JOAN P.

BATAYO justifying a tax, and not the magnitude of the

UNIVERSITY OF NEGROS-OCCIDENTAL RECOLETOS interest to be affected nor the degree to which
SCHOOL OF LAW – TAXATION 1
the general advantage of the community, and
thus the public welfare, may be ultimately
INHERENT LIMITATIONS
benefited by their promotion. Incidental to the
public or to the state, which results from the
1.
promotion of private interest and the prosperity
PASCUAL vs. SECRETARY OF PUBLIC WORKS
of private enterprises or business, does not justify
110 PHIL 331
their aid by the use public money.
GR No. L-10405, December 29, 1960
The test of the constitutionality of a statute
requiring the use of public funds is whether the
"A law appropriating the public revenue is invalid
statute is designed to promote the public
if the public advantage or benefit, derived from
interest, as opposed to the furtherance of the
such expenditure, is merely incidental in the
advantage of individuals, although each
promotion of a particular enterprise."
advantage to individuals might incidentally serve
the public.
FACTS: Governor Wenceslao Pascual of Rizal
2.
instituted this action for declaratory relief, with
PEPSI-COLA BOTTLING CO. OF THE PHILS., INC.
injunction, upon the ground that RA No. 920,
vs. MUNICIPALITY OF TANAUAN
which apropriates funds for public works
69 SCRA 460
particularly for the construction and
GR No. L-31156, February 27, 1976
improvement of Pasig feeder road terminals.
Some of the feeder roads, however, as alleged
"Legislative power to create political
and as contained in the tracings attached to the
corporations for purposes of local self-
petition, were nothing but projected and planned
government carries with it the power to confer
subdivision roads, not yet constructed within the
on such local governmental agencies the power
Antonio Subdivision, belonging to private
to tax.
respondent Zulueta, situated at Pasig, Rizal; and
which projected feeder roads do not connect any
FACTS: Plaintiff-appellant Pepsi-Cola commenced
government property or any important premises
a complaint with preliminary injunction to
to the main highway. The respondents'
declare Section 2 of Republic Act No. 2264,
contention is that there is public purpose
otherwise known as the Local Autonomy Act,
because people living in the subdivision will
unconstitutional as an undue delegation of taxing
directly be benefitted from the construction of
authority as well as to declare Ordinances Nos. 23
the roads, and the government also gains from
and 27 denominated as "municipal production
the donation of the land supposed to be occupied
tax" of the Municipality of Tanauan, Leyte, null
by the streets, made by its owner to the
and void. Ordinance 23 levies and collects from
government.
soft drinks producers and manufacturers a tax of
one-sixteenth (1/16) of a centavo for every bottle
ISSUE: Should incidental gains by the public be
of soft drink corked, and Ordinance 27 levies and
considered "public purpose" for the purpose of
collects on soft drinks produced or manufactured
justifying an expenditure of the government?
within the territorial jurisdiction of this
municipality a tax of ONE CENTAVO (P0.01) on
HELD: No. It is a general rule that the legislature
each gallon (128 fluid ounces, U.S.) of volume
is without power to appropriate public revenue
capacity. Aside from the undue delegation of
for anything but a public purpose. It is the
authority, appellant contends that it allows
essential character of the direct object of the
double taxation, and that the subject ordinances
expenditure which must determine its validity as
are void for they impose percentage or specific
tax.
ISSUE: Are the contentions of the appellant
tenable?
HELD: No. On the issue of undue delegation of
taxing power, it is settled that 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 conferred by the people. It is a power
that is purely legislative and which the central
legislative body cannot delegate either to the
executive or judicial department of the
government without infringing upon the theory
of separation of powers. The exception, however,
lies in the case of municipal corporations, to
which, said theory does not apply. Legislative
powers may be delegated to local governments
in respect of matters of local concern. By
necessary implication, the legislative power to
create political corporations for purposes.
3.
Manila International Airport Authority vs CAGR
No. 155650, July 20, 2006, 495 SCRA 591
Facts:Manila International Airport Authority
(MIAA) is the operator of the Ninoy International
Airportlocated at Paranaque City. The Officers of
Paranaque City sent notices to MIAA due to real
estate taxdelinquency. MIAA then settled some
of the amount. When MIAA failed to settle the
entire amount, theofficers of Paranaque city
threatened to levy and subject to auction the
land and buildings of MIAA,which they did. MIAA
sought for a Temporary Restraining Order from
the CA but failed to do so withinthe 60 days
reglementary period, so the petition was
dismissed. MIAA then sought for the TRO with
theSupreme Court a day before the public
auction, MIAA was granted with the TRO but
unfortunately theTRO was received by the
Paranaque City officers 3 hours after the public
auction.MIAA claims that although the charter
provides that the title of the land and building are
withMIAA still the ownership is with the Republic
of the Philippines. MIAA also contends that it is
aninstrumentality of the government and as such
exempted from real estate tax. That the land and
buildingsof MIAA are of public dominion
therefore cannot be subjected to levy and
auction sale. On the other hand, the officers of
Paranaque City claim that MIAA is a government
owned and controlled corporationtherefore not
exempted to real estate tax.
Issues:Whether or not MIAA is an instrumentality
of the government and not a government owned
andcontrolled corporation and as such exempted
from tax.
Whether or not the land and buildings of MIAA
are part of the public dominion and thus cannot
be the subject of levy and auction sale.
Ruling:Under the Local government code,
government owned and controlled corporations
are notexempted from real estate tax. MIAA is
not a government owned and controlled
corporation, for to become one MIAA should
either be a stock or non stock corporation. MIAA
is not a stock corporation for its capital is not
divided into shares. It is not a non stock
corporation since it has no members. MIAA is
aninstrumentality of the government vested with
corporate powers and government
functions.Under the civil code, property may
either be under public dominion or private
ownership. Thoseunder public dominion are
owned by the State and are utilized for public use,
public service and for thedevelopment of
national wealth. The ports included in the public
dominion pertain either to seaports or airports.
When properties under public dominion cease to
be for public use and service, they form part of
the patrimonial property of the State.The court
held that the land and buildings of MIAA are part
of the public dominion. Since theairport is
devoted for public use, for the domestic and
international travel and transportation. Even if
MIAA charge fees, this is for support of its
operation and for regulation and does not change
the character of the land and buildings of MIAA
as part of the public dominion. As part of the
public dominion the landand buildings of MIAA
are outside the commerce of man. To subject
them to levy and public auction iscontrary to
public policy. Unless the President issues a
proclamation withdrawing the airport land and
buildings from public use, these properties
remain to be of public dominion and are
inalienable. As longas the land and buildings are
for public use the ownership is with the Republic
of the Philippines.
4.
CIR vs Mitsubishi, GR No L-54908, January 22,
1990
Atlas Consolidated Mining and Dev Corp (Atlas)
entered into a loan and sales contract with
Mitsubishi, a Japanese corp licenses to engage in
business in the Phils., for purposes of the
projected expansion of the productive capacity
of Atlas.
Mitsubishi agreed to extend a loan to Atlas for
the installation of a new concentrator for copper
production and Atlas to sell to Mitsubishi all the
copper concentrates produced for 15 years.
Mitsubishi applied for a loan with Export-Import
Bank of Japan (Eximbank) for purpose of its
obligation under said contract. Pursuant to the
contract between Atlas and Mitsubishi, interest
payments were made by Atlas to Mitsubishi for
the years 1974-75. The corresponding 15% tax
thereon in the amount of P1,971,595.01 was
withheld pursuant to sec. 24(b)(1) and sec. 53
(b)(2) of NIRC, as amended by PD 131, and duly
remitted to the government.
Private respondent filed a claim for the tax
credit requesting the sum of P1,971,595.01 be
applied against their existing and future tax
liabilities. It was later noted by respondent CTA
that Mitsubishi executed a waiver and disclaimer
of its interest in the claim for tax credit in favor
of Atlas.
Mitsubishi filed a petition for review with
respondent court on the ground that Mitsubishi
was a mere agent of Eximbank, which is a
financing institution owned, controlled and
financed by the Japanese Government. Such
government status of Eximbank, if it may be so
called, is the basis for private respondents claim
for exemption from paying the tax on the
interest payment on the loan. It was further
claimed that the interest payments on the loan
from the consortium of Japanese banks were
likewise exempt because loan supposedly came
from or were fniancé by Eximbank. Relying on
the provision of sec. 29(b)(7)(A) NIRC.
CTA promulgated its decision ordering petitioner
to grant a tax credit in favor of Atlas and the
court declared that all papers and documents
pertaining to the loan obtained by Mitsubishi
from Eximbank shows that this was the same
amount given to Atlas. It also observed that the
money for the loan from the consortium of
private Japanese banks originated from
Eximbank. From these, respondent court
concluded that the ultimate creditor of Atlas
was Eximbank. Mitsubishi was acting as a mere
“arranger or conduit through which the loan
flowed from the creditor Eximbank to the debtor
Atlas.
ISSUE: 1) WON the interest income from the
loan extended to Atlas by Mitsubishi is
excludible from gross income taxation pursuant
to sec. 29(b)(7)(A), NIRC and therefore, exempt
from withholding tax.
2) WON Mitsubishi is a mere conduit of
Eximbank which will then be considered as the
creditor whose investment in the Phils. On loans
are exempt from taxes.
HELD:
1) NO
The signatories on the loans and sales contract
were Mitsubishi and Atlas, nowhere in the
contract can it be inferred that Mitsubishi acted
for and behalf of Eximbank of Japan nor of any
entity, private or public, for that matter. When
Mitsubishi obtained the loan of USD 20M from
Eximbank of Japan said amount ceased to be the
property of the bank and become property of
Mitsubishi.
Mitsubishi and not Eximbank is the sole creditor
of Atlas, the former being the owner of the USD
20M upon completion of its loan contract with
Eximbank of Japan. The interest income of the
 loan paid by Atlas to Mitsubishi is therefore
entirely different from the interest income paid
by Mitsubishi to Eximbank of Japan. What was
the subject of the 15% withholding tax is not the
interest income paid by Mitsubishi to Eximbank,
but the interest income earned by Mitsubishi
from the loan to Atlas.
2) NO
When Mitsubishi secured the loan, it was in its
own independent capacity as a private entity
and not as a conduit of the consortium of
Japanese banks or the Eximbank of Japan. While
loans were secured by Mitsubishi primarily “as a
loan to and in consideration for importing
copper concentrates from Atlas, the fact
remains that it was a loan by Eximbank of Japan
to Mitsubishi and not to Atlas
5.
Commissioner of Internal Revenue vs. Marubeni
Corporation
Facts:
CIR assails the CA decision which affirmed CTA,
ordering CIR to desist from collecting the 1985
deficiency income, branch profit remittance and
contractor’s taxes from Marubeni Corp after
finding the latter to have properly availed of the
tax amnesty under EO 41 & 64, as amended.
Marubeni, a Japanese corporation, engaged in
general import and export trading, financing and
construction, is duly registered in the Philippines
with Manila branch office. CIR examined the
Manila branch’s books of accounts for fiscal year
ending March 1985, and found that respondent
had undeclared income from contracts with NDC
and Philphos for construction of a wharf/port
complex and ammonia storage complex
respectively.
On August 27, 1986, Marubeni received a letter
from CIR assessing it for several deficiency taxes.
CIR claims that the income respondent derived
were income from Philippine sources, hence
subject to internal revenue taxes. On Sept 1986,
respondent filed 2 petitions for review with CTA:
the first, questioned the deficiency income,
branch profit remittance and contractor’s tax
assessments and second questioned the
deficiency commercial broker’s assessment.
On Aug 2, 1986, EO 41 declared a tax amnesty for
unpaid income taxes for 1981-85, and that
taxpayers who wished to avail this should on or
before Oct 31, 1986. Marubeni filed its tax
amnesty return on Oct 30, 1986.
On Nov 17, 1986, EO 64 expanded EO 41’s scope
to include estate and donor’s taxes under Title 3
and business tax under Chap 2, Title 5 of NIRC,
extended the period of availment to Dec 15, 1986
and stated those who already availed amnesty
under EO 41 should file an amended return to
avail of the new benefits. Marubeni filed a
supplemental tax amnesty return on Dec 15,
1986.
CTA found that Marubeni properly availed of the
tax amnesty and deemed cancelled the
deficiency taxes. CA affirmed on appeal
Issue: W/N Marubeni is exempted from paying
tax.
Held: Yes.
1. On date of effectivity CIR claims Marubeni is
disqualified from the tax amnesty because it falls
under the exception in Sec 4b of EO 41:
“Sec. 4. Exceptions.—The following taxpayers
may not avail themselves of the amnesty herein
granted: xxx b) Those with income tax cases
already filed in Court as of the effectivity hereof;”
Petitioner argues that at the time respondent
filed for income tax amnesty on Oct 30, 1986, a
case had already been filed and was pending
before the CTA and Marubeni therefore fell
under the exception. However, the point of
reference is the date of effectivity of EO 41 and
that the filing of income tax cases must have been
made before and as of its effectivity.
EO 41 took effect on Aug 22, 1986. The case
questioning the 1985 deficiency was filed with
CTA on Sept 26, 1986. When EO 41 became
effective, the case had not yet been filed.
Marubeni does not fall in the exception and is
thus, not disqualified from availing of the
amnesty under EO 41 for taxes on income and
branch profit remittance.
The difficulty herein is with respect to the
contractor’s tax assessment (business tax) and
respondent’s availment of the amnesty under EO
64, which expanded EO 41’s coverage. When EO
64 took effect on Nov 17, 1986, it did not provide
for exceptions to the coverage of the amnesty for
business, estate and donor’s taxes. Instead,
Section 8 said EO 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.”
Due to the EO 64 amendment, Sec 4b cannot be
construed to refer to EO 41 and its date of
effectivity. The general rule is that an
amendatory act operates prospectively. 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.
2. On situs of taxation Marubeni contends that
assuming it did not validly avail of the amnesty, it
is still not liable for the deficiency tax because the
income from the projects came from the
“Offshore Portion” as opposed to “Onshore
Portion”. It claims 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.
(BG: Marubeni won in the public bidding for
projects with government corporations NDC and
Philphos. In the contracts, the prices were broken
down into a Japanese Yen Portion (I and II) and
Philippine Pesos Portion and financed either by
OECF or by supplier’s credit. The Japanese Yen
Portion I corresponds to the Foreign Offshore
Portion, while Japanese Yen Portion II and the
Philippine Pesos Portion correspond to the
Philippine Onshore Portion. Marubeni has
already paid the Onshore Portion, a fact that CIR
does not deny.)
CIR 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 (a tax on the
exercise of a privilege of selling services or labor
rather than a sale on products)
Marubeni, however, was able to sufficiently
prove in trial that not all its work was performed
in the Philippines because some of them were
completed in Japan (and in fact subcontracted) in
accordance with the provisions of the contracts.
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 Philippines’
taxing jurisdiction and are therefore not subject
to contractor’s tax. Petition denied.
Constitutional Limitations
6.
Tiu vs. Court of Appeals
The constitutionality and validity of EO 97-A, that
provides that the grant and enjoyment of the tax
and duty incentives authorized under RA 7227
were limited to the business enterprises and
residents within the fenced-in area of the Subic
Special Economic Zone (SSEZ), was questioned.

Nature of the case: A petition for review to
reverse the decision of the Court of Appeals
which upheld the constitutionality and validity of
the E.O. 97-A.
Facts of the case: The petitioners assail the
constitutionality of the said Order claiming that
they are excluded from the benefits provided by
RA 7227 without any reasonable standards and
thus violated the equal protection clause of the
Constitution. The Court of Appeals upheld the
validity and constitutionality and denied the
motion for reconsideration. Hence, this petition
was filed.
Issue: WON E.O. 97-A violates the equal
protection clause of the Constitution
Arguments: Petitioners contend that the SSEZ
encompasses (1) the City of Olongapo, (2) the
Municipality of Subic in Zambales, and (3) the
area formerly occupied by the Subic Naval Base.
However, EO 97-A, according to them, narrowed
down the area within which the special privileges
granted to the entire zone would apply to the
present “fenced-in former Subic Naval Base”
only. It has thereby excluded the residents of the
first two components of the zone from enjoying
the benefits granted by the law. It has effectively
discriminated against them, without reasonable
or valid standards, in contravention of the equal
protection guarantee.
The solicitor general defends the validity of EO
97-A, arguing that Section 12 of RA 7227 clearly
vests in the President the authority to delineate
the metes and bounds of the SSEZ. He adds that
the issuance fully complies with the requirements
of a valid classification.
Decision: Panganiban J., The Court held that the
classification was based on valid and reasonable
standards and does not violate the equal
protection clause.
The fundamental right of equal protection of the
laws is not absolute, but is subject to reasonable
classification. If the groupings are characterized
by substantial distinctions that make real
differences, one class may be treated and
regulated differently from another. The
classification must also be germane to the
purpose of the law and must apply to all those
belonging to the same class.
Classification, to be valid, must (1) rest on
substantial distinctions, (2) be germane to the
purpose of the law, (3) not be limited to existing
conditions only, and (4) apply equally to all
members of the same class.
Ruling: Petition denied. The challenge decision
and resolution were affirmed.
7.
John Hay Peoples Alternative Coalition vs. BCDA
JOHN HAY PEOPLES ALTERNATIVE COALITION vs.
LIM
G. R. No. 119775, October 24, 2003
FACTS:
R.A. No. 7227 otherwise known as the "Bases
Conversion and Development Act of 1992," which
was enacted setting out the policy of the
government to accelerate the sound and
balanced conversion into alternative productive
uses of the former military bases under the 1947
Philippines-United States of America Military
Bases Agreement, namely, the Clark and Subic
military reservations as well as their extensions
including the Camp John Hay Station in the City of
Baguio. It created public respondent Bases
Conversion and Development Authority2 (BCDA),
and the Subic Special Economic [and Free Port]
Zone (Subic SEZ). Also the said law granted the
Subic SEZ incentives ranging from tax and duty-
free importations, exemption of businesses
therein from local and national taxes.
On August 16, 1993, BCDA entered into a
Memorandum of Agreement and Escrow
Agreement with private respondents Tuntex
(B.V.I.) Co., Ltd (TUNTEX) and Asiaworld
Internationale Group, Inc. (ASIAWORLD),
preparatory to the formation of a joint venture
for the development of Poro Point in La Union
and Camp John Hay as premier tourist
destinations and recreation centers. Four months
later, BCDA, TUNTEX and ASIAWORD executed a
Joint Venture Agreement whereby they bound
themselves to put up a joint venture company
known as the Baguio International Development
and Management Corporation.
Meanwhile, the Baguio City government passed a
number of resolutions in response to the actions
taken by BCDA in their MOA and as owner and
administrator of Camp John Hay. One of which is
Resolution No. 255, seeking and supporting the
issuance by then President Ramos of a
presidential proclamation declaring an area of
288.1 hectares of the camp as a SEZ in
accordance with the provisions of R.A. No. 7227.
On July 5, 1994 then President Ramos issued
Proclamation No. 420 which established a SEZ on
a portion of Camp John Hay, and in effect,
granted tax exemptions pursuant to R.A. No.
7227 to Subic SEZ extends to other SEZs.
The petitioners now allege that nowhere in R. A.
No. 7227 is there a grant of tax exemption to SEZs
yet to be established in base areas, unlike the
grant under Section 12 thereof of tax exemption
and investment incentives to the therein
established Subic SEZ. The grant of tax exemption
to the John Hay SEZ, petitioners conclude, thus
contravenes Article VI, Section 28 (4) of the
Constitution which provides that "No law
granting any tax exemption shall be passed
without the concurrence of a majority of all the
members of Congress."
On the other hand, respondents contend that by
extending to the John Hay SEZ economic
incentives similar to those enjoyed by the Subic
SEZ which was established under R.A. No. 7227,
the proclamation is merely implementing the
legislative intent of said law to turn the US
military bases into hubs of business activity or
investment. They underscore the point that the
government's policy of bases conversion can not
be achieved without extending the same tax
exemptions granted by R.A. No. 7227 to Subic SEZ
to other SEZs.
ISSUE:
Whether or not Proclamation No. 420
(particularly Sec. 3) is unconstitutional since it
provides for national and local tax exemption and
grants other economic incentives to the John Hay
SEZ
RULING:
Yes. The SC ruled in favor of the Petitioners.
It is clear that under Section 12 of R.A. No. 7227
it is only the Subic SEZ which was granted by
Congress with tax exemption, investment
incentives and the like. There is no express
extension of the aforesaid benefits to other SEZs
still to be created at the time via presidential
proclamation.
While the grant of economic incentives may be
essential to the creation and success of SEZs, free
trade zones and the like, the grant thereof to the
John Hay SEZ cannot be sustained. The incentives
under R.A. No. 7227 are exclusive only to the
Subic SEZ, hence, the extension of the same to
the John Hay SEZ finds no support therein.
Neither does the same grant of privileges to the
John Hay SEZ find support in the other laws
specified under Section 3 of Proclamation No.
420, which laws were already extant before the
issuance of the proclamation or the enactment of
R.A. No. 7227.
More importantly, the nature of most of the
assailed privileges is one of tax exemption. It is
the legislature, unless limited by a provision of
the state constitution, that has full power to
exempt any person or corporation or class of
property from taxation, its power to exempt
being as broad as its power to tax. Other than
Congress, the Constitution may itself provide for
specific tax exemptions, or local governments
may pass ordinances on exemption only from
local taxes.

The challenged grant of tax exemption would
circumvent the Constitution's imposition that a
law granting any tax exemption must have the
concurrence of a majority of all the members of
Congress. In the same vein, the other kinds of
privileges extended to the John Hay SEZ are by
tradition and usage for Congress to legislate
upon. If it were the intent of the legislature to
grant to the John Hay SEZ the same tax
exemption and incentives given to the Subic SEZ,
it would have so expressly provided in the R.A.
No. 7227.
Thus, the second sentence of Section 3 of
Proclamation No. 420 is hereby declared NULL
AND VOID and is accordingly declared of no legal
force and effect.
8.
Tolentino vs. Secretary of Finance G.R. No.
115455, August 25, 1994
Facts: The value-added tax (VAT) is levied on the
sale, barter or exchange of goods and properties
as well as on the sale or exchange of services. RA
7716 seeks to widen the tax base of the existing
VAT system and enhance its administration by
amending the National Internal Revenue Code.
There are various suits challenging the
constitutionality of RA 7716 on various grounds.
One contention is that RA 7716 did not originate
exclusively in the House of Representatives as
required by Art. VI, Sec. 24 of the Constitution,
because it is in fact the result of the consolidation
of 2 distinct bills, H. No. 11197 and S. No. 1630.
There is also a contention that S. No. 1630 did not
pass 3 readings as required by the Constitution.
Issue: Whether or not RA 7716 violates Art. VI,
Secs. 24 and 26(2) of the Constitution
Held: The argument that RA 7716 did not
originate exclusively in the House of
Representatives as required by Art. VI, Sec. 24 of
the Constitution will not bear analysis. 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. 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. 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. Nor does the
Constitution prohibit the filing in the Senate of a
substitute bill in anticipation of its receipt of the
bill from the House, so long as action by the
Senate as a body is withheld pending receipt of
the House bill.
The next argument of the petitioners was that S.
No. 1630 did not pass 3 readings on separate
days as required by the Constitution because the
second and third readings were done on the
same day. But this was because the President had
certified S. No. 1630 as urgent. The presidential
certification dispensed with the requirement not
only of printing but also that of reading the bill on
separate days. That upon the certification of a bill
by the President the requirement of 3 readings
on separate days and of printing and distribution
can be dispensed with is supported by the weight
of legislative practice.
9.
Kapatiran ng mga Naglilingkod sa Pamahalaan ng
Pilipinas, Inc vs. Tan
G.R No. L-81311 June 30, 1988
FACTS: The petitioners seeks to nullify Executive
Order No. 273 issued by the President of the
Philippines on July 25, 1987, to take effect on
January 1, 1988, and which amended certain
sections of the National Internal Revenue Code
and adopted the Value-added tax (VAT), for being
unconstitutional in that its enactment is not
allegedly within the powers of the President; that
the Vat is oppressive, and violates the due
process and equal protection clauses and other
provisions of the 1987 Constitution.
ISSUES: 1. Whether or not Executive Order No.
273 is unconstitutional on the ground that the
President had no authority to issue the said EO.
2. Whether or not Executive Order
No.273 is oppressive, discriminatory, unjust and
regressive, in violation of the provisions of Art. VI,
sec. 28(1) of the 1987 Constitution.
3. Whether or not EO 273 unduly
discriminates against custom brokers.
HELD: 1. The EO 273 issued by the President is
constitutional. Under the Proclamation No. 3,
which decreed a Provisional Constitution, sole
legislative authority was vested upon the
President. Art. II, sec. 1 of the Provisional
Constitution states that, “Sec. 1 Until the
Legislature is elected and convened under a new
Constitution, the President shall continue to
exercise legislative powers”. On October 15,
1986, the Constitutional Commission of 1986
adopted a new Constitution for the Republic of
the Philippines which was ratified in a plebiscite
conducted on February 2, 1987. Art. XVIII, sec.6
of said Constitution, provides that, “Sec. 6 The
incumbent President shall continue to exercise
legislative powers until the first Congress is
convened”. Under both the Provisional and 1987
Constitution, the President is vested with
legislative powers until a legislature under a new
Constitution is convened. The First Congress,
created and elected under the 1987 Constitution,
was convened on July 27, 1987. Hence, the
enactment of EO 273 on July 25, 1987, two days
before Congress convened on July 27, 1987, was
within the President’s constitutional power and
authority to legislate.
2. EO 273 satisfies all the requirements of
a valid tax. It is uniform.
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 sales tax adopted in EO 273 is
applied similarly on all goods and services sold to
the public, which are not exempt, at constant
rate of 0% or 10%. The disputed tax is also
equitable. It is imposed only on sales of goods
and services by persons engaged in business with
an aggregate gross annual sales exceeding Php
200, 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 cost 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.
3. The phrase “except customs brokers”
under Sec. 103 of EO 273 is not meant to
discriminate against customs brokers. It was
inserted in Sec. 103(r) to complement the
provisions of Sec. 102 of the Code, which makes
the services of customs brokers subject to the
payment of the VAT and to distinguish customs
brokers from other professionals who are subject
to the payment of an occupation tax under the
Local Tax Code. The distinction is based upon
material differences, in that the activities of
customs brokers partake more of a business,
rather than a profession and were thus subjected
to the percentage tax under Sec. 174 of the
National Internal Revenue Code prior to its
amendment by EO 273. EO 273 abolished the
percentage tax and replaced it with the VAT.
10.
Sison v Ancheta G.R. No. L-59431. July 25, 1984.
Facts:
Petitioners challenged the constitutionality of
Section 1 of Batas Pambansa Blg. 135. It amended
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 alleged 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 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 OSG prayed for dismissal of the petition due
to lack of merit.
Issue: Whether the imposition of a higher tax rate
on taxable net income derived from business or
profession than on compensation is
constitutionally infirm.
(WON 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)
Held: No. Petition dismissed
Ratio:
The need for more revenues is rationalized by
the government's role to fill the gap not done by
public enterprise in order to meet the needs of
the times. It is better equipped to administer for
the public welfare.
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.
The power to tax is an attribute of sovereignty
and the strongest power of the government.
There are restrictions, however, diversely
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, taxation would be
a destructive power.
The petitioner failed to prove that the statute ran
counter to the Constitution. He used
arbitrariness as basis without a factual
foundation. 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.
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 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.
For equal protection, the applicable standard to
determine whether this was denied in the
exercise of police power or eminent domain was
the presence of the purpose of hostility or
unreasonable discrimination.
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.
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.
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.
Lutz v Araneta- 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.
Petitioner- kindred concept of uniformity- Court-
Philippine Trust Company- The rule of uniformity
does not call for perfect uniformity or perfect
equality, because this is hardly attainable
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
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"
There was a difference 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.
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.
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.
Taxpayers who are recipients of compensation
income are set apart as a class.
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 was a lack of a factual foundation, the
forcer of doctrines on due process and equal
protection, and he reasonableness of the
distinction between compensation and taxable
net income of professionals and businessmen not
being a dubious classification
11.
American Tobacco v. Camacho (2008)
G.R. No. 163583 August 20, 2008
YNARES-SANTIAGO, J.
Lessons Applicable: Court of Tax Appeals
Jurisdiction, Regional Trial Court Jurisdiction,
Equal Protection and Uniformity of Taxation
(constitutional issue), BIR Power to Conduct
Resurvey and Reclassification (delegated by
express legislation)
Laws Applicable:
FACTS:
 June 2001, petitioner British American
Tobacco introduced and sold Lucky Strike,
Lucky Strike Lights and Lucky Strike Menthol
Lights cigarettes w/ SRP P 9.90/pack - Initial
assessed excise tax: P 8.96/pack (Sec. 145
[c])
 February 17, 2003: RR 9-2003: Periodic
review every 2 years or earlier of the
current net retail price of new brands and
variants thereof for the purpose of the
establishing and updating their tax
classification
 March 11, 2003: RMO 6-2003: Guidelines
and procedures in establishing current net
retail prices of new brands of cigarettes and
alcohol products
 August 8, 2003: RR 22-2003: Implement the
revised tax classification of certain new
brands introduced in the market after
January 1, 1997 based on the survey of their
current net retail prices. This increased the
excise tax to P13.44 since the average net
retail price is above P 10/pack. This cause
petitioner to file before the RTC of Makati a
petition for injunction with prayer for
issuance of a Temporary Restraining Order
and/or Writ of Preliminary Injunction sought
to enjoin the implementation of Sec. 145 of
the NIRC, RR No. 1-97, 9-2003, 22-2003 and
6-2003 on the ground that they discriminate
against new brands of cigarettes in violation
of the equal protection and uniformity
provisions of the Constitution
 RTC: Dismissed
 While petitioner's appeal was pending, RA
9334 amending Sec. 145 of the 1997 NIRC
among other took effect on January 1, 2005
which in effect increased petitioners excise
tax to P25/pack
 Petitioner filed a Motion to Admit attached
supplement and a supplement to the
petition for review assailing the
constitutionality of RA 9334 and praying a
downward classification of Lucky Strike
products at the bracket taxable at P
8.96/pack since existing brands are still
taxed based on their price as of October
1996 eventhough they are equal or higher
than petitioner's product price.
 Philip Morris Philippines Manufacturing
Incorporated, Fortune Tobacco Corp.,
Mighty Corp. and JT International
Intervened.
 Fortune Tobacco claimed that the CTA
should have the exclusive appellate
jurisdiction over the decision of the BIR in
tax disputes
ISSUE:
W/N RA 9334 of the classification freeze
provision is unconstitutional for violating
the equal protection and uniformity
provisions of the Constitution
HELD:
2. No. In Sison Jr. v. Ancheta, the court held that
"xxx 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. If the law be looked
upon in tems of burden on 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. xxx" Thus,
classification if rational in character is allowable.
In Lutz v. Araneta: "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" SC
previously 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"

Under the the rational basis test, a legislative
classification, to survive an equal protection
challenge, must be shown to rationally further a
legitimate state interest. The classifications must
be reasonable and rest upon some ground of
difference having a fair and substantial relation
to the object of the legislation
A legislative classification that is reasonable does
not offend the constitutional guaranty of the
equal protection of the laws. The classification is
considered valid and reasonable provided that:
(1) it rests on substantial distinctions; (2) it is
germane to the purpose of the law; (3) it
applies, all things being equal, to both present
and future conditions; and (4) it applies equally
to all those belonging to the same class.
Moreover, petitioner failed to clearly
demonstrate the exact extent of such impact as
the price is not the only factor that affects
competition.
12
BUREAU OF CUSTOMS EMPLOYEES
ASSOCIATION (BOCEA) v. HON. MARGARITO B.
TEVES
G.R. No. 181704, December 6, 2011
R.A. No. 9335, otherwise known as the Attrition
Act of 2005 and its IRR are constitutional.
Former President Gloria Macapagal-
Arroyo enacted R.A. No. 9335, otherwise known
as the Attrition Act of 2005 to optimize the
revenue-generation capability and collection of
the Bureau of Internal Revenue (BIR) and the
Bureau of Customs (BOC). The law intends to
encourage BIR and BOC officials and employees
to exceed their revenue targets by providing a
system of rewards and sanctions through the
creation of a Rewards and Incentives Fund (Fund)
and a Revenue Performance Evaluation Board
(Board). It covers all officials and employees of
the BIR and the BOC with at least six months of
service, regardless of employment status.
Contending that the enactment and
implementation of R.A. No. 9335 are tainted with
constitutional infirmities in violation of the
fundamental rights of its members, petitioner
Bureau of Customs Employees Association
(BOCEA), directly filed the present petition
before this Court against respondents.
In essence, BOCEA contends that R.A.
No. 9335 and its IRR (1) gives an undue
delegation of legislative power to the Board; (2)
violates the rights of BOCEA’s members to: (a)
equal protection of laws, (b) security of tenure
and (c) due process because R.A. No. 9335 and its
IRR unduly discriminates against BIR and BOC
employees as compared to employees of other
revenue generating government agencies which
are not subject to attrition, (2) that the assailed
law because it inflicts punishment upon a
particular group or class of officials and
employees without trial. This is evident from the
fact that the law confers upon the Board the
power to impose the penalty of removal upon
employees who do not meet their revenue
targets.
HELD:
Petition DISMISSED.
Delegation of Legislative power
In Abakada, the Court held,
Two tests determine the validity
of delegation of legislative
power: (1) the completeness test
and (2) the sufficient standard
test. A law is complete when it
sets forth therein the policy to
be executed, carried out or
implemented by the delegate. It
lays down a sufficient standard
when it provides adequate
guidelines or limitations in the
law to map out the boundaries of
the delegate’s authority and
prevent the delegation from
 running riot. To be sufficient, the
standard must specify the limits
of the delegate’s authority,
announce the legislative policy
and identify the conditions
under which it is to be
implemented.
RA [No.] 9335 adequately states the
policy and standards to guide the President in
fixing revenue targets and the implementing
agencies in carrying out the provisions of the law.
In sum, the Court finds that R.A. No. 9335, read
and appreciated in its entirety, is complete in all
its essential terms and conditions, and that it
contains sufficient standards as to negate
BOCEA’s supposition of undue delegation of
legislative power to the Board.
Equal protection of the laws
Equal protection simply provides that all
persons or things similarly situated should be
treated in a similar manner, both as to rights
conferred and responsibilities imposed.
Both the BIR and the BOC are bureaus
under the DOF. They principally perform the
special function of being the instrumentalities
through which the State exercises one of its great
inherent functions — taxation. Indubitably, such
substantial distinction is germane and intimately
related to the purpose of the law. Hence, the
classification and treatment accorded to the BIR
and the BOC under RA [No.] 9335 fully satisfy the
demands of equal protection.
Moreover, RA [No.] 9335 in no way
violates the security of tenure of officials and
employees of the BIR and the BOC.The guarantee
of security of tenure only means that an
employee cannot be dismissed from the service
for causes other than those provided by law and
only after due process is accorded the employee.
In the case of RA [No.] 9335, it lays down a
reasonable yardstick for removal (when the
revenue collection falls short of the target by at
least 7.5%) with due consideration of all relevant
factors affecting the level of collection. This
standard is analogous to inefficiency and
incompetence in the performance of official
duties, a ground for disciplinary action under civil
service laws. The action for removal is also
subject to civil service laws, rules and regulations
and compliance with substantive and procedural
due process.
R.A. No. 9335 is not a bill of attainder
A bill of attainder is a legislative act which
inflicts punishment on individuals or members of
a particular group without a judicial trial.
Essential to a bill of attainder are a specification
of certain individuals or a group of individuals, the
imposition of a punishment, penal or otherwise,
and the lack of judicial trial
R.A. No. 9335 does not possess the
elements of a bill of attainder. It does not seek to
inflict punishment without a judicial trial. R.A. No.
9335 merely lays down the grounds for the
termination of a BIR or BOC official or employee
and provides for the consequences thereof. The
democratic processes are still followed and the
constitutional rights of the concerned employee
are amply protected.
Facts: Prior to January 1, 1997, the excises taxes
on cigarettes were in the form of ad valorem
taxes, pursuant to Section 142 of the 1977
National Internal Revenue Code (1977 Tax Code).
Beginning January 1, 1997, RA 8240 took effect
and a shift from ad valorem to specific taxes was
made. A portion of Section 142(c) of the 1977 Tax
Code, as amended by RA 8240, reads in part:
“The specific tax from any brand of cigarettes
within the next three (3) years of effectivity of
this Act shall not be lower than the tax [which] is
due from each brand on October 1, 1996.
xxx
The rates of specific tax on cigars and cigarettes
under paragraphs (1), (2), (3) and (4) hereof, shall
be increased by twelve percent (12%) on January
1, 2000.”
To implement the 12% increase in specific taxes
mandated under Section 145 of the 1997 Tax
Code and again pursuant to its rule-making
powers, the CIR issued RR 17-99, which reads
partly:
“Provided, however, that the new specific tax
rate for any existing brand of cigars [and]
cigarettes packed by machine, distilled spirits,
wines and fermented liquors shall not be lower
than the excise tax that is actually being paid prior
to January 1, 2000.”
Pursuant to these laws, respondent Fortune
Tobacco Corporation paid in advance excise taxes
and filed an administrative claim for tax refund
with the CIR for erroneously and/or illegally
collected taxes in the amount of P491 million.
In its decision, the CTA First Division ruled in favor
of Fortune Tobacco and granted its claim for
refund. The CTA First Divisions ruling was upheld
on appeal by the CTA en banc. The CIR’s motion
for reconsideration of the CTA en banc’s decision
was denied in a resolution.
Issue: Whether or not Section 1 of RR 17-99 is an
unauthorized administrative legislation on the
part of the CIR.
Ruling: Yes. The proviso in Section 1 of RR 17-99
clearly went beyond the terms of the law it was
supposed to implement, and therefore entitles
Fortune Tobacco to claim a refund of the
overpaid excise taxes collected pursuant to this
provision.
The rule on uniformity of taxation is violated by
the proviso in Section 1, RR 17-99. Uniformity in
taxation requires that all subjects or objects of
taxation, similarly situated, are to be treated alike
both in privileges and liabilities. Although the
brands all belong to the same category, the
proviso in Section 1, RR 17-99 authorized the
imposition of different (and grossly
disproportionate) tax rates. It effectively
extended the qualification stated in the third
paragraph of Section 145(c) of the 1997 Tax Code
that was supposed to apply only during the
transition period. In the process, the CIR also
perpetuated the unequal tax treatment of similar
goods that was supposed to be cured by the shift
from ad valorem to specific taxes.
The Court further said that the omission in the
law in fact reveals the legislative intent not to
adopt the higher tax rule. It appears that despite
its awareness of the need to protect the increase
of excise taxes to increase government revenue,
Congress ultimately decided against adopting the
higher tax rule.

DUE PROCESS
14.
Abakada Guro Party List vs. Ermita
Facts:
ABAKADA GURO Party List, et al., filed a petition
for prohibition o questioning the constitutionality
of Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC).
Section 4 imposes a 10% VAT on sale of goods
and properties;
Section 5 imposes a 10% VAT on importation of
goods; and
Section 6 imposes a 10% VAT on sale of services
and use or lease of properties;
These provisions contain a provision which
authorizing the President, upon
recommendation of the Secretary of Finance, to
raise the VAT rate to 12%, effective January 1,
2006, after specified conditions have been
satisfied.
Issues:
Whether or not there is a violation of Article VI,
Section 24 of the Constitution.
Whether or not there is undue delegation of
legislative power in violation of Article VI Sec
28(2) of the Constitution.
Whether or not there is a violation of the due
process and equal protection of the Constitution.
Ruling:
No, 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, and excise
and franchise taxes.
No, 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 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. In
this case, it is not a delegation of legislative power
but a delegation of ascertainment of facts upon
which enforcement and administration of the
increased rate under the law is contingent.
No, the power of the State to make reasonable
and natural classifications for the purposes of
taxation has long been established. Whether it
relates to the subject of taxation, the kind of
property, the rates to be levied, or the amounts
to be raised, the methods of assessment,
valuation and collection, the State’s power is
entitled to presumption of validity. As a rule, the
judiciary will not interfere with such power
absent a clear showing of unreasonableness,
discrimination, or arbitrariness.
NON-IMPAIRMENT
15.
REPUBLIC OF THE PHILIPPINES et al. v.
HONORABLE RAMON S. CAGUIOA et al.
536 SCRA 193 (2007), EN BANC
Congress enacted Republic Act (R.A) No. 7227 or
the Bases Conversion and Development Act of
1992 which created the Subic Special Economic
and Freeport Zone (SBF) and the Subic Bay
Metropolitan Authority (SBMA). Section 12 of R.A
No. 7227 of the law provides that no taxes, local
and national, shall be imposed within the Subic
Special Economic Zone. Pursuant to the law,
Indigo Distribution Corporation, et al., which are
all domestic corporations doing business at the
SBF, applied for and were granted Certificates of
Registration and Tax Exemption by the SBMA.
Congress subsequently passed R.A. No. 9334,
which provides that all applicable taxes,
duties, charges, including excise taxes due
thereon shall be applied to cigars and cigarettes,
distilled spirits, fermented liquors and wines
brought directly into the duly chartered or
legislated freeports of the Subic Economic
Freeport Zone. On the basis of Section 6 of R.A.
No. 9334, SBMA issued a Memorandum declaring
that, all importations of cigars, cigarettes,
distilled spirits, fermented liquors and wines into
the SBF, shall be treated as ordinary importations
subject to all applicable taxes, duties
and charges, including excise taxes.
Upon its implementation, Indigo et al., sought for
a reconsideration of the directives on the
imposition of duties and taxes, particularly excise
taxes by the Collector of Customs and the SBMA
Administrator. Their request was subsequently
denied prompting them to file with the RTC of
Olongapo City a special civil action for
declaratory relief to have certain provisions of
R.A. No. 9334 declared as unconstitutional. They
prayed for the issuance of a writ of preliminary
injunction and/or Temporary Restraining Order
(TRO) and preliminary mandatory injunction. The
same was subsequently granted by Judge Ramon
Caguioa. The injunction bond was approved at
One Million pesos (P1,000,000).
ISSUES:
Whether or not public respondent judge
committed grave abuse of discretion amounting
to lack or excess in jurisdiction in peremptorily
and unjustly issuing the injunctive writ in favor of
private respondents despite the absence of the
legal requisites for its issuance
HELD:
One such case of grave abuse obtained in this
case when Judge Caguioa issued his Order of May
4, 2005 and the Writ of Preliminary Injunction on
May 11, 2005 despite the absence of a clear and
unquestioned legal right of private respondents.
In holding that the presumption of
constitutionality and validity of R.A. No. 9334 was
overcome by private respondents for the reasons
public respondent cited in his May 4, 2005 Order,
he disregarded the fact that as a condition sine
qua non to the issuance of a writ of preliminary
injunction, private respondents needed also to
show a clear legal right that ought to be
protected. That requirement is not satisfied in
this case. To stress, the possibility of irreparable
damage without proof of an actual existing right
would not justify an injunctive relief.
Indeed, Sections 204 and 229 of the NIRC provide
for the recovery of erroneously or illegally
collected taxes which would be the nature of the
excise taxes paid by private respondents should
Section 6 of R.A. No. 9334 be declared
unconstitutional or invalid.
The Court finds that public respondent had also
ventured into the delicate area which courts are
cautioned from taking when deciding
applications for the issuance of the writ of
preliminary injunction. Having ruled preliminarily
against the prima facie validity of R.A. No. 9334,
he assumed in effect the proposition that private
respondents in their petition for declaratory
relief were duty bound to prove, thereby shifting
to petitioners the burden of proving that R.A. No.
9334 is not unconstitutional or invalid.
In the same vein, the Court finds Judge Caguioa
to have overstepped his discretion when he
arbitrarily fixed the injunction bond of the SBF
enterprises at only P1million. Rule 58 FACTS:
Manila Electric Company (MERALCO) was grante
d franchise by certain municipalities of the Provi
nce of Laguna and the National Electrification Ad
ministration for the supply of electric light, heat
and power within their concerned areas.
Upon enactment of the Local Government Code,
the province enacted an ordinance imposing a t
ax on businesses enjoying a franchise. MERALCO
paid under protest and later claimed for refund
as it contravened Sec 1 of PD 551 imposing a fra
nchise tax of 2% of gross receipts notwithstandi
ng any provision of law or local ordinance to the
contrary.
ISSUE:
Whether or not the imposition of a franchise tax
by the Province of Laguna to MERLACO is violativ
e of the non-
impairment clause of the Constitution considerin
g that under PD 551 notwithstanding any provisi
on of law or local ordinance to the contrary, the
franchise tax payable shall be 2% of gross receip
ts.
RULING:
No, it is contractual tax exemptions where non-
impairment clause of the Constitution can rightl
y be invoked, not franchise. Contractual tax exe
mptions are those agreed to by the taxing autho
rity in contracts, such as those contained in gove
rnment bonds or debentures, lawfully entered in
to by them under enabling laws in which the gov
ernment, acting in its private capacity, sheds its
cloak of authority and waives its governmental i
mmunity.
It is even explicit in Article XII, Section 11, of the
1987 Constitution that “…Neither shall any such
franchise or right be granted except under the c
ondition that it shall be subject to amendment, a
lteration, or repeal by the Congress when the co
mmon good so requires. ” Hence, the Local Gove
rnment Code repealed or modified the inconsist
ent part or parts of PD 551.
, Section 4(b) provides that a bond is executed in
favor of the party enjoined to answer for all
damages which it may sustain by reason of the
injunction. The purpose of the injunction bond is
to protect the defendant against loss or damage
by reason of the injunction in case the court
finally decides that the plaintiff was not entitled
to it, and the bond is usually conditioned
accordingly.
Whether this Court must issue the writ of
prohibition, suffice it to stress that being
possessed of the power to act on the petition for
declaratory relief, public respondent
can proceed to determine the merits of the main
case. Moreover, lacking the requisite proof of
public respondent‘s alleged partiality, this Court
has no ground to prohibit him from proceeding
with the case for declaratory relief. For these
reasons, prohibition does not lie.
16
Meralco vs. Province of Laguna
FACTS:
Manila Electric Company (MERALCO) was grante
d franchise by certain municipalities of the Provi
nce of Laguna and the National Electrification Ad
ministration for the supply of electric light, heat
and power within their concerned areas.
Upon enactment of the Local Government Code,
the province enacted an ordinance imposing a t
ax on businesses enjoying a franchise. MERALCO
paid under protest and later claimed for refund
as it contravened Sec 1 of PD 551 imposing a fra
nchise tax of 2% of gross receipts notwithstandi
ng any provision of law or local ordinance to the
contrary.
ISSUE:
Whether or not the imposition of a franchise tax
by the Province of Laguna to MERLACO is violativ
e of the non-
impairment clause of the Constitution considerin
g that under PD 551 notwithstanding any provisi
on of law or local ordinance to the contrary, the
franchise tax payable shall be 2% of gross receip
ts.
RULING:
No, it is contractual tax exemptions where non-
impairment clause of the Constitution can rightl
y be invoked, not franchise. Contractual tax exe
mptions are those agreed to by the taxing autho
rity in contracts, such as those contained in gove
rnment bonds or debentures, lawfully entered in
to by them under enabling laws in which the gov
ernment, acting in its private capacity, sheds its
cloak of authority and waives its governmental i
mmunity.
It is even explicit in Article XII, Section 11, of the
1987 Constitution that “…Neither shall any such
franchise or right be granted except under the c
ondition that it shall be subject to amendment, a
lteration, or repeal by the Congress when the co
mmon good so requires. ” Hence, the Local Gove
rnment Code repealed or modified the inconsist
ent part or parts of PD 551
Taxation of Special Entities
17.
American Bible Society vs. City of Manila
GR No. L-9637 | April 30, 1957
Facts:
· American Bible Society 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
· City of Manila 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
· American Bible Society has been distributing
and selling bibles and/or gospel portions
throughout the Philippines and translating the
same into several Philippine dialect
· City Treasurer of Manila informed American
Bible Society that it was violating several
Ordinances for operating without the necessary
permit and license, thereby requiring the
corporation to secure the permit and license fees
covering the period from 4Q 1945-2Q 1953
· To avoid closing of its business, American Bible
Society paid the City of Manila its permit and
license fees under protest
· American Bible filed a complaint, questioning
the constitutionality and legality of the
Ordinances 2529 and 3000, and prayed for a
refund of the payment made to the City of
Manila. They contended:
a. They had been in the Philippines since 1899
and were not required to pay any license fee or
sales tax
b. it never made any profit from the sale of its
bibles
· City of Manila prayed that the complaint be
dismissed, reiterating the constitutionality of the
Ordinances in question
· Trial Court dismissed the complaint
· American Bible Society appealed to the Court of
Appeals
Issue: WON American Bible Society liable to pay
sales tax for the distribution and sale of bibles
Ruling: NO
· Under Sec. 1 of Ordinance 3000, one of the
ordinance in question, person or entity engaged
in any of the business, trades or occupation
enumerated under Sec. 3 must obtain a Mayor’s
 permit and license from the City Treasurer.
American Bible Society’s business is not among
those enumerated
· However, item 79 of Sec. 3 of the Ordinance
provides that all other businesses, trade or
occupation not mentioned, 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.
· 2 provisions of law that may have bearing on
this case:
a. Chapter 60 of the Revised Administrative Code,
the Municipal Board of the City of Manila is
empowered to tax and fix the license fees on
retail dealers engaged in the sale of books
b. Sec. 18(o) of RA 409: 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. Further, 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
· The only difference between the 2 provisions is
the limitation as to the amount of tax or license
fee that a retail dealer has to pay per annum
· As held in Murdock vs. Pennsylvania, The power
to impose a license tax on the exercise of these
freedoms provided for in the Bill of Rights, 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.
· Further, the case also mentioned that 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
· Under Sec. 27(e) of Commonwealth Act No. 466
or the National Internal Revenue
Code,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 shall not
be taxed
· 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 American Bible Society was
engaged in the business or occupation of selling
said "merchandise" for profit
· Therefore, the Ordinance cannot be applied for
in doing so it would impair American Bible
Society’s free exercise and enjoyment of its
religious profession and worship as well as its
rights of dissemination of religious beliefs.
Wherefore, and on the strength of the foregoing
considerations, We hereby reverse the decision
appealed from, sentencing defendant return to
plaintiff the sum of P5,891.45 unduly collected
from it

18.
REV. FR. CASIMIRO LLADOC v. The
COMMISSIONER OF INTERNAL REVENUE and
The COURT of TAX APPEALS. G.R. No. L-19201.
June 16, 1965
FACTS:
M.B. Estate, Inc. donated P10,000.00 in cash to
the parish priest of Victorias, Negros Occidental,
for the construction of a new Catholic Church in
the locality. The total amount was actually spent
for the purpose intended.
A year later, M.B. Estate, Inc., filed the donor's
gift tax return. CIR issued an assessment for
donee's gift tax against the parish, of which
petitioner was the priest.
Petitioner filed a protest which was denied by the
CIR. He then filed an appeal with the CTA citing
that he was not the parish priest at the time of
donation, that there is no legal entity or juridical
person known as the "Catholic Parish Priest of
Victorias," and, therefore, he should not be liable
for the donee's gift tax and that assessment of
the gift tax is unconstitutional.
The CTA denied the appeal thus this case.
ISSUE: Whether petitioner and the parish are
liable for the donee's gift tax
RULING:
Yes for the parish. The Constitution only made
mention of property tax and not of excise tax as
stated in Section 22, par 3. The assessment of the
CIR did not rest upon general ownership; it was
an excise upon the use made of the properties,
upon the exercise of the privilege of receiving the
properties. A gift tax is not a property tax, but an
excise tax imposed on the transfer of property by
way of gift inter vivos, the imposition of which on
property used exclusively for religious purposes,
does not constitute an impairment of the
Constitution.
No for the petitioner. The Court ordered
petitioner to be substituted by the Head of
Diocese to pay the said gift tax after the CIR and
Solicitor General did not object to such
substitution.
19.
Herrera v Quezon City Board of Assessment
(1961)
Herrera v Quezon City Board of Assessment GR
No L-15270, September 30, 1961
FACTS:
In 1952, the Director of the Bureau of Hospitals
authorized Jose V. Herrera and Ester Ochangco
Herrera to establish and operate the St.
Catherine’s Hospital. In 1953, the Herreras sent
a letter to the Quezon City Assessor requesting
exemption from payment of real estate tax on
the hospital, stating that the same was
established for charitable and humanitarian
purposes and not for commercial gain. The
exemption was granted effective years 1953 to
1955. In 1955, however, the Assessor
reclassified the properties from “exempt” to
“taxable” effective 1956, as it was ascertained
that out of the 32 beds in the hospital, 12 of
which are for pay-patients. A school of
midwifery is also operated within premises of
the hospital.
ISSUE:
Whether St. Catherine’s is exempt from realty
tax
RULING:
Yes. The admission of pay-patients does not
detract from the charitable character of a
hospital, if all its funds are devoted exclusively to
the maintenance of the institution as a public
charity.
The exemption extends to facilities which are
incidental to and reasonably necessary for the
accomplishment of said
purpose – a school for training nurses, a nurses’
home, e

20.
CIR v CA & YMCA
GR No 124043, October 14, 1998
FACTS:
In 1980, YMCA earned an income of 676,829.80
from leasing out a portion of its premises to small
shop owners, like restaurants and canteen
operators and 44,259 from parking fees collected
from non-members. On July 2, 1984, the CIR
issued an assessment to YMCA for deficiency
taxes which included the income from lease of
YMCA’s real property. YMCA formally protested
the assessment but the CIR denied the claims of
YMCA. On appeal, the CTA ruled in favor of YMCA
and excluded income from lease to small shop
owners and parking fees. However, the CA
reversed the CTA but affirmed the CTA upon
motion for reconsideration.
ISSUE:
Whether the rental income of YMCA is taxable
RULING:
Yes. The exemption claimed by YMCA is expressly
disallowed by the very wording of then Section 27
of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from
any of their properties, real or personal, be
subject to the tax imposed by the same Code.
While the income received by the organizations
enumerated in Section 26 of the NIRC is, as a rule,
exempted from the payment of tax in respect to
income received by them as such, the exemption
does not apply to income derived from any of
their properties, real or personal or from any of
their activities conducted for profit, regardless of
the disposition made of such income.
Digest#2
Facts:
The main question in this case is: “is the income
derived from rentals of real property owned by
Young Men’s Christian Association of the
Philippines (YMCA) – established as “a welfare,
educational and charitable non-profit
corporation” – subject to income tax under the
NIRC and the Constitution? In 1980, YMCA
earned an income of P676,829 from leasing out
a portion of its premises to small shop owners,
like restaurants and canteen operators and P44k
form parking fees.
Issue:
Whether or not the rental income of the YMCA
taxable
Ruling:
Yes. The exemption claimed by the YMCA is
expressly disallowed by the very wording of the
last paragraph of then Sec. 27 of the NIRC; court
is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any
convoluted attempt at construction. The said
provision mandates that the income of exempt
organizations (such as YMCA) from any of their
properties, real or personal, be subject to the
tax imposed by the same Code. Private
respondent is exempt from the payment of
property tax, but nit income tax on rentals from
its property.
21.
Petitioner: Lung Center of the Philippines
Respondents: Quezon City and Constantino P.
Rosas, in his capacity as City Assessor of Quezon
City
Facts:
The petitioner is a non-stock and non-
profit entity established on January 16, 1981 and
a registered owner of a parcel of land located at
Quezon Avenue corner Elliptical Road, Central
District, 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.
On June 7, 1993, both the land and the
hospital building of the petitioner were assessed
for real property taxes in the amount
of P4,554,860 by the City Assessor of Quezon
City. On August 25, 1993, the petitioner filed a
Claim for Exemption that it is a charitable
institution. The petitioners request was denied,
and a petition was, thereafter, filed before the
Local Board of Assessment Appeals of Quezon
City (QC-LBAA) for reversal. The petitioner
alleged 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. The petitioner contends that it
is a charitable institution and, as such, is exempt
from real property taxes. The QC-LBAA rendered
judgment dismissing the petition and holding
the petitioner liable for real property taxes.
The QC-LBAAs decision was, likewise, affirmed
on appeal by the Central Board of Assessment
Appeals of Quezon City (CBAA) which ruled that
the petitioner was not a charitable institution
and that its real properties were not actually,
directly and exclusively used for charitable
purposes; hence, it was not entitled to real
property tax exemption under the constitution
and the law. The petitioner sought relief from
the Court of Appeals, which rendered judgment
affirming the decision of the CBAA.
Thus, the petitioner files a petition for review on
certiorari before the Supreme Court.
Issue:
1. Whether or not petitioner is a charitable
institution within the context of PD 1823 and the
1973 and 1987 Constitution and Section 234(b)
of RA 7160.
2. Whether or not petitioner is exempted from real
property taxes.
Discussion:
1. The Court ruled that the petitioner is a
charitable institution within the context of the
1973 and 1987 Constitution. Under PD 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 with the Ministry
of Health and the Ministry of Human
Settlements. The purpose for which it was
created was to render medical services to the
public in general including those who are poor
and also the rich, and become a subject of
charity. Under Presidential Decree No. 1823,
petitioner is entitled to receive donations, even
if the gift or donation is in the form of subsidies
granted by the government.
2. Partly No. Under PD No. 1823, the petitioner
does not enjoy any property tax exemption
privileges for its real properties as well as the
building constructed thereon.The property tax
exemption under Section 28(3), Article VI of the
Constitution is for the property taxes only. This
provision was implanted by Sec.243 (b) of RA
No. 7160 which provides that in order to be
entitled to the exemption, the petitioner must
be able to prove that: it is a charitable institution
and; its real properties are actually, directly and
exclusively used for charitable purpose.
Accordingly, the portions occupied by the
hospital used for its patients are exempt from
real property taxes while those leased to private
entities are not exempt from such taxes.
Held:
The petition was partly granted. The
respondent Quezon City Assessor was directed
to determine the precise portions of the land
and the area thereof which are leased to private
persons, and to compute the real property taxes
due thereon as provided for by law.
22.
 Commissioner of Internal
Revenue vs. St Luke's Medical Center
Facts:
St. Luke’s Medical Center, Inc. (St.
Luke’s) is a hospital organized as a non-stock
and non-profit corporation. St. Luke’s accepts
both paying and non-paying patients. The BIR
assessed St. Luke’s deficiency taxes for 1998
comprised of deficiency income tax, value-
added tax, and withholding tax. The BIR claimed
that St. Luke’s should be liable for income tax at
a preferential rate of 10% as provided for by
Section 27(B). Further, the BIR claimed that St.
Luke’s was actually operating for profit in 1998
because only 13% of its revenues came
from charitable purposes. Moreover, the
hospital’s board of trustees, officers and
employees directly
benefit from its profits and assets.
On the other hand, St. Luke’s
maintained that it is a non-stock and non-profit
institution for charitable and social welfare
purposes exempt from income tax under Section
30(E) and (G) of the NIRC. It argued that the
making of profit per se does not destroy its
income tax exemption.
Issue:
The sole issue is whether St. Luke’s is
liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a
preferential tax rate of 10^ on the income of
proprietary non-profit hospitals.
Ruling:
Section 27(B) of the NIRC does not
remove the income tax exemption of
proprietary non-profit hospitals under Section
30(E) and (G). Section 27(B) on one hand, and
Section 30(E) and (G) on the
other hand, can be construed together
without the removal of such tax exemption.
Section 27(B) of the NIRC imposes a 10%
preferential tax rate on the
income of (1) proprietary non-
profit educational institutions and (2)
proprietary non-profit hospitals. The only
qualifications for hospitals are that they must be
proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary
educational institution” as
“any private school maintained and administer
ed by private individuals or groups” with a
government permit. “Non-profit” means no net
income or asset accrues to or benefits any
member or specific person, with all the net
income or asset devoted to the institution’s
purposes and all its activities conducted not for
profit.
“Non-profit” does not necessarily
mean “charitable.” In Collector of Internal
Revenue v. Club Filipino Inc. de Cebu, this Court
considered as non-profit a sports club organized
for recreation and entertainment of its
stockholders and members. The club was
primarily funded by membership fees and dues.
If it had profits, they were used for overhead
expenses and improving its golf course. The club
was non-profit because of its purpose
and there was no evidence that it
was engaged in a profit-making enterprise.
The sports club in Club Filipino Inc. de
Cebu may be non-profit, but it was not
charitable.
The Court defined “charity” in Lung Center o
f the Philippines v.
Quezon City as “a gift, to be applied consiste
ntly with existing laws, for the benefit of an
indefinite number of persons, either by bringing
their minds and hearts under the influence of
education or religion, by assisting them to
establish themselves in life or [by] otherwise
lessening the burden of government.”
However, despite its being a tax exempt
institution, any income such institution earns
from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Sec.
30.
To be a charitable institution, however,
an organization must meet the
substantive test of charity in Lung Center. Th
e issue in Lung Center concerns exemption
from real property tax and not income tax.
However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an
indefinite number of persons which lessens the
burden of
government. In other words, charitable institu
tions provide for free goods and services to
the public which would otherwise fall on the
shoulders of government. Thus, as a matter of
efficiency, the government forgoes taxes
which should have been spent to address pu
blic needs, because certain private entities
already assume a part of the burden. This is the
rationale for
the tax exemption of charitable institutions.
The loss of taxes by the government is
compensated by its relief from doing public
works which would have been funded by
appropriations from the Treasury
The Constitution exempts charitable
institutions only from real property taxes. In the
NIRC, Congress decided to extend the
exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC
is materially different from Section 28(3), Article
VI of the Constitution.
Section 30(E) of the NIRC defines the
corporation or association that is exempt from
income tax. On the other hand, Section 28(3),
Article VI of the Constitution does not define a
charitable institution, but requires that the
institution “actually, directly and exclusively”
use the property for a charitable purpose.
To be exempt from real property taxes,
Section 28(3), Article VI of the Constitution
requires that a charitable institution use the
property “actually, directly and exclusively” for
charitable purposes.
To be exempt from income
taxes, Section 30(E) of the NIRC
requires that a charitable institution must be
“organized and operated
exclusively” for charitable purposes. Likewise, to
be exempt from income taxes, Section 30(G) of
the NIRC requires that the institution
be “operated exclusively” for social welfare.
However, the last paragraph of Section
30 of the NIRC qualifies the words “organized
and operated exclusively” by providing that:
Notwithstanding the provisions in the
preceding paragraphs, the income of whatever
kind and character of the foregoing
organizations from any of
their properties, real or personal, or from an
y of their activities
conducted for profit regardless of the disposi
tion made of such income, shall be subject to
tax imposed under this Code.
In short, the last paragraph of Section
30 provides that if a tax exempt charitable
institution conducts “any” activity for profit,
such activity is not tax exempt even as its not-
for-profit activities remain tax exempt.
Thus, even if the charitable institution
must be “organized and operated exclusively”
for charitable purposes, it is nevertheless
allowed to engage in “activities conducted for
profit” without losing its tax exempt status for
its not-for-profit activities. The only
consequence is that the
“income of whatever kind and character”
of a charitable institution
“from any of its activities conducted for profi
t, regardless of the disposition made of such
income, shall be subject to tax.” Prior to the
introduction of Section 27(B), the tax rate on
such income from for-profit activities was the
ordinary corporate rate under Section
27(A). With the introduction of Section 27(B),
the tax rate is now 10%.
The Court finds that St. Luke’s is a
corporation that is not “operated exclusively”
for charitable or social welfare purposes insofar
as its revenues from paying patients are
concerned. This ruling is based not only on a
strict interpretation of a provision granting tax
exemption, but also on the clear and plain text
of Section 30(E) and (G). Section 30(E) and (G) of
the NIRC requires that an institution be
“operated exclusively” for charitable or social
welfare purposes to be completely exempt from
income tax. An institution under Section 30(E) or
(G) does not lose its tax exemption if it earns
income from its for-profit activities. Such income
from for-profit activities, under the last
paragraph of Section 30, is merely subject to
income tax, previously at the ordinary corporate
rate but now at the preferential 10% rate
pursuant to Section 27(B).
St. Luke’s fails to meet the requirements
under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income.
However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long
as it does not distribute any of its profits to its
members and such profits are reinvested
pursuant to its corporate purposes. St. Luke’s, as
a proprietary non-profit hospital, is entitled to
the preferential tax rate of 10% on its net
income from its for-profit activities.
St. Luke’s is therefore liable for
deficiency income tax in 1998 under Section
27(B) of the NIRC. However, St. Luke’s has good
reasons to rely on the letter dated 6 June 1990
by the BIR, which opined that St. Luke’s is “a
corporation for purely charitable and social
welfare purposes” and thus exempt from
income tax.
In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court
said that “good faith and honest belief that one
is not subject to tax on the basis of previous
interpretation of government agencies tasked to
implement the tax law, are sufficient
justification to delete the imposition of
surcharges and interest.”
WHEREFORE, St. Luke’s Medical Center, Inc. is
ORDERED
TO PAY the deficiency income tax in
1998 based on the 10% preferential income
tax rate under Section 27(8) of the
National Internal Revenue Code. However,
it is not liable for surcharges
and interest on such deficiency income tax u
nder Sections 248 and 249 of
the National Internal Revenue Code. All other
parts of the Decision and Resolution of the
Court of Tax Appeals are AFFIRMED.