falsity of a return does not merit the application of the
ten-year prescriptive period. The element of fraud, as in the case of the taxpayer's intent to
evade the payment of the correct amount of tax, must be clearly established. In the
absence of proof that there exists fraudulent intent on the part of respondent in failing to
report as income the improvements introduced by its lessees, there is no basis for the
application of the ten-year prescriptive period.
On the validity of Section 49 of Revenue Regulation No. 2, respondent posits that the said
revenue regulation should no longer be enforced considering that in the 12 March 2002
Resolution of the CTA, the court mentioned the fact that its counterpart provision in the US
Revenue Regulations was declared without force and effect by the US Supreme Court and
the BIR itself adopted this ruling in its 6 May 1975 ruling issued to Mr. Antonio M. de
Ynchausti stating that, Section 49 of Revenue Regulation No. 2, which was patterned after
the US Revenue Regulations, should no longer be enforced.
The Issue
The central issue that needs to be resolved in this case is whether or not petitioner's right
to assess herein deficiency income taxes has indeed prescribed as ruled by the CTA.
The Court's Ruling
The petition has no merit.
Petitioner mainly argues that respondent, in failing to report as part of its income the
improvements introduced by its lessees in its ITR, filed a "false return" as defined in the
Aznar Case and consequently, the assessment made 5 years after the ITR was filed on 15
April 1994 was still within the ten-year prescriptive period provided for in Section 222 of the
1997 NIRC.
What, therefore, constitutes "false return" to warrant the application of the ten-year
prescriptive period?
Section 222 of the 1997 NIRC provides:

(a)
In the case of a false or fraudulent return with intent to evade tax or of failure to file
a return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be filed without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud or omission; provided, that in a fraud assessment which has become final
and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof.
In interpreting the above provision, it is important to note that commentaries 11 consider
two (2) groups of exceptions provided for in Section 222: The first, where there is a failure
to file the required return; and the second, where there is a return filed but the same is
false or fraudulent and made with intent to evade tax. It appears that the phrase "with
intent to evade tax" qualifies not only the word "fraudulent" but also the word "false",
having been grouped together as one category under the exceptions.
Under the rules of statutory construction, the qualifying words "with intent to evade tax"
should refer to both the words "false" and "fraudulent" since these words are not separated
by a comma. If it was the intent of the lawmakers to qualify only the word "fraudulent" then
the same should have been treated separately or at the very least, the words "false" and
"fraudulent" should have been separated by a comma to show separate treatment of the
two.
In the case of Florentino and Zandueta vs. P.N.B., 12 the Supreme Court ruled in this wise:
Grammatically, the qualifying clause refers only to the last antecedent; that is, "any citizen
of the Philippines or any association or corporation organized under the laws of the
Philippines." It should be noted that there is a comma before the words "or to any citizen,
etc.," which separates said phrase from the preceding ones.
The words "false" and "fraudulent" can therefore be treated as one category of exception
qualified by the phrase "with intent to evade tax."
But even if We disregard the grammatical construction, there are still persuasive reasons
why the qualifying phrase should refer to both the words "false" and "fraudulent."
It is more logical to follow such interpretation considering that our tax law provides a
statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers
from any unreasonable examination, investigation or assessment. Thus, the law on
prescription should be liberally construed in order to afford such protection. Consequently,
the exceptions to the law on prescription should be strictly construed. 13 To allow a
different interpretation of the said provision would be unfair for the taxpayer and would
negate the purpose for which said periods were intended.
Reliance on the Aznar Case with regard to the issue of prescription is misplaced. Although in
the said case, the Supreme Court ruled that a "false return" merely implies a deviation from
the truth, whether intentional or not, such pronouncement should not be given a sweeping
application in all cases where a mistake in ITR entries are made by taxpayers. Otherwise,
any mistake, however slight, in a return filed by a taxpayer in good faith would justify the
application of the ten-year prescriptive period for assessment. Consequently, the protection
provided for under Section 203 of the 1997 NIRC is rendered nugatory. Logically therefore,
not all "false returns" would call for an application of Section 222 of the 1997 NIRC. Only
"false returns" which are filed by a taxpayer with intent to evade tax should warrant an
application of the ten-year prescriptive period.
In order to render a return made by a taxpayer a "false return" within the meaning of
Section 222, of the Tax Code, there must appear, a design to mislead or deceive on the
part of the taxpayer, or at least culpable negligence. A mistake, not culpable in respect of
its value would not constitute a false return.
Moreover, the factual setting of the Aznar Case is entirely different from that of the case at
bar. In the said case, the taxpayer was assessed deficiency income taxes for the years 1946
to 1951, covering more than five taxable years. On the other hand, in this case, respondent
was assessed deficiency income taxes only for the year 1993.
There is a false or fraudulent return if any of the following are present:
1.
There is intentional substantial under declaration of income.
2.
There is intentional substantial overstatement of deductions.
3.
There is intentional under declaration of selling price and overvaluation of cost or
property sold.
4.
Recurrence of the understatement of income or overstatement of deductions for
more than one taxable year. (emphasis supplied)
In the Aznar Case the taxpayer undoubtedly filed several false tax returns warranting the
application of the ten-year prescriptive period. Clearly, in this case, even if respondent
made an understatement of income in its ITR, the same cannot constitute a "false" or
"fraudulent" return, since the subject deficiency assessment pertains only to one taxable
year. Moreover, no proof was presented to show that such understatement of income was
done intentionally to evade taxes.
The CTA correctly ruled that,
There is no basis for the application of the ten-year prescriptive period based on the ground
that there is no "willful intention to evade tax" on the part of the Petitioner (respondent
herein).
An indispensable ingredient that must be proven to exist for the 10-year prescriptive period
to apply is that there must be, apart from the element of mistake, a clear, unequivocal and
willful intention to evade tax.
In this case, the failure of respondent to report as part of its income the improvements
introduced by its lessees was omission done in good faith and not intentionally to evade
taxes due to the government, considering that Section 49 of Revenue Regulation No. 2
admits of different interpretations.
In one commentary, the authors recognize that with respect to improvements introduced by
the lessee, several rules may be followed, thus,
In the case of lease agreements where the improvements introduced by the lessee would
thereby or later become the lessor's property, the following rules have been offered:
(a)
BIR Rule (Rev. Reg. No. 2): At his option, the lessor may consider the property as
income
(1)
Upon the completion of the improvement; or
(2)
By spreading the value of the improvement over the life of the lease.
(b)
United States Rule (Blatt vs. U.S., 308 U.S. 267):
(1)
If the improvements are in the concept of rents, the lessor must treat the property
as income upon completion of the improvement; but
(2)
If the introduction of improvement is merely an incidental element of the contract,
then the lessor must treat the property as income upon the termination of the lease.
The problem being indeed one of accounting, due consideration should be given to the
taxpayer's own accounting preference. Equally acceptable perhaps would be the following
approaches to a lessor who is
(a)
On cash basis The lessor may consider the improvements as income upon the
effective transfer of legal and beneficial ownership to him, i.e., fulfillment of all conditions
therefore. If such transfer were to take place prior to the termination of the lease it shall be
its fair market value at the time of transfer minus its expected depreciation for the balance
of the period (such remaining value being what the improvement would be worth to the
taxpayer). If the transfer were to take place upon the termination of the lease then the
taxable income would be the fair market value of the property at that time. This remaining
value, having been earned, may then serve as a basis for possible depreciation allowance
over the further useful life of the improvement.
(b)
On accrual basis The value of the improvement may be spread over the life of the
lease and the value allocated over each taxable year is the portion that is deemed earned.
If, for any reason, the improvement suffers a loss or is totally lost, then to that extent, not
exceeding what has been earned, this may become a deductible loss.
It appears, therefore, that in applying Section 49 of Revenue Regulation No. 2, the choice is
given to the lessor on when to treat the said improvements as income and when to report
the same in its ITR. There is no hard and fast rule with respect to the application of the said
provision. The lessor may opt to apply the BIR Rule or the U.S. Rule since no fixed guideline
with respect to reporting such improvements as income has been provided for. It cannot be
said, therefore, that in failing to report as income the improvements introduced by the
lessee, respondent was motivated by ill will with intent to evade taxes. Differences in
interpretation of the law between the Commissioner and the taxpayer (do) not necessarily
make the taxpayer's return false.
The burden of proving fraud is with the BIR. One of the disputable presumptions provided in
Section 3 (ff), Rule 131 of the Revised Rules of Court is that the law has been obeyed. If
the three-year period for assessment has expired at the time of the mailing of the notice of
deficiency, the burden is on the BIR to show that the ten (10) year period is applicable.
The Supreme Court has ruled,
On the issue of whether Sec 331 or Sec. 332 (a) of the National Internal Revenue Code
should apply to this case, there is no iota of evidence presented by the petitioner as to any
fraud or falsity on the return with intent to evade payment of tax. . . . Petitioner merely
relies on the provisions of Section 25 of the National Internal Revenue Code, violation of
which, according to petitioner, presupposes the existence of fraud. But this is begging the
question and We do not subscribe to the view of the petitioner.
Fraud is a question of fact and the circumstances constituting fraud must be alleged and
proved in the court below. . . . Fraud is never lightly presumed because it is a serious
charge. (emphasis supplied) 20
In the above quoted case of Commissioner of Internal Revenue vs. Ayala Securities
Corporation, 21 the Supreme Court applied the Aznar doctrine (on false and fraudulent
return in relation to the fraud penalty) to the prescriptive period, stating that fraud must be
alleged and proved and never lightly presumed. The Aznar Case provided thus,
The lower court's conclusion regarding the existence of fraudulent intent to evade payment
of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The
fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by the law. It must amount to
intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a
mere mistake cannot be considered fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mistakes in making entries in the returns and
in the assessment, respectively, under the inventory method of determining tax liability, it
would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the
respondent as made in good faith. (emphasis supplied)
Considering the foregoing, there is no basis to disregard the three-year prescriptive period.
Since the petitioner failed to present proof that respondent filed a false return with intent to
evade tax, the period for assessment that should apply is the three-year period provided in
Section 203 of the 1997 NIRC and not the ten-year period provided in Section 222 of the
Code. Therefore, petitioner's right to assess respondent the subject deficiency income taxes
has already prescribed considering that the assessment notice was issued more than three
years, or five and a half years to be exact, after respondent filed its ITR.
WHEREFORE, the petition is DISMISSED. The Decision, dated 10 January 2002, of the Court
of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala Hotels, Inc. vs. Commissioner
of Internal Revenue, is hereby AFFIRMED in toto. SO ORDERED.
Footnotes
SEC. 203. Period of limitation upon assessment and collection. Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years after the last
day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period; provided, that in a case where a return is filed beyond the period prescribed by law,
the three-year period shall be counted from the day the return was filed. For purposes of
this Section, a return filed before the last day prescribed by law for the filing thereof shall
be considered as filed on such last day. (The National Internal Revenue Code [NIRC] of
1997).
SEC. 222. Exceptions as to period of limitation of assessment and collection of taxes.
(a)
In the case of a false or fraudulent return with intent to evade tax or of failure to file
a return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be filed without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud or omission; provided, that in a fraud assessment which has become final
and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof. (1997 NIRC).
iii.
Regional Trial Court (RTC) Decision
1.
People vs. Imelda Marcos (Crim. Case Nos. Q-91-24382-83, 91-24388-89, and 9124392, 20 April 2007)
a.
i.
ii.
iii.
iv.
Several criminal cases were filed against respondent for:

Failure to pay income tax;
Failure to give a written notice of death
Failure to pay estate taxes
Failure to file income and estate tax returns
b.
The court took judicial notice of the fact that the Marcoses were forcibly evicted from
the country and brought to Hawaii in 1986, leaving most of their personal and real
properties under the possession and control of the government.
c.
The RTC held:
As the defense contended, the Marcoses were totally isolated from the rest of the world.
They were not afforded means of communication and transportation and were not allowed
to receive visitors. Thus, it was really impossible for the accused to have complied with the
requirement of filing and paying any of her tax obligations. Likewise, even though she
wanted to do so, their sudden departure from the country prevented the accused from
bringing her personal record and documents with which she could assess or determine her
income for the year 1985 to prepare her income tax returnConsequently, failing on the
part of the prosecution to substantiate through competent evidence that accused Mrs.
Imelda Marcos willfully, unlawfully and feloniously neglected to file and pay [an] income tax
return for [the] year 1985, she could not be held criminally liable.
The Court finds merit in the argument that the failure on the part of the accused to file the
estate tax return and to pay the estate tax is not willful. Although accused may have failed
to comply with what is required by law, accused should be exempted from criminal liability
as she was prevented to do so due to an insuperable cause made by no less than the
government, i.e., as early as February 1986, accused and her family were forcibly placed on
exile in Honolulu, Hawaii until November 1991, when they returned to the country; the
properties of President Marcos were sequestered and placed under the control and
possession of the government after which forfeiture proceedings were filed before the
Sandiganbayan Court.
True, as pointed out by the defense, why would the government require accused to comply
with her obligations when it had taken away the very means by which she could comply
with the requirements of the law? Logically, a legal heir who does not possess a knowledge
or information regarding the total value of the estate of the decedent would not dare
execute a return under oath under pain of criminal liability. In the same manner, it is
error to expect that accused would pay the tax due on the estate of her late husband during
the alleged time under which she was made to pay when she had no records in her
possession and control with which she could assess the gross value of the late president at
the time of hi death and the deductions allowed from the gross estate to determine the
estate tax liability.
On the whole, underscoring the finding of the Court that accuseds failure to comply with
her tax obligation was due to causes beyond her control, there is no doubt that the element
of willfulness for crimes involving the violation of the National Internal Revenue Code, as
alleged in the Information in these five (5) criminal complaints, is lacking. In short, the
prosecutions evidence did not pass the test of moral certainty that there was willful
disobedience on the part of the accused with the intention to evade and defeat the tax.
C.
Challenges in Proving Intent and Willfulness in Tax Cases
i.
Willfulness is a state of mind
ii.
Willfulness is determined by a subjective standard
iii.
The element of willfulness is often the most difficult element to prove in an evasion
case. Absent an admission or confession, which is seldom available, or accomplice
testimony, willfulness is rarely subject to direct proof and must generally be inferred from
the defendant's acts or conduct. [U.S. Criminal Tax Manual 8.06[2]]
D.
Proof of Willfulness in U.S. Jurisprudence
i.
Proof of Willfulness Failure to File Returns [ US Criminal Tax Manual 10.04[5] [a]]
1.
Willfulness is suggested by a pattern of failing to file for consecutive years in which
returns should have been filed. United States v. Greenlee, 517 F.2d 899, 903 (3d Cir. 1975).
This may include years prior or subsequent to the prosecution period. United States v.
Upton, 799 F.2d 432, 433 (8th Cir. 1986); United States v. Farris, 517 F.2d 226, 229 (7th
Cir. 1975).
2.
Willfulness may be shown by disregarding IRS warning letters, and
contradictory forms. United States v. Shivers, 788 F.2d 1046, 1048 (5th Cir. 1986)
filing
3.
There is also an element of common sense in establishing willfulness in a failure to
file case.
4.
Thus, willfulness can be shown by such factors as: the background of the defendant;
the filing of returns in prior years, United States v. Briscoe, 65 F.3d 576, 588 (7th Cir.
1995); United States v. Hauert, 40 F.3d 197, 199 (7th Cir. 1994); United States v.
Birkenstock, 823 F.2d 1026, 1028 (7th Cir. 1987); United States v. Bohrer, 807 F.2d 159,
161 (10th Cir. 1986) United States v. Shivers, 788 F.2d 1046, 1048 (5th Cir. 1986); that the
defendant was a college graduate with accounting knowledge; that the defendant was
familiar with books and records and operated a business, United States v. Segal, 867 F.2d
1173, 1179 (8th Cir. 1989); that the defendant earned a large gross income, Bohrer, 807
F.2d at 161. See also United States v. MacLeod, 436 F.2d 947, 949 (8th Cir. 1971) United
States v. Ostendorff, 371 F.2d 729, 731 (4th Cir. 1967).
5.
Evidence that a defendant had filed returns in other years when he claimed refunds
while there was a substantial tax due for the years he failed to file is relevant evidence and
more than enough to establish willfulness. Garguilo, 554 F.2d at 62.
ii.
Proof of Willfulness Attempt to Evade or Defeat Tax [US Criminal Tax Manual
8.06[2]]
1.
In the leading case of Spies v. United States, 317 U.S. 492, 499 (1943), the
Supreme Court, "by way of illustration and not by way of limitation," set forth the following
as examples of conduct from which willfulness may be inferred:
Keeping a double set of books, making false entries or alterations, or false invoices or
documents, destruction of books or records, concealment of assets or covering up sources
of income, handling of one's affairs to avoid making the records usual in transactions of the
kind, and any conduct, the likely effect of which would be to mislead or to conceal.
2.
Examples of Proof of Willfulness Attempt to Evade or Defeat Tax
a.
Willfulness may be inferred from evidence of a consistent pattern of underreporting
large amounts of income.
United States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989) (evidence of willfulness was
sufficient where taxpayer failed to report $182,601 of income over three years); United
States v. Kryzske, 836 F.2d 1013, 1019-20 (6th Cir. 1988) (willfulness found where taxpayer
failed to file complete tax returns over a four-year period and underreported his income by
$940.50 for one of those years); United States v. Guidry, 199 F.3d 1150, 1157 (10th Cir.
1999); see also United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996); United States v.
Skalicky, 615 F.2d 1117 (5th Cir. 1980); United States v. Larson, 612 F.2d 1301 (8th Cir.
1980); United States v. Gardner, 611 F.2d 770 (9th Cir. 1980)
b.
Failure to supply an accountant with accurate and complete information.
United States v. Samara, 643 F.2d 701, 703 (l0th Cir. 1981) (taxpayer kept receipt books for
cash received but did not supply them to accountant, thus concealing cash receipts); see
also United States v. Guidry, 199 F.3d 1150, 1157 (10th Cir.1999); United States v.
Brimberry, 961 F.2d 1286, 1290 (7th Cir. 1992); United States v. Chesson, 933 F.2d 298,
305 (5th Cir. 1991); United States v. Michaud, 860 F.2d 495, 500 (1st Cir. 1988); United
States v. Meyer, 808 F.2d 1304, 1306 (8th Cir. 1987); United States v. Ashfield, 735 F.2d
101, 107 (3d Cir. 1984); United States v. Conforte, 624 F.2d 869 (9th Cir. 1980); United
States v. Scher, 476 F.2d 319 (7th Cir. 1973).
c.
Taxpayer who relies on others to keep his records and prepare his tax returns may
not withhold information from those persons relative to taxable events and then escape
criminal responsibility for the resulting false returns.
United States v. Simonelli, 237 F.3d 19, 30 (1st Cir. 2001); United States v. O'Keefe, 825
F.2d 314, 318 (11th Cir. 1987); United States v. Garavaglia, 566 F.2d 1056 (6th Cir. 1977).
d.
False statements to agents; false exculpatory statements, whether made by a
defendant or instigated by him.
United States v. Chesson, 933 F.2d 298, 304 (5th Cir. 1991); United States v. Frederickson,
846 F.2d 517, 520-21 (8th Cir. 1988) (taxpayer falsely stated that she did not receive
income from other employees who worked in her massage parlor and that she deposited
most of her income in the bank); United States v. Walsh, 627 F.2d 88 (7th Cir. 1980);
United States v. Tager, 481 F.2d 97, 100 (10th Cir. 1973); United States v. Callanan, 450
F.2d 145, 150 (4th Cir. 1971); United States v. Jett, 352 F.2d 179, 182 (6th Cir. 1965); see
also United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996); United States v. Pistante, 453
F.2d 412 (9th Cir. 1971); United States v. Adonis, 221 F.2d 717, 719 (3d Cir. 1955).
e.
Keeping a double set of books. United States v. Daniels, 617 F.2d 146 (5th Cir.
1980).
f.
Hiding, destroying, throwing away, or losing books and records.
United States v. Walker, 896 F.2d 295, 300 (8th Cir. 1990) (taxpayers hid records and assets
in an attempt to conceal them from the IRS). See United States v. Chesson, 933 F.2d 298,
304-05 (5th Cir. 1991) (taxpayer altered and destroyed invoices after undergoing a civil
audit for underreporting income); United States v. Pistante, 453 F.2d 412 (9th Cir. 1971);
United States v.
Holovachka, 314 F.2d 345, 357 (7th Cir. 1963); Gariepy v. United
States, 189 F.2d 459, 463 (6th Cir. 1951).
g.
Making or using false documents, false entries in books and records, false invoices,
and the like.
United States v. Wilson, 118 F.3d 228, 236 (4th Cir. 1997); United States v. Chesson, 933
F.2d 298, 304 (5th Cir. 1991); United States v. Walker, 896 F.2d 295, 298 (8th Cir. 1990)
(defendants submitted false invoices to their family company so that the company would
treat their personal expenses as business expenses).
h.
Destruction of invoices to customers. United States v. Garavaglia, 566 F.2d 1056,
1059 (6th Cir. 1977).
i.
Nominees Placing property or a business in the name of another.
United States v. Daniel, 956 F.2d 540 (6th Cir. 1992); United States v. Peterson, 338 F.2d
595, 597 (7th Cir. 1964); United States v. Woodner, 317 F.2d 649, 651 (2d Cir. 1963);
Banks v. United States, 204 F.2d 666, 672 (8th Cir. 1953), vacated and remanded, 348 U.S.
905 (1955), reaff'd, 223 F.2d 884 (8th Cir. 1955).
j.
Extensive use of currency or cashier's checks.
United States v. Daniel, 956 F.2d 540 (6th Cir. 1992) (defendant used cash extensively,
immediately converted checks to cash, and paid employees and insurance policies in cash);
United States v. Holovachka, 314 F.2d 345, 358 (7th Cir. 1963); Schuermann v. United
States, 174 F.2d 397, 398 (8th Cir. 1949).
k. Spending large amounts of cash which could not be reconciled with the amount of
income reported.
United States v. Simonelli, 237 F.3d 19, 30 (1st Cir. 2001); United States v. Olbres, 61 F.3d
967, 971 (1st Cir. 1995); United States v. Kim, 884 F.2d 189, 192 (5th Cir. 1989); or
engaging in surreptitious cash transactions, United States v. Skalicky, 615 F.2d 1117 (5th
Cir. 1980). See also United States v. Holladay, 566 F.2d 1018, 1020 (5th Cir. 1978) United
States v. Mortimer, 343 F.2d 500, 503 (7th Cir. 1965) (money orders and cashier's checks).
l.
Use of bank accounts held under fictitious names. United States v. Ratner, 464 F.2d
101, 105 (9th Cir. 1972); Elwert v. United States, 231 F.2d 928 (9th Cir. 1956); cf. United
States v. White, 417 F.2d 89, 92 (2d Cir. 1969).
m.
Checks cashed and the currency deposited in an out-of-town bank account. United
States v. White, 417 F.2d 89, 92 (2d Cir. 1969).
n.
Unorthodox accounting practices with deceptive results. United States v. Slutsky, 487
F.2d 832, 834 (2d Cir. 1973); United States v. Waller, 468 F.2d 327, 329 (5th Cir. 1972).
o.
Repetitious omissions of items of income, e.g., income from various sources not
reported.
United States v. Walker, 896 F.2d 295, 299 (8th Cir. 1990) (over a two-year period taxpayer
failed to report interest income totaling $20,476); United States v. Tager, 479 F.2d 120, 122
(10th Cir. 1973); Sherwin v. United States, 320 F.2d 137, 141 (9th Cir. 1963).
p.
Prior and subsequent similar acts reasonably close to the prosecution years.
United States v. Middleton, 246 F.3d 825, 836-837 (6th Cir. 2001); Matthews v. United
States, 407 F.2d 1371, 1381 (5th Cir. 1969); United States v. Johnson, 386 F.2d 630 (3d Cir.
1967); United States v. Magnus, 365 F.2d 1007 (2d Cir. 1966); United States v. Alker, 260
F.2d 135 (3d Cir. 1958); cf. Fed. R. Evid. Rule 404(b).
q.
Alias used on gambling trip -- relevant to an intent to evade taxes. United States v.
Catalano, 491 F.2d 268, 273 (2d Cir. 1974).
r.
The defendant's attitude toward the reporting and payment of taxes generally.
United States v. Hogan, 861 F.2d 312 (1st Cir. 1988); United States v. Stein, 437 F.2d 775
(7th Cir. 1971); United States v. O'Connor, 433 F.2d 752, 754 (lst Cir. 1970); United States
v. Taylor, 305 F.2d 183, 185 (4th Cir. 1962);
s.
Background and experience of defendant. General educational background and
experience of defendant can be considered as bearing on defendant's ability to form willful
intent.
United States v. Guidry, 199 F.3d 1150, 1157-1158 (10th Cir.1999)(willfulness inferred from
defendant's expertise in accounting via her business degree and her work experience as
comptroller of a company); United States v. Klausner, 80 F.3d 55, 63 (2d Cir. 1996)
(defendant's background as a CPA, and extensive business experience including that as a
professional tax preparer); United States v. Smith, 890 F.2d 711, 715 (5th Cir. 1989)
(defendant's background as an entrepreneur probative of willfulness); United States v.
Segal, 867 F.2d 1173, 1179 (8th Cir. 1989) (defendant was a successful and sophisticated
businessman); United States v. Rischard, 471 F.2d 105, 108 (8th Cir. 1973); . See United
States v. Diamond, 788 F.2d 1025 (4th Cir. 1986); United States v. MacKenzie, 777 F.2d
811, 818 (2d Cir. 1985) (willfulness inferred from the fact that each defendant had a college
degree, one in economics and the other in business).
t.
Offer to bribe government agent. Barcott v. United States, 169 F.2d 929, 931-32 (9th
Cir. 1948) (attempt to bribe revenue agent).
u.
Use of false names and surreptitious reliance on the use of cash. United States v.
Walsh, 627 F.2d 88, 92 (7th Cir. 1980); United States v. Holladay, 566 F.2d 1018, 1020 (5th
Cir. 1978).
v.
Backdating documents, such as receipts, contracts, and the like, to gain a tax
advantage. United States v. Drape, 668 F.2d 22 (1st Cir. 1982); United States v. Crum, 529
F.2d 1380 (9th Cir. 1976); United States v. O'Keefe, 825 F.2d 314 (llth Cir. 1987).
w.
Illegal sources of income. United States v. Palmer, 809 F.2d 1504, 1505-06 (llth Cir.
1987) (sale of narcotics).
Burden of Proof in Establishing Fraud
A tax fraud or evasion case is basically a criminal case. In the establishment of fraud,
the burden of proof is on the BIR. The presumption that an officer of the government has
performed his duty regularly, (Sec 2 Rule 131 New Rules of Court) as in the case of the
correctness of deficiency assessments, is not applicable in fraud cases. In criminal cases,
the burden of proof as to the offense charged lies on the prosecution. (Sec 2 Rule 131 New
Rules of Court) Mere suspicions and doubts as to the intention of the taxpayer are not
sufficient proof of fraud. Fraud is never presumed, it must be proved. As in felonies under
the Revised Penal Code, the guilt of the accused for offenses under the Tax Code must be
established beyond reasonable doubt.
METHODS OF PROVING INCOME
In general, the income of the taxpayer may be proven by the BIR through the use of direct
approach or evidence method or through indirect methods.
A. Direct approach, specific item or evidence method.-- This method of proof is
the simplest method of proving that a suspect has paid for something using illicit
funds received through illegal means. The investigator simply looks for a specific
financial transaction and tries to establish a direct link between the suspect and a
financial transaction. This method is the preferred technique of proving financial
criminal activity because it is the easiest to present at trial, and the proof that results
from its application is the most difficult for the suspect to refute.
There are two sides to every financial transaction: payment and receipt. The specific
item method can be used to document the movement of money from either side of a
transaction. Point-of-payment analysis begins at the transactions origin the PAYER of
the funds. Alternatively,point-of-receipt analysis begins with the receiver the RECIPIENT
of the funds. The type of analysis to use is normally contingent upon the circumstances of
the investigation. Proof of fraudulent acts is adduced by specific items of fraudulent
transactions. It is that method whereby the existence of the principal or ultimate fact is
proven without any inference or presumption. Examples are:
Income Tax
1. Omission or understatement of taxable income a.
Failure to file income tax return.
b. Items of income and expenses, assets or liabilities have been omitted or falsely claimed
in the accounting records or return in order to minimize or reduce taxes;
c Misclassification of accounts - Income taken upon and classified as liabilities; erroneous
classification of income from taxable to exempt; ordinary gains classified as capital gains;
non-deductible expenses disguised as deductible items; and capital expenditures classified
as deductible items.
d. Sales/income of domestic branches purportedly shown as income of the foreign head
office;
e. Keeping two sets of invoice or receipts, one set registered with the BIR and sales or
income recorded thereon are the ones posted in the accounting records, whereas the other
set is not reported for tax purposes;
f. Keeping two sets of books of accounts records, one set registered with the BIR and the
other set reflects the correct transactions and not registered and reported to the BIR;
g.
Non-issuance of receipts to customers; and
h.
Sales invoices or receipts issued to customers reflect the correct transactions, but
invoices or receipts recorded for tax purposes reflect much smaller amounts.
2. Utilization of other persons or entities:
a. Establishment of several entities - corporations, partnerships, or proprietor-ships - by a
person by making it appear that sale are made by the different entities created when in fact
such sales are only made by one person;
b. Allocating income and expenses to other persons in order to reduce or minimize taxes
by a controlling person; and
c.
Establishment of a registered partnership or corporation, using dummy partners or
stockholders.
d.
Improper claims of costs of sales and deductible expense.
e.
Fictitious purchaser, or padding of purchases, or that proceeds are diverted to the
personal benefit of the taxpayer or his assign;
f.
False or fictitious claims of deductions;
g Misclassification of deductions i. Investments or major repairs or improvements claimed as nominal

expenses;
ii. Dividend declarations classified as expenses or salaries;

iii. Withdrawals claimed as expenses or compensation;
iv. Claim of depreciation of non-existing assets or already fully depreciated, or on assets
which were appraised higher for credit purposes;
v. Claim of purchases from no-VAT sources as VAT purchases and claiming tax credits
thereon; and
vi. Improper claims of tax credits without having paid the input taxes passed on by the
seller.
3. Claims of false personal exemptions a. Claiming exemptions as married by an unmarried individual or head of the family by
single persons who do not actually support their parents; and
b. Claiming false additional exemptions of alleged children, or children who are already of
age, or who are not physically incapacitated.
Business Taxes: VAT and Percentage Taxes
1. Omission or understatement of taxable sales/income;
2. Keeping falsified books of accounts;
3. Non-issuance of sales invoices, or under- recording of sales to conceal the amount of
sales subject to business taxes on VAT;
4. Claiming fictitious tax credits;
5. Crediting sales against items or income discounts of costs of sales to conceal the amount
of sales subject to business taxes on VAT.
6. Deducting against sales or income discounts which were granted subsequently and not in
the sales invoice.
7. Deducting returned sales which were not actually returned.
8. Misclassification of sales or income a Classifying sales as exempt when in fact they are taxable,
b Misclassification of sales of goods subject to VAT as only subject to percentage taxes;
c Claiming domestic sales as export sales when in fact the goods were sold in the domestic
market; and
d Sales in the local market which are made to appear as sales by the foreign head office.
B. Indirect Method
This relies upon circumstantial evidence of determining the correct income or transaction of
a taxpayer. Circumstantial evidence is that which tends to prove the existence of the
disputed fact by proof of other facts which have a legitimate tendency to lead the mind to a
conclusion that the fact exists which is sought to be established. However, where
circumstantial evidence is relied upon to prove a fact, the circumstances must be proved
by direct evidence and cannot themselves be inferred.
The legal basis for an indirect approach in the determination of the correct income or
transactions of a taxpayer is anchored on Sections 6 (power of the Commissioner to make
assessments) and Section 43 (general rule) of the Tax Code.
1.
Networth or Inventory Method
This is a method of reconstructing income based on the theory that if the taxpayer's net
worth has increased in a given year in an amount larger than his reported income, he had
understated his income for that year.
Formula:
The mathematical formula for this method may be laid down as follows:
Assets at year end
Less: Liabilities at year end
Equals: Networth for the year
Less: Prior years net worth
Equals: Increase in net worth
Plus: Non-deductible item
Less: Non-taxable income or receipts subjected to final tax or transfer taxes
Equals: Taxable net income
Less: Personal and additional exemptions
Equals: Net income subject to tax
The Commissioner's determination of taxpayer's unreported income through the networth
expenditure method usually involves the following steps:
1. The net worth on a fixed starting date is established (excess of assets over liabilities).
This starting date is usually the beginning of the first tax year under examination. The
amount of such net worth is considered of vital importance in order to foreclose the
possibility than an increase in net worth during the tax year, or an excess of expenditure
over reported income, did not originate from prior accumulated funds (e.g., hoarded cash or
undisclosed assets which would not represent income during the tax year).
2. The net worth at the close of each tax year under examination is established;
3. Comparison is made of the net worth at the beginning and end of each year, to
determine the increase, if any;
4. The increase in net worth for each year is adjusted to eliminate items accounting for
such increases which arise from non-tax sources (i.e., gifts, bequests, other receipts exempt
from tax, etc.) and adjustment is made where property is sold at a profit but the entire
profit is not taxable because of long-term capital gain provision. The increase in net worth
for the year, after these eliminations and adjustments, is presumed to be income realized in
that year;
5. The amount of non-deductible expenditures is determined or estimated. These items
usually consists of personal, family and living expenses; and
6. The reconstructed income under the net worth expenditure method is the sum of items
(4) and (5) and this amount is then compared with the income reported, if any, by the
taxpayer.
Establishing the starting point
Following the decisions of the U.S. Supreme Court, our own Supreme Court in the Perez
case said that one requisite for the use of the net worth method is the establishment, with
reasonable certainty, of an opening net worth to serve as a starting point, from which to
calculate future increases in the taxpayers assets. The wisdom of this statement is
apparent since an inaccurate beginning net worth will affect the accuracy of the
determination of income subsequent to the base point. For instance, if a taxpayers
beginning net worth is understated, taxable income will be overstated.
Proof of visible assets and liabilities comprising beginning net worth is usually easily
established by such means as real estate records; income, estate and gift tax returns and
records; books and records of the taxpayer; and bank records which the taxpayer may
furnish. The item difficult to prove is cash on hand, in order to account for part or all the
deficiency in taxable income. To establish a firm starting point, it is necessary to show that
the defendant had no large sum of cash for which he was not given credit. This is usually
done by offering evidence which negates the existence of a cash hoard.
Taxable sources of income
In order for income to be taxable, it must come from a taxable source. In Eugenio Perez vs.
CTA & CIR, G.R. No. L-10507, May 30, 1968, the Supreme Court said: The net worth
increase must be attributable to taxable income. On the basis of the said case, direct proof
of the source of income is not essential.
The government must either prove a likely source of taxable income or negate all nontaxable source of income. In cases where the government resorts to the latter type of
proof, it is even more important to establish a firm starting point, particularly with reference
to cash on hand. Any doubt concerning the starting cash could create a doubt as to the
years which the increase occurred, and the court might conclude that the omission of
income took place in some prior year than during the years under indictment.
Circumstance and conditions necessary to warrant the use of the indirect method in
establishing a prima facie case of fraud:
1. That the taxpayer's accounting records are inadequate and do not clearly reflects his
income; or that the taxpayer maintains no books and records; or that taxpayer's accounting
records are available, but he refuses to produce them;
2. That there is a fixed starting point or opening net worth (i.e., a date beginning of a
taxable year or prior year to it), at which time the taxpayer's financial conditions can be
affirmatively established with some definiteness. (Statements of net worth of taxpayers,
who availed of the tax amnesty under the provisions of E.O. 41, may be used as the starting
point as at December 31, pursuant to the authority given to the BIR under Section 7 of said
E.O.).
3. That the circumstances are such that the method does reflect the taxpayer's income with
reasonable accuracy and certainly, and proper and just addition of personal expenses and
other non-deductible expenditures were made and correct; fair and equitable credit
adjustments were given by way of eliminating non-taxable items or receipts or taxable
income which have been subjected to final tax.
4. The need for evidence of the source of income under this method. In all the leading
cases on this matter, courts are unanimous in holding that when the tax case is civil in
nature, direct proof of sources of income is not essential. However, when a taxpayer is
criminally prosecuted for tax evasion, the need for evidence of a likely source of income
becomes a pre-requisite for a successful prosecution.
This proof of a likely source of income may be shown by any of the following:
1. Demonstrating that there were specific omissions of income items by the taxpayer in his
income tax return.
2. A showing that the nature of the taxpayer's business is such that it has capacity of
generating a substantial income.
3. Proofs of under-declaration of income by the existence of unregistered sales invoices,
which were not recorded in the books;
4. Findings of unrecorded purchases;
5. Existence of business permits, license from government agencies as to the types of
businesses the taxpayer is engaged in;
6. Keeping separate sets of books one is registered and the other, reflecting the correct
transactions of a business, is not registered.
7. Use of false invoices or documents, and
8. Willful destruction of accounting records.

2.
Expenditure Method
The expenditure method proceeds on the theory that where the amount of money which a
taxpayer spends during a given year exceeds his reported income, and the source of such
money is otherwise unexplained, it may be inferred that such expenditures represent
unreported income.
The discussion on when and how the net worth method should be used are equally
applicable to the expenditures method. In a case where the taxpayer has several assets
(and liabilities) whose cost bases remain the same throughout the period under
investigation, the expenditure method may be preferred over the net worth method because
a more laconic presentation can be made of the computation of taxable income. This is
because assets and liabilities which do not change during the period under investigation
may be omitted from the expenditures statement. The expenditure method is used often
on a taxpayer who spends his income on lavish living and has little, if any, net worth.
Formula:
The expenditure method of determining income should be applied by deducting the
aggregate yearly expenditures from the declared yearly income, not the expenditures
incurred each month from the declared therefor.
Under this formula enunciated by the court in the above-cited case, the particulars in the
use of this method are shown below:
A. Expenditures for a given taxable year:
1. All expenses and deductions claimed perreturn filed with the BIR (Exclude non-cash
items, such as aromatization of goodwill, depreciation of assets, application of deferred
expenses from prior period, etc.)
2. Expenses, personal and non-deductive or deductible for tax purposes, as
determined per investigation (Exclude non-cash terms)
3. Payments of debts, payables, accruals,and other liabilities - taken up in the ITR
and those not taken up, such as personal and other liabilities.
of taxes
4.
Payment
5. Acquisition of assets - per ITR and personal acquisitions such as cars,appliances, even
real estate.
Total Expenditures per Investigation
B. Sources of Cash:
1.
Declared income per Income Tax Return
Deduct: Accounts Receivables if taxpayer is on cash basis method of accounting

Add : Collection from receivables
2.
Non-taxable receipts, prizes, royalties, etc.
3.
Non-Taxable receipt, such as dividends donations from abroad
4.
Receipts subjected to transfer such as donations, inheritance
5.
Cash loans, if any
6.
Cash at the beginning of the period
Excess Cash as determined per Investigation

As in the case of the networth method, when a tax case is civil in nature, direct proof of
sources of income is not essential.
However, when a criminal case is filed against the
taxpayer, the need for evidence of a likely source of income becomes a prerequisite.
3. Percentage Method
Although the use of this method is of little value in criminal cases, it is useful in testchecking or corroborating the results obtained by some other means of proof such as
specific items, net worth, and expenditures methods, and for evaluating allegations from
information regarding unreported profits or income.
The percentage method is a computation whereby determinations are made by the use of
percentages or ratios considered typical of the business under investigation. By reference
to similar businesses or situations, percentage computations are secured to determine sales,
gross profit, or even net profit. Likewise, by the use of some known base and the typical
percentage applicable, individual items of income or expenses may be determined.
These percentages may be externally derived or they may in some instances be internally
derived from the taxpayers accounts for other periods or from an analysis of subsidiary
records. Gross profit percentages may be other similar data. Also, other years not covered
by the investigation or portion of year under investigation may indicate typical percentage
applicable to the entire year or year under investigation. It must, however, be emphasized
that in comparing transactions of similarly situated business, the name of the particular
taxpayer used as the model must not be divulged to the taxpayer under investigation nor in
the report as this would constitute as a violation by an internal revenue officer of the
provision of Section 270 (unlawful divulgence of trade secrets) of the Tax Code.
Findings resulting from the revenue officers observation or surveillance of the taxpayers
business operations for a definite period may be used by him as basis for assessing taxes
for the other periods of the same taxable year and such assessment is deemed prima facie
correct.
4. Unit and Value Method
This is not a prime method of proof. The determination of gross receipts may be computed
by applying price and profit figures to the known ascertainable quality of business done by
the taxpayer.
This method is feasible when the investigation can ascertain the number of units handled
by the taxpayer and also when he knows the price or profit charged per unit. There may be
regulatory body to which the taxpayer units of production or service.
Examples are: (a) records of sugar milled by a sugar central; (b) records of fish production
to the Bureau of Fishery and Aquatic Resources; (c)
records of production by pioneer
industries to the Board of Investments; and (d) records of logs exported to the Forest
Management Bureau.
Types of Tax Fraud
There are two (2) types of tax fraud, to wit: (a) criminal fraud; and (b) civil fraud.
1. Criminal fraud.--A criminal tax fraud case results when all the elements of fraud can be
proven beyond reasonable doubt. Proof beyond reasonable doubt does not mean such a
degree of proof as absolute certainty, excluding possibility of error. What is only required is
that degree of proof which produces conviction in an unprejudiced mind. Moral certainty
signifies the judgment and conscience of the trial judge, as a reasonable man, is convinced
that the defendant is guilty of the crime charged. Upon conviction, the taxpayer shall be
liable to both criminal and civil penalties, in addition to deficiency taxes.
2. Civil fraud.--When all the elements of fraud cannot be proven beyond reasonable doubt,
but these elements can be established by clear and convincing evidence amounting to more
than a mere preponderance of evidence, civil fraud exists. It cannot be justified by mere
speculation. Here, the taxpayer shall be liable aside from the deficiency taxes only to the
civil penalties. Aside from deficiency taxes, the taxpayer shall be liable to surcharge of fifty
percent (50%). This penalty can be imposed by the Commissioner even without the
concurrence of any court.
"Preponderance of evidence" means that the testimony adduced by one side is more
credible and conclusive than that of the other. "Clear and convincing evidence" need not
rise to proof beyond reasonable doubt as in a criminal case, but must be stronger than mere
preponderance of evidence. In determining the preponderance or superior weight of the
evidence, the court may consider all the facts and circumstances of the case, like the
witnesses manner of testifying, the nature of the facts to which they testify, the probability
of their testimony, their interest or want of interest, and also their personal credibility.
False or Fraudulent Return
In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be filed without assessment at any time within ten (10) years after the discovery of the
falsity, fraud or omission.(sec 222 NIRC )
The proper and reasonable interpretation of Section 222(a) (exceptions as to period of
limitation of assessment and collection of taxes) of the Tax Code should be that in the three
different cases of (a) false return, (b) fraudulent return with intent to evade tax, (c) failure
to file a return, tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud, or omission. The stand of the court that the law should be interpreted to
mean a separation of the three different situations of false return, fraudulent return with
intent to evade tax, and failure to file a return is strengthened immeasurably by the last
portion of the provision which aggregates the situations into three different classes, namely
falsity, fraud, and omission. That there is a difference between false return and
fraudulent return cannot be denied.
While false return merely implies deviation from
the truth, whether intentional or not, fraudulent return implies intentional or deceitful entry
(in the books) with intent to evade the taxes due. Whenever the government is placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due
to false returns, fraudulent return intended to evade payment of tax, or failure to file
returns, the period of ten years from the time of discovery or omission even seems to be
inadequate and should be the one enforced.
Commissioner vs. Ayala Hotels, CA-GR SP No. 70025, Apr. 19, 2004
Based on the decision of the court in the Aznar case, it becomes easy for revenue
officers to claim that there was falsity in the return filed by the taxpayer that would allow
the assessment of tax within ten years from date of discovery. The same court, however,
required that in order to render a return made by a taxpayer a false return within the
meaning of Section 222 of the Tax Code, there must appear a design to mislead or deceive
on the part of the taxpayer, or at least culpable negligence. A mistake, which is not
culpable in respect of its value, would not constitute a false return. In fact, the Supreme
Court held that mere falsity of a return does not merit the application of the ten-year
prescriptive period. The element of fraud, as in the case of taxpayers intent to evade the
payment of the correct amount of tax, must be clearly established.
In the case of willful neglect to file the return within the period prescribed by this Code
or by rules and regulations, or in case a false or fraudulent return is willfully made, the
penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in
case any payment has been made on the basis of such return before the discovery of the
falsity or fraud. A substantial under-declaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as determined by the Commissioner pursuant to
the rules and regulations to be promulgated by the Secretary of Finance, shall constitute
prima facie evidence of a false or fraudulent return. Failure to report sales, receipts or
income in an amount exceeding thirty percent (30%) of that declared per return, and a
claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall
render the taxpayer liable to the 50% fraud penalty for substantial under-declaration of
sales, receipts or income or for overstatement of deductions. The taxpayer must note,
however, that such legal presumption is only prima-facie that could be proven by
substantial documentary evidence.
Commissioner vs. BF Goodrich Phils., 303 SCRA 546
Relevant Cases:
A. There is fraud in the following decided cases:
1. Fraud must be the product of a deliberate intent to evade taxes.-- Fraud, in order to
justify an assessment based on the ten-year prescriptive period, must be the product of a
deliberate intent to evade taxes. Fraud means actual intentional wrongdoing and the intent
required is the specific purpose to evade a tax owed. However, when the errors committed
were either mistakes of law or innocent mistakes of facts with no intention to evade tax,
there is no fraud.
2. Fraud is more than a mistake in judgment.- If the factor of judgment enters into a
decision to do or not to do a particular thing, whichever course is taken can hardly be called
fraudulent. Statements of opinion, as distinguished from those of material facts, are not
fraud. Errors as to doubtful legal points do not constitute fraud. Mistake upon a doubtful or
difficult question of law may be the basis of good faith. When the mistake is one involving
some matter of doubt or difficulty of such serious nature as to reasonably require judicial
interference, no penalty can be imposed because the false statement is due to honest
mistake of law or fact.
Insular Lumber Co. vs. Collector, G.R. No. L-7100, April 28, 1956
3. Simple statement that return filed was not fraudulent does not disprove existence of
fraud.-- The income which was reported by the taxpayer in his return was the income
from the rents. Substantial income derived from other sources was not included. The
Court held that a simple statement in the letter that the returns were not fraudulent is
not sufficient to overthrow the findings of the Commissioner as to the reason for the
omission. Hence, the tax may be assessed within ten years from the discovery of the
fraud.
Tayengco vs. Collector, CTA Case No. 51, July 31, 1964
4.Substantial under-declarations of income for six consecutive years demonstrate
fraudulence of return.-- Substantial under-declarations of income for six consecutive
years eloquently demonstrate the falsity or fraudulence of the income tax returns
with an intent to evade the payment of tax. Hence, the imposition of the fraud
penalty is pro-per.
Perez vs. Court of Tax Appeals, L-10507, May 30, 1958
5. Presence of fictitious expenses, with no evidence presented, proves existence of fraud.-The Commissioners determination based on the circumstances of the case that fraud is
present stands if no evidence is presented by the taxpayer to show that the return filed by
him was not fraudulent. The Supreme Court upheld the Commissioners findings of fraud
brought about by the presence of fictitious expenses, which were claimed by the taxpayer
as deductions from gross income.
Tan Guan vs. Commissioner,
6. Advice of eminent counsel.-- When the taxpayers belief is founded on the advice of
eminent counsel or where the mistake is one involving some matter of doubt or difficulty of
such nature as to reasonably require judicial interference, there is no fraud.
Where the failure to failure an income tax return for and in behalf of an entity which is later
found to be a corporation within the meaning of Section 22(B) of the Tax Code was due to
reasonable cause, such as an honest belief based on the advice of its attorney and
accountants, a penalty in the form of surcharge should not be imposed and collected.
Collector vs. Batangas Transportation Co. et al.,
G.R. No. L-9692, Jan. 6, 1958
B. However, the courts did not consider the tax returns filed as false or fraudulent
with intent to evade the payment of the tax in the following cases:
1. Mere understatement in the tax return will not necessarily imply fraud.--Mere
understatement in the tax returns of seven property subject to estate tax will not
necessarily imply fraud. It appears that three of the seven lots alleged to have
been excluded were actually included in the returns; that one lot was not
included because it belonged to one of the heirs; and that the three remaining
lots were already declared in the return submitted by the husband as part of the
conjugal property for purposes of income tax. The omission, therefore, was not
deliberate and did not amount to fraud indicative of an intention to evade
payment of the proper tax due the government. A mere failure to report certain
income or the filing of a false return is not sufficient basis for the application of
the ten-year prescriptive period. An indispensable ingredient that must be
proven to exist for the ten-year period to apply is that there must be, apart from
the element of mistake, a clear, unequivocal and willful intention to evade the
tax. There is no basis to consider the taxpayers act as fraudulent with intent to
evade tax, if the taxpayer has sufficiently shown that the non-reporting of
income was based on its reliance on several provisions, rulings and accepted
principles of taxation and may thus be considered, at the very least, an honest
belief.
Ayala Hotels vs. Commissioner, CTA Case No. 6002, Jan. 10, 2002
Sale of real property for a price less than its fair market value is not necessarily a false
return.--The fact that private respondents property was sold for a price less than its
declared fair market value alone did not by itself justify a finding of false return which
contains wrong information due to mistake, carelessness or ignorance. The Court reasoned
out that it is possible that real property may be sold for less than adequate consideration
for a bona fide business purpose; in such event, the sale remains an arms length
transaction. Private respondent declared the sale in its 1974 return submitted to the BIR.
Commissioner vs. B.F. Goodrich Phils.,
2. Fraud is a question of fact and the circumstances constituting fraud must be alleged
and proved in the trial court.-- The finding of the trial court as to its non-existence is
final and cannot be reviewed, unless clearly shown to be erroneous. Fraud is never
lightly to be presumed because it is a serious charge.
Commissioner vs. Ayala Securities Co., 70 SCRA 204
3. Fraud is never imputed and the courts never sustain findings of fraud upon
circumstances that only create suspicion.--The Supreme Court held that it is
persuaded considerably by the private respondents (Javiers) contention that there
is no fraud in the filing of the return and agree fully with the CTAs interpretation of
Javiers notation in his income tax return filed on March 15, 1978, thus: The
taxpayer was the recipient of some money from abroad which he presumed to be a
gift but turned out to be an error and is now subject of litigation, that it was an
error or mistake of fact or law not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had literally laid his cards
on the table. Fraud is never imputed and the courts never sustain findings of fraud
upon circumstances which, at most create only suspicion and the mere
understatement of a tax is not itself proof of fraud for the purpose of tax evasion. A
fraudulent return is always an attempt to evade a tax, but a merely false return
may not be.
Commissioner vs. Javier, 199 SCRA 824
5. Mistakes of revenue officers on three different occasions remove element of
fraud.-The presence of fraud was held quite unlikely in an assessment where the BIR itself
appeared not too sure as to the real amount of the taxpayers net income, as where the
BIR had on three different occasions arrived at three highly different computations.
Republic vs. Lim de Yu,
The lower court in three instances supported petitioners stand on the wrong inclusions
in his lists of assets made by the Commissioner, resulting in the very substantial reduction
of petitioners tax liability by the lower court. The foregoing shows that it was not only Mr.
Aznar who committed mistakes in his report of income but also the respondent
Commissioner who committed mistakes in his use of the inventory method. The mistakes
of the Commissioner which also involve very substantial amounts were also repeated
yearly, and yet we cannot presume therefrom the existence of any taint of official fraud. It
necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if
both petitioner and respondent committed mistakes in making entries in the returns and in
the assessment, it would be unfair to treat the mistakes of the petitioner as tainted with
fraud and those of the respondent as made in good faith.
Aznar vs. CTA and Collector,
6. Assessments based on mere approximations and calculations.By alleging that he
employed mathematical computations in ascertaining the quantity of finished products
actually manufactured and exported by petitioner, respondent concedes at least that his
assessments were based on mere inferences and presumptions. Likewise, by stating that it
was physically impossible for such number of cartons with such volume capacity to contain
such exportation, or for petitioner to have manufactured and exported such finished
garments, respondent admits that his assessments were not based on actual facts but
merely on approximations and calculations. And in averring that the raw material
discrepancies in yards were arrived at by mere inferences and presumptions, and
subsequently became the basis of the assessments for advance sales tax and for income
tax, respondent failed to indicate his nebulous position how the advance sales or the
undeclared income from sales of embroidery textile materials in pesos and centavos were
arrived at. Since fraud is imputed to petitioner, fraudulent intent was deduced from
surmises and conjectures, unsupported by clear and convincing proof to this effect. The
presumption of correctness of assessment, being a mere presumption, cannot be made to
rest on another presumption.
Collector vs. Benipayo, 4 SCRA 182
Commissioner vs. Island Garment Manufacturing Corporation and CTA, G.R. No. L-46644,
Sept. 11, 1987
THE COLLECTOR OF INTERNAL REVENUE (now Commissioner), petitioner, vs. ALBERTO D.
BENIPAYO, respondent.
[G.R. No. L-13656. January 31, 1962.]
SYLLABUS
TAXATION; AMUSEMENT TAXES; FRAUD SHOULD BE SUPPORTED BY CLEAR AND
CONVINCING PROOF. To sustain the deficiency tax assessed against respondent would
amount to a finding that he had, for a considerable period of time, cheated and defrauded
the government by selling to each adult patron, two children's tax-free tickets instead of
one ticket subject to the amusement tax provided for in Section 260 of the National Internal
Revenue Code. Fraud is a serious charge and, to be sustained, must be supported by clear
and convincing proof which, in this case, is lacking.
DECISION
This is an appeal taken by the Collector of Internal Revenue from the decision of the Court
of Tax Appeals dated January 23, 1948, reversing the one rendered by the former, thereby
relieving respondent Alberto D. Benipayo from the payment of the deficiency amusement
tax assessed against him in the total amount of P12,093.45.
Respondent is the owner and operator of the Lucena Theater located in the municipality of
Lucena, Quezon. On October 3, 1953 Internal Revenue Agent Romeo de Guia investigated
respondent's amusement tax liability in connection with the operation of said theater during
the period from August 1952 to September, 1953. On October 15, 1953 De Guia submitted
his report to the Provincial Revenue Agent to the effect that respondent had
disproportionately issued tax-free 20-centavo children's tickets. His finding was that during
the years 1949 to 1951 the average ratio of adults and children patronizing the Lucena
Theater was 3 to 1, i.e., for every three adults entering the theater, one child was also
admitted, while during the period in question, the proportion was reversed three children
to one adult. From this he concluded that respondent must have fraudulently sold two taxfree 20-centavo tickets, in order to avoid payment of the amusement tax prescribe in
Section 260 of the National Internal Revenue Code. Based on the average ratio between
adult and children attendance in the past years, Examiner de Guia recommended a
deficiency amusement tax assessment against respondent in the sum of P11,193.45,
inclusive of 25% surcharge, plus a suggested compromise penalty of P900.00 for violation
of section 260 of the National Internal Revenue Code, or a total sum of P12,093.45 covering
the period from August, 1952 to September, 1953, inclusive.
On July 14, 1954, petitioner issued a deficiency amusement tax assessment against
respondent demanding from the latter the payment of the total sum of P12,152.93 within
thirty days from receipt thereof. On August 16, 1954, respondent filed the corresponding
protest with the Conference Staff of the Bureau of Internal Revenue. After due hearing, the
Conference Staff submitted to petitioner Collector of Internal Revenue its finding to the
effect that the "meager reports of these fieldmen (Examiner de Guia and the Provincial
Revenue Agent of Quezon) are mere presumptions and conclusions, devoid of findings of
fact of the alleged fraudulent practices of the herein taxpayer". In view thereof, and as
recommended by the Conference Staff, petitioner referred the case back to the Provincial
Revenue Agent of Quezon for further investigation. The report submitted by Provincial
Revenue Officer H. I. Bernardo after this last investigation partly reads as follows:
"The returns from July 1 to July 11, showed that 31.43% of the entire audience of 12,754
consisted of adults, the remaining 68.57% of children. During this said period due, perhaps,
to the absence of agents in the premises, subject taxpayer was able to manipulate the
issuance of tickets in the way and manner alleged in Asst. De Guia's indorsement report
mentioned above. But during the period from July 14 to July 24, 1955, when agents of this
office supervised in the sales of admission tickets the sales for adults soared upwards to
76% while that for children dropped correspondingly to 24%.
"It is opined without fear of contradiction that the ratio of three (3) adults to every one (1)
child in the audience or a proportion of 75:25 as reckoned in Asst. De Guia's indorsement
report of this Office's new findings of a proportion of 76:24, represents or convey the true
picture of the situation under the law of averages, provided that the film being shown is not
a children's show. There is no hard and fast rule in this regard, but this findings would seem
to admit no contradiction.
"Please note that the new findings of this Office is not a direct proof of what has transpired
during the period investigated by Asst. De Guia and now pending before the Conference
Staff", . . . (Exh. 3, BIR Record, p.137-138).
After considering said report, the Conference Staff of the Bureau of Internal Revenue
recommended to the Collector of Internal Revenue the issuance of the deficiency
amusement tax assessment in question.
The only issue in this appeal is whether or not theater is sufficient evidence in the record
showing that respondent, during the period under review, sold and issued to his adult
customers two tax-free 20-centavo children's tickets, instead of one 40-centavo ticket for
each adult customer; to cheat or defraud the Government.
On this question the Court of Tax Appeals said the following in the appealed decision:
"To our mind, the appealed decision has no factual basis and must be reversed. An
assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an
obligation arises on the part of the taxpayer concerned to pay the amount assessed and
demanded. Hence, assessments should not be based on mere presumptions no matter how
reasonable or logical said presumptions may be. Assuming arguendo that the average ratio
of adults and children patronizing the Lucena Theater from 1949 to 1951 was 3 to 1, the
same does not give rise to the inference that the same conditions existed during the years
in question (1952 and 1953). The fact that almost that same ratio existed during the month
of July, 1955 does not provide a sufficient inference on the conditions in 1952 and
1953. . . .
"In order to stand the test of judicial scrutiny, the assessment must be based on actual
facts. The presumption of correctness of assessment being a mere presumption cannot be
made to rest on another presumption that the circumstances in 1952 and 1953 are
presumed to be the same as those existing in 1949 to 1951 and July 1955. In the case
under consideration there are no substantial facts to support the assessment in question. . .
."
A review of the record has not disclosed anything sufficient to justify a reversal of the above
finding made by the Court of Tax Appeals. It should be borne in mind that to sustain the
deficiency tax assessed against respondent would amount, in effect, to a finding that he
had, for a considerable period of time, cheated and defrauded the government by selling to
each adult patron two children's tax-free tickets instead of one ticket subject to the
amusement tax provided for in Section 260 of the National Internal Revenue Code. Fraud is
a serious charge and, to be sustained, it must be supported by clear and convincing proof
which, in the present case, is lacking.
The claim that respondent admitted having resorted to the anomalous practice already
mentioned is not entirely correct. What respondent appears to have admitted was that
during a certain limited period he had adopted a sort of rebate system applicable to cases
where adults and children came in groups and were all charged 20 centavos admission
tickets. This practice was, however, discontinued when he was informed by the Bureau of
Internal Revenue that it was not in accordance with law.
WHEREFORE, the appealed judgment is hereby affirmed, with costs.

Consequence of failure to prove fraud
The Commissioners failure to prove fraud can be fatal to the assessment as when a tax
liability is assessed beyond the usual three-year prescriptive period. The fact that the
Commissioner did not include the fraud penalty in his deficiency assessment which was
issued after the filing of the taxpayers return is an indication that the Commissioner himself
does not believe that there was fraud. There was no fraud if the Commissioner merely
relied upon an alleged substantial under-declaration of income tax resulting from his own
computation of the cost basis of the lands and improvements sold by the taxpayer to the
Government. It appeared that the taxpayer honestly believed in a different cost basis and
had explained the nature of the improvements introduced on the lands. The mere
understatement of income in itself does not prove fraud.
Yutivo Sons Hardware Co. vs. CTA, 1 SCRA 160
Effects of Fraud
1. Civil fraud results in the imposition of the 50% surcharge, to be imposed by the BIR;
2. Criminal fraud involves the imposition of penal sanctions to be imposed by the
Regional Trial Court or the CTA, depending on the amount of basic tax, upon
conviction;
3. The power of the Commissioner to assess the tax is extended to ten (10) years from
date of discovery of the falsity or fraud; however, Section 281 (prescription for
violations of any provision of this Code) of the Tax Code provides that prescription
for violations of the Tax Code shall begin to run from the day of the commission of
the violation of the law, and if the same be not known at the time, from the
discovery thereof and the institution of judicial proceedings for its investigation and
punishment;
4. Cases involving fraud cannot be the subject of compromise as mandated by Section 204
of the Tax Code;
5. The fact of fraud shall be judicially taken cognizance of in the civil or criminal action for
the collection of a fraud assessment that has become final and executory on the
administrative level;
6. Suspension and temporary closure of the business operations of a taxpayer under
Section 116 (tax on persons exempt from VAT) of the Tax Code for violation of the VAT
provisions.
Tax Fraud
FACTS: In G.R. No. 120925, Lucas Adamson, president of Adamson Management Corp.
(AMC) and AMC sold common shares of stock in Adamson and Adamson, Inc. (AAI) to APAC
Holding Ltd. (APAC) for which capital gains tax was paid. Subsequently, AMC again sold to
APAC Phil. common shares of stock in AAI for which AMC likewise paid capital gains tax.
The Commissioner of Internal Revenue issued a "Notice of Taxpayer" to AMC, Adamson, and
AMCs treasurer and secretary, informing them of deficiencies on their payment of capital
gains tax and VAT. The notice contained a schedule for preliminary conference. Shortly
after, the CIR filed with the DOJ her Affidavit of Complaint against AMC, Adamson, and the
two officers for violation of Sections 45 (a) and (d), and 110, in relation to Section 100, as
penalized under Section 255, and for violation of Section 253, in relation to Section 252 (b)
and (d) of the NIRC. Charged before the RTC, the court ruled that the complaints for tax
evasion filed by the CIR should be regarded as a decision of the Commissioner regarding
the tax liabilities of Adamson and appealable to the CTA. It further held that the said cases
cannot proceed independently of the assessment case pending before the CTA, which has
jurisdiction to determine the civil and criminal tax liability of the respondents therein. The
Court of Appeals reversed the trial court's decision and reinstated the criminal complaints.
It held that, in a criminal prosecution for tax evasion, assessment of tax deficiency is not
required because the offense of tax evasion is complete or consummated when the offender
has knowingly and wilfully filed a fraudulent return with intent to evade the tax.
In G.R. No. 124557, AMC, Adamson, and AMCs treasurer and secretary filed a letter
request for re-investigation with the CIR of the "Examiner's Findings" earlier issued by the
BIR, which pointed out the tax deficiencies. Before the CIR could act on their letter-request,
AMC, Adamson and the two other officers filed a Petition for Review with the CTA, assailing
the CIR's finding of tax evasion against them. The CTA denied the CIRs Motion to Dismiss.
It considered the criminal complaint filed by the CIR with the DOJ as an implied formal
assessment, and the filing of the criminal informations with the RTC as a denial of
petitioners' protest regarding the tax deficiency.
On appeal, the Court of Appeals sustained the CTA's denial of the CIR's Motion to Dismiss.
ISSUES:
1.
Whether the Commissioner's recommendation letter can be considered as a formal
assessment of private respondents' tax liability.
2.
Whether the filing of the criminal complaints against the private respondents by the
DOJ is premature for lack of a formal assessment.
3.
Whether the CTA has no jurisdiction to take cognizance of both the criminal and civil
cases.
RULING:
1.
The recommendation letter of the Commissioner cannot be considered a formal
assessment. Even a cursory perusal of the said letter would reveal three key points: (1) It
was not addressed to the taxpayers; (2) there was no demand made on the taxpayers to
pay the tax liability, nor a period for payment set therein; (3) the letter was never mailed or
sent to the taxpayers by the Commissioner.
In fine, the said recommendation letter served merely as the prima facie basis for filing
criminal informations that the taxpayers had violated Section 45 (a) and (d), and 110, in
relation to Section 100, as penalized under Section 255, and for violation of Section 253, in
relation to Section 252 9 (b) and (d) of the Tax Code.
2.
When fraudulent tax returns are involved as in the cases at bar, a proceeding in
court after the collection of such tax may be begun without assessment.
Here, the private respondents had already filed the capital gains tax return and the VAT
returns, and paid the taxes they have declared due therefrom. Upon investigation of the
examiners of the BIR, there was a preliminary finding of gross discrepancy in the
computation of the capital gains taxes due from the sale of two lots of AAI shares, first to
APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not
been paid for VAT-liable sale of services for the third and fourth quarters of 1990. Arguably,
the gross disparity in the taxes due and the amounts actually declared by the private
respondents constitutes badges of fraud.
3.
RA 1125, RA 8424 and RA 9282 have expanded the jurisdiction of the CTA. However,
they did not change the jurisdiction of the CTA to entertain an appeal only from a final
decision or assessment of the Commissioner, or in cases where the Commissioner has not
acted within the period prescribed by the NIRC. In the cases at bar, the Commissioner has
not issued an assessment of the tax liability of private respondents.
LUCAS G. ADAMSON, ET AL. vs. COURT OF APPEALS, ET AL., [G.R. Nos. 120935 & 124557,
May 21, 2009.]
The general rule of statutory construction involving tax law and its rationale is that tax laws
are liberally interpreted in favor of the taxpayer and strictly against the government. The
reason is taxes being burdens are not to be imposed or presumed to be imposed beyond
what the statutes expressly and clearly import (RR v. Collector 52 Phil. 950; Public v. IAC,
1298 SCRA 335). No person or property is subject to taxation unless they fall within the
terms or plain import of a taxing statute [Commissioner v. Court of Appeals, 204 SCRA,
182, 189 (1991)]. Since taxation is a destructive power which interferes with the personal
and property rights of the people and takes from them a portion of their property for the
support of the government, tax statutes must be construed strictly against the government
and liberally in favor of the taxpayer [Mactan Cebu International Airport Authority v. Marcos
et .al. 261 SCRA 6567 (1996)].
Note: Accordingly, these relevant rulings:
(a) Provisions of a taxing act are not to be extended by implication ( Commissioner v. CA
GR NO.115349, April 18, 1997).
(b) Like other statutes, tax laws operate prospectively whether they enact, amend or repeal
unless the purpose of the legislature to give prospective effect is expressly declared or may
be implied from the language used (Phil. Ed. Co v. Commissioner v. CTA Case NO. 703,
Sept. 20, 1965).
(c) Since our income tax laws are of American origin, interpretation by American Courts on
our parallel tax laws have persuasive effect (Banas Jr. v. Court of Appeals, GR No. 102967,
Feb. 10, 2000).
TAX EXEMPTION- is the grant of immunity from or the privilege of not being imposed by a
financial burden or charge to which other subjects are subjected to.
In its broad sense, whenever a tax or property does not apply to all property within the
jurisdiction of the taxing authorities, the property is not taxed is said to be exempted. In its
narrow sense, the grant of immunity, express or implied, to a particular person or persons
or corporation of a particular class, from a tax upon property or an excise tax which persons
or corporations generally within the same taxing districts are obliged to pay. Every tax
exemption implies a waiver to collect what otherwise would be due to the government
(International Revenue v. Botelho Shipping Corp. 20 SCRA 485).
The basis is the grant of a Tax exemption is an attribute of sovereignty. It is based on public
policy, an act of sovereignty and contract. Exemption from taxation may be created by
either by a constitution provision or by a legislative enactment.
The Constitution provides a limit on the exercise of the power of Congress to grant tax
exemptions under Sec. 28(4), Art. VI, 1987 Constitution. No law granting any tax
exemption shall be passed without the concurrence of a majority of all the members of
Congress [Sec. 28(4), Art. VI,1987 Constitution].
However a tax exemption granted may be revoked being an act of liberality which could be
taken back by the taxing authority (government) anytime . Since taxation is the general
rule and exemption there from is an excepted rule, tax exemption may thus be withdrawn at
the pleasure of the taxing authority
[Mactan Authority v. Marcos et. al. 263 SCRA 667
(1996)].
Kinds of Tax Exemption
a. As to manner of creation
1) Express or affirmative exemption-expressly granted by organic or statute law
2) Implied or exemption by omission -when particular persons, property or excises are
deemed exempt as they fall outside the scope of the taxing provision itself.
b. As to extent
1) Total - absolute immunity
2) Partial - one where a collection of a part of the tax is dispensed with
c. As to object
1) Personal - granted directly in favor of certain persons
2) Impersonal - granted directly in favor of a certain class of property
d. As to source
1) Constitutional- immunities from taxation that originate from the constitution
2) Statutory - those which emanate from legislation
3) Contractual- agreed to by the taxing authority in contracts lawfully entered into by
them under enabling laws
4) Treaty
5) Licensing Ordinance
The following partake the nature of Tax Exemption
a. Deductions for income tax purposes
b. Claims for refund
c. Tax amnesty
d. Condonation of unpaid tax liabilities
Nature of the Power to Grant Tax Exemption
Like the inherent power to tax, the power to exempt is an attribute of sovereignty for
the power to prescribe who or what property shall be taxed implies the power to prescribe
who or what property shall not be taxed.
Municipal corporations have no inherent power to tax. But the moment the power to
impose tax is granted, they also have the power to grant exemption unless forbidden by the
Constitution or law.
Nature of Tax Exemption
a. An exemption from taxation is a mere personal privilege of the grantee.
b. It is generally revocable by the government unless the exemption is founded on a
contract which is protected from impairment.
c. It implies a waiver on the part of the Government of its right to collect what otherwise
would be due to it and prejudicial thereto. (Comm. vs. Bothelo Shipping)
Tax exemptions are not violative of the equal protection clause
Grant of tax exemption to National Power Corp. is not a case of tax evasion.
This tax exemption is intended not only to insure that the NPC shall continue to generate
electricity for the country but more importantly, to assure cheaper rates to be paid by the
consumers. The allegation that this is in effect allowing tax evasion by oil companies is not
quite correct. There are various arrangements in the payment of crude oil purchased by
NPC from oil companies. Generally, the customs duties paid by the oil companies are added
to the selling price paid by NPC. As to the specific and ad valorem taxes, they are added as
part of the seller's price, but NPC pays the price net of tax, on condition that NPC would
seek a tax refund to the oil companies. No tax component on fuel had been charged or
recovered by NPC from the consumers through its power rates. Thus, this is not a case of
tax evasion of the oil companies but of tax relief for the NPC.
Ernesto M. Maceda vs. CatalinoMacaraig, Jr., et al.,
G.R. No. 88291, May 31, 1991
Income derived from its property by a tax exempt organization is not absolutely
taxable. Taken in solitude, a word or phrase such as, in this case, "the income of
whatever kind and character . . . from any of their properties" might easily convey a
meaning quite different from the one actually intended and evident when a word or
phrase is considered with those with which it is associated. It is a rule in statutory
construction that every part of the statute must be interpreted with reference to the
context, that every part of the statute must be considered together with the other parts
and kept subservient to the general intent of the whole enactment. A close reading of
the last paragraph of Sec. 30 of the National Internal Revenue Code, in relation to the
whole section on tax exemption of the organizations enumerated therein, shows that
the phrase "conducted for profit" in the last paragraph of Sec. 30 qualifies, limits and
describes "the income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities" in order to
make such income taxable. It is the exception to Sec. 30 pars. (g) and (h) providing for
the tax exemptions of the income of said organizations. Hence, if such income from
property or any other property is not conducted for profit, then it is not taxable.
Commissioner of Internal Revenue vs. Court of Appeals, et al.,
G.R. No. 124043, October 14, 1998
Income from any property of exempt organizations is taxable.
A reading of the last paragraph of Section 30 ineludibly shows that the income from any
property of exempt organizations, as well as that arising from any activity it conducts for
profit, is taxable. The phrase "any of their activities conducted for profit" does not qualify
the word "properties." This makes income from the property of a non-profit organization
taxable, regardless of how that income is used whether for profit or for lofty non-profit
purposes. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of.
Commissioner of Internal Revenue vs. Court of Appeals, et al.,

G.R. No. 124043, October 14, 1998
Conditions for grant of tax exemption.
Revenue laws are not intended to be liberally construed. Considering that taxes are the
lifeblood of the government and in Holmes's memorable metaphor, the price we pay for
civilization, tax laws must be faithfully and strictly implemented.
Commissioner of Internal Revenue vs. Rosemarie Acosta,
G.R. No. 154068, August 3, 2007
[G.R. No. 144104. June 29, 2004.]
LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P. ROSAS, in his
capacity as City Assessor of Quezon City
FACTS:
The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established
on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the registered owner of
a parcel of land located at Quezon Avenue, Quezon City. Erected in the middle of the
aforesaid lot is a hospital known as the Lung Center of the Philippines. A big space at the
ground floor is being leased to private parties, for canteen and small store spaces, and to
medical or professional practitioners who use the same as their private clinics for their
patients whom they charge for their professional services. Almost one-half of the entire
area on the left side of the building along Quezon Avenue is vacant and idle, while a big
portion on the right side, at the corner of Quezon Avenue and Elliptical Road, is being
leased for commercial purposes to a private enterprise known as the Elliptical Orchids and
Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services to
out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.
On June 7, 1993, both the land and the hospital building of the petitioner were assessed for
real property taxes by the City Assessor of Quezon City.
Petitioner filed a Claim for Exemption from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution.
Petitioner contends that under Section 28, paragraph 3 of the 1987 Constitution, the
property is exempt from real property taxes. It averred that a minimum of 60% of its
hospital beds are exclusively used for charity patients and that the major thrust of its
hospital operation is to serve charity patients. It argues that it is a charitable institution
and, as such, exempt from real property taxes.
ISSUES:
1.
Whether the petitioner is a charitable institution within the context of Presidential
Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act
No. 7160.
2.
Whether the real properties of petitioner are exempt from real property taxes.
HELD:
1.
Yes.
To determine whether an enterprise is a charitable institution/entity or not, the elements

which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject
to the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the
high incidence of lung and pulmonary diseases in the Philippines.
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether outpatient, or confined in the hospital, or receives subsidies from the government, so long as
the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing or
operating the institution. (Congregational Sunday School, etc. v. Board of Review; Lutheran
Hospital Association of South Dakota v. Baker)
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not
lose its character as a charitable institution simply because the gift or donation is in the
form of subsidies granted by the government. (Yorgason v. County Board of Equalization of
Salt Lake County)
In this case, the petitioner adduced substantial evidence that it spent its income, including
the subsidies from the government for 1991 and 1992 for its patients and for the operation
of the hospital. It even incurred a net loss in 1991 and 1992 from its operations.
2.
Notwithstanding the finding that petitioner is a charitable institution, those portions
of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for charitable purposes.
The settled rule is that laws granting exemption from tax are construed strictissimi juris
against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to an appropriation.
Hence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. (Salvation Army v. Hoehn)
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that petitioner shall enjoy tax exemptions and privileges. However, it is plain as
day that under the decree, petitioner does not enjoy any property tax exemption privileges
for its real properties as well as the building constructed thereon. If the intentions were
otherwise, the same should have been among the enumeration of tax exempt privileges
under Section 2.
It is a settled rule of statutory construction that the express mention of one person, thing,
or consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.
The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution covers
property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the 1986
Constitutional Commission, explained: ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes."
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act
No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
(Note the following substantial changes in the Constitution: Under the 1935 Constitution,
". . . all lands, buildings, and improvements used 'exclusively' for charitable . . . purposes
shall be exempt from taxation." However, under the 1973 and the present Constitutions, for
"lands, buildings, and improvements" of the charitable institution to be considered exempt,
the same should not only be "exclusively" used for charitable purposes; it is required that
such property be used "actually" and "directly" for such purposes.)
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed and enjoyed
to the exclusion of others; debarred from participation or enjoyment; and "exclusively" is
defined, "in a manner to exclude; as enjoying a privilege exclusively." If real property is
used for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words "dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without doing violence to the Constitutions and
the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable purposes is
the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes.
The petitioner failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals
for their clinics and a canteen. Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name "Elliptical Orchids and
Garden Center." Indeed, the petitioner's evidence shows that it collected P1,136,483.45 as
rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, the portions of the land leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from such taxes. On the other hand,
the portions of the land occupied by the hospital and portions of the hospital used for its
patients, whether paying or non-paying, are exempt from real property taxes.
Construction of Tax Exemptions
General Rule: Exemptions are not favored and are construed strictissimi juris (by the most
strict right or law) against the taxpayer. (Comm. of Customs vs. Phil. Acetylene)
Principle of StrictissimiJuris
Laws granting tax exemption are construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing power.
(a) One of the established rules of statutory construction is that tax exemption is construed
strictly against the taxpayer and to grant the same it must be provided by law or if not
expressly mentioned by law, must at least be within the purview by clear legislative intent.
Exemption being obnoxious to taxation is not favored and never presumed if granted. It
must categorically and unmistakably expressed in terms that admit of no doubt, yet such
exempting provisions must be interpreted strictissimi juris against the taxpayer and liberally
in favor of the taxing authority. This is so because "the law does not look with favor tax
exemption" or "tax exemptions are looked upon with disfavor." "It is prejudicial to the state;
hence, he "that seeks to avail that privilege must justify it by words too plain to be mistaken
and too categorical to be misinterpreted. A claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against the taxpayer. Tax exemption
are to be construed strictly; that is, they are not to be extended beyond the ordinary and
reasonable intendment of the language actually used by the legislative authority in granting
the exemption. (Sea-Land Service vs. CA)
(b) The rationale for such strict interpretation is:
(1) Taxes are important to the states existence under the lifeblood theory. [See also
Cyanamid Philippines Inc. v. Court of Appeals, 322 SCRA 639 (2000)Commissioner v.
Guerero, 21 SCRA 180; Caltex v. C0A, 208 SCRA 726; Paper Industries Corp. v. CTA, 250
SCRA 743; Light Rail Transit Authority v. Central Board etc. 342 SCRA 692(2000)].
Western Mineral Corp. v. Commissioner 124 SCRA 121;
Commissioner v. Philippine Ace Lines, 125 SCRA 912; Com. vs. S.C. Johnson and Sons, Inc.
309 SCRA 87 (1999).
Reagan v. Commissioner, 30 SCRA 968; Commissioner v. CTA, 328 SCRA 822(2000);
Commissioner of Custom v. Court of Tax Appeals, 328 SCRA 822(2000);
Paper Industries Corp. v. Court of Appeals, 250 SCRA 434
Mactan Cebu International Airport Authority v. Marcos et. al., 261 SCRA 667; citing
Compania General v. Collector of Customs, 275 US 87, 100 (1927);
(2) To minimize differential treatment and foster impartiality, fairness and equality of
treatment among taxpayers.
(3) Taxation is high prerogative of sovereignty whose relinquishment is never presumed.
[Luzon Stevedoring Corp. v. Court of Appeals, 163 SCRA( 647 (1988)].
Construction of tax Statutes
Laws granting tax exemption are construed strictissimijuris
a) The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken.
Lung Center of the Phil. vs. Quezon City, et al.,
G.R. No. 144104, June 29, 2004
Laws allowing tax exemption are construed strictissimijuris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes.
Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October
14, 1998
Republic Bank vs. Court of Tax Appeals, et al GR 62554-55 Sept. 2, 1992
CIR vs. SC Johnson & Sons, et al GR 127105 June 25, 1999
BIR wins vs St. Lukes hospital ordered to pay P63.9M tax deficiency Oct 25, 2012
The Supreme Court has ordered St. Lukes Medical Center Inc. to pay the Bureau of
Internal Revenue P63.9 million in deficiency income tax, value added tax and withholding
tax on compensation for 1998, based on the 10-percent preferential income tax as
stipulated in the 1997 Tax Code.
According to BIR head revenue executive assistant Claro Ortiz, this means that all hospitals
that claim to be non-profit but are proprietary will now have to pay income tax. In 2002, St.
Luke's disputed the BIRs assessment that it should be paying income taxes, saying that it
is a non-profit hospital. The case eventually reached the Supreme Court. In a decision
penned by Associate Justice Antonio Carpio on Sept. 26 and received by the BIR on Oct. 17,
the SC reversed an earlier decision by the Court of Tax Appeals, which dismissed the BIRs
assessment. The appellate court had argued that St. Lukes was not subject to income tax
because non-stock corporations are exempt from paying income tax.
However, the SC ruled that St. Lukes services that patients pay for are subject to income
tax.
St. Lukes Medical Center is ordered to pay the deficiency income tax in 1998 based on the
10 percent preferential income tax rate under Section 27(B) of the National Internal
Revenue Code [NIRC]. However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the NIRC, the decision stated. The
BIR claimed that St. Lukes had total revenues of P1.73 billion in 1998 alone. St. Lukes
refuted the assessment, saying that its free services to patients amounted to P218 million in
1998.
The Supreme Court ruled that while there is no dispute that St. Lukes is organized as a
non-stock and non-profit charitable institution, this does not automatically exempt it from
paying taxes. For a charitable institution to be exempt from income taxes, Section 30(E) of
the NIRC requires that [it] must be organized and operated exclusively for charitable
purposes, the SC said in its decision.
Taxation of non-stock, non-profit hospitals
17 October 2012
by Atty. Anthony G. Prestoza / Tax Law for Business
TAXATION of non-stock, non-profit organizations had always been a controversy. There are
a number of types or classes of organizations or associations exempted from income taxes
by the Tax Code. So these types of organizations are the usual channel through which
activities are pursued if the intention is not for profit. But despite the clear exemption from
income taxes, the number of cases pursued administratively and litigated in the courts
would indicate that the taxation of these class of organizations is not that clear after all.
Among the types of organizations exempted from income taxes are non-stock corporations
organized for charitable purposes and not for profit, but operated exclusively for the
promotion of the general welfare. For one to invoke exemption from income tax, it must be
organized as non-stock and operated for the purposes in which it was organized. That
classification itself had been an issue in the area of income taxation. The Court had
repeatedly defined what a non-stock organization is but its relevance crops up every time a
tax-related issue is involved. So what really constitutes a non-stock corporation? Once
again, the Supreme Court, in GR 195909 and 195960, September 26, 2012, referred to the
definition in the Corporation Code of a non-stock corporation as one where no part of its
income is distributable as dividends to its members, trustees, or officers and that any profit
obtained as an incident to its operations shall whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the corporation was organized.
That case involves the income taxation of a non-stock and non-profit hospital organized for
charitable and for social welfare purposes. The institution claims that it is exempt from
income taxation under Section 30 of the Tax Code, which exempts this kind of institution
from income taxation. The tax authority, on the other hand, claims that it should be subject
to income tax under Section 27(B) of the Tax Code, which imposes 10-percent income tax
on proprietary and nonprofit hospitals. As decided by the Court, a non-stock, non-profit
corporation is indeed exempt from income taxation. That exemption, however, is intended
solely for the activities of a non-stock, non-profit entity which are operated exclusively for
charitable or social welfare purposes. Any other income that may be generated by these
entities shall be subject to the 10-percent preferential tax rate the tax imposed on
proprietary non-profit hospitals.
Apparently, according to the Court, proprietary means private, and when applied to a
hospital means private hospital. On the other hand, non-profit means no net income or
asset accrues to or benefits any member or person, with all net income or asset devoted to
the institutions purposes and all its activities conducted not for profit.
Thus, if a hospital not organized for profit, generates income not in relation to its charitable
or social welfare purposes, it shall be taxed at the preferential rate of 10 percent. Simply
put, even if a hospital does not distribute income to its members or trustees and uses the
income proceeds from non-related activities in furtherance of its purposes, the same shall
still be taxable at a rate of 10 percent.
The implication of this is that a non-stock, non-profit organization, including a hospital,
organized for charitable and/or for purposes of promoting the general welfare is not subject
to income tax. The exemption, however, extends only to the activities pursued exclusively
for such purposes, that is, not-for-profit activities. That exemption is not lost even if said
entity involves itself in activities conducted for profit. But these revenues derived from
profit- generating activities will be subject to income tax. With respect to hospitals, that
income tax shall not be the regular income tax rate of 30 percent but the special income tax
rate of 10 percent imposed on proprietary and nonprofit hospitals.
b) The Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or diminution thereof
with respect to its mode or its rate, must be strictly construed, and the same must be
couched in clear and unmistakable terms in order that it may be applied." More specifically
stated, the general rule is that any claim for exemption from the tax statute should be
strictly construed against the taxpayer
Luzon Stevedoring Corp. vs. Court of Tax Appeals, et al.,
G.R. No. L-30232, July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-appellant, vs. COURT OF TAX APPEALS
and the HONORABLE COMMISSIONER OF INTERNAL REVENUE, respondents-appellee.
[G.R. No. L-30232. July 29, 1988.]
SYLLABUS
1.
TAXATION; TAX EXEMPTIONS; ANY DIMINUTION OF POWER TO TAX STRICTLY
CONSTRUED; REASON. This Court has laid down the rule that "as the power of taxation
is a high prerogative of sovereignty, the relinquishment is never presumed and any
reduction or diminution thereof with respect to its mode or its rate, must be strictly
construed, and the same must be coached in clear and unmistakable terms in order that it
may be applied." (84 C.J.S. pp. 659-800), More specifically stated, the general rule is that
any claim for exemption from the tax statute should be strictly construed against the
taxpayer (Acting Commissioner of Customs v. Manila Electric Co. et al., 69 SCRA 469
[1977] and Commissioner of Internal Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142
[1975]).
2.
ID.; ID.; TAX EXEMPTIONS FROM COMPENSATING TAX; REQUIREMENTS OF
AMENDATORY LAW ENUMERATED. As correctly analyzed by the Court of Tax Appeals, in
order that the importations in question may be declared exempt from the compensating
tax, it is indispensable that the requirements of the amendatory law be complied with,
namely: (1) the engines and spare parts must be used by the importer himself as a
passenger and/or cargo vessel; and (2) the said passenger and/or cargo vessel must be
used in coastwise or oceangoing navigation. As pointed out by the Court of Tax Appeals, the
amendatory provisions of Republic Act No. 3176 limit tax exemption from the compensating
tax to imported items to be used by the importer himself as operator of passenger and/or
cargo vessel.
3.
STATUTORY CONSTRUCTION AND INTERPRETATION; TERM "TUGBOAT" DEFINED.
As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows: "A
tugboat is a strongly built, powerful steam or power vessel, used for towing and, now, also
used for attendance on vessel. (Webster New International Dictionary, 2nd Ed.). "A tugboat
is a diesel or steam power vessel designed primarily for moving large ships to and from
piers for towing barges and lighters in harbors, rivers and canals. (Encyclopedia
International Grolier, Vol. 18, p. 256). "A tug is a steam vessel built for towing,
synonymous with tugboat." (Bouvier's Law Dictionary.) Under the foregoing definitions,
petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo
vessels. Thus, it is a cardinal principle of statutory construction that where a provision of
law speaks categorically, the need for interpretation is obviated, no plausible pretense being
entertained to justify non-compliance. All that has to be done is to apply it in every case
that falls within its terms (Allied Brokerage Corp. v. Commissioner of Customs, L-27641, 40
SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35 SCRA 270 [1970]).
4.
ID.; STATUTES ARE TO BE CONSTRUED IN THE LIGHT OF THE PURPOSES TO BE
ACHIEVED. Even if construction and interpretation of the law is insisted upon, following
another fundamental rule that statutes are to be construed in the light of purposes to be
achieved and the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66,
86 SCRA 544 [1978]), it will be noted that the legislature in amending Section 190 of the
Tax Code by Republic Act 3176, as appearing in the records, intended to provide incentives
and inducements to bolster the shipping industry and not the business of stevedoring, as
manifested in the sponsorship speech of Senator Gil Puyat.
5.
TAXATION; COURT OF TAX APPEALS; FINDINGS AND CONCLUSION NOT DISTURBED
LACKING ABUSE OF AUTHORITY; CASE AT BAR. On analysis of petitioner-appellant's
transactions, the Court of Tax Appeals found that no evidence was adduced by petitionerappellant that tugboats are passenger and/or cargo vessels used in the shipping industry as
an independent business. There appears to be no plausible reason to disturb the findings
and conclusion of the Court of Tax Appeals. As a matter of principle, this Court will not set
aside the conclusion reached by an agency such as the Court of Tax Appeals, which is, by
the very nature of its function, dedicated exclusively to the study and consideration of tax
problems and has necessarily developed an expertise on the subject unless there has been
an abuse or improvident exercise of authority (Reyes v. Commissioner of Internal Revenue,
24 SCRA 199 [1981]), which is not present in the instant case.
DECISION
This is a petition for review of the October 21, 1968 Decision of the Court of Tax Appeals in
CTA Case No. 1484, "Luzon Stevedoring Corporation v. Hon. Ramon Oben, Commissioner,
Bureau of Internal Revenue", denying the various claims for tax refund; and the February
20, 1969 Resolution of the same court denying the motion for reconsideration.
Herein petitioner-appellant, in 1961 and 1962, for the repair and maintenance of its
tugboats, imported various engine parts and other equipment for which it paid, under
protest, the assessed compensating tax. Unable to secure a tax refund from the
Commissioner of Internal Revenue, on January 2, 1964, it filed a Petition for Review (Rollo,
pp. 14-18) with the Court o Tax Appeals, docketed therein as CTA Case No. 1484, praying
among others, that it be granted the refund of the amount o P33,442.13. The Court of Tax
Appeals, however, in a Decision dated October 21, 1969 (Ibid., pp. 22-27), denied the
various claims for tax refund. The decretal portion of the said decision reads:
"WHEREFORE, finding petitioner's various claims for refund amounting to P33,442.13

without sufficient legal justification, the said claims have to be, as they are hereby, denied.
With costs against petitioner."
On January 24, 1969, petitioner-appellant filed a Motion for Reconsideration (Ibid., pp. 2834), but the same was denied in a Resolution dated February 20, 1969 (Ibid., p. 35).
Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave due course to the petition (Ibid., p.
40).
Petitioner-appellant raised three (3) assignments of error, to wit:
I
The lower court erred in holding that the petitioner-appellant is engaged in business as
stevedore, the work of unloading and loading of a vessel in port, contrary to the evidence
on record.
II
The lower court erred in not holding that the business in which petitioner-appellant is
engaged, is part and parcel of the shipping industry.
III
The lower court erred in not allowing the refund sought by petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not petitioner's "tugboats" can be interpreted to
be included in the term "cargo vessels" for purposes of the tax exemption provided for in
Section 190 of the National Internal Revenue Code, as amended by Republic Act No. 3176.
Said law provides:
"Sec. 190.
Compensating tax . . . And Provided further, That the tax imposed in this
section shall not apply to articles to be used by the importer himself in the manufacture or
preparation of articles subject to specific tax or those for consignment abroad and are to
form part thereof or to articles to be used by the importer himself as passenger and/or
cargo vessel, whether coastwise or ocean-going, including engines and spare parts of said
vessel. . ."
Petitioner contends that tugboats are embraced and included in the term cargo vessel under
the tax exemption provisions of Section 190 of the Revenue Code, as amended by Republic
Act. No. 3176. He argues that in legal contemplation, the tugboat and a barge loaded with
cargoes with the former towing the latter for loading and unloading of a vessel in part,
constitute a single vessel. Accordingly, it concludes that the engines, spare parts and
equipment imported by it and used in the repair and maintenance of its tugboats are
exempt from compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that petitioner-appellant's "tugboats" are

not "cargo vessel" because they are neither designed nor used for carrying and/or
transporting persons or goods by themselves but are mainly employed for towing and
pulling purposes. As such, it cannot be claimed that the tugboats in question are used in
carrying and transporting passengers or cargoes as a common carrier by water, either
coastwise or oceangoing and, therefore, not within the purview of Section 190 of the Tax
Code, as amended by Republic Act No. 3176 (Brief for Respondents-Appellees, pp. 4-5).
This Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or diminution thereof
with respect to its mode or its rate, must be strictly construed, and the same must be
coached in clear and unmistakable terms in order that it may be applied." (84 C.J.S. pp.
659-800), More specifically stated, the general rule is that any claim for exemption from the
tax statute should be strictly construed against the taxpayer (Acting Commissioner of
Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977] and Commissioner of Internal
Revenue v. P.J. Kiener Co. Ltd., et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in order that the importations in question
may be declared exempt from the compensating tax, it is indispensable that the
requirements of the amendatory law be complied with, namely: (1) the engines and spare
parts must be used by the importer himself as a passenger and/or cargo vessel; and (2) the
said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation
(Decision, CTA Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the amendatory provisions of Republic Act No.
3176 limit tax exemption from the compensating tax to imported items to be used by the
importer himself as operator of passenger and/or cargo vessel (Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a tugboat is defined as follows:
"A tugboat is a strongly built, powerful steam or power vessel, used for towing and, now,
also used for attendance on vessel. (Webster New International Dictionary, 2nd Ed.)
"A tugboat is a diesel or steam power vessel designed primarily for moving large ships to
and from piers for towing barges and lighters in harbors, rivers and canals. (Encyclopedia
International Grolier, Vol. 18, p.256).
"A tug is a steam vessel built for towing, synonymous with tugboat. (Bouvier's Law
Dictionary.)" (Rollo, p.24).
Under the foregoing definitions, petitioner's tugboats clearly do not fall under the categories
of passenger and/or cargo vessels. Thus, it is a cardinal principle of statutory construction
that where a provision of law speaks categorically, the need for interpretation is obviated,
no plausible pretense being entertained to justify non-compliance. All that has to be done is
to apply it in every case that falls within its terms (Allied Brokerage Corp. v. Commissioner
of Customs, L-27641, 40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419,35 SCRA 270
[1970]).
And, even if construction and interpretation of the law is insisted upon, following another
fundamental rule that statutes are to be construed in the light of purposes to be achieved
and the evils sought to be remedied (People v. Purisima etc., et al., L-42050-66, 86 SCRA
544 [1978], it will be noted that the legislature in amending Section 190 of the Tax Code by
Republic Act 3176, as appearing in the records, intended to provide incentives and
inducements to bolster the shipping industry and not the business of stevedoring, as
manifested in the sponsorship speech of Senator Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the Court of Tax Appeals found that no
evidence was adduced by petitioner-appellant that tugboats are passenger and/or cargo
vessels used in the shipping industry as an independent business. On the contrary,
petitioner-appellant's own evidence supports the view that it is engaged as a stevedore,
that is, the work of unloading and loading of a vessel in port; and towing of barges
containing cargoes is a part of petitioner's undertaking as a stevedore. In fact, even its
trade name is indicative that its sole and principal business is stevedoring and lighterage,
taxed under Section 191 of the National Internal Revenue Code as a contractor, and not an
entity which transports passengers or freight for hire which is taxed under Section 192 of
the same Code as a common carrier by water (Decision, CTA Case No. 1484; Rollo, p. 25).
Under the circumstances, there appears to be no plausible reason to disturb the findings
and conclusion of the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the conclusion reached by an agency
such as the Court of Tax Appeals, which is, by the very nature of its function, dedicated
exclusively to the study and consideration of tax problems and has necessarily developed an
expertise on the subject unless there has been an abuse or improvident exercise of
authority (Reyes v. Commissioner of Internal Revenue, 24 SCRA 199 [1968]), which is not
present in the instant case.
PREMISES CONSIDERED, the instant petition is DISMISSED and the decision of the Court of
Tax Appeals is AFFIRMED.
SO ORDERED.
Tax exemption provision in a treaty should be construed in favor of the party for whose
benefit the stipulation was inserted.
Where two meanings of a stipulation are admissible, that which is least to the advantage of
the party for whose benefit the stipulation was inserted in the treaty should be preferred.
Thus, an ambiguity in the tax exemption provision in the Military Bases Agreement and in
the "Aide Memoire" in accordance with which a contract was entered into, cannot be
interpreted in favor of the American Government or for that matter a party claiming under
it, like a taxpayer, especially when it is considered that for the Philippine Government "the
exception contained in tax statutes must be strictly construed against the one claiming
exemption and that he who would seek to be thus privileged must justify it by words too
plain to be mistaken and too categorical to be misinterpreted."
Commissioner of Internal Revenue vs. P. J. Kiener Co., Ltd., et al., G.R. No. L-24754, July
18, 1975
Mere filing of tax amnesty does not ipso facto shield taxpayer from immunity against
prosecution. Tax amnesty is construed strictly against the taxpayer.
The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield
taxpayer from immunity against prosecution. Tax amnesty is a general pardon to taxpayers
who want to start a clean tax slate. It also gives the government a chance to collect
uncollected tax from tax evaders without having to go through the tedious process of a tax
case. To avail of a tax amnesty granted by the government, and to be immune from suit on
its delinquencies, the taxpayer must have voluntarily disclosed his previously untaxed
income and must have paid the corresponding tax on such previously untaxed income.
A tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.
Bibiano V. Baas, Jr. vs. Court of Appeals, et al., G.R. No. 102967, February 10, 2000
Along with police power and power of eminent domain of the government, taxation is one of
the three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived
of this most essential power and attribute of sovereignty by vague implications of law.
Rather, being derogatory of sovereignty, the governing principle is that tax exemptions are
to be construed in strictissimijuris against the taxpayer and liberally in favor of the taxing
authority; and he who claims an exemption must be able to justify his claim by the clearest
grant of statute.
CompagnieFinanciereSucresEtDenrees vs. Commissioner of Internal Revenue, G.R. No.
133834, August 28, 2006
Reasons for the Application of StrictissimiJuris
a. Lifeblood theory
b. To minimize differential treatment and "foster impartiality, fairness and equality of
treatment among taxpayers. (Maceda vs. Macaraig)
c. Taxation is a high prerogative of sovereignty whose relinquishment is never presumed.
(Luzon Stevedoring vs. CA)
Tax exemptions should be strictly construed against those claiming to be qualified thereto.
The Philippine Casino Operators Corporation (PCOC) is not exempt from the payment of
duties, taxes and other imposts on importations despite its concessionaire's contract with
the Philippine Amusement and Gaming Corporation (PAGCOR). Under B.P. Blg. 1067-B, as
amended, full exemption from the payment of importation-related taxes is granted to
PAGCOR and no other irrespective of the type of article imported. While it grants
exemption not only to PAGCOR but also to "any corporation having existing contractual
arrangements with it," the exemption covers only the importation of vessels and/or
accessory ferry boats. It is settled that tax exemptions should be strictly construed against
those claiming to be qualified thereto.
Commissioner
of
Customs
G.R. No. 132929, March 27, 2000
vs.
Court
of
Tax
Appeals,
et
al.,
StrictissimiJuris
FACTS: Rosemarie Acosta, an employee of Intel Manufacturing Phils., Inc., was assigned in
a foreign country from January 1, 1996 to December 31, 1996. During that period, Intel
withheld the taxes due on her compensation income and remitted to the BIR the amount of
P308,084.56. Claiming that the income taxes withheld and paid resulted in an
overpayment, respondent filed a petition for review with the CTA. The CTA dismissed the
same, ruling that respondent failed to file a written claim for refund with the CIR, a
condition precedent to the filing of a petition for review before the CTA and that her failure
to allege in her petition the date of filing the final adjustment return, deprived the court of
its jurisdiction over the subject matter of the case.
Upon review, the Court of Appeals
reversed the CTA, ruling that respondent's filing of an amended return indicating an
overpayment was sufficient compliance with the requirement of a written claim for refund.
Petitioner sought reconsideration, but was denied. Hence, the instant petition.
ISSUES:
1.
Does the amended return filed by respondent indicating an overpayment constitute
the written claim for refund required by law, thereby vesting the CTA with jurisdiction over
this case?
2.
Can the 1997 NIRC be applied retroactively?
RULING:
1.
No. The law is clear. A claimant must first file a written claim for refund,
categorically demanding recovery of overpaid taxes with the CIR, before resorting to an
action in court. This obviously is intended, first, to afford the CIR an opportunity to correct
the action of subordinate officers; and second, to notify the government that such taxes
have been questioned, and the notice should then be borne in mind in estimating the
revenue available for expenditure. Tax refunds are in the nature of tax exemptions which
are construed strictissimijuris against the taxpayer and liberally in favor of the government.
As tax refunds involve a return of revenue from the government, the claimant must show
indubitably the specific provision of law from which her right arises; it cannot be allowed to
exist upon a mere vague implication or inference nor can it be extended beyond the
ordinary and reasonable intendment of the language actually used by the legislature in
granting the refund.
2.
No. Section 204 (c) of RA 8424 cannot be given retroactive application. Tax laws are
prospective in operation, unless the language of the statute clearly provides otherwise. At
the time respondent filed her amended return, the 1997 NIRC was not yet in effect. Hence,
respondent had no reason at that time to think that the filing of an amended return would
constitute the written claim for refund required by applicable law.
C I R vs. Rosemarie Acosta, G.R. No. 154068, August 3, 2007
Exceptions to Strictissimi Juris
(1) When the law granting the same provides for liberal interpretation;
(2) In case of special taxes relating to special cases and affecting special classes of persons;
(3) If exemption refer to the public property;
(4) In cases of exemptions granted to charitable and educational institutions or their
property (Maceda v. Macaraig, Jr.,197 SCRA 77).
(5) In cases of exemptions in favor of a government political subdivision or instrumentality.
EXAMPLES
(a) Condonation is construed as tax exemption, therefore the rule of strictissimi juris
should be applied (Surigao Consolidated Mining Co. Inc. v. Collector of Customs, 9 SCRA
728). Commissioner v. Tokyo Shipping Co. Ltd. 244 SCRA 332;
(b) Laws granting partial refund partake of the nature of a tax exemption; hence, to be
applied by the strictissimi juris rule [Commissioner of Internal Revenue v. Rio Tuba Nickel
Mining Corp. et. al. 207 SCRA 549, (1992)].
(c) Members of the judiciary not exempt from income tax to give substance to equality
of the three branches of government.[ Nitafan v. Commissioner of Internal Revenue, 152
SCRA 284 (1987)]. revoking Perfecto vs. Meer & Endencia vs. David. The SC ruled that all
citizens should bear their aliquot part of the cost of maintaining the government and should
share the burden ofgeneral income taxation equitably.
Exceptions to the StrissisimiJuris Rule
FACTS: For the period Jan. to Dec. 2001, PLDT collected from respondent PAL the 10%
Overseas Communications Tax (OCT) imposed by Sec. 120 of the NIRC of 1997 on the
amount paid by the latter for overseas telephone calls it had made through the former.
Respondent later filed with the BIR an administrative claim for refund of the amount it
alleged to have erroneously paid in 2001, claiming that other than being liable for basic
corporate income tax or the franchise tax, whichever was lower, respondent was clearly
exempted from all other taxes, including OCT, by virtue of the "in lieu of all taxes" clause in
Sec. 13 of P.D. No. 1590. When petitioner failed to act on the request for refund,
respondent filed a Petition for Review with the CTA in Division. The CTA First Division
granted the petition, ordering the petitioner to refund the amount paid. Not satisfied with
the decision, petitioner filed a Motion for Reconsideration, which was denied.
Petitioner then filed an appeal with the CTA En Banc. The same was likewise denied. The
CTA En Banc ruled that P.D. No. 1590 does not provide that only the actual payment of
basic corporate income tax or franchise tax by respondent would entitle it to the tax
exemption provided under Sec. 13 of the latter's franchise. Like the CTA First Division, the
CTA en banc ruled that by providing for net loss carry-over, P.D. No. 1590 recognized the
possibility that respondent would end up with a net loss in the computation of its taxable
income, which would mean zero liability for basic corporate income tax.
The CTA En Banc denied petitioner's Motion for Reconsideration; hence, the present Petition
for Review.
ISSUES:
1. Whether the CTA En Banc erred in holding that the phrase "in lieu of all other taxes" in
Sections 13 and 14 of P.D. No. 1590 does not contemplate the fulfilment of a condition
before the exemption from all other taxes may be applied.
2. Whether tax refunds are in the nature of tax exemptions, and as such, they should be
construed strictissimijuris against the person or entity claiming the exemption.
RULING:
1.
The language used in Sec. 13 of P.D. No. 1590, granting respondent tax exemption,
is clearly all-inclusive. The basic corporate income tax or franchise tax paid by respondent
shall be "in lieu of all other taxes, duties, royalties, registration, license, and other fees and
charges of any kind, nature, or description imposed, levied, established, assessed or
collected by any municipal, city, provincial, or national authority or government agency,
now or in the future . . .", except only real property tax. Even a meticulous examination of
P.D. No. 1590 will not reveal any provision therein limiting the tax exemption of respondent
to final withholding tax on interest income or excluding from said exemption the OCT.
In CIR vs. PAL, G.R. No. 160528, October 9, 2006, the Supreme Court held: A careful
reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes"
proviso is a mere incentive that applies only when PAL actually pays something. It is clear
that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b)
as consideration for its franchise. Either option excludes the payment of other taxes and
dues imposed or collected by the national or the local government. PAL has the option to
choose the alternative that results in lower taxes. It is not the fact of tax payment that
exempts it, but the exercise of its option. In the event that respondent incurs a net loss, it
shall have zero liability for basic corporate income tax, the lowest possible tax liability.
There being no qualification to the exercise of its options under Section 13 of Presidential
Decree No. 1590, then respondent is free to choose basic corporate income tax, even if it
would have zero liability for the same in light of its net loss position for the taxable year.
2. Indeed, a tax refund, which is in the nature of a tax exemption, should be construed
strictissimijuris against the taxpayer. However, when the claim for refund has clear legal
basis and is sufficiently supported by evidence, as in the present case, then the Court shall
not hesitate to grant the same.
COMMISSIONER OF INTERNAL REVENUE vs. PAL
14, 2009.]
[G.R. No. 180043.July
Revocation of Tax Exemptions

Since taxation is the rule and exemption is the exception, the exemption may thus be
withdrawn at the pleasure of the taxing authority. (Mactan Cebu Intl Airport Authority vs.
Marcos)
Restrictions on Revocation
a. Non impairment clause - Where the exemption was granted to private parties based on
material consideration of a mutual nature, which then becomes contractual and is covered
by the non-impairment clause of the Constitution.
b. Adherence to form - if the tax exemption is granted by the Constitution, its revocation
may be effected through Constitutional amendment only
c. Where the tax exemption grant is in the form of a special law and not by a general law
even if the terms of the general act are broad enough to include the codes in the general
law unless there is manifest intent to repeal or alter the special law (Province of Misamis
Oriental vs. Cagayan Electric Power and Light Co. Inc)
Nature of Tax Amnesty
1. General or intentional overlooking by the state of its authority to impose penalties on
persons otherwise guilty of evasion or violation of a revenue or tax law.
2. Partakes of an -absolute forgiveness or waiver of the government of its right to collect.
3. To give tax evaders, who wish to relent and are willing to reform a chance to do so.
Rules on Tax Amnesty
(1) Tax amnesty like tax exemption, is never favored nor presumed in law and if granted by
statute must be construed strictly, against the taxpayer who must show compliance with the
law.
(2) Tax amnesty are strictly construed for two reasons: First, under the lifeblood(necessity)
theory; and Second, the government itself is bound by terms and conditions so should be
the taxpayer[ People v. Castaneda Jr. 165 SCRA 327 (1988)].
(3) The government is not estopped from questioning the tax liability even if amnesty
payments were already received. The justifying rationale for this rule being the lifeblood
(necessity) theory of taxation and therefore any erroneous application and enforcement of
the law by public officers do not block subsequent correct application of the statute. The
government is never estopped by mistakes or errors of its agent/s.
(4) The defense of tax amnesty, like insanity is a personal defense and this is being so
because it relates to the circumstances of a particular accused and not to the character of
the acts charged in the information [People v. Castaneda, Jr. 1265 SCRA 327 (1988)].
(5) In case of doubt, tax amnesty are to be strictly construed against the government. Tax
statutes are so construed, for taxes being burdens are not to be presumed beyond what the
tax amnesty expressly and clearly declares [Republic v. IAC, 196 SCRA 335 (1991); Bisnar,
Jr. v. CA, 325 SCRA 259 (2000)].
Tax Amnesty
Immunity from all criminal, civil and
administrative liabilities arising from nonpayment of taxes
Applies only to past tax periods, hence
retroactive application
Tax Exemption
Immunity from civil liability only
Prospective application
Doctrine of Imprescriptibility
As a rule, taxes are imprescriptible as they are lifeblood of the government. However,
tax statutes may provide for statute of limitations.
The rules that have been adopted are as follows:
a.) National Internal Revenue Code
The statute of Limitation for assessment of tax if a return is filed is within three (3)
years from the due date or if filed after due date, within three (3) years from date of actual
filing. If no return is filed or the return tiled is false or fraudulent, the period to assess is
within ten (10) years from discovery of the failure to file return or the filing of false or
fraudulent return.
The period to collect tax is within three (3) years from receipt of notice of assessment.
In the case, however, (of omission to tile or if the return filed is false or fraudulent, the
period to, collect is within ten (10) years from discovery of failure to file return or of the
filing of false or fraudulent return without need of an assessment.
b.) Tariff and customs code
lt does not express any general statute of limitation. lt provides, however, that "when
articles have entered and passed free of duty or final adjustment of duties made, with
subsequent delivery such entry and passage free of duty or settlements of duties will, after
the expiration of one (1) year of the date of the final payment of duties, in the absence of
fraud of protest, be final and conclusive upon all parties, unless the liquidation of import
entry was merely tentative (Sec 1603, TCC)
c.) Local Government Code
Local taxes, fees, or charges shall be assessed within five (5) years from the date they
become due. In case of fraud or intent to evade the payment of taxes, fees or charges the
same may be assessed within ten (10) years from discovery of the fraud or intent to evade
payment. They shall also be collected either by administrative or judicial action within five
(5) years from date-of assessment (Sec. 194. LGC)
TAX LAWS
NATURE OFTAX LAWS
1. Not political in character
2. Civil in nature, not subject to ex post facto law prohibitions
3. Not penal in character
CONSTRUCTION OF TAX LAWS
1. Legislative Intention must be considered- tax statutes are to receive a reasonable
construction with a view to carrying out their purpose and intent. (51 Am. Jura 361)
2. Where there is doubt - In every case of doubt, in tax statutes imposing payment of tax,
laws are construed strictly against the government and liberally in favor of the taxpayer.
(Manila Railroad vs. Collector of Customs).
Taxes, being burdens are not to be presumed beyond what the statute expressly and clearly
declares. (Collector vs. La Tondena)
3. Where language is plain rule of strict construction against the government does not
apply where the language of the tax law is plain and there is no doubt as to the legislative
intent. (51 Am. Jun 368) The words employed are to be given their ordinary meaning.
4. Where taxpayer claims exemption- exemptions are construed strictly against the one who
asserts the claim of exemption (Union Gannent vs. CTA)
5. Public purpose is always presumed.
6. Provisions of the taxing act are not to be extended by implication.
7. Tax laws are special laws and prevail over general laws.
COMMISSIONER OF INTERNAL REVENUE vs. PAL [G.R. No. 180043. July 14, 2009.]
FACTS: For the period Jan. to Dec. 2001, PLDT collected from respondent PAL the 10%
Overseas Communications Tax (OCT) imposed by Sec. 120 of the NIRC of 1997 on the
amount paid by the latter for overseas telephone calls it had made through the former.
Respondent later filed with the BIR an administrative claim for refund of the amount it
alleged to have erroneously paid in 2001, claiming that other than being liable for basic
corporate income tax or the franchise tax, whichever was lower, respondent was clearly
exempted from all other taxes, including OCT, by virtue of the "in lieu of all taxes" clause in
Sec. 13 of P.D. No. 1590. When petitioner failed to act on the request for refund,
respondent filed a Petition for Review with the CTA in Division. The CTA First Division
granted the petition, ordering the petitioner to refund the amount paid. Not satisfied with
the decision, petitioner filed a Motion for Reconsideration, which was denied.
Petitioner then filed an appeal with the CTA En Banc. The same was likewise denied. The
CTA En Banc ruled that P.D. No. 1590 does not provide that only the actual payment of
basic corporate income tax or franchise tax by respondent would entitle it to the tax
exemption provided under Sec. 13 of the latter's franchise. Like the CTA First Division, the
CTA en banc ruled that by providing for net loss carry-over, P.D. No. 1590 recognized the
possibility that respondent would end up with a net loss in the computation of its taxable
income, which would mean zero liability for basic corporate income tax.
The CTA En Banc denied petitioner's Motion for Reconsideration; hence, the present Petition
for Review.
ISSUES:
1. Whether the CTA En Banc erred in holding that the phrase "in lieu of all other taxes" in
Sections 13 and 14 of P.D. No. 1590 does not contemplate the fulfilment of a condition
before the exemption from all other taxes may be applied.
2. Whether tax refunds are in the nature of tax exemptions, and as such, they should be
construed strictissimi juris against the person or entity claiming the exemption.
RULING:
1.
The language used in Sec. 13 of P.D. No. 1590, granting respondent tax exemption,
is clearly all-inclusive. The basic corporate income tax or franchise tax paid by respondent
shall be "in lieu of all other taxes, duties, royalties, registration, license, and other fees and
charges of any kind, nature, or description imposed, levied, established, assessed or
collected by any municipal, city, provincial, or national authority or government agency,
now or in the future . . .", except only real property tax. Even a meticulous examination of
P.D. No. 1590 will not reveal any provision therein limiting the tax exemption of respondent
to final withholding tax on interest income or excluding from said exemption the OCT.
In CIR vs. PAL, G.R. No. 160528, October 9, 2006, the Supreme Court held: A careful
reading of Section 13 rebuts the argument of the CIR that the "in lieu of all other taxes"
proviso is a mere incentive that applies only when PAL actually pays something. It is clear
that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b)
as consideration for its franchise. Either option excludes the payment of other taxes and
dues imposed or collected by the national or the local government. PAL has the option to
choose the alternative that results in lower taxes. It is not the fact of tax payment that
exempts it, but the exercise of its option. In the event that respondent incurs a net loss, it
shall have zero liability for basic corporate income tax, the lowest possible tax liability.
There being no qualification to the exercise of its options under Section 13 of Presidential
Decree No. 1590, then respondent is free to choose basic corporate income tax, even if it
would have zero liability for the same in light of its net loss position for the taxable year.
2. Indeed, a tax refund, which is in the nature of a tax exemption, should be construed
strictissimi juris against the taxpayer. However, when the claim for refund has clear legal
basis and is sufficiently supported by evidence, as in the present case, then the Court shall
not hesitate to grant the same.
StrissimiJuris
FACTS: Respondent JulianeBaier-Nickel, a non-resident German citizen, is the President of
JUBANITEX, Inc., a domestic corporation engaged in "manufacturing, marketing on
wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and
disposing embroidered textile products." Through JUBANITEX's General Manager, Marina Q.

Guzman, the corporation appointed and engaged the services of respondent as commission
agent. It was agreed that respondent will receive 10% sales commission on all sales
actually concluded and collected through her efforts.
In 1995, respondent received the amount of P1,707,772.64, representing her sales
commission income from which JUBANITEX withheld the corresponding 10% withholding tax
amounting to P170,777.26, and remitted the same to the BIR. On October 17, 1997,
respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26. On April 14, 1998, respondent filed a claim to refund the
amount of P170,777.26 alleged to have been mistakenly withheld and remitted by
JUBANITEX to the BIR. Respondent contended that her sales commission income is not
taxable in the Philippines because the same was a compensation for her services rendered
in Germany and therefore considered as income from sources outside the Philippines. Both
the CTA and the CIR contended that the commissions received by respondent were actually
her remuneration in the performance of her duties as President of JUBANITEX and not as a
mere sales agent thereof. The income derived by respondent is therefore an income taxable
in the Philippines because JUBANITEX is a domestic corporation.
ISSUE: Whether respondent's sales commission income is taxable in the Philippines.
HELD: Pursuant to Section 25 of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from
all sources within the Philippines. Thus, the keyword in determining the taxability of nonresident aliens is the income's "source." In construing the meaning of "source" in Section 25
of the NIRC, resort must be had on the origin of the provision. Both the petitioner and
respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways
Corporation in support of their arguments, but the correct interpretation of the said case
favors the theory of respondent that it is the situs of the activity that determines whether
such income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying principle of the law
on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v.
Collector of Internal Revenue. The divergence in opinion centered on whether the sale of
tickets in the Philippines is to be construed as the "activity" that produced the income, as
viewed by the majority, or merely the physical source of the income, as ratiocinated by
Justice Florentino P. Feliciano in his dissent. The majority, through Justice
AmeurfinaMelencio-Herrera, as ponente, interpreted the sale of tickets as a business
activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case
to support its view that source of income is the physical source of the money earned. If
such was the interpretation of the majority, the Court would have simply stated that source
of income is not the business activity of BOAC but the place where the person or entity
disbursing the income is located or where BOAC physically received the same. But such was
not the import of the ruling of the Court. It even explained in detail the business activity
undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its
conclusion that BOAC is subject to Philippine income taxation.
Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is
exempt from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were
performed in Germany. Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital question posed in this
controversy.
The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimijuris against the taxpayer. To those therefore, who claim a refund rest
the burden of proving that the transaction subjected to tax is actually exempt from
taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated
that the activity or the service which would entitle her to 10% commission income, are
"sales actually concluded and collected through [her] efforts." What she presented as
evidence to prove that she performed income producing activities abroad, were copies of
documents she allegedly faxed to JUBANITEX and bearing instructions as to the sizes of, or
designs and fabrics to be used in the finished products as well as samples of sales orders
purportedly relayed to her by clients. However, these documents do not show whether the
instructions or orders faxed ripened into concluded or collected sales in Germany. At the
very least, these pieces of evidence show that while respondent was in Germany, she sent
instructions/orders to JUBANITEX. As to whether these instructions/orders gave rise to
consummated sales and whether these sales were truly concluded in Germany, respondent
presented no such evidence. Neither did she establish reasonable connection between the
orders/instructions faxed and the reported monthly sales purported to have transpired in
Germany.
In sum, the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to
support the conclusion that it was in Germany where she performed the income producing
service which gave rise to the reported monthly sales in the months of March and May to
September of 1995. She thus failed to discharge the burden of proving that her income was
from sources outside the Philippines and exempt from the application of our income tax law.
Hence, the claim for tax refund should be denied. C I R vs. JulianeBaier-Nickel, as
represented by Marina Q. Guzman (Attorney-in-fact)G.R. No. 153793, August 29, 2006
APPLICATION OF TAX LAWS
General Rule: Tax laws are prospective in operation.
Exception: While it is not favored, a statute may nevertheless operate retroactively provided
it is expressly declared or is clearly the legislative intent. (Cebu Portland Cement vs.
Collector)
KINDS OF PROVISIONS OF TAX LAWS
1. Mandatory - those provisions intended for the security of the citizens or which are
designed to insure equality of taxation or certainly as to the nature and amount of each
persons tax.
2. Directory-those provisions designed merely for the information or direction of officers or

to secure methodical and systematic modes of proceedings.
Importance of Distinction
The omission to follow mandatory provisions render invalid the act or proceeding to
which it relates while the omission to follow directory provisions does not involve such
consequence.
SOURCES OF TAX LAWS
1. Constitution
2. Legislation or statutes, including presidential decrees and executive orders on taxation
and tax ordinances
3. Administrative Rules and regulations, ruling and opinions of tax officials particularly the
CIR, including opinions of the Secretary of Justice
Authority of the Secretary of Finance to promulgate rules and regulations
The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate
all needful rules and regulations for the effective enforcement of the provisions of the NIRC
(Sec. 244 NIRC).
The state that is being administered may not be altered or added to by the exercise of a
power to make regulations thereunder.
Requisites for validity and effective of regulation
a. They must not be contrary to law and Constitution (Art. 7 Civil Code)
b. They must be published in the official gazette (Lim vs. central Bank, Sec. 79-B and 551
Rev. Adm. Code)
Force and Effect of Regulations
Such regulations once established and found to be consonance with the general purposes
and objects of the law have the force and effect of law and so they must be applied and
enforced. (De Guzman vs. Lontok)
Administrative Rulings and Opinions
Rulings- less general interpretations of tax laws at the administrative level which are issued
by tax officials in the performance of their assessment functions. They are usually rendered
by the CIR on request of tax payers to clarify certain provisions of the tax law. These rulings
may be revoked by the Secretary of Finance if the latter finds them not in accordance with
law
The Secretary of Finance has the power to revoke, repeal or abrogate the acts or
previous rulings of his predecessors in office. The construction of the statute by those
administering it is not binding on their successors if thereafter the latter becomes satisfied
that a different construction should be given
It should abide with the principle Verba legis non estrecedendumwhich means that from
the words of a statute there should be no departure.
Non-delegation, Uniformity of taxation
Fortune Tobacco Corp. is engaged in the manufacture of different brands
of cigarettes. The Philippine Patent Office issued to the corporation
certificates of trademark registration over "Champion/ "Hope," and "More"
cigarettes. Initially, the CIR classified the brands as foreign brands since they were listed in
the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco
changed the names as follows: Hope" to "Hope Luxury" and More to "Premium More,"
thereby removing them from the foreign brand category. A certification was presented to
show that "Champion" was an original Fortune Tobacco brand. The three brands were
therefore taxed ad valorem as local brands.
Subsequently, RA 7554 was passed, imposing a 55% tax on locally
manufactured cigarettes bearing a foreign brand. The rate for cigarettes
bearing a local brand was set at 45%. After the enactment of RA 7654 but before its
effectivity, the BIR issued a circular reclassifying the three brands as foreign brands.
Pursuant to RA 7654, the CIR assessed Fortune Tobacco for ad valorem tax deficiency
amounting to P9.5M. Fortune filed a petition for review with the CTA. The CTA upheld the
stand of Fortune, stating that at the time of the enactment of RA 7654, the three brands
were still classified as local brands. Therefore, they should not be assessed the 55% tax,
but only the 45% tax.
ISSUE: Whether the three brands should be taxed as local or as foreign
brands.
HELD: They are local brands. The BIR may issue rules in the exercise of its quasi
legislative powers, but these rules must be merely interpretative in nature. It cannot go
beyond providing for the means that can facilitate the implementation of the law. In this
case, the circular issued by the BIR reclassifying the three brands as foreign brands was
aimed precisely at placing them within the scope of RA 7654 and subjecting them to a new
tax rate. In issuing the circular, the BIR did not simply interpret the law; it legislated under
its quasi-legislative authority. The due process requirements of notice, hearing, and
publication should not have been then ignored. The circular might have also infringed on
uniformity of taxation. The Constitution requires taxation to be uniform and equitable.
Uniformity
requires that all subjects or objects of taxation, similarly situated, are to be treated alike or
put on equal footing both in privileges and liabilities.
Thus, all taxable articles or kinds of property of the same class must be
taxed at the same rate, and the tax must operate with the same force and
effect in every place where the subject may be found. In this case, other cigarettes bearing
foreign brands were not included within the scope of the circular. According to
Commissioner Chato, the reason for leaving out the other brands was because there was
not enough time to include them. The SC ruled that the circular was hastily promulgated, in
violation of the rule on uniformity of taxation.
Commissioner of Internal Revenue vs Court of Appeals
Error of law clearly conflicting with the letter and spirit of the law
BIR Ruling No. 132-99 was issued by then Commissioner Beethoven L. Rualo on August 23,
1999 based on a request made by Citibank and Standard Chartered Bank for a ruling on the
issue of whether instructions sent by overseas clients to their banks in the Philippines to
debit their local or foreign currency accounts and pay a named recipient in the Philippines is
subject to documentary stamp tax.
Fittingly, the Court is not bound by such erroneous ruling of the BIR. The rule that the
construction given to a statute by an administrative agency charged with the interpretation
and application of a statute is normally entitled to great respect and should be accorded
great weight by the courts is not absolute. The exception is when such construction is
clearly shown to be in sharp conflict with the governing statute and other laws, as is the
case here (United Harbor Pilots' Association of the Philippines, Inc. vs. Association of
International Shipping Lines, Inc., 391 SCRA 522 [2002]). When an administrative agency
renders an opinion or issues a statement of policy, it merely interprets a pre-existing law
and the administrative interpretation is at best advisory for it is the courts that finally
determine what the law means. Thus, an action by an administrative agency may be set
aside by the judicial department if there is an error of law clearly conflicting with the letter
and spirit of the law (Energy Regulatory Board vs. Court of Appeals, 357 SCRA 30 [2001]).
ADMINISTRATIVE DELEGATION
CIR VS CA AND COMMONWEALTH MANAGEMENT
GR N0. 125355 MARCH 30, 2000
SYSTEM PLUS COMPUTER COLLEGE VS. CALOOCAN CITY

NAPOCOR VS CITY OF CABANATUAN
GR NO. 149110
PAGCOR VS. BUREAU OF INTERNAL REVENUE

STA. LUCIA REALTY VS CITY OF PASIG
GR NO. 146382 AUG 7, 2003
APRIL 9, 2003
GR 172087 MARCH 15, 2011
GR 166838
JUNE 15, 2011
COMMISSIONER VS FILINVEST DEVELOPMENT CORP. GR 163653 JULY 19, 2011

APC GROUP INC. VS CIR
CTA CASE NO. 6155 MARCH 11, 2002
Non Retroactivity of Repeal

Any revocation, modification or reversal of any of the rules and regulations or any of the
rulings or circulars promulgated by the CIR cannot be given retroactive effect when such will
be prejudicial to the taxpayer but it shall be retroactive in the following cases:
a. Where the taxpayer deliberately misstates or omits materials facts from his return or in
any document required of him by the BIR;
b. Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or
c. Where the taxpayer acted in bad faith. (Sec. 246 NIRC)
Opinions - they have the character of substantive rules and are generally binding and
effective if not otherwise contrary to law and the Constitution. These are also given by the
Secretary of Justice.
4. Judicial Decisions- decisions of the Supreme Court applying or interpreting existing tax
laws are binding on all subordinate courts and have the force and effect of law. They form
part of the legal system of the Philippines (Art. 8 Civil Code). They constitute evidence of
what the law means. (People vs. Licera)
Not all sources of tax laws require publication in the Official Gazette. The following require
publication as a condition for their effectivity: statues including those, of local application
and private laws, presidential decrees and executive orders and administrative rules and
regulations if their purpose is to enforce or implement existing law, pursuant to a valid
delegation. (Tanada vs. Tuvera)
Interpretative regulations and those which are merely Internal in; nature need not be
published.
PRINCIPLE OF LEGISLATIVE APPROVAL OF AN ADMINISTRATIVE INTERPRETATION
THROUGH RE-ENACTMENT
Where a statute is susceptible of the meaning placed upon it by a ruling of the government
agency charged with its enforcement and the legislature thereafter reenacts the provision
without substantial change, such action is to some extent confirmatory that the ruling
carries out the legislative purpose.
Error of law clearly conflicting with the letter and spirit of the law
BIR Ruling No. 132-99 was issued by then Commissioner Beethoven L. Rualo on August 23,
1999 based on a request made by Citibank and Standard Chartered Bank for a ruling on the
issue of whether instructions sent by overseas clients to their banks in the Philippines to
debit their local or foreign currency accounts and pay a named recipient in the Philippines is
subject to documentary stamp tax.
Fittingly, the Court is not bound by such erroneous ruling of the BIR. The rule that the
construction given to a statute by an administrative agency charged with the interpretation
and application of a statute is normally entitled to great respect and should be accorded
great weight by the courts is not absolute. The exception is when such construction is
clearly shown to be in sharp conflict with the governing statute and other laws, as is the
case here (United Harbor Pilots' Association of the Philippines, Inc. vs. Association of
International Shipping Lines, Inc., 391 SCRA 522 [2002]). When an administrative agency
renders an opinion or issues a statement of policy, it merely interprets a pre-existing law
and the administrative interpretation is at best advisory for it is the courts that finally
determine what the law means. Thus, an action by an administrative agency may be set
aside by the judicial department if there is an error of law clearly conflicting with the letter
and spirit of the law (Energy Regulatory Board vs. Court of Appeals, 357 SCRA 30 [2001]).
RULE OF NO ESTOPPEL AGAINST THE GOVERNMENT
General Rule: The Government is not estopped by the mistakes or errors of its agents;
erroneous application and enforcement of law by public officers do not bar the subsequent
correct application of statutes. (E. Rodriguez, Inc. vs. Collector L-23041, JuIy31, 1969)
Exception: In the interest of justice and fair play, as where injustice will result to
thetaxpayer. CIR vs. CA GR No. 117982, Feb. 6, 1997
CIR vs. CA GR No. 107135,Feb. 3, 1999
AGENCIES INVOLVED IN TAX ADMINISTRATION AND ENFORCEMENT
Tax administration-refers to the manner and procedure of assessing and collecting or
enforcing tax liabilities.
1. BUREAU OF INTERNAL REVENUE it is the administrative agency of the government
charged with the primary function of administration of the national internal revenue laws
and regulations. For administrative purposes, the BIR is under the executive supervision and
control of the Department of Finance which oversees the administration of national taxes in
the Philippines. (Sec. 2, NIRC)
Powers and Duties of the BIR
a. Assessment and collection of all nation internal revenue taxes, fees, and charges.
b. Enforcement- of all forfeitures, penalties and fines connected therewith.
c. Execution of judgments in all cases decided in its favor by the Court of Tax Appeals and
the ordinary courts.
d. Giving effect to and administering the supervisory and police powers conferred to it by
this Code or other laws. (Sec. 2, NIRC)
e. Recommend, to the Secretary of Finance all needful rules and regulations for the effective
enforcement if the provisions of the NIRC. (Sec. 245 NIRC)
Organization of the BIR

The BIR is under one chief and four assistant chief known respectively as the
Commissioner of Internal revenue and Deputy Commissioner of Internal Revenue.
The Bureau is divided into the National Office and the Field Service
a. National Office- its function is confined to general direction, guidance and control of the
entire operations of internal revenue service, national policy formulation and program
planning for efficient and effective implementation of internal revenue law and, regulations.
It consists of the Commissioner and the four Deputy Commissioners
Powers of the Commissioner
1) Interpret the provisions of the NIRC and other tax laws (Sec. 4, NIRC)
2) Decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws
or portions thereof administered by the Bureau of Internal Revenue (Sec. 4, NIRC)
3) Obtain information, and to summon, examine, and take testimony of persons in r
ascertaining the correctness of any return, or in making a return when none has been
made, or in determining the liability of an person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax compliance (Sec. 5, NIRC)
4) Make assessments and prescribe additional requirements for tax administration and
enforcement (Sec.6, NIRC)
b. Field Service -the BIR operates under a decentralized system through which is primarily
charged with the operational activities of the Bureau 1) Regional Offices (RO) -for effective
administration and control, the Philippines has been divided into Regional Offices which
directly execute and implement the national policies and programs prescribed by the
National Office for the enforcement of internal revenue laws. Each office is headed by a
Regional Director.
Powers and Duties of the Regional Director
a) Implement, laws, policies, plans, programs, rules and regulations of the department or
agencies in the regional area
b) Administer and enforce internal revenue laws, and rules and regulations including the
assessment and collection of all internal revenue taxes, charges and fees.
c) Issue Letters of Authority for the examination of taxpayers within the region;
d) Provide economical, efficient and effective service to the people in the area;
e) Coordinate with regional offices or other departments, bureaus and agencies in the area;
f) Coordinate with local government units in the area;
g) Exercise control and supervision over the officers and employees within the region; and
h) Perform such other functions as may be provided by law and as may be delegated by the
Commissioner.
2) Revenue District Offices (RDO)- under the Regional Offices are RDOs headed by revenue
district officers who are under the direct control and supervision of the Regional Director.
These offices implement programs, methods and procedures necessary for efficient,
effective, and economical assessment and collection of internal revenue taxes in the
revenue district.
Composition of RDOs
a) Fieldsmen and examiners performing assessment work
b) Collection agents and clerks performing collection work.
Duties of Revenue District Officers and other Internal Revenue Officers
a) Ensure that all laws, and rules and regulations affecting national internal revenue are
faithfully executed and complied with, and to aid in the prevention, detection and
punishment of frauds or delinquencies in connection therewith
b) Examine the efficiency of all officers and employees of the Bureau of Internal Revenue
under his supervision and to report in writing to the Commissioner, through the Regional
Director, any neglect of duty incompetency delinquency or malfeasance in office of any
internal revenue officer of which he may obtain knowledge with a statement of all the facts
and any evidence sustaining each case.
Authority of Revenue District Officers
a) Examine taxpayers within the jurisdiction `of the district in order to collect the correct
amount of tax
b) Recommend the assessment of any deficiency tax due in the same manner that the said
acts could have been performed by the Revenue Regional Director himself (Sec. 13 NIRC)
Agents and Deputies for Collection of National Internal Revenue Taxes
a) The Commissioner of Customs and his subordinates with respect to the collection of
national internal revenue taxes on imported goods;
b) The head of the appropriate government office and his subordinates with respect to the
collection of energy tax; and
c) Banks duly accredited by the Commissioner with respect to receipt of payments internal
revenue taxes authorized to be made thru bank. (Sec. 12 NIRC)
2. BUREAU OF CUSTOMS- It is the administrative agency of the government charged with
the administration of the tariff and customs laws and regulations. For the collection of
national internal revenue on imported articles, the Commissioner of Customs and his
subordinates, together with the heads of appropriate government offices and their
subordinates and duly authorized banks are constituted agents of the Commissioner of
internal Revenue. It is also under the supervision of the Secretary of Finance.
General Duties, Powers, and Jurisdiction of the BOC
a. The assessment and collection of the lawful revenues from imported articles and all other
dues, fees, charges, fines and penalties accruing under the tariff and customs laws.
b. The prevention and suppression of smuggling and other frauds upon the customs.
c. The supervision and control over the entrance and clearance of vessels and aircraft
engaged in foreign commerce.
d. The enforcement of tariff and customs laws and other laws, rules, and regulation relating
to tariff and customs administration.
e. The supervision and control over the handling of foreign mails arriving in the Philippines,
for the purpose of the collection of the lawful duty on the dutiable articles thus imported and
the prevention of smuggling through the medium of such mails
f. The supervision and control over all import and export cargoes, landed or stored in piers,
airports, terminal facilities, including container yards and freight stations for the protection
of government revenue.
g. Exclusive jurisdiction over seizure and forfeiture cases under the tariff and C customs
laws. (Sec. 601, TCC)
Territorial Jurisdiction of the BOC
a. Extent- the BOC has the right of supervision and police authority over all seas within the
jurisdiction of ,the Philippines, and over all coasts, ports, airports, harbors, bays, rivers and
inland waters whether navigable from the sea or not. (Sec. 603 TCC)
b. Exception- When a vessel becomes subject to seizure by reason of an act done in

Philippine waters in violation of the tariff and customs laws, a pursuit of such vessel begun
within the jurisdictional waters may continue beyond the maritime zone and the vessel may
o seized on the high seas.
2. LOCAL GOVERNMENT UNITS - it is primarily in charge of the assessment and collection of
the taxes it imposed within its jurisdiction (local and real- property taxes). Whenever the
power to impose and collect tax or other revenue is exercised under the local government
code, that power shall b exercised by the sangguniangpanlalawigan in the case of provinces,
the sangguniangpanlungsod in the case of cities, the sangguniangbayan in the case of
municipalities, or the sangguniang barangay s in case of municipalities , or the barangays
through an appropriate ordinance.
3. ORDINARY COURTS -The Regional Trial Courts or the Metropolitan and Municipal Trial
Courts, as the case may be are given the collection of internal revenue taxes and customs
duties in cases which are not within the appellate jurisdiction of the Court of the Tax
Appeals. The ordinary courts have jurisdiction over non-disputed assessments. They are
also given jurisdiction over cases involving local taxes and special taxes not administered by
the BIR and the BOC.
4. COURT OF TAX APPEALS - it was created by Congress as a centralized court specializing
in tax cases.
Composition of the CTA -The CTA consists of a presiding Justice and 5 Associate Justices
each of whom shall be appointed by the President upon nomination of the Judicial and Bar
Council. (RA 1125 as amended by RA - 9282)
5.SUPREME COURT - In tax cases, as in other cases, it is the court of last resort to which an
appeal or petition for review may be taken by the party adversely affected by a ruling,
order or decision of the CA, CTA or a RTC. Furthermore, the SC has exclusive appellate
jurisdiction in all cases involving the constitutionality or validity of any law, or those
involving the legality of any tax, impost assessment or toll, or any penalty imposed in
relation thereto. (Secs. 1, 5[2], Constitution)
ACKOWLEDGMENTS:
San Beda Law Review Center
Ateneo Law Review Center
CD Asia LexLibris

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GEN PRINCIPLES Taxation

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GENERAL PRINCIPLES OF TAXATION

experimental enterprise and involve themselves in a new business requiring millions of

Claim of tax deductions

To promote public purpose

To facilitate the States need

Limited to the cost of

No exaction; but private

No direct benefit is received;

A direct benefit results in the

Contracts may be impaired

Contract may be impaired

No transfer but only restraint

Transfer is effected in favor

All persons, property, rights

5. Transfer of Property Rights

3. It is proportionate in character taxes must be based on ability to pay in accordance with

b. Local levied by the local government

3,227,781.15 3,378,116.16 19,517,021.91

3rd Qtr., 1991

3,748,687.30 2,978,409.09 21,721,845.60

5,835,462.49 1,710,669.82 30,887,982.25

1st Qtr., 199223,341,849.94

4,851,620.03 2,631,837.72 26,889,937.88

By Claims For Certificate

1994 (2nd Quarter) 007730

11 July 1996 P25,317,534.01

1994 (4th Quarter)

11 July 1996 P21,791,020.61

11 July 1996 P37,322,799.19

1992 (1st-3rd Quarter)

16 July 1996 P84,662,787.46

23 July 1996 P36,501,147.95

TAXES DISTINGUISHED FROM OTHER IMPOSITIONS

Levied only on hand

Cannot be made a personal liability of the person

Exceptional both as to time and locality

Based wholly on benefit

Exemption does not apply. N.B. If property is exempt

Based on the power of

Emanates from police power

The purpose is regulatory

Amount is limited to the cost of(1) issuing the license,

Normally paid after the

Normally paid before commencement of business

License fee may be with or without consideration

Non-payment makes the business illegal

Tax and Debt

Due to the government

May be due to the government but in its corporate

Payable in money, property or service

Does not draw interest

Draws interest if stipulated or delayed

Subject to compensation or set-off

No imprisonment in case of non-payment (Art.III, Sec.

Can be imposed by private individual

Non -Revenue Purpose

SOCIAL SECURITY SYSTEM

These contentions must necessarily fail.

Synex, Inc. 2/F PCCI Corporate Centre

118 L.P. Leviste Street

The Facts Presented

Provisions of the Tax Code of 1997

Rates of income tax on domestic corporations.