Montero - Tax Digests (Block A 2014)
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(ii) NON-IMPAIRMENT
52. PEOPLE v. CAGUIOA
Tax Exemption; Non-impairment
REYES NOTES/CASE:
Is a tax exemption a vested right?
No. The Supreme Court in REPUBLIC V. CAGUIOA [536 SCRA 194]
held that there is no vested right in a tax exemption and more so
when the latest expression of legislative intent renders it continuance
doubtful. In the said case, RA 7227 granted private domestic
corporations doing business in the Subic SEZ tax exemptions on
importations of general merchandise. However, RA 9334 withdrew
the tax exemption on the importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines.
FACTS:
• In 1992, Congress enacted Republic Act (R.A) No. 7227 or
the Bases Conversion and Development Act of 1992 which,
among other things, created the Subic Special Economic
and Freeport Zone (SBF) and the Subic Bay Metropolitan
Authority (SBMA)
• R.A. No. 7227 envisioned the SBF to be developed into a
"self-sustaining, industrial, commercial, financial and
investment center to generate employment opportunities in
and around the zone and to attract and promote productive
foreign investments.”
Section 12 of the law provided:
The provisions of existing laws, rules and regulations to the
contrary notwithstanding, no taxes, local and national, shall
be imposed within the Subic Special Economic Zone.
• Subsequently, RA 9334 was passed. It withdrew the tax
exemption on the importations of cigars, cigarettes, distilled
spirits, fermented liquors and wines.
On the basis of R.A. No. 9334, SBMA issued a
•
Memorandum declaring that effective January 1, 2005, all
importations of cigars, cigarettes, distilled spirits, fermented
liquors and wines into the SBF, including those intended to
be transshipped to other free ports in the Philippines, shall
be treated as ordinary importations subject to all applicable
taxes, duties and charges, including excise taxes.
• Meanwhile, on February 3, 2005, former Bureau of Internal
Revenue (BIR) Commissioner Guillermo L. Parayno, Jr.
requested then Customs Commissioner George M. Jereos to
immediately collect the excise tax due on imported alcohol
and tobacco products brought to the Duty Free Philippines
(DFP) and Freeport zones.
• Accordingly, the Collector of Customs of the port of Subic
directed the SBMA Administrator to require payment of all
appropriate duties and taxes on all importations of cigars and
cigarettes, distilled spirits, fermented liquors and wines; and
for all transactions involving the said items to be covered
from then on by a consumption entry and no longer by a
warehousing entry.
• Respondents herein question the validity or constitutionality
of RA 9334 which withdrew tax exemption on the
importations of cigars, cigarettes, distilled spirits, fermented
liquors and wines arguing the following, That:
(3) the assailed law violates the one bill-one subject rule
embodied in Section 26(1), Article VI of the Constitution as
well as the constitutional proscription against the impairment
of the obligation of contracts.
ISSUES:
1. Whether or not Tax exemption is a vested right.
2. Whether or not the assailed law (RA 9334) violates the
constitutional proscription against the impairment of the
obligation of contracts.
HELD & RATIO:
1. NO.
• There is no vested right in a tax exemption, more
so when the latest expression of legislative
intent renders its continuance doubtful. Being a
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mere statutory privilege, a tax exemption may be
modified or withdrawn at will by the granting
authority.
To state otherwise is to limit the taxing power of the
State, which is unlimited, plenary, comprehensive
and supreme. The power to impose taxes is one so
unlimited in force and so searching in extent, it is
subject only to restrictions which rest on the
discretion of the authority exercising it.
• Whatever right may have been acquired on the basis
of the Certificates of Registration and Tax Exemption
must yield to the State’s valid exercise of police
power. It is well to remember that taxes may be
made the implement of the police power.
It is not difficult to recognize that public welfare and
necessity underlie the enactment of R.A. No. 9334.
As petitioners point out, the now assailed provision
was passed to curb the pernicious practice of some
unscrupulous business enterprises inside the SBF of
using their tax exemption privileges for smuggling
purposes. Smuggling in whatever form is bad
enough; it is worse when the same is allegedly
perpetrated, condoned or facilitated by enterprises
hiding behind the cloak of their tax exemption
privileges.
2. NO.
• While the tax exemption contained in the
Certificates of Registration of private
respondents may have been part of the
inducement for carrying on their businesses in
the SBF, this exemption, nevertheless, is far
from being contractual in nature in the sense
that the non-impairment clause of the
Constitution can rightly be invoked.
Montero - Tax Digests (Block A 2014)
• The rights granted under the Certificates of
Registration and Tax Exemption of private
respondents are not absolute and unconditional as
to constitute rights in esse – those clearly founded
on or granted by law or is enforceable as a matter of
law.
• These certificates granting private respondents a
"permit to operate" their respective businesses are in
the nature of licenses, which the bulk of
jurisprudence considers as neither a property nor a
property right. The licensee takes his license subject
to such conditions as the grantor sees fit to impose,
including its revocation at pleasure. A license can
thus be revoked at any time since it does not confer
an absolute right.
53. MERALCO v. PROVINCE OF LAGUNA and BALAZO
May 5, 1999
REYES NOTES/ CASE:
Meralco was granted a franchise to operate an electric light
and power service in Calamba, Laguna. In 1991, the Local
Government Code was enacted to enjoin LGUs to create their own
source of revenue and to levy taxes, fees and charges, as consistent
with local autonomy. Pursuant to this, a provincial ordinance was
enacted imposing a franchise tax, which is why the Provincial
Treasurer demanded Meralco to pay its corresponding tax. Meralco
reluctantly paid and subsequently filed a claim for refund, which was
denied. The issue is whether or not the imposition of a franchise tax
under the challenged provincial ordinance is violative of the non-
impairment clause of the Constitution and Sec. 1 of PD No. 551
which provided for a different franchise tax that Meralco is paying.
The Court held the negative and explained that the LGC effectively
withdrew the tax exemption privilege through its Secs. 193 and 534.
Also, the non-impairment clause does not apply to tax exemptions
granted under franchises.
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FACTS:
• January 19, 1983: Meralco was granted a franchise by the
National Electrification Administration to operate an electric
light and power service in Calamba, Laguna.
• September 12, 1991: The Local Government Code of 1991
(LGC) was enacted to take effect on January 1, 1992
enjoining local government units to create their own sources
of revenue and to levy taxes, fees and charges, subject to
the limitations expressed therein, consistent with the basic
policy of local autonomy.
• Pursuant to the provisions of the Code, respondent province
enacted Laguna Provincial Ordinance No. 01-92, effective 01
January 1993, providing, in part, as follows:
o Sec. 2.09. Franchise Tax. — There is hereby
imposed a tax on businesses enjoying a franchise,
at a rate of fifty percent (50%) of one percent (1%) of
the gross annual receipts, which shall include both
cash sales and sales on account realized during the
preceding calendar year within this province,
including the territorial limits on any city located in
the province.
• On the basis of that ordinance, respondent Provincial
Treasurer (Balazo) sent a demand letter to Meralco for the
corresponding tax payment.
• Meralco paid the tax which amounted to P19,520,628.42
under protest.
• Meralco sent a formal claim for refund to Balazo claiming
that the franchise tax it had paid and continued to pay to the
National Government pursuant to P.D. 551 already included
the franchise tax imposed by the Provincial Tax Ordinance. It
averred that the imposition of a franchise tax under the
ordinance, with regard to Meralco, contravened the
provisions of Sec. 1 of PD 551.
o Any provision of law or local ordinance to the
contrary notwithstanding, the franchise tax payable
by all grantees of franchises to generate, distribute
and sell electric current for light, heat and power
shall be two per cent (2%) of their gross receipts
received from the sale of electric current and from
Montero - Tax Digests (Block A 2014)
transactions incident to the generation, distribution
and sale of electric current.
o Such franchise tax shall be payable to the
Commissioner of Internal Revenue or his duly
authorized representative on or before the twentieth
day of the month following the end of each calendar
quarter or month, as may be provided in the
respective franchise or pertinent municipal regulation
and shall, any provision of the Local Tax Code or
any other law to the contrary notwithstanding, be in
lieu of all taxes and assessments of whatever nature
imposed by any national or local authority on
earnings, receipts, income and privilege of
generation, distribution and sale of electric current.
• August 28, 1995: The claim for refund was denied by the
governor, relying on the LGC as a more recent law than the
old decree invoked by Meralco.
ISSUES:
1. Whether or not the imposition of a franchise tax under Sec.
2.09 of Laguna Provincial Ordinance No. 01-92, insofar as
Meralco is concerned, is violative of the non-impairment clause
of the Constitution and Sec. 1 of P.D. No. 551.
HELD & RATIO:
1. NO, the tax exemption granted under franchise is deemed
repealed under the LGC. Also, such tax exemption partakes the
nature of a grant which is beyond the purview of the non-impairment
clause of the Constitution.
• Under the now prevailing 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. Nevertheless, the fundamental law did not intend the
delegation to be absolute and unconditional; the constitutional
objective obviously is to ensure that, while the local government
units are being strengthened and made more autonomous, the
legislature must still see to it that
o (a) the taxpayer will not be over-burdened or saddled
with multiple and unreasonable impositions;
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o (b) each local government unit will have its fair share of
available resources;
o (c) the resources of the national government will not be
unduly disturbed; and
o (d) local taxation will be fair, uniform, and just.
• Indicative of the legislative intent to carry out the Constitutional
mandate of vesting broad tax powers to local government units,
the Local Government Code has effectively withdrawn tax
exemptions or incentives theretofore enjoyed by certain entities.
o 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.
• The LGC also contains a repealing clause.
o Sec. 534. Repealing Clause. — . . .(f) All general
and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or
part or parts thereof which are inconsistent with any of
the provisions of this Code are hereby repealed or
modified accordingly.
• Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly
be invoked, are those agreed to by the taxing authority in
contracts, such as 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. Truly,
tax exemptions of this kind may not be revoked without impairing
the obligations of contracts. These contractual tax exemptions,
however, are not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature of a grant
which is beyond the purview of the non-impairment clause of the
Constitution.
• Article XII, Section 11, of the 1987 Constitution, like its precursor
provisions in the 1935 and the 1973 Constitutions, is explicit that
Montero - Tax Digests (Block A 2014)
no franchise for the operation of a public utility shall be granted
except under the condition that such privilege shall be subject to
amendment, alteration or repeal by Congress as and when the
common good so requires.
FINAL VERDICT: Petition is dismissed
54. PROVINCE OF MISAMIS ORIENTAL VS CAGAYAN
ELECTRIC POWER AND LIGHT CO.
Reyes Notes:
Q9.When can the non-impairment clause be rightly invoked
against the withdrawal of a tax exemption?
In PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN ELECTRIC
[181 SCRA 38], the Supreme Court held that the non-impairment
clause may be rightly invoked against contractual tax exemptions.
Contractual tax exemptions are those agreed by the taxing authority
in contracts, such as 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 government immunity (see also
MERALCO V. PROVINCE OF LAGUNA [306 SCRA 750])
FACTS:
• 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 ½ of 1% on businesses enjoying
franchises.
• Pursuant to this, the Province of Misamis Oriental enacted an
ordinance which also provided a franchise tax.
• CEPALCO refused to pay the additional tax, claiming the
exemption granted to it under its franchise.
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• Nevertheless, because of the opinion rendered by the Provincial
Fiscal, upholding the legality of the Revenue Ordinance,
CEPALCO paid under protest.
ISSUE: W/N CEPALCO is exempt from paying the provincial
franchise tax.
HELD & RATIO:
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.
• Also, the Local Tax Regulation 3-75 issued by the Secretary of
Finance made it clear that the franchise tax imposed under local
tax ordinance pursuant to the Tax Code shall be collected from
businesses holding franchise but NOT from business
establishments whose franchise contain the ‘in-lieu-of-all-taxes-
proviso’
• Carcar Electric & Ice Plant vs. CIR: the tax 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.
• MERALCO v Vera is not applicable in the present case because
what the Government sought to impose on Meralco in that case
was not a franchise tax but a COMPENSATING TAX on the
equipment it imported.
Montero - Tax Digests (Block A 2014)
55. CAGAYAN ELECTRIC POWER vs. CIR
REYES NOTES/ CASE:
A tax exemption embodied in a legislative franchise is not a
contractual tax exemption. A franchise does not take the nature of a
contractual tax exemption, which cannot be revoked without
impairing the obligations of contracts. A legislative franchise can be
withdrawn through amendment or repeal.
FACTS:
• This is about the liability of petitioner Cagayan Electric
Power & Light Co., Inc. for income tax amounting to
P75,149.73 for the more than seven-month period of the
year 1969 in addition to franchise tax.
• CEPL is the holder of a legislative franchise, R.A. 3247,
under which its payment of 3% tax on its gross earnings from
the sale of electric current is "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" (Sec. 3).
• R.A. 5431 amended section 24 of the Tax Code by making
liable for income tax all corporate taxpayers not
specifically exempt under paragraph (c) (1) of said section
and section 27 of the Tax Code notwithstanding the
"provisions of existing special or general laws to the
contrary".
• Thus, franchise companies were subjected to income tax in
addition to franchise tax. CEPL’s franchise was amended by
R.A. 6020, effective 1969, by authorizing CEPL to furnish
electricity to the municipalities of Villanueva and
Jasaan, Misamis Oriental in addition to Cagayan de Oro
City and the municipalities of Tagoloan and Opol.
• The amendment reenacted the tax exemption in its original
charter. Due to the amendment made to section 24 of the
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Tax Code, the CIR required CEPL in 1973 to pay deficiency
income taxes for 1968-to 1971. CIR cancelled the
assessments for 1970 and 1971 but insisted on those for
1968 and 1969. CEPL filed a petition for review with the Tax
Court Tax court - CEPL liable only for the income tax for the
period from January 1 to August 3, 1969 or before the
passage of Republic Act No. 6020 which reiterated its tax
exemption. The petitioner appealed to this Court.
ISSUES:
Whether or not the petitioner's franchise is a contract that can be
impaired by such implied repeal
HELD & RATIO:
YES, such franchise can be impaired by the implied repeal. A tax
exemption embodied in a legislative franchise is not a contractual tax
exemption. A franchise does not take the nature of a contractual tax
exemption, which cannot be revoked without impairing the
obligations of contracts.
• Congress could impair CEPL’s legislative franchise by
making it liable for income tax from which before it was
exempted by virtue of the exemption provided for in section 3
of its franchise. (R.A. 3247)
• The Constitution provides that a franchise is subject to
amendment, alteration or repeal by the Congress when the
public interest so requires (Sec. 8, Art. XIV, 1935
Constitution; Sec. 5, Art. XIV, 1973 Constitution),
• Sec 1 R.A. 3247 provides that the grantee is subject to the
provisions of the Constitution and to the terms and
conditions established in Act No. 3636 whose section 12
provides that the franchise is subject to amendment,
alteration or repeal by Congress.
Source: 2015 Digests
Montero - Tax Digests (Block A 2014)
56. J. CASANOVAS V. HORD
G.R. No. 34733; March 22, 1907
CASE:
The Spanish Government, in accordance with the provisions of the
royal decree of the 14th of May, 1867, granted to J. Casanovas
certain mines in the said Province of Ambos Camarines, of which
mines the Casanovas is now the owner. The Royal Decree states
that aside from the tax imposed therein, J. Casanovas shall be
exempt from all other taxes. Later on, in accordance with Act No.
1189 (INternal Revenue Act), Hord, the collector of Revenue
imposed additional taxes, apart from those imposed in the Royal
Decree to J. Casanovas in the amount of 9600 php. Casanovas, paid
under protest such tax. Casanovas challenged Sec 134 of the
Internal Revenue Act stating that it is void since it comes within the
provision of section 5 of the act of Congress of July 1, 1902 which
provides "that no law impairing the obligation of contracts shall be
enacted”.
SC, after affirming that the deed between the Spanish Government
and J. Casanovas is a contract, ruled that since Sec 134 of the
Internal Revenue Act imposes additional taxes, aside from those
imposed in the Royal Decree, it impairs the contract between
Casanovas and the Spanish Government, the said law is void as to
him. SC further stated that the fact that this concession was made by
the Government of Spain, and not by the Government of the United
States, is not important (note that the case was decided when the
Philippines was under the American Regime).
FACTS:
• In January, 1897, the Spanish Government, in accordance with
the provisions of the royal decree of the 14th of May, 1867,
granted to J. Casanovas certain mines in the said Province of
Ambos Camarines, of which mines the Casanovas is now the
owner.
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o Hord, the collector of internal revenue conceded that
there were valid perfected mining concessions granted
prior to the 11th of April, 1899.
• The Royal Decree states that each mining claim of 60,000 sam
there shall be paid an annual fixed that of about 20 pesos and a
10 peso fixed tax for 150,000 sqm. It is further provided in this
Decree that the pertencia of iron mines and mines of
combustible minerals shall be exempt from the said annual tax
for a period of 30 years from the date of publication of this
decree. Most importantly, Art. 81 of this Decree states that “No
other taxes than those herein mentioned shall be imposed upon
mining and metallurgical industries.”
o Simply put, aside from the tax imposed by this Royal
Decree, J. Casanovas is exempt from all other taxes.
• The deed granted to J. Casanovas by the Spanish Gov’t
indicated that he shall pay taxes on the mine and its output as
prescribed in the royal decree. It also stated that he shall comply
with all the requirements contained in the royal decree and in the
regulations for concessions of the same nature as the present.
• Act. No. 1189 (Internal Revenue Act) was passed and Sec 134
of such states that:
“SEC. 134. On all valid perfected mining concessions
granted prior to April eleventh, eighteen hundred and ninety-
nine, there shall be levied and collected on the after January
first, nineteen hundred and five, the following taxes:
2. (a) On each claim containing an area of sixty thousand
square meters, an annual tax of one hundred pesos; (b) and
at the same rate proportionately on each claim containing an
area in excess of, or less than, sixty thousand square
meters.
3. On the gross output of each an ad valorem tax equal to
three per centum of the actual market value of such output.
• Hord, as the collector of the internal revenue, accordingly
imposed upon J. Casanovas the tax mentioned in section 134
(totalling to Php 9,600), which tax, as has before been stated, J.
Casanovas paid under protest.
• J. Casanovas brought this action against the Hord to recover the
sum of P9,600, paid by him under protest as taxes on certain
mining claims owned by him in the Province of Ambos
Camarines.
Montero - Tax Digests (Block A 2014)
ISSUE:
1. Whether or not Sec 134 of Act No. 1189 violated the non-
impairment of contracts clause indicated in Sec 5 of the Act of
Congress of July 1, 1902.
RATIO:
1. Yes, Sec 134 of Act No. 1189 violated the non-impairment of
contracts clause indicated in Sec 5 of the Act of Congress
of July 1, 1902.
• Petitioner’s Contention:
! Sec 134 of Act No. 1189 is void because it comes within
the provision of section 5 of the act of Congress of July
1, 1902 which provides "that no law impairing the
obligation of contracts shall be enacted.”
• SC Ruling:
! The court ruled that it seems clear that the deed
granted by the Spanish Government to J. Casanovas
constituted a contract between the Spanish
Government and Casanovas the obligation of which
contract was impaired by the enactment of section
134 of the Internal Revenue Law, thereby infringing
the provisions above quoted from section 5 of the
act of Congress of July 1, 1902 as it imposed
additional taxes to J. Casanovas, aside from those
stated in the royal decree.
o The fact that this concession was made by the
Government of Spain, and not by the
Government of the United States, is not
important.
! According to SC, Sec 134 of Act No. 1189 is also void
because it is in conflict with section 60 of the act of
Congress of July 1, 1902. Sec 60 of such seems to
indicate that concessions, like those in question, can be
canceled only by reason of illegality in the procedure by
which they were obtained, or for failure to comply with
the conditions prescribed as requisite for their retention
in the laws under which they were granted. There is
nothing in the section which indicates that they can be
canceled for failure to comply with the conditions
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prescribed by subsequent legislation. In fact, the real
intention of the act seems to be that such concession
should be subject to the former legislation and not to any
subsequent legislation.
o There is no claim in this case that there was any
illegality in the procedure by which these
concessions were obtained, nor is there any
claim that J. Casanovas has not complied with
the conditions prescribed in the said royal
decree of 1867.
! SC further stated that it from the above ruling of the
court it is not necessary anymore to consider the further
claim of J. Casanovas that the taxes imposed by article
134, are in violation of the part of section 5 of the act of
July 1, 1902, which declares "that the rule of taxation in
said Islands shall be uniform.”
! (According to the 2A 2015 Digest: own words nung
gumawa) Â state can grant tax exemptions. If they grant
one, we must determine first if the grant is a contract or
not. If it is a contract between the state and the grantee,
then the tax exemption can’t just be removed by the
state through a subsequent legislation at will.
! As in the case at bar, the state granted a tax exemption
through a contract and IT CANNOT BE IMPAIRED
UNLESS FOR A VALID REASON. A subsequent law
cannot be passed infringing such contract.

FINAL VERDICT: The judgment of the court below is reversed, and

judgment is ordered in favor of the plaintiff and against the defendant
for P9,600, with interest thereon, at 6 per cent, from the 21st day of
February, 1906, and the costs of the Court of First Instance. No costs
will be allowed to either party in this court.

Source: I lifted a specific portion from 2A 2015 Digest.

Note: I did not include the other jurirsprudence cited in the case.