G.R. No.
L-28896 February 17, 1988 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns
COMMISSIONER OF INTERNAL REVENUE vs. ALGUE, INC., and THE COURT OF TAX APPEALS,
Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the
other hand, such collection should be made in accordance with law as any arbitrariness will negate the very
reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good,
may be achieved.
The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax
returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the
Collector of Internal Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the
total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965,
Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day
in the office of the petitioner.2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the
pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced
his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April
7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was
only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on
April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with
the Court of Tax Appeals. 6
The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal
may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the
warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed
rejected." 10 But there is a special circumstance in the case at bar that prevents application of this accepted
doctrine.
The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it
filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy
was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty.
Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the
intervening period, the warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and
was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it
was filed, the reglementary period which started on the date the assessment was received, viz., January 14,
1965. The period started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the
appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not
an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently.
Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for
actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees
for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent
purchase of the properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be
personal holding company income 12 but later conformed to the decision of the respondent court rejecting this
assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons
among whom it was distributed It has been established that the Philippine Sugar Estate Development Company
had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process.
Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo
Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new
corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of
P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the
aforenamed individuals. 16
and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the
evidence, that no distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made,
whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner
suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.
We find that these suspicions were adequately met by the private respondent when its President, Alberto
Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum
but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was
a family corporation where strict business procedures were not applied and immediate issuance of receipts was
not required. Even so, at the end of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly,
everything seemed to be informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the
respondent court is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying
on any trade or business, including a reasonable allowance for salaries or other compensation for personal
services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid or incurred
in carrying on any trade or business may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of deductibility in the case of compensation 1
payments is whether they are reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are reasonable and are, in fact,
payments purely for service. This test and its practical application may be further stated and illustrated as
follows:
Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is
likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If
in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive
payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would
seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a
distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they
its controlling stockholders. 23
The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the
claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The
private respondent has proved that the payment of the fees was necessary and reasonable in the light of the
efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental
enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and
should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed
for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part
of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in
the running of the government. The government for its part, is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and material values.
This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an
arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law
has not been observed.
We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the
private respondent was permitted under the Internal Revenue Code and should therefore not have been
disallowed by the petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.SO
ORDERED.
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., vs. MUNICIPALITY OF TANAUAN,
LEYTE, THE MUNICIPAL MAYOR, ET AL
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was
certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging
the power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as
amended, June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced
a complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare
Section 2 of Republic Act No. 2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the
municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first,
both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates
imposed therein are practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer
of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said
municipality, sought to enforce compliance by the latter of the provisions of said Ordinance No. 27, series of
1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and
collects "from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every
bottle of soft drink corked." 2 For the purpose of computing the taxes due, the person, firm, company or
corporation producing soft drinks shall submit to the Municipal Treasurer a monthly report, of the total number
of bottles produced and corked during the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects
"on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE
CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing
the taxes due, the person, fun company, partnership, corporation or plant producing soft drinks shall submit to
the Municipal Treasurer a monthly report of the total number of gallons produced or manufactured during the
month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and
upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal
and constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the
costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn,
elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. 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. 6 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. 7 This is sanctioned by immemorial practice. 8 By
necessary implication, the legislative power to create political corporations for purposes of local self-
government carries with it the power to confer on such local governmental agencies the power to tax. 9 Under
the New Constitution, local governments are granted the autonomous authority to create their own sources of
revenue and to levy taxes. Section 5, Article XI provides: "Each local government unit shall have the power to
create its sources of revenue and to levy taxes, subject to such limitations as may be provided by law." Withal,
it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the sphere of the legislative
power to enact and vest in local governments the power of local taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not
suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not
limited 6 the exact measure of that which is exercised by itself. When it is said that the taxing power may be
delegated to municipalities and the like, it is meant that there may be delegated such measure of power to
impose and collect taxes as the legislature may deem expedient. Thus, municipalities may be permitted to tax
subjects which for reasons of public policy the State has not deemed wise to tax for more general
purposes. 10 This is not to say though that the constitutional injunction against deprivation of property without
due process of law may be passed over under the guise of the taxing power, except when the taking of the
property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule
on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the
government levying the tax; and (4) in the assessment and collection of certain kinds of taxes notice and
opportunity for hearing are provided. 11 Due process is usually violated where the tax imposed is for a private
as distinguished from a public purpose; a tax is imposed on property outside the State, i.e., extraterritorial
taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax does not
violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result in
an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to
the amount of the tax and the manner in which it shall be apportioned are generally not necessary to due
process of law. 12
There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory
of double taxation. It must be observed that the delegating authority specifies the limitations and enumerates
the taxes over which local taxation may not be exercised. 13 The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction against double taxation found in the
Constitution of the United States and some states of the Union. 14 Double taxation becomes obnoxious only
where the taxpayer is taxed twice for the benefit of the same governmental entity 15 or by the same
jurisdiction for the same purpose, 16 but not in a case where one tax is imposed by the State and the other by
the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two
ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from
its assumption that both ordinances are valid and legally enforceable. This is not so. As earlier quoted, 2
Ordinance No. 23, which was approved on September 25, 1962, levies or collects from soft drinks producers or
manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume
contents of the bottle used. When it was discovered that the producer or manufacturer could increase the
volume contents of the bottle and still pay the same tax rate, the Municipality of Tanauan enacted Ordinance
No. 27, approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity. The difference between the two ordinances clearly lies in the tax rate of the
soft drinks produced: in Ordinance No. 23, it was 1/16 of a centavo for every bottle corked; in Ordinance No.
27, it is one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the
Municipal Council of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute
for the prior Ordinance No. 23, and operates as a repeal of the latter, even without words to that
effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to enforce
Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that the Acting Municipal
Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27, series of
1962 is being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees
admits in his brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the
provisions of the latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific
tax. Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264,
is broad enough as to extend to almost "everything, accepting those which are mentioned therein." As long as
the text levied under the authority of a city or municipal ordinance is not within the exceptions and limitations
in the law, the same comes within the ambit of the general rule, pursuant to the rules of exclucion
attehus and exceptio firmat regulum in cabisus non excepti 19 The limitation applies, particularly, to the
prohibition against municipalities and municipal districts to impose "any percentage tax or other taxes in any
form based thereon nor impose taxes on articles subject to specific taxexcept gasoline, under the provisions of
the National Internal Revenue Code." For purposes of this particular limitation, a municipal ordinance which
prescribes a set ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales
tax and is null and void for being outside the power of the municipality to enact. 20 But, the imposition of "a tax
of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced
or manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or other
taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not on the sales.
The volume capacity of the taxpayer's production of soft drinks is considered solely for purposes of determining
the tax rate on the products, but there is not set ratio between the volume of sales and the amount of the
tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such
as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches
firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films,
playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.
3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced
or manufactured, or an equivalent of 1- centavos per case, 23 cannot be considered unjust and unfair. 24 an
increase in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory.
Municipal corporations are allowed much discretion in determining the reates of imposable taxes. 25 This is in
line with the constutional policy of according the widest possible autonomy to local governments in matters of
local taxation, an aspect that is given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless
the amount is so excessive as to be prohibitive, courts will go slow in writing off an ordinance as unreasonable.
27 Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if the purpose of the
law to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or
P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and
dealers of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance
No. 41, series of 1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of
Ordinance No. 27. Municipalities are empowered to impose, not only municipal license taxes upon persons
engaged in any business or occupation but also to levy for public purposes, just and uniform taxes. The
ordinance in question (Ordinance No. 27) comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local
Autonomy Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan,
Leyte, series of 1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal
effect. Costs against petitioner-appellant. SO ORDERED.
G.R. No. 134062 April 17, 2007
COMMISSIONER OF INTERNAL REVENUE, vs.BANK OF THE PHILIPPINE ISLANDS
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May 29, 1998 in CA-
G.R. SP No. 41025 which reversed and set aside the decision 3 and resolution4 of the Court of Tax Appeals (CTA)
dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed
respondent Bank of the Philippine Islands (BPIs) deficiency percentage and documentary stamp taxes for the
year 1986 in the total amount of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax P 7, 270,892.88
Add: 25% surcharge 1,817,723.22
20% interest from 1-21-87 to 10-28-88 3,215,825.03
Compromise penalty 15,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13
1986 Deficiency Documentary Stamp Tax
Deficiency percentage tax P93,723,372.40
Add: 25% surcharge 23,430,843.10
Compromise penalty 15,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50.5
Both notices of assessment contained the following note:
Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown above.
Said assessment has been based on return (filed by you) (as verified) (made by this Office) (pending provides that:
investigation) (after investigation). You are requested to pay the above amount to this Office or to our
Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx 6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed, even in the
vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency assessment is to
inform taxpayer why he has incurred a deficiency so that he can make an intelligent decision on whether to
pay or to protest the assessment. This is all the more so when the assessment involves astronomical
amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in the briefest form, why he
believes the taxpayer has a deficiency documentary and percentage taxes, and as to the percentage tax, it is
important that the taxpayer be informed also as to what particular percentage tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged between
your office and the Bankers Association of the Philippines [BAP] on this issue and of BPIs submission of its
computations under this compromise. There is therefore no basis whatsoever for this assessment, assuming
it is on the subject of the BAP compromise. On the other hand, if it relates to documentary stamp tax on
some other issue, we should like to be informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on how such assessment may be
protested since your letter does not even tell the taxpayer what particular percentage tax is involved and
how your examiner arrived at the deficiency. As soon as this is explained and clarified in a proper letter of
assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment. 7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85 and
therefore not deserving of any rejoinder by this office as no valid issue was raised against the validity of our
assessment still we obliged to explain the basis of the assessments.
this constitutes the final decision of this office on the matter. 8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8, 1991
letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992. 10
On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated November 16, 1995, the
CTA dismissed the case for lack of jurisdiction since the subject assessments had become final and
unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal
Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125. 12 It denied reconsideration in
a resolution dated May 27, 1996.13
On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the CTA14 for a
decision on the merits.15 It ruled that the October 28, 1988 notices were not valid assessments because they
did not inform the taxpayer of the legal and factual bases therefor. It declared that the proper assessments
were those contained in the May 8, 1991 letter which provided the reasons for the claimed deficiencies.16 Thus,
it held that BPI filed the petition for review in the CTA on time. 17 The CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for deficiency percentage and documentary stamp taxes for 3
1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to
be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the
taxpayer fails to respond, the [CIR] shall issue an assessment based on his findings.
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices19 were valid assessments. If
they were not, as held by the CA, then the correct assessments were in the May 8, 1991 letter, received by BPI
on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the findings which
the CIR denied in his December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the
petition for review filed by BPI in the CTA on February 18, 1992 would be well within the 30-day period
provided by law.20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments. He
asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the precise
purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof. 21 He contends
that there was no law or jurisprudence then that required notices to state the reasons for assessing deficiency
tax liabilities.22
BPI counters that due process demanded that the facts, data and law upon which the assessments were based
be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228), specifically
"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due process
requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however,
That a preassessment notice shall not be required in the following cases:
The taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the
deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of the
tax liabilities and a demand for payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its
amendment by RA 8424 (also known as the Tax Reform Act of 1997).23 In CIR v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of
estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon
the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform
Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the CIR's findings was changed in
1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be
made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22,
1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA
8424 was already in effect. The notice required under the old law was no longer sufficient under the
new law.25(emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was
for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a written
statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read
into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities,
the amount the taxpayer was to pay and a demand for payment within a prescribed period. 26 Everything
considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid
assessment under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation
of what the law required under the former Section 270. The amendment introduced by RA 8424 was an
innovation and could not be reasonably inferred from the old law. 29 Clearly, the legislature intended to insert a
new provision regarding the form and substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the legal
and factual basis of the formers decision to charge the latter for deficiency documentary stamp and gross
receipts taxes.31
In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to inform it in
writing of the factual and legal bases of the assessments even if these were not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that "no person shall be
deprived of his property without due process of law." 32 We note, however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to discuss
with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI] ignored) but that the
examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the issues, present
evidences as to what they need." Now, how can [BPI] and/or its counsel honestly tell this Court that they did
not know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,] contrary to
the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of the Accounting
Department of [BPI]. He testified to the fact that he prepared worksheets which contain his analysis regarding
the findings of the [CIRs] examiner, Mr. San Pedro and that the same worksheets were presented to Mr. Carlos
Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and basis
of the assessments, and was given all the opportunity to contest the same but ignored it despite the notice
conspicuously written on the assessments which states that "this ASSESSMENT becomes final and unappealable
if not protested within 30 days after receipt." Counsel resorted to dilatory tactics and dangerously played with
time. Unfortunately, such strategy proved fatal to the cause of his client. 33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to the
consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will
not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only
be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or
abuse on the part of the [CTA].34
Under the former Section 270, there were two instances when an assessment became final and unappealable:
(1) when it was not protested within 30 days from receipt and (2) when the adverse decision on the protest
was not appealed to the CTA within 30 days from receipt of the final decision: 35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in
such form and manner as may be prescribed by the implementing regulations within thirty (30) days from
receipt of the assessment; otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the
decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said decision;
otherwise, the decision shall become final, executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the same
within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify as a protest
since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter of
assessment, we shall inform you of the taxpayers decision on whether to pay or protest the
assessment."36 Hence, by its own declaration, BPI did not regard this letter as a protest against the
assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the October
28, 1988 notices as valid or proper assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day period provided in
the former Section 270 meant that they became final and unappealable. Thus, the CTA correctly dismissed
BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the correctness of the 4
assessments or invoking any defense that would reopen the question of its liability on the merits.37 Not only
that. There arose a presumption of correctness when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to
prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly
made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax assessments. 38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to have
failed to appeal the CIRs final decision regarding the disputed assessments within the 30-day period provided
by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision on the matter." BPI
therefore had 30 days from the time it received the decision on June 27, 1991 to appeal but it did not. Instead
it filed a request for reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond
the reglementary period. BPI must now suffer the repercussions of its omission. We have already declared that:
the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his action on
an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as
contemplated by Sections 7 and 11 of [RA 1125], as amended. On the basis of his statement indubitably
showing that the Commissioner's communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the
opportune time. Without needless difficulty, the taxpayer would be able to determine when his right
to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to
continually delay the finality of the assessment and, consequently, the collection of the amount
demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the
[CIR], this would encourage his office to conduct a careful and thorough study of every questioned assessment
and render a correct and definite decision thereon in the first instance. This would also deter the [CIR] from
unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play,
regularity, and orderliness in administrative action. 39(emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject tax
assessments.
We realize that these assessments (which have been pending for almost 20 years) involve a considerable
amount of money. Be that as it may, we cannot legally presume the existence of something which was never
there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will not be held
liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A
principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the
state whose social contract with its citizens obliges it to promote public interest and common good. The theory
behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals in CA-G.R.
SP No. 41025 is REVERSED and SET ASIDE. SO ORDERED.
G.R. No. 88291 May 31, 1991
ERNESTO M. MACEDA, vs. HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary,
Office of the President; HON. VICENTE R. JAYME, in his capacity as Secretary of the Department of
Finance; HON. SALVADOR MISON, in his capacity as Commissioner, Bureau of Customs; HON. JOSE
U. ONG, in his capacity as Commissioner of Internal Revenue; NATIONAL POWER CORPORATION;
the FISCAL INCENTIVES REVIEW BOARD; Caltex (Phils.) Inc.; Pilipinas Shell Petroleum Corporation;
Philippine National Oil Corporation; and Petrophil Corporation, respondents.
This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive
Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of Customs and the Fiscal
Incentives Review Board FIRB for exempting the National Power Corporation (NPC) from indirect tax and
duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake the
development of hydraulic power and the production of power from other sources. 1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, duties, fees, imposts, charges and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities.
On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress declared as a
national policy the total electrification of the Philippines through the development of power from all sources to
meet the needs of industrial development and rural electrification which should be pursued coordinately and
supported by all instrumentalities and agencies of the government, including its financial institutions. 2 The
corporate existence of NPC was extended to carry out this policy, specifically to undertake the development of
hydro electric generation of power and the production of electricity from nuclear, geothermal and other
sources, as well as the transmission of electric power on a nationwide basis. 3 Being a non-profit corporation,
Section 13 of the law provided in detail the exemption of the NPC from all taxes, duties, fees, imposts and
other charges by the government and its instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of Republic Act
No. 6395 by specifying, among others, the exemption of NPC from such taxes, duties, fees, imposts and other
charges imposed "directly or indirectly," on all petroleum products used by NPC in its operation. Presidential
Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by integrating the tax exemption
in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of
government-owned or controlled corporations including their subsidiaries. 4 However, said law empowered the
President and/or the then Minister of Finance, upon recommendation of the FIRB to restore, partially or totally,
the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and duty
exemption privileges of NPC from June 11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued
resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges effective July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty incentives
granted to government and private entities which had been restored under Presidential Decree Nos. 1931 and
1955 but it gave the authority to FIRB to restore, revise the scope and prescribe the date of effectivity of such
tax and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges
effective March 10, 1987. On October 5, 1987, the President, through respondent Executive Secretary
Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties originally paid
by respondents Caltex, Petrophil and Shell for specific and ad valorem taxes to the BIR; and for Customs
duties and ad valorem taxes paid by PNOC, Shell and Caltex to the Bureau of Customs on its crude oil
importation.
Many of the factual statements are reproduced from the Senate Committee on Accountability of Public
Officers and Investigations (Blue Ribbon) Report No. 474 dated January 12, 1989 and approved by the
Senate on April 21, 1989 (copy attached hereto as Annex "A") and are identified in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931 was
promulgated abolishing the tax exemptions of all government-owned or-controlled corporations, the oil
firmsnever paid excise or specific and ad valorem taxes for petroleum products sold and delivered to the
NPC. This non-payment of taxes therefore spanned a period of eight (8) years. (par. 23, p. 7, Annex "A")
During this period, the Bureau of Internal Revenue was not collecting specific taxes on the purchases of NPC
of petroleum products from the oil companies on the erroneous belief that the National Power Corporation
(NPC) was exempt from indirect taxes as reflected in the letter of Deputy Commissioner of Internal Revenue
(DCIR) Romulo Villa to the NPC dated October 29, 1980 granting blanket authority to the NPC to purchase
petroleum products from the oil companies without payment of specific tax (copy of this letter is attached
hereto as petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC only
after the promulgation of P.D. No. 1931 on June 11, 1984, withdrawing all exemptions granted in favor of
government-owned or-controlled corporations and empowering the FIRB to recommend to the President or
to the Minister of Finance the restoration of the exemptions which were withdrawn. "Specifically, Caltex paid
the total amount of P58,020,110.79 in specific and ad valorem taxes for deliveries of petroleum products to
NPC covering the period from October 31, 1984 to April 27, 1985." (par. 23, p. 7, Annex "A")
3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion. Beginning
June 11, 1984, when P.D. 1931 was promulgated abolishing NPC's tax exemptions, Caltex's billings to NPC
always included both duties and taxes. (Caturla, tsn, Oct. 10, 1988, pp. 1-5) (par. 24, p, 7, Annex "A")
4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to April, 1985,
NPC was billed a total of P522,016,77.34 (sic) including both duties and taxes, the specific tax component
being valued at P58,020,110.79. (par. 25, p. 8, Annex "A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true copy of
which is hereto attached as Annex "C", restored the tax exemption privileges of NPC effective retroactively to
June 11, 1984 up to June 30, 1985. The first paragraph of said resolution reads as follows:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power 5
Corporation under C.A. No. 120, as amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for a "refund of
Specific Taxes paid on petroleum products . . . in the total amount of P58,020,110.79. (par. 26, pp. 8-9,
Annex "A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex "D"),
Acting BIR Commissioner Ruben Ancheta declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum products from
the oil companies free of specific and ad valorem taxes, during the period in question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata, Chairman of the
FIRB (Annex "E"), requesting "the FIRB to resolve conflicting rulings on the tax exemption privileges of the
National Power Corporation (NPC)." These rulings involve FIRB Resolutions No. 1-84 and 10-85. (par. 40, p.
12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata confirmed the
ruling of May 8, 1985 of Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development Co., Ltd.,
a Korean contractor of NPC for its infrastructure projects, certified true copy of which is attached hereto as
petitioner's Annex "E", BIR Acting Commissioner Ruben Ancheta ruled:
In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by P.D. 938, this
Office is of the opinion, and so holds, that the scope of the tax exemption privilege enjoyed by NPC under
said section covers only taxes for which it is directly liable and not on taxes which are only shifted to it.
(Phil. Acetylene vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since contractor's tax is directly payable by
the contractor, not by NPC, your request for exemption, based on the stipulation in the aforesaid contract
that NPC shall assume payment of your contractor's tax liability, cannot be granted for lack of legal basis."
(Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is directly
liable and does not cover taxes which are only shifted to it or for indirect taxes. The BIR, through Ancheta,
reversed its previous position of May 8, 1985 adopted by Ancheta himself favoring NPC's indirect tax
exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex (Annex "F"),
the BIR Commissioner declared that PAL's tax exemption is limited to taxes for which PAL is directly liable,
and that the payment of specific and ad valorem taxes on petroleum products is a direct liability of the
manufacturer or producer thereof". (par. 51, p. 15, Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions retroactively
from July 1, 1985 to a indefinite period, certified true copy of which is hereto attached as petitioner's Annex
"H".
12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79
(corresponding to Caltex) was approved and released by way of a Tax Credit Memo (Annex "Q") dated July
7, 1986, certified true copy of which [is) attached hereto as petitioner's Annex "F," which was assigned by
NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment on July 30, 1987, certified true copy
of which is hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15, Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in partial
settlement of its outstanding obligations to the latter while Caltex, in turn, would apply the assigned tax
credit against its specific tax payments for two (2) months. (per memorandum dated July 28, 1986 of DCIR
Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit assigned
to Caltex, the NPC reiterated its request for the release of the balance of its pending refunds of taxes paid by
respondents Petrophil, Shell and Caltex covering the period from June 11, 1984 to early part of 1986
amounting to P410.58 million. (The claim of the first two (2) oil companies covers the period from June 11,
1984 to early part of 1986; while that of Caltex starts from July 1, 1985 to early 1986). This request was
denied on August 18, 1986, under BIR Ruling 152-86 (certified true copy of which is attached hereto as
petitioner's Annex "I"). The BIR ruled that NPC's tax free privilege to buy petroleum products covered only
the period from June 11, 1984 up to June 30, 1985. It further declared that, despite FIRB No. 1-86, NPC had
already lost its tax and duty exemptions because it only enjoys special privilege for taxes for which it
isdirectly liable. This ruling, in effect, denied the P410 Million tax refund application of NPC (par. 28, p. 9,
Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not resolved the
motion. (Benigna, II 3, Oct. 17, 1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988, p. 15)." (par.
29, p. 9, Annex "A")
15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR Commissioner
Tan, Jr. (certified true copy of which is hereto attached and made a part hereof as petitioner's Annex "J"),
reversed his previous position and states this time that all deliveries of petroleum products to NPC are tax
exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93, entitled
"Withdrawing All Tax and Duty Incentives, Subject to Certain Exceptions, Expanding the Powers of the Fiscal
Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption privilege
and included in the exemption "those pertaining to its domestic purchases of petroleum and petroleum
products, and the restorations were made to retroact effective March 10, 1987, a certified true copy of which
is hereto attached and made a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoez, Secretary of Justice, issued Opinion No. 77, series of
1987, opining that "the power conferred upon Fiscal Incentives Review Board by Section 2a (b), (c) and (d)
of Executive order No. 93 constitute undue delegation of legislative power and, therefore, [are]
unconstitutional," a copy of which is hereto attached and made a part hereof as Petitioner's Annex "L."
19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the Chairman of
the FIRB a certified true copy of which is hereto attached and made a part hereof as petitioner's Annex "M,"
confirmed and approved FIRB Res. No. 17-87 dated June 24, 1987, allegedly pursuant to Sections 1 (f) and
2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who by letter
dated May 2, 1988 asked him to rule "on whether or not, as the law now stands, the National Power
Corporation is still exempt from taxes, duties . . . on its local purchases of . . . petroleum products . . ."
declared that "NPC under the provisions of its Revised Charter retains its exemption from duties and taxes
imposed on the petroleum products purchased locally and used for the generation of electricity," a certified
true copy of which is attached hereto as petitioner's Annex "N." (par. 30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5, 1988 but
without the usual official form of "By the Authority of the President," a certified true copy of which is hereto
attached and made a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the Executive Secretary are based on the
RESOLUTION No. 17-87 of FIRB restoring the tax and duty exemption of the respondent NPC pertaining to
its domestic purchases of petroleum products (petitioner's Annex K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988 reported that
the Office of the President and the Department of Finance had ordered the BIR to refund the tax payments of
the NPC amounting to Pl.58 Billion which includes the P410 Million Tax refund already rejected by BIR
Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July 28, 1988 of Undersecretary
Marcelo B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was ordered released to NPC
(par. 31, p. 1 0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan requesting
them to hold in abeyance the release of the Pl.58 billion and await the outcome of the investigation in regard
to Senate Resolution No. 227," copies attached as Petitioner's Annexes "P" and "P-1 " (par. 32, p. 10, Annex
"A").
Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the BIR dated
August, 1988 requesting him to hold in abeyance the release of the tax refunds to NPC until after the
termination of the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from customs
custody, the corresponding customs duties and ad valorem taxes are paid. Bunker fuel oil is one of the
petroleum products processed from the crude oil; and same is sold to NPC. After the sale, NPC applies for
tax credit covering the duties and ad valorem exemption under its Charter. Such applications are processed
by the Bureau of Customs and the corresponding tax credit certificates are issued in favor of NPC which, in
turn assigns it to the oil firm that imported the crude oil. These certificates are eventually used by the
assignee-oil firms in payment of their other duty and tax liabilities with the Bureau of Customs. (par. 70, p.
19, Annex "A")
A lesser amount totalling P740 million, covering the period from 1985 to the present, is being sought by
respondent NPC for refund from the Bureau of Customs for duties paid by the oil companies on the
importation of crude oil from which the processed products sold locally by them to NPC was derived.
However, based on figures submitted to the Blue Ribbon Committee of the Philippine Senate which
conducted an investigation on this matter as mandated by Senate Resolution No. 227 of which the herein
petitioner was the sponsor, a much bigger figure was actually refunded to NPC representing duties and ad
valorem taxes paid to the Bureau of Customs by the oil companies on the importation of crude oil from 1979
to 1985.
26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227, entitled:
Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct a Formal and 6
Extensive Inquiry into the Reported Massive Tax Manipulations and Evasions by Oil Companies,
particularly Caltex (Phils.) Inc., Pilipinas Shell and Petrophil, Which Were Made Possible By Their Availing
of the Non-Existing Exemption of National Power Corporation (NPC) from Indirect Taxes, Resulting
Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the Department of Finance, Their
Refusal to Pay Since 1976 Customs Duties Amounting to Billions of Pesos on Imported Crude Oil
Purportedly for the Use of the National Power Corporation, the Non-Payment of Surtax on Windfall Profits
from Increases in the Price of Oil Products in August 1987 amounting Maybe to as Much as Pl.2 Billion
Surtax Paid by Them in 1984 and For Other Purposes.
27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a lengthy formal
inquiry on the matter, calling all parties interested to the witness stand including representatives from the
different oil companies, and in due time submitted its Committee Report No. 474 . . . The Blue Ribbon
Committee recommended the following courses of action.
1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power Corporation (NPC) and its
approval of Tax Credit memo covering said amount (Annex "P" hereto), dated July 7, 1986, and cancel its
approval of the Deed of Assignment (Annex "Q" hereto) by NPC to Caltex, dated July 28, 1986, and collect
from Caltex its tax liabilities which were erroneously treated as paid or settled with the use of the tax
credit certificate that NPC assigned to said firm.:
1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD 938 was issued.
Therefore, the grant of a tax refund to NPC in the amount of P58 million was illegal, and therefore, null
and void. Such refund was a nullity right from the beginning. Hence, it never transferred any right in
favor of NPC.
2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil companies on the same
ground that the NPC, since May 27, 1976 up to June 17, 1987 was never granted any indirect tax
exemption. So, the P1.58 billion represent taxes legally and properly paid by the oil firms.
3. Start collection actions of specific or excise and ad valorem taxes due on petroleum products sold to
NPC from May 27, 1976 (promulgation of PD 938) to June 17, 1987 (issuance of EO 195).
B. For the Bureau of Customs (BOC) to do the following:
1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of
petroleum products by NPC and allegedly granted under the NPC charter covering the years 1978-1988
...
 28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to direct
the Bureau of Internal Revenue and of Customs to proceed with the processing of claims for tax
credits/refunds of the NPC, respondent Executive Secretary rendered his ruling, the dispositive portion
of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained by proper
authorities, that department and/or its line-tax bureaus may now proceed with the processing of the claims of
the National Power Corporation for duty and tax free exemption and/or tax credits/ refunds, if there be any, in
accordance with the ruling of that Department dated May 20,1988, as confirmed by this Office on June 15,
1988 . .
Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary injunction
and/or restraining order, praying among others that:
1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent FIRB
Executive Secretary Macaraig, and Secretary of Finance Jayme restraining them and other persons acting
for, under, and in their behalf from enforcing their resolution, orders and ruling, to wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");
C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N").
2. Said temporary restraining order should also include respondent Commissioners of Customs Mison and
Internal Revenue Ong restraining them from processing and releasing any pending claim or application by
respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction against
above-named respondents and all persons acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the respondents:
A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27, 1976 up to the
present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");
3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund for
P58,020,110.79 (petitioner's Annex "F");
7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987 (petitioner's
Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the Bureau of
Internal Revenue and
9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by way of tax credit
certificates from 1979 up to the present.
C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent NPC with
the Bureau of Customs and the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue from enforcing
the abovequestioned resolution, orders and ruling of respondents Executive Secretary, Secretary of Finance,
and FIRB by processing and releasing respondent NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending claims for
refund of respondent NPC with the Bureau of Customs covering the period from 1985 to the present; to
cancel and invalidate the illegal payment made by respondents Caltex, Shell and PNOC by using the tax
credit certificates assigned to them by NPC and to recover from respondents Caltex, Shell and PNOC all the
amounts appearing in said tax credit certificates which were used to settle their duty and tax liabilities with
the Bureau of Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the pending claims
for refund of respondent NPC with the Bureau of Internal Revenue covering the period from June 11, 1984 to
June 17, 1987.
PETITIONER prays for such other relief and remedy as may be just and equitable in the premises. 6
The issues raised in the petition are the following:
To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds, this
Honorable Court must resolve the following issues:
Main issue
Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the enactment
of P.D. No. 938 on May 27, 1976 which amended P.D. No. 380, issued on January 11, 1974.
Corollary issues
1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax exemption
privilege effective June 11, 1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986
restoring NPC's tax exemption privilege effective July 1, 1985 included the restoration of indirect tax
exemption to NPC and
2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987; and if said Resolution was validly issued,
the nature and extent of the tax exemption privilege restored to NPC. 7
In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required respondents
to comment thereon, within ten (10) days from notice. The respondents having submitted their comment, on
October 10, 1989 the Court required petitioner to file a consolidated reply to the same. After said reply was
filed by petitioner on November 15, 1989 the Court gave due course to the petition, considering the comments
of respondents as their answer to the petition, and requiring the parties to file simultaneously their respective
memoranda within twenty (20) days from notice. The parties having submitted their respective memoranda,
the petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the standing to challenge the questioned orders and
resolution.
In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-
elected Senator of the Philippines." Public respondent argues that petitioner must show he has sustained direct
injury as a result of the action and that it is not sufficient for him to have a mere general interest common to
all members of the public.8
The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the
ruling inLozada when it involves illegal expenditure of public money. The petition questions the legality of the
tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil
companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.
Assuming petitioner has the personality to file the petition, public respondents also allege that the proper
remedy for petitioner is an appeal to the Court of Tax Appeals under Section 7 of R.A. No. 125 instead of this
petition. However Section 11 of said law provides 7
Sec. 11. Who may appeal; effect of appealAny person, association or corporation adversely affected by a
decision or ruling of the Commissioner of Internal Revenue, the Collector of Customs (Commissioner of
Customs) or any provincial or City Board of Assessment Appeals may file an appeal in the Court of Tax
Appeals within thirty days after receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner of
Internal Revenue, the Commissioner of Customs or any provincial or city Board of Assessment Appeal who may
appeal to the Court of Tax Appeals. Petitioner does not fall under this category.
Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal Revenue
to impose a tax assessment not found by him to be proper. It would be tantamount to a usurpation of
executive functions. 9
Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the
Commissioners of Internal Revenue and Customs when the exercise of discretion is tainted with arbitrariness
and grave abuse as to go beyond statutory authority. 10
Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an unlawful
exercise of jurisdiction 11 or to prevent the oppressive exercise of legal authority. 12 Precisely, petitioner
questions the lawfulness of the acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an indirect
tax. A direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in.
Examples are the custom duties and ad valorem taxes paid by the oil companies to the Bureau of Customs for
their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal
Revenue after converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone
else ." 13 For example, the excise and ad valorem taxes that oil companies pay to the Bureau of Internal
Revenue upon removal of petroleum products from its refinery can be shifted to its buyer, like the NPC, by
adding them to the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential Decree
No. 938, the exemption of NPC from indirect taxation was revoked and repealed. While petitioner concedes that
NPC enjoyed broad exemption privileges from both direct and indirect taxes on the petroleum products it used,
under Section 13 of Republic Act No, 6395 and more so under Presidential Decree No. 380, however, by the
deletion of the phrases "directly or indirectly" and "on all petroleum products used by the Corporation in the
generation, transmission, utilization and sale of electric power" he contends that the exemption from indirect
taxes was withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No. 938
regarding the payments of "all forms of taxes, etc." cannot be interpreted to include indirect tax exemption. He
cites Philippine Aceytelene Co. Inc. vs. Commissioner of Internal Revenue. 14 Petitioner emphasizes the
principle in taxation that the exception contained in the tax statutes must be strictly construed against the one
claiming the exemption, and that the rule that a tax statute granting exemption must be strictly construed
against the one claiming the exemption is similar to the rule that a statute granting taxing power is to be
construed strictly, with doubts resolved against its existence. 15 Petitioner cites rulings of the BIR that the
phrase exemption from "all taxes, etc." from "all forms of taxes" and "in lieu of all taxes" covers only taxes for
which the taxpayer is directly liable. 16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree No.
1931, the relevant provision of which are to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the
payment of duties, taxes . . . heretofore granted in favor of government-owned or controlled corporations
are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the
Fiscal Incentives Review Board . . . is hereby empowered to restore, partially or totally, the exemptions
withdrawn by Section 1 above . . . (Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation
under C.A. No. 120 as amended are restored up to June 30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing agreements, the NPC is
hereby required to furnish the FIRB on a periodic basis the particulars of items received or to be received
through such arrangements, for purposes of tax and duty exemptions privileges. 17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation
(NPC) under Commonwealth Act No. 120, as amended, are restored: Provided, That importations of fuel oil
(crude oil equivalent), and coal of the herein grantee shall be subject to the basic and additional import
duties; Provided, further, that the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other monetary benefits from
deposit substitutes, trust funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and improvements
owned by it provided that the beneficial use of the property is not transferred to another pursuant to the
provisions of Sec. 10(a) of the Real Property Tax Code, as amended. 18
Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86. Indeed,
they were issued in compliance with the requirement of Section 2, P.D. No. 1931, whereby the FIRB should
make the recommendation subject to the approval of "the President of the Philippines and/or the Minister of
Finance." While said Resolutions do not appear to have been approved by the President, they were
nevertheless approved by the Minister of Finance who is also duly authorized to approve the same. In fact it
was the Minister of Finance who signed and promulgated said resolutions. 19
The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and 1-86
which were promulgated by then Acting Minister of Finance Alfredo de Roda, Jr. and Minister of Finance Cesar
E.A Virata, as Chairman of FIRB respectively, should be separately approved by said Minister of Finance as
required by P.D. 1931 is, a superfluity. An examination of the said resolutions which are reproduced in full in
the dissenting opinion show that the said officials signed said resolutions in the dual capacity of Chairman of
FIRB and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of
Albay, 20wherein the Court observed that under P.D. No. 776 the power of the FIRB was only recommendatory
and requires the approval of the President to be valid. Thus, in said case the Court held that FIRB Resolutions
Nos. 10-85 and 1-86 not having been approved by the President were not valid and effective while the validity
of FIRB 17-87 was upheld as it was duly approved by the Office of the President on October 5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended P.D.
No. 776, it is clearly provided for that such FIRB resolution, may be approved by the "President of the
Philippines and/or the Minister of Finance." To repeat, as FIRB Resolutions Nos. 10-85 and 1-86 were duly
approved by the Minister of Finance, hence they are valid and effective. To this extent, this decision modifies or
supersedes the Court's earlier decision in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges
enjoyed by the NPC under its charter, C.A. No. 120, as amended, are restored, that is, only its direct tax
exemption privilege; and that it cannot be interpreted to cover indirect taxes under the principle that tax
exemptions are construedstricissimi juris against the taxpayer and liberally in favor of the taxing authority.
Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a tax
credit certificate 21 which was assigned to respondent Caltex through a deed of assignment approved by the
BIR 22 is patently illegal. He also contends that the pending claim of respondent NPC in the amount of P410.58
million with respondent BIR for the sale and delivery to it of bunker fuel by respondents Petrophil, Shell and
Caltex from July 1, 1985 up to 1986, being illegal, should not be released.
Now to the second corollary issue involving the validity of FIRB Resolution No. 17-87 issued on June 24, 1987.
It was issued under authority of Executive Order No. 93 dated December 17, 1986 which grants to the FIRB
among others, the power to recommend the restoration of the tax and duty exemptions/incentives withdrawn
thereunder.
Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect that
the powers conferred upon the FIRB by Section 2(a), (b), and (c) and (4) of Executive Order No. 93 "constitute
undue delegation of legislative power and is, therefore, unconstitutional." Petitioner observes that the FIRB did
not merely recommend but categorically restored the tax and duty exemption of the NPC so that the
memorandum of the respondent Executive Secretary dated October 5, 1987 approving the same is a
surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine
in Philippine Aceytelene, petitioner avers that the restoration cannot cover indirect taxes and it cannot create
new indirect tax exemption not otherwise granted in the NPC charter as amended by Presidential Decree No.
938.
The petition is devoid of merit. 8
The NPC is a non-profit public corporation created for the general good and welfare 23 wholly owned by the
government of the Republic of the Philippines. 24 From the very beginning of its corporate existence, the NPC
enjoyed preferential tax treatment 25 to enable the Corporation to pay the indebtedness and obligation and in
furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No.
6395" 26 which provides:
Sec. 1. Declaration of PolicyCongress hereby declares that (1) the comprehensive development, utilization
and conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the
total electrification of the Philippines through the development of power from all sources to meet the need of
rural electrification are primary objectives of the nation which shall be pursued coordinately and supported
by all instrumentalities and agencies of the government including its financial institutions.
From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is
obvious.
Under Republic Act No. 358, its exemption is provided as follows:
Sec. 2. To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all
taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities
and municipalities."
Under Republic Act No. 6395:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and other
Charges by Government and Governmental Instrumentalities. The Corporation shall be non-profit and shall
devote all its returns from its capital investment, as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby
declared exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and
 (d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the Philippines, its
provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of electric power.
(Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts and other
Charges by the Government and Government Instrumentalities. The Corporation shall be non-profit and
shall devote all its returns from its capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its
subsidiaries, is hereby declared, exempt:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other governmental agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operation and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,
on all petroleum produced used by the Corporation in the generation, transmission, utilization, and sale of
electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and Other
Charges by the Government and Government Instrumentalities.The Corporation shall be non-profit and
shall devote all its returns from its capital investment as well as excess revenues from its operation, for
expansion. To enable the Corporation to pay the indebtedness and obligations and in furtherance and
effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its
subsidiaries hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as
costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings. (Emphasis supplied.)
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover
"all taxes, duties, fees, imposts, charges, etc. . . ." However, the amendment under Republic Act No. 6395
enumerated the details covered by the exemption. Subsequently, P.D. No. 380, made even more specific the
details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum
products used in its operation. Presidential Decree No. 938 amended the tax exemption by simplifying the
same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties, fees, imposts, as well as
costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative
proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax
exemptions it has been enjoying before. The rationale for this exemption is that being non-profit the NPC "shall
devote all its returns from its capital investment as well as excess revenues from its operation, for expansion.
To enable the Corporation to pay the indebtedness and obligations and in furtherance and effective
implementation of the policy enunciated in Section one of this Act, . . ." 27
The preamble of P.D. No. 938 states
WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit character
of the NPC has not been fully utilized because of restrictive interpretations of the taxing agencies of the
government on said provisions. . . . (Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938 shall
be construed strictly against NPC. On the contrary, the law mandates that it should be interpreted liberally so
as to enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes
granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of
exemptions in favor of a government political subdivision or instrumentality. 28
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or
deductions, even more obvious than with reference to the affirmative or levying provisions of tax statutes, is
to minimize differential treatment and foster impartiality, fairness, and equality of treatment among tax
payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the government
itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of
money that has to be handled by government in the course of its operations. For these reasons, provisions
granting exemptions to government agencies may be construed liberally, in favor of non tax liability of such
agencies. 29
In the case of property owned by the state or a city or other public corporations, the express exemption should
not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the
state, since as to such property "exemption is the rule and taxation the exception." 30
The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No. 6395
and P.D. No. 380, is deemed repealed by P.D. No. 938 when the reference to it was deleted is not well-taken.
Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are presumed
to be passed with deliberation and with knowledge of all existing ones on the subject, it is logical to conclude
that in passing a statute it is not intended to interfere with or abrogate a former law relating to the same
subject matter, unless the repugnancy between the two is not only irreconcilable but also clear and convincing
as a result of the language used, or unless the latter Act fully embraces the subject matter of the earlier. 31 The
first effort of a court must always be to reconcile or adjust the provisions of one statute with those of another
so as to give sensible effect to both provisions. 32
The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated
part or a particular provision alone. 33 When construing a statute, the reason for its enactment should be kept
in mind and the statute should be construed with reference to its intended scope and purpose 34 and the evil
sought to be remedied. 35
The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric
generation of power and production of electricity from other sources, as well as the transmission of electric
power on a nationwide basis, to improve the quality of life of the people pursuant to the State policy embodied
in Section E, Article II of the 1987 Constitution.
It is evident from the provision of P.D. No. 938 that its purpose is to maintain the tax exemption of
NPC from all forms of taxes including indirect taxes as provided for under R.A. No. 6895 and P.D. No. 380 if it
is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given
controlling weight. 36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June 26,
1985 confirming said ruling, the letters of the BIR of August 18, 1986, and December 22, 1986, the letter of
the Secretary of Finance of February 19, 1987, the Memorandum of the Executive Secretary of October 9, 9
1987, by authority of the President, confirming and approving FIRB Resolution No. 17-87, the letter of the
Secretary of Finance of May 20, 1988 to the Executive Secretary rendering his opinion as requested by the
latter, and the latter's reply of June 15, 1988, it was uniformly held that the grant of tax exemption to NPC
under C.A. No. 120, as amended, included exemption from payment of all taxes relative to NPC's petroleum
purchases including indirect taxes. 37 Thus, then Secretary of Finance Vicente Jayme in his letter of May 20,
1988 to the Executive Secretary Macaraig aptly stated the justification for this tax exemption of NPC
The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase 'taxes
imposed indirectly on oil products and its exemption from 'all forms of taxes.' It is suggested that the change
in language evidenced an intention to exempt NPC only from taxes directly imposed on or payable by it;
since taxes on fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC locally are levied on and
paid by its oil suppliers, NPC thereby lost its exemption from those taxes. The principal authority relied on is
the 1967 case of Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the Revised Charter, the strengthening of NPC's
preferential tax treatment was clearly the intention. To the extent that the explanatory "whereas clauses"
may disclose the intent of the law-maker, the changes effected by P.D. 938 can only be read as being
expansive rather than restrictive, including its version of Section 13.
Our Tax Code does not recognize that there are taxes directly imposed and those imposed indirectly. The
textbook distinction between a direct and an indirect tax may be based on the possibility of shifting the
incidence of the tax. A direct tax is one which is demanded from the very person intended to be the payor,
although it may ultimately be shifted to another. An example of a direct tax is the personal income tax. On
the other hand, indirect taxes are those which are demanded from one person in the expectation and
intention that he shall indemnify himself at the expense of another. An example of this type of tax is the
sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no moment.
What is more relevant is that when an "indirect tax" is paid by those upon whom the tax ultimately falls, it is
paid not as a tax but as an additional part of the cost or of the market price of the commodity.
This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he analyzed
the nature of the percentage (sales) tax to determine whether it is a tax on the producer or on the purchaser
of the commodity. Under out Tax Code, the sales tax falls upon the manufacturer or producer. The phrase
"pass on" the tax was criticized as being inaccurate. Justice Castro says that the tax remains on the
manufacturer alone. The purchaser does not pay the tax; he pays an amount added to the price because of
the tax. Therefore, the tax is not "passed on" and does not for that reason become an "indirect tax" on the
purchaser. It is eminently possible that the law maker in enacting P.D. 938 in 1976 may have used lessons
from the analysis of Chief Justice Castro in 1967 Philippine Acetylene case.
When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-called oil
crunch had already drastically pushed up crude oil Prices from about $1.00 per bbl in 1971 to about $10 and
a peak (as it turned out) of about $34 per bbl in 1981. In 1974-78, NPC was operating the Meralco thermal
plants under a lease agreement. The power generated by the leased plants was sold to Meralco for
distribution to its customers. This lease and sale arrangement was entered into for the benefit of the
consuming public, by reducing the burden on the swiftly rising world crude oil prices. This objective was
achieved by the use of NPC's "tax umbrella under its Revised Charterthe exemption from specific taxes on
locally purchased fuel oil. In this context, I can not interpret P.D. 938 to have withdrawn the exemption from
tax on fuel oil to which NPC was already entitled and which exemption Government in fact was utilizing to
soften the burden of high crude prices.
There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil products
sold to NPC, whether paid to them by NPC or no never entered into the rates charged by NPC to its
customers not even during those periods of uncertainty engendered by the issuance of P.D. 1931 and E. 0.
93 on NP/Cs tax status. No tax component on the fuel have been charged or recovered by NPC through its
rates.
There is an import duty on the crude oil imported by the local refineries. After the refining process, specific
and ad valorem taxes are levied on the finished products including fuel oil or residue upon their withdrawal
from the refinery. These taxes are paid by the oil companies as the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component. NPC
pays the oil companies' invoices including the duty component but net of the tax component. NPC then
applies for drawback of customs duties paid and for a credit in amount equivalent to the tax paid (by the oil
companies) on the products purchased. The tax credit is assigned to the oil companiesas payment, in
effect, of the tax component shown in the sales invoices. (NOTE: These procedures varied over timeThere
were instances when NPC paid the tax component that was shifted to it and then applied for tax credit. There
were also side issues raised because of P.D. 1931 and E.O. 93 which withdrew all exemptions of government
corporations. In these latter instances, the resolutions of the Fiscal Incentives Review Board (FIRB) come
into play. These incidents will not be touched upon for purposes of this discussion).
NPC rates of electricity are structured such that changes in its cost of fuel are automatically (without need of
fresh approvals) reflected in the subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability to the tax
and duty component on the oil products, such amount will go into its fuel cost and be passed on to its
customers through corresponding increases in rates. Since 1974, when NPC operated the oil-fired generating
stations leased from Meralco (which plants it bought in 1979), until the present time, no tax on fuel oil ever
went into NPC's electric rates.
That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon me by yet
another circumstance. It is conceded that NPC at the very least, is exempt from taxes to which it is directly
liable. NPC therefore could very well have imported its fuel oil or crude residue for burning at its thermal
plants. There would have been no question in such a case as to its exemption from all duties and taxes, even
under the strictest interpretation that can be put forward. However, at the time P.D. 938 was issued in 1976,
there were already operating in the Philippines three oil refineries. The establishment of these refineries in
the Philippines involved heavy investments, were economically desirable and enabled the country to import
crude oil and process / refine the same into the various petroleum products at a savings to the industry and
the public. The refining process produced as its largest output, in volume, fuel oil or residue, whose
conventional economic use was for burning in electric or steam generating plants. Had there been no use
locally for the residue, the oil refineries would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-pass the
local oil refineries and import its fossil fuel requirements directly in order to avail itself of its exemption from
"direct taxes." The oil refineries had to keep operating both for economic development and national security
reasons. In fact, the restoration by the FIRB of NPC's exemption after P.D. 1931 and E.O. 93 expressly
excluded direct fuel oil importations, so as not to prejudice the continued operations of the local oil
refineries.
To answer your query therefore, it is the opinion of this Department that NPC under the provisions of its
Revised Charter retains its exemption from duties and taxes imposed on the petroleum products purchased
locally and used for the generation of electricity.
The Department in issuing this ruling does so pursuant to its power and function to supervise and control the
collection of government revenues by the application and implementation of revenue laws. It is prepared to
take the measures supplemental to this ruling necessary to carry the same into full effect.
As presented rather extensively above, the NPC electric power rates did not carry the taxes and duties paid
on the fuel oil it used. The point is that while these levies were in fact paid to the government, no part
thereof was recovered from the sale of electricity produced. As a consequence, as of our most recent
information, some P1.55 B in claims represent amounts for which the oil suppliers and NPC are "out-of-
pocket. There would have to be specific order to the Bureaus concerned for the resumption of the processing
of these claims." 38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the said
opinion ruling of the latter was confirmed and its implementation was directed. 39
The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the Secretary of
Finance as confirmed by the then Executive Secretary are well-taken. When the NPC was exempted from all
forms of taxes, duties, fees, imposts and other charges, under P.D. No. 938, it means exactly what it
says, i.e., all forms of taxes including those that were imposed directly or indirectly on petroleum products used
in its operation.
Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC
extends only to taxes for which it is directly liable and not to taxes merely shifted to it. However, these rulings
are predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It involved
the sales tax of products the plaintiff sold to NPC from June 2, 1953 to June 30,1958 when NPC was enjoying
tax exemption from all taxes under Commonwealth Act No. 120, as amended by Republic Act No. 358 issued on
June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so plaintiff
cannot claim exemptions simply because the NPC, the buyer, was exempt.
However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC whereby
Section 13 thereof was amended by emphasizing its non-profit character and expanding the extent of its tax
exemption.
As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells out
clearly the exemption of the NPC from indirect taxes. And as hereinabove stated, in P.D. No. 380, the
exemption of NPC from indirect taxes was emphasized when it was specified to include those imposed "directly
and indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the same in
general terms to cover "all forms of taxes, duties, fees, imposts, etc." which, as hereinabove discussed, 10
logically includes exemption from indirect taxes on petroleum products used in its operation.
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the
authority of which FIRB Resolution Nos. 10-85 and 1-86 were issued, and when Executive Order No. 93 was
promulgated, by which FIRB Resolution 17-87 was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental
circumstances. As a matter of fact, the amendments of Section 13, under R.A. No. 6395, P.D. No, 380 and P.D.
No. 838 appear to have been brought about by the earlier inconsistent rulings of the tax agencies due to the
doctrine in Philippine Acetylene, so as to leave no doubt as to the exemption of the NPC from indirect taxes on
petroleum products it uses in its operation. Effectively, said amendments superseded if not abrogated the
ruling in Philippine Acetylene that the tax exemption of NPC should be limited to direct taxes only.
In the light of the foregoing discussion the first corollary issue must consequently be resolved in the
affirmative, that is, FIRB Resolution No. 10-85 dated February 7, 1985 and FIRB Resolution No. 1-86 dated
January 7, 1986 which restored NPC's tax exemption privileges included the restoration of the indirect tax
exemption of the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which
restored NPC's tax exemption privilege effective March 10, 1987, the Court finds that the same is valid and
effective.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the
National Power Corporation, including those pertaining to its domestic purchases of petroleum and
petroleum products, granted under the terms and conditions of Commonwealth Act No. 120 (Creating
the National Power Corporation, defining its powers, objectives and functions, and for other
purposes), as amended, are restored effective March 10, 1987, subject to the following conditions:
1. The restoration of the tax and duty exemption privileges does not apply to the following:
1.1. Importation of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which include but are not limited
to those financed by the NPC's own internal funds, domestic borrowings from any source
whatsoever, borrowing from foreign-based private financial institutions, etc.); and
1.3. Interest income derived from any source.
 2. The NPC shall submit to the FIRB a report of its expansion program, including details of disposition
of relieved tax and duty payments for such expansion on an annual basis or as often as the FIRB may
require it to do so. This report shall be in addition to the usual FIRB reporting requirements on
incentive availment. 40
Executive Order No. 93 provides as follows
Sec. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty
incentives granted " to government and private entities are hereby withdrawn, except:
a) those covered by the non-impairment clause of the Constitution;
b) those conferred by effective international agreements to which the Government of the Republic of
the Philippines is a signatory;
c) those enjoyed-by enterprises registered with:
(i) the Board of Investments pursuant to Presidential Decree No. 1789, as amended;
(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66, as amended;
(iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to
Presidential Decree No. 538, as amended;
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction No.
1416;
e) those conferred under the four basic codes namely:
(i) the Tariff and Customs Code, as amended;
(ii) the National Internal Revenue Code, as amended;
(iii) the Local Tax Code, as amended;
(iv) the Real Property Tax Code, as amended;
f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board.
Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended,
is hereby authorized to:
a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;
b) revise the scope and coverage of tax and/of duty exemption that may be restored.
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date or period of effectivity of the restoration of tax and/or duty exemption;
e) formulate and submit to the President for approval, a complete system for the grant of subsidies
to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty
exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible
beneficiaries and the terms and conditions for the grant thereof taking into consideration the
international commitments of the Philippines and the necessary precautions such that the grant of
subsidies does not become the basis for countervailing action.
Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into
account any or all of the following considerations:
a) the effect on relative price levels;
b) relative contribution of the beneficiary to the revenue generation effort;
c) nature of the activity the beneficiary is engaged;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that the
powers conferred upon the FIRB by Sections 2(a), (b), (c), and (d) of Executive Order No. 93 constitute undue
delegation of legislative power and is therefore unconstitutional. However, he was overruled by the respondent
Executive Secretary in a letter to the Secretary of Finance dated March 30, 1989. The Executive Secretary, by
authority of the President, has the power to modify, alter or reverse the construction of a statute given by a
department secretary.41
A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The standards
of the delegated power are also clearly provided for.
The required "standard" need not be expressed. In Edu vs. Ericta 42 and in De la Llana vs. Alba 43 this Court
held: "The standard may be either express or implied. If the former, the non-delegated objection is easily met.
The standard though does not have to be spelled out specifically. It could be implied from the policy and
purpose of the act considered as a whole."
In People vs. Rosenthal 44 the broad standard of "public interest" was deemed sufficient. In Calalang vs.
Williams, 45, it was "public welfare" and in Cervantes vs. Auditor General, 46 it was the purpose of promotion of
"simplicity, economy and efficiency." And, implied from the purpose of the law as a whole, "national security"
was considered sufficient standard 47 and so was "protection of fish fry or fish eggs. 48
The observation of petitioner that the approval of the President was not even required in said Executive Order
of the tax exemption privilege approved by the FIRB unlike in previous similar issuances, is not well-taken. On
the contrary, under Section l(f) of Executive Order No. 93, aforestated, such tax and duty exemptions extended
by the FIRB must be approved by the President. In this case, FIRB Resolution No. 17-87 was approved by the
respondent Executive Secretary, by authority of the President, on October 15, 1987. 49
Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated
The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its
non-delegation the exception. The reason is the increasing complexity of modern life and many technical
fields of governmental functions as in matters pertaining to tax exemptions. This is coupled by the growing
inability of the legislature to cope directly with the many problems demanding its attention. The growth of
society has ramified its activities and created peculiar and sophisticated problems that the legislature cannot
be expected reasonably to comprehend. Specialization even in legislation has become necessary. To many of
the problems attendant upon present day undertakings, the legislature may not have the competence, let
alone the interest and the time, to provide the required direct and efficacious, not to say specific solutions. 50
Thus, in the case of Tablarin vs. Gutierrez, 51 this Court enunciated the rationale in favor of delegation of
legislative functions
One thing however, is apparent in the development of the principle of separation of powers and that is that
the maxim of delegatus non potest delegare or delegati potestas non potest delegare, adopted this practice
but which is also recognized in principle in the Roman Law d. 17.18.3) has been made to adapt itself to the
complexities of modern government, giving rise to the adoption, within certain limits, of the principle of
subordinate legislation, not only in the United States and England but in practically all modern governments.
(People vs. Rosenthal and Osmea, 68 Phil. 318, 1939). Accordingly, with the growing complexities of
modern life, the multiplication of the subjects of governmental regulation, and the increased difficulty of
administering the laws, there is a constantly growing tendency toward the delegation of greater power by
the legislative, and toward the approval of the practice by the Courts. (Emphasis supplied.)
The legislative authority could not or is not expected to state all the detailed situations wherein the tax
exemption privileges of persons or entities would be restored. The task may be assigned to an administrative
body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such
presumption can be overturned if its invalidity is proved beyond reasonable doubt. Otherwise, a liberal
interpretation in favor of constitutionality of legislation should be adopted. 52
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as above
discussed, the tax exemption privilege that was restored to NPC by FIRB Resolution No. 17-87 of June 1987
includes exemption from indirect taxes and duties on petroleum products used in its operation. 11
Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld
in Albay. 53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by President
Marcos in 1984 are invalid as they were presumably promulgated under the infamous Amendment No. 6 and
that as they cover tax exemption, under Section 17(4), Article VIII of the 1973 Constitution, the same cannot
be passed "without the concurrence of the majority of all the members of the Batasan Pambansa." And, even
conceding that the reservation of legislative power in the President was valid, it is opined that it was not validly
exercised as there is no showing that such presidential encroachment was justified under the conditions then
existing. Consequently, it is concluded that Executive Order No. 93, which was intended to implement said
decrees, is also illegal. The authority of the President to sub-delegate to the FIRB powers delegated to him is
also questioned.
In Albay, 54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree
withdrew tax exemptions of government-owned or controlled corporations including their subsidiaries but
authorized the FIRB to restore the same. Nevertheless, in Albay, as above-discussed, this Court ruled that the
tax exemptions under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions were only
recommendatory and were not duly approved by the President of the Philippines as required by P.D. No.
776. 55 The Court also sustained in Albaythe validity of Executive Order No. 93, and of the tax exemptions
restored under FIRB Resolution No. 17-87 which was issued pursuant thereto, as it was duly approved by the
President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is provided
that:
All existing laws, decrees, executive orders, proclamation, letters of instructions, and other executive
issuances not inconsistent with this constitution shall remain operative until amended, repealed or revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with the
Constitution.1wphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are
unconstitutional, the result would be the same, as then the latest applicable law would be P.D. No. 938 which
amended the NPC charter by granting exemption to NPC from all forms of taxes. As above discussed, this
exemption of NPC covers direct and indirect taxes on petroleum products used in its operation. This is as it
should be, if We are to hold as invalid and inoperative the withdrawal of such tax exemptions under P.D. No.
1931 as well as under Executive Order No. 93 and the delegation of the power to restore these exemptions to
the FIRB.
The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court ruled
that the NPC is liable for real estate taxes as of June 11, 1984 (the date of promulgation of P.D. No. 1931)
when NPC had ceased to enjoy tax exemption privileges since FIRB Resolution Nos. 1085 and 1-86 were not
validly issued. The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is estimated to
amount to P7.49 billion plus another P4.76 billion in fuel import duties the firm had earlier paid to the
government which the NPC now proposed to pass on to the consumers by another 33-centavo increase per
kilowatt hour in power rates on top of the 17-centavo increase per kilowatt hour that took effect just over a
week ago., 56 Hence, another case has been filed in this Court to stop this proposed increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated August
24, 1975 was already amended by P.D. No. 1931 ,57 wherein it is provided that such FIRB resolutions may be
approved not only by the President of the Philippines but also by the Minister of Finance. Such resolutions were
promulgated by the Minister of Finance in his own right and also in his capacity as FIRB Chairman. Thus, a
separate approval thereof by the Minister of Finance or by the President is unnecessary.
As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and
consequently, Albaymust be considered superseded to this extent by this decision. This is because P.D. No. 938
which is the latest amendment to the NPC charter granting the NPC exemption from all forms of taxes certainly
covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the
country but more importantly, to assure cheaper rates to be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil companies is not quite correct.1a\^/phi1 There
are various arrangements in the payment of crude oil purchased by NPC from oil companies. Generally, the
custom duties paid by the oil companies are added to the selling price paid by NPC. As to the specific and ad
valorem taxes, they are added a part of the seller's price, but NPC pays the price net of tax, on condition that
NPC would seek a tax refund to the oil companies. No tax component on fuel had been charged or recovered by
NPC from the consumers through its power rates. 58 Thus, this is not a case of tax evasion of the oil companies
but of tax relief for the NPC. The billions of pesos involved in these exemptions will certainly inure to the
ultimate good and benefit of the consumers who are thereby spared the additional burden of increased power
rates to cover these taxes paid or to be paid by the NPC if it is held liable for the same.
The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors may claim
the same privilege should be dispelled by the fact that (a) this decision particularly treats of only the exemption
of the NPC from all taxes, duties, fees, imposts and all other charges imposed by the government on the
petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A. No. 6395 and Section 13(d)
of P.D. No. 380, both specifically exempt the NPC from all taxes, duties, fees, imposts and all other charges
imposed by the government on all petroleum products used in its operation only, which is the very exemption
which this Court deems to be carried over by the passage of P.D. No. 938. As a matter of fact in Section 13(d)
of P.D. No. 380 it is specified that the aforesaid exemption from taxes, etc. covers those "directly or indirectly"
imposed by the "Republic of the Philippines, its provincies, cities, municipalities and other government agencies
and instrumentalities" on said petroleum products. The exemption therefore from direct and indirect tax on
petroleum products used by NPC cannot benefit the suppliers, importers and contractors of NPC of other
products or services.
The Court realizes the laudable objective of petitioner to improve the revenue of the government. The amount
of revenue received or expected to be received by this tax exemption is, however, not going to any of the oil
companies. There would be no loss to the government. The said amount shall accrue to the benefit of the NPC,
a government corporation, so as to enable it to sustain its tremendous task of providing electricity for the
country and at the least cost to the consumers. Denying this tax exemption would mean hampering if not
paralyzing the operations of the NPC. The resulting increased revenue in the government will also mean
increased power rates to be shouldered by the consumers if the NPC is to survive and continue to provide our
power requirements. 59 The greater interest of the people must be paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED.
G.R. No. 160756 March 9, 2010
CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., vs.THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,
In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 2 and the
revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said provision and
those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and
creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if there is no
realized gain.
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of
CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these revenue
regulations are contrary to law for two reasons: first, they ignore the different treatment by RA 8424 of
ordinary assets and capital assets andsecond, respondent Secretary of Finance has no authority to collect CWT,
much less, to base the CWT on the gross selling price or fair market value of the real properties classified as
ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due
process clause because, like the MCIT, the government collects income tax even when the net income has not
yet been determined. They contravene the equal protection clause as well because the CWT is being levied
upon real estate enterprises but not on other business enterprises, more particularly those in the
manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as
ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of
its gross income when such MCIT is greater than the normal corporate income tax imposed under Section
27(A).4 If the regular income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of
the MCIT over the normal tax shall be carried forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27(E) of RA 8424 provides: 12
Section 27 (E). [MCIT] on Domestic Corporations. -
(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year,
as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth
taxable year immediately following the year in which such corporation commenced its business operations,
when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the
taxable year.
(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby authorized to
suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner,
the necessary rules and regulations that shall define the terms and conditions under which he may suspend
the imposition of the [MCIT] in a meritorious case.
(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E) hereof, the
term gross income shall mean gross sales less sales returns, discounts and allowances and cost of goods
sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold including
insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of
finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies: Provided, however, that in the case of banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The pertinent
portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon
any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in
which such corporation commenced its business operations. The MCIT shall be imposed whenever such
corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under
Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.
(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as computed
under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal
income tax for the three (3) immediately succeeding taxable years.
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated
RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes.6 Under Section
2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real property, other than
capital assets, by persons residing in the Philippines and habitually engaged in the real estate business were
subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale,
exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation, estate,
trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in
accordance with the following schedule
Those which are exempt from a withholding Exempt
tax at source as prescribed in Sec. 2.57.5 of
these regulations.
With a selling price of five hundred 1.5%
thousand pesos (P500,000.00) or less.
With a selling price of more than five 3.0%
hundred thousand pesos (P500,000.00) but
not more than two million pesos
(P2,000,000.00).
With selling price of more than two million 5.0%
pesos (P2,000,000.00)
Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange,
the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall
be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on
the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a
case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or
installments to be paid to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be
deducted and withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale,
exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling
price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the
Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other
than capital asset, shall be imposed upon the withholding agent,/buyer, in accordance with the following
schedule:
Where the seller/transferor is exempt from [CWT] in accordance with Sec. Exempt
2.57.5 of these regulations.
Upon the following values of real property, where the seller/transferor is
habitually engaged in the real estate business.
With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less. 1.5%
With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) 3.0%
but not more than Two Million Pesos (P2,000,000.00).
With a selling price of more than two Million Pesos (P2,000,000.00). 5.0%
Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange,
the fair market value of the property received in exchange shall be considered as the consideration.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall
apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed
25% of the selling price), the tax shall be deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment
plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax
based on the gross selling price or fair market value of the property, whichever is higher, on the first
installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on
the sale, transfer or exchange of real property other than capital asset has been fully paid. (Underlined
amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange
subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers
and conveyances have been reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a
particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The
pertinent portions thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived
from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to
applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital 13
assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current
fair market value as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.
c. In the case of domestic corporations.
(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied:
(1) there must be an actual case calling for the exercise of judicial review; (2) the question before the court
must be ripe for adjudication; (3) the person challenging the validity of the act must have standing to do so;
(4) the question of constitutionality must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lis mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual
case calling for the exercise of judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the
BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has raised
concerns in mere abstract and hypothetical form without any actual, specific and concrete instances cited that
the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical data on
which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of real
property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does not really
settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. 11 On the
other hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse
effect on the individual challenging it.12
Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we
stated inDidipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have
ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the
Constitution and/or the law is enough to awaken judicial duty. 14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such
question once and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did
not allege that [it] itself is in the real estate business. It did not allege any material interest or any wrong that
it may suffer from the enforcement of [the assailed provisions]. 15
Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained
or will sustain direct injury as a result of the governmental act being challenged. 16 In Holy Spirit Homeowners
Association, Inc. v. Defensor,17 we held that the association had legal standing because its members stood to
be injured by the enforcement of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the
individual members of petitioner association are residents of the NGC. As such they are covered and stand to
be either benefited or injured by the enforcement of the IRR, particularly as regards the selection process of
beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail those
provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly, petitioner
and its members have sustained direct injury arising from the enforcement of the IRR in that they have been
disqualified and eliminated from the selection process. 18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements
of an actual case, ripeness or legal standing when paramount public interest is involved. 19 The questioned MCIT
and CWT affect not only petitioners but practically all domestic corporate taxpayers in our country. The
transcendental importance of the issues raised and their overreaching significance to society make it proper for
us to take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system.
It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true
income of corporations.21 It was devised as a relatively simple and effective revenue-raising instrument
compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that
everyone will make some minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT] so
as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative convenience.
This will go a long way in ensuring that corporations will pay their just share in supporting our public life and
our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business to the government. They
also benefit from the efforts of the government to improve the financial market and to ensure a favorable
business climate. It is therefore fair for the government to require them to make a reasonable contribution to
the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report
minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-
declaration of income or over-deduction of expenses otherwise called tax shelters. 23
Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year out and
paid no tax. So, if the corporation has been losing for the past five years to ten years, then that corporation
has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have
this provision to avoid this type of tax shelters, Your Honor. 24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements and its
tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are allowed in our
jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income, it prevents tax
evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the
law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the
year in which the corporation commenced its operations. 25 This grace period allows a new business to stabilize
first and make its ventures viable before it is subjected to the MCIT. 26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which
shall be credited against the normal income tax for the three immediately succeeding years. 27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of
Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force
majeure and legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries
already had their own system of minimum corporate income taxation. Our lawmakers noted that most
developing countries, particularly Latin American and Asian countries, have the same form of safeguards as we
do. As pointed out during the committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%) of
gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the
different countries have different basis for that minimum income tax.
The other thing youll notice is the preponderance of Latin American countries that employed this method.
Okay, those are additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own 14
versions of the MCIT.30
MCIT Is Not Violative of Due Process
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of law. It
explains that gross income as defined under said provision only considers the cost of goods sold and other
direct expenses; other major expenditures, such as administrative and interest expenses which are equally
necessary to produce gross income, were not taken into account. 31 Thus, pegging the tax base of the MCIT to a
corporations gross income is tantamount to a confiscation of capital because gross income, unlike net income,
is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The
exercise of taxing power derives its source from the very existence of the State whose social contract with its
citizens obliges it to promote public interest and the common good. 33
Taxation is an inherent attribute of sovereignty.34 It is a power that is purely legislative.35 Essentially, this
means that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose),
extent (rate), coverage (subjects) and situs (place) of taxation. 36 It has the authority to prescribe a certain tax
at a specific rate for a particular public purpose on persons or things within its jurisdiction. In other words, the
legislature wields the power to define what tax shall be imposed, why it should be imposed, how much tax shall
be imposed, against whom (or what) it shall be imposed and where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no
limits, so that the principal check against its abuse is to be found only in the responsibility of the legislature
(which imposes the tax) to its constituency who are to pay it. 37 Nevertheless, it is circumscribed by
constitutional limitations. At the same time, like any other statute, tax legislation carries a presumption of
constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty
or property without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause
may properly be invoked to invalidate, in appropriate cases, a revenue measure 39 when it amounts to a
confiscation of property.40 But in the same case, we also explained that we will not strike down a revenue
measure as unconstitutional (for being violative of the due process clause) on the mere allegation of
arbitrariness by the taxpayer.41 There must be a factual foundation to such an unconstitutional taint. 42 This
merely adheres to the authoritative doctrine that, where the due process clause is invoked, considering that it
is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.43
Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth which flows
into the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point
in time while income denotes a flow of wealth during a definite period of time.45 Income is gain derived and
severed from capital.46 For income to be taxable, the following requisites must exist:
(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from taxation. 47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other
words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the
sale of its goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not
being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax,
and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income
tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the
corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items
and at the same time reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many
jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless
it interferes with interstate commerce or violates the requirement as to uniformity of taxation. 50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a
lower tax rate but a broader tax base.51 Since our income tax laws are of American origin, interpretations by
American courts of our parallel tax laws have persuasive effect on the interpretation of these laws.52 Although
our MCIT is not exactly the same as the AMT, the policy behind them and the procedure of their
implementation are comparable. On the question of the AMTs constitutionality, the United States Court of
Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing
from large numbers of taxpayers with large incomes who were yet paying no taxes.
xxx xxx xxx
We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational
means of obtaining a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a
minimum amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation. 55
American courts have also emphasized that Congress has the power to condition, limit or deny deductions from
gross income in order to arrive at the net that it chooses to tax. 56 This is because deductions are a matter of
legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the
MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor
does it present empirical data to show that the implementation of the MCIT resulted in the confiscation of their
property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes. 58 Taxation is
necessarily burdensome because, by its nature, it adversely affects property rights. 59 The party alleging the
laws unconstitutionality has the burden to demonstrate the supposed violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is
being imposed and collected even when there is actually a loss, or a zero or negative taxable income:
Sec. 2.27(E) [MCIT] on Domestic Corporations.
(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or negative
taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from such
corporation. (Emphasis supplied)
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable
income, merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in
its business operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2%
of its gross income. This is consistent with the law which imposes the MCIT on gross income notwithstanding
the amount of the net income. But the law also states that the MCIT is to be paid only if it is greater than the
normal net income. Obviously, it may well be the case that the MCIT would be less than the net income of the
corporation which posts a zero or negative taxable income.
We now proceed to the issues involving the CWT.
The withholding tax system is a procedure through which taxes (including income taxes) are collected.61 Under
Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a)
withholding of final tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free
covenant bonds. Petitioner is concerned with the second category (CWT) and maintains that the revenue
regulations on the collection of CWT on sale of real estate categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends
that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated
"with grave abuse of discretion amounting to lack of jurisdiction" and "patently in contravention of
law"62 because they ignore such distinctions. Petitioners conclusion is based on the following premises: (a) the
revenue regulations use gross selling price (GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as ordinary assets and (b) they mandate the
collection of income tax on a per transaction basis, i.e., upon consummation of the sale via the CWT, contrary
to RA 8424 which calls for the payment of the net income at the end of the taxable period. 63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of
taxes on income from the sale of capital and ordinary assets.
Petitioners arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary
rules and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the
limitation that the rules and regulations must not override, but must remain consistent and in harmony with,
the law they seek to apply and implement.64 It is well-settled that an administrative agency cannot amend an
act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax
which is sanctioned by our tax laws.66 The withholding tax system was devised for three primary reasons: first,
to provide the taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through failure to file the 15
corresponding returns and third, to improve the governments cash flow.67 This results in administrative
savings, prompt and efficient collection of taxes, prevention of delinquencies and reduction of governmental
effort to collect taxes through more complicated means and remedies. 68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any
person, national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA
8424 which provides:
SEC. 57. Withholding of Tax at Source.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR],
require the withholding of a tax on the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the income tax liability of
the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed
on the income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable
year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real
Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income
tax from net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible
tax obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year. 70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic
corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to
be deducted from the net income tax payable by the taxpayer at the end of the taxable year. 71 Precisely,
Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived
from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be subject to
applicable taxes imposed under the Code, depending on whether the subject properties are classified as capital
assets or ordinary assets;
a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the
[CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as
determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case
may be, based on net taxable income.
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall besubject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to theordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes
withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld,
then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the tax withheld, the
taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality
and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know,
nor is he privy to, how much the taxpayer/seller will have as its net income at the end of the taxable year.
Instead, said withholding agents knowledge and privity are limited only to the particular transaction in which
he is a party. In such a case, his basis can only be the GSP or FMV as these are the only factors reasonably
known or knowable by him in connection with the performance of his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as
ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the
gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also
withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets
are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as
follows:
FWT CWT
a) The amount of income tax withheld by the a) Taxes withheld on certain income payments are
withholding agent is constituted as a full and final intended to equal or at least approximate the tax
payment of the income tax due from the payee on the due of the payee on said income.
said income.
b)The liability for payment of the tax rests primarily b) Payee of income is required to report the income
on the payor as a withholding agent. and/or pay the difference between the tax withheld
and the tax due on the income. The payee also has
the right to ask for a refund if the tax withheld is
more than the tax due.
c) The payee is not required to file an income tax c) The income recipient is still required to file an
return for the particular income. 73
income tax return, as prescribed in Sec. 51 and
Sec. 52 of the NIRC, as amended.74
As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the
sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners
contention that ordinary assets are being lumped together with, and treated similarly as, capital assets in
contravention of the pertinent provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the
provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax
involving ordinary assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way
as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The
withholding agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due
from the income payable is the essence of the withholding tax method of tax collection.
No Rule that Only Passive Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable.
According to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The
enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on
CWT should also be limited to passive income:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5);
28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3),
28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or person and paid in the same manner and subject to
the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these
as passive income. The BIR defines passive income by stating what it is not:
if the income is generated in the active pursuit and performance of the corporations primary purposes, the
same is not passive income76
It is income generated by the taxpayers assets. These assets can be in the form of real properties that return
rental income, shares of stock in a corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural
or juridical persons, residing in the Philippines." There is no requirement that this income be passive income. If
that were the intent of Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT.
The former covers the kinds of passive income enumerated therein and the latter encompasses any income
other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) 16
in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section
57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has been held that,
where a statute does not require any particular procedure to be followed by an administrative agency, the
agency may adopt any reasonable method to carry out its functions. 77 Similarly, considering that the law uses
the general term "income," the Secretary and CIR may specify the kinds of income the rules will apply to based
on what is feasible. In addition, administrative rules and regulations ordinarily deserve to be given weight and
respect by the courts78 in view of the rule-making authority given to those who formulate them and their
specific expertise in their respective fields.
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its
members of their property without due process of law because, in their line of business, gain is never assured
by mere receipt of the selling price. As a result, the government is collecting tax from net income not yet
gained or earned.
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of
the taxable year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld.
Nothing is taken that is not due so there is no confiscation of property repugnant to the constitutional
guarantee of due process. More importantly, the due process requirement applies to the power to tax. 79 The
CWT does not impose new taxes nor does it increase taxes. 80 It relates entirely to the method and time of
payment.
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to
wait years and may even resort to litigation before they are granted a refund. 81 This argument is misleading.
The practical problems encountered in claiming a tax refund do not affect the constitutionality and validity of
the CWT as a method of collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor
wages, materials, cost of money and other expenses which can then save the entity from having to obtain
loans entailing considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which
add to the burden of the realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs; heavy taxes and
prohibitive "up-front" regulatory fees from at least 20 government agencies. 82
Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints
are essentially matters of policy best addressed to the executive and legislative branches of the government.
Besides, the CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales
on installment are taxed on a per-installment basis.83 Petitioners desire to utilize for its operational and capital
expenses money earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is
being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises
are not similarly imposed a CWT on their sales, even if their manner of doing business is not much different
from that of a real estate enterprise. Like a manufacturing concern, a real estate business is involved in a
continuous process of production and it incurs costs and expenditures on a regular basis. The only difference is
that "goods" produced by the real estate business are house and lot units. 84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived
of the same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."85 Stated differently, all persons belonging to the same class shall be taxed alike. It follows that
the guaranty of the equal protection of the laws is not violated by legislation based on a reasonable
classification. 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.86
The taxing power has the authority to make reasonable classifications for purposes of taxation. 87 Inequalities
which result from a singling out of one particular class for taxation, or exemption, infringe no constitutional
limitation.88 The real estate industry is, by itself, a class and can be validly treated differently from other
business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize
that what distinguishes the real estate business from other manufacturing enterprises, for purposes of the
imposition of the CWT, is not their production processes but the prices of their goods sold and the number of
transactions involved. The income from the sale of a real property is bigger and its frequency of transaction
limited, making it less cumbersome for the parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several
thousand customers every month involving both minimal and substantial amounts. To require the customers of
manufacturing enterprises, at present, to withhold the taxes on each of their transactions with their tens or
hundreds of suppliers may result in an inefficient and unmanageable system of taxation and may well defeat
the purpose of the withholding tax system.
Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not
similarly subjected to the CWT.89As already discussed, the Secretary may adopt any reasonable method to
carry out its functions.90 Under Section 57(B), it may choose what to subject to CWT.
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales
of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject
to CWT for their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect
the regisration of any document transferring real property unless a certification is issued by the CIR that the
withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on
its contention that the CWT is unconstitutional. We have ruled that it is not. Furthermore, this provision uses
almost exactly the same wording as Section 58(E) of RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source.
(E) Registration with Register of Deeds. - No registration of any document transferring real property
shall be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has
certified that such transfer has been reported, and the capital gains or [CWT], if any, has been paid:
xxxx any violation of this provision by the Register of Deeds shall be subject to the penalties imposed under
Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand
is the income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend
not only with Einsteins observation but also with the vast and well-established jurisprudence in support of the
plenary powers of Congress to impose taxes. Petitioner has miserably failed to discharge its burden of
convincing the Court that the imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED. SO ORDERED.
G.R. No. L-1104 May 31, 1949
EASTERN THEATRICAL CO., INC., ET AL., vs.VICTOR, ALFONSO as City Treasurer of Manila, THE
MUNICIPAL BOARD OF THE CITY OF MANILA, and JUAN NOLASCO, as Mayor of the City of Manila, \
Twelve corporation engaged in motion picture business have initiated these proceeding through a complaint
dated May 5, 1946, to impugn the validity of Ordinance No. 2958 of the City of Manila which was enacted by
the municipalBoard of said city on April 25 1946 approved by the Mayor on April 27, 1946 and took effect on
May 1, 1946 said ordinance reading as follows:
AN ORDINANCE IMPOSING A FEE ON THE PRICE OF EVERY ADMISSION TICKET SOLD BY
CINEMATOGRAPHS, THEATERS VAUDEVILLE COMPANIES THEATRICAL SHOWS AND BOXING EXHIBITION
AND PROVIDING FOR OTHER PURPOSES.
SEC. 1. In addition to the fees paid by cinematographers, theaters, vaudeville companies, theatrical shows
and boxing exhibitions, as provided for in sections 633 and 778 of Ordinance No. 1600, known as the
Revised Ordinance of the City of Manila, as amended, there shall be collected from the place of amusement
which are specifically mentioned above the following fees on the price of every admission ticket sold by such
enterprises:
a. For every ticket sold the price of which is from P0.25 to P0.99 P0.05
b. For every ticket sold the price of which is from P1 to P1.99 0.10
c. For every ticket sold the price of which is from P2 to P2.99 0.15
d. for every ticket sold the price of which is from P3 to P4.99 0.20
e. or every ticket sold the price of which is from P5 to P5.99 0.25
f. For every ticket sold the price of which is from P0 to P14.99 0.35
g. For ticket sold thee price of which is from P15 or more 0.50
SEC. 2 It shall be the duty of every proprietor lessee, promoter, or operatorof such cinematographs, theater,
vaudeville companies, theatrical show and boxing exhibition to provide himself with tickets which shall be
serially numbered, indication therein the name of amusement place and the fee charge for admission. Before
such ticket are sold he same shall be presented to the office of the city Treasurer for registration. Tickets
once issued and presented at the gate of entrance shall be cut by the gatekeeper into halves, the first half to
be returned to the customer and the other half to be retained by the gate keeper.
It shall also be the duty of said proprietor lessee promoter or operator to deliver to the Office of the City
Treasurer the fees corresponding to the number of ticket old by him within two days after the performances
or exhibition has taken place. 17
SEC. 3. The fees herein prescribed shall not be paid where the admission fees or charge are collection for
and in behalf of any charitable education or religion institution or association.
All place of amusement which are operate by U.S. Army and Navy with fund belonging to the U.S.
Government are hereby exempted from fees herein imposed.
SEC. 4. Any person violation any of the provision of this ordinance shall upon conviction thereof be punished
by a fine of not more than P200 or by imprisonment for not more than six months or by both such fine and
imprisonment in the discretion of the court. If the violation is committed by the club firm or corporation the
manager the managing director or person charged with the management of the business of such club firm or
corporation shall be criminally responsible therefor.
SEC. 5. This Ordinance shall take effect on the May 1, 1946.
Plaintiffs, operator of theaters in Manila And distributor of local or imported films allege that they are interested
in the provision of section 1,2 and 4 of said ordinance which they impugn as null and void upon the following
grounds: (a) For violation the Constitution more particular the provision regarding the uniformity and equality
of taxation and thee equal protection of the laws; (b) because the Municipal Board of Manila exceeded and
over-stepped the power granted it the Charter of the City of Manila; (c) because it contravenes violates and is
inconsistent with, existing nationallegislation more particularly revenue and tax laws and (d) because it is
unfair, unjust, arbitrary capricious unreasonable oppressive and is contrary to and violation our basic and
recognizes principles of taxation and licensing laws.
Defendants allege as affirmative defenses the following: (a) That the ordinance was passed by the Municipal
Board of Manila by virtue of its express legislative power to tax fix the license fee and regulate the business of
theaters, cinematographs and further to fix the location of and to tax, fix the license fee for and regulate the
business of theatrical performances public exhibition circus and other performances and places of amusement;
(b) that the graduated tax required by said ordinance being applied to all cinematographs, theaters, vaudeville
companies theatricalshow and boxing exhibitions similarly situated and as a class without distinction or
exception the same does not violate the prohibition against uniformity and equality of taxation; (c) that the
graduated tax onadmission tickets to theaters and other places of amusement imposed by the National Internal
Revenue Code (Commonwealth Act No. 466) is collected by and for the purposes of the National Government,
whereas, Ordinance No.2958 imposes and requires the collection of a similar tax by and for the purposes of the
Government of the City of Manila, and there is no case of double taxation, (d) that said ordinance having been
enacted under the express power of the Municipal Board to tax for revenue as distinguishedfrom its power to
license for purely police purposes, the fact that the amount collected thereunder are higher than what are
needed for police regulation and supervision does not render said ordinance unfair unjust capricious
unreasonable and oppressive; (e) that consideration the nature of the business of the plaintiffs and the
enormous volume of business they handle the graduated tax fixed by the ordinance is not unreasonable.
Defendants allege also that since May 1, 1946, when the ordinance in question took effect plaintiffs have been
charging the theater-going public increased prices for admission to the cinematographs owned and operated to
the graduated tax imposed by said ordinance and as a result while refusing to pay said tax but at the same
time collecting an amount equal to said tax plaintiffs have taken undue advantage of said ordinance to realized
more profits.
On September 5, 1946, Judge Emilio Pena of the court of first Instance of Manila rendered a decision upholding
the validity of Ordinance No. 2958.
Plaintiffs appellants assign in the their brief three errors committed by the trial court. We will consider them
separately.
Appellants contend that the lower court erred in holding that under section 2444 (m) of the Revised
administrative Code the Municipal Board of the City ofManila had the power to enact Ordinance No. 2958.
Section 2444 (m) of the Revised Administrative code reads as follows:
To tax fix the license fee and regulate the business of hotels restaurants refreshment places, cafes, lodging
houses, boarding houses livery garages warehouses, pawnshops theaters, cinematographs; and further to fix
the location of and to tax fix the license fee for and regulate the businessof lively stables, the license fee for
and regulate the business of livery stable, boarding stables, embalmers, public billiard table public pool
tables, bowling alleys, dance halls, public dancing halls, cabarets, circusand other similar parades, public
vehicles, race tracks, horse races,Junk dealers, theatrical performances, public exhibitions, circus andother
performances and places of amusements, match factories, blacksmith shops, foundries, steam boilers,
lumber yards, shipyards, thestorage and sale of gunpowder, tar, pitch, resin, coal, oil, gasoline,benzene,
turpentine, 'hemp, cotton, nitroglycerin, petroleum or any Ofthe products thereof and of all other highly
combustible or explosivematerials and other establishment likely to endanger the public safety or give rise to
conflagration or explosion and subject to the provision of ordinance issue by the (Philippines Health Service)
Bureau of Health in accordance with law tanneries, renders tallow chandlers bone factories and soap
factories.
Appellants line of argument runs as follows:
By virtue of the specific power granted in the above quoted provision of the Revised Administration Code
Ordinance No. 2958 was enacted.
On August 7, 1940 the National Assembly enacted Commonwealth Act No. 466, known as the National Internal
Revenue Code section 18, 260 and 261 of which read as follows:
SEC. 18. Sources of revenue. The following taxes fees and charges are deemed to be national internal
revenue taxes:
(a) Income tax;
(b) Estate inheritance and gift taxes;
(c) Specific taxes on certain articles;
(d) Privilege taxes on business or occupation;
(e) Documentary stamp taxes;
(f) Mining taxes;
(g) Miscellaneous taxes fees and charges, namely, taxes on banks and insurance companies franchise taxes
on amusements charges on forest product fees for sealing weights and measures firearms license fees radio
registration fees and water rentals.
SEC. 260. Amusement taxes. There shall be collected from the proprietor, lessee, or operation of theater
cinematographs, concert halls, circuses, boxing exhibition and other places of amusement the following
taxes:
(a) When the amount paid for admission exceeds twenty-nine centavos, two centavos on each admission;
(b) When the amount paid for admission exceeds twenty-nine but does not exceed thirty-nine centavos,
three centavos on each admission;
(c) When the amount paid for admission exceeds thirty-nine centavos but does not exceed forty-nine
centavos four centavos on each admission.
(d) When the amount paid for admission exceeds forty-nine centavos but does not exceed fifty-nine
centavos five admission.
(e) When the amount paid for admission exceeds fifty-nine centavos but does not exceed sixty-nine centavos
six centavos on each admission.
(f) When the amount paid for admission exceeds sixty-nine centavos but does not exceed seventy nine
centavos seven centavos on each admission.
(g) When the amount paid for admission exceeds seventy nine centavos but does not exceed eighty-nine
centavos eight centavos on each admission;
(h) When the amount paid for admission exceeds eighty-nine centavos but does not exceed ninty-nine
centavos, nine centavos on each admission;
(i) When the amount paid for admission exceeds ninety-nine centavos, ten centavos on each admission.
In the case of theaters or cinematographs, the taxes herein prescribed shall first be decuted and withheld by
the proprietros, lessees, or operators of such theaters or cinematogrphs and paid to the Collector of Internal
Revenue before the gross receipts are divided between the proprietros, lessees, or operators of the theaters
of cinematographs and the distributors of the cinematographic films.
In the case of cockpits, race tracks, and cabarets, there shall be collected from the proprietor, lessee, or
operator a tax equivalent to ten per centum of the gross receipts, irrespective of whether or not any amount
is charged or paid for admission: Provided, however, That in the case of race tracks, this tax is in addition to
the privilege tax prescribed in seciton 193. for the purpose of the amusement tax, the term "gross receipts"
embraces all the receipts of the proprietor, lessee, or operator of the amusement place, excluding the
receipts derived by him from the sale of liquors, beverages, or other articles subject to specific tax, or from
any business subject to tax under this Code. (This section was amended by section 8, Republic Act No. 39,
effective October 1, 1946. We are quoting the original provision to show the status of the law when the
Ordinance was passed.)
SEC. 261. Exemption. The tax herein imposed shall not be paid where the admission fee or charges are
collected by or for and in behalf of any religious, charitable, scientific, or educational institution or
association, and where no part of the net proceeds of such admission fees or charges inures to the benefit of
any private stockholder or individual.
Ordinance No. 2958 does not specify the kind of the tax sought to be imposed but the seven schedules and
other details of said ordinance are, in every respect, identical with the amusement tax provided by section 260
of Commonwealth Act No. 466.
But, plaintiffs argue, that section 2444(m) of the Revised Administrative Code confers upon the City of Manila
the power to impose a tax on business but not on amusement and, consequently, Ordinance No. 2958 was
enacted beyond the charter powers of the City of Manila.
The whole argument of plaintiffs hinges, therefore, on the assumption that the power granted to the City of
Manila by section 2444(m) of the Revised Administrative Code is limited to the authority to impose a tax on
business, with exclusion of the power to impose a tax amusement; but, the assumption is based on an
arbitrary labeling of the kind of tax authorized by said section 2444(m). The distinction made by plaintiffs as to
the power to tax on business and the power to tax on amusement has no ground under the provisions of 18
section 2444(m) of the Revised Administrative Code. The tax therein authorized cannot be defined as tax on
business and cannot be restricted within a smaller scope than what is authorized by the words used, to the
extent of excluding what plaintiffs describe as tax on amusement.
The very fact that section 2444 (m) of the Revised Administrative Code includes theaters, cinematographs,
public billiard tables, public pool tables, bowling alleys, dance halls, public dancing halls, cabarets, circuses and
other similar places, race tracks, horse races, theatrical performances, public exhibition, circus and other
performances and places of amusements, will show conclusively that the power to tax amusement is expressly
included within the power granted by section 2444(m) of the Revised Administrative Code.
Plaintiffs-appellants contend that the lower court erred in not holding that section 2444 (m) of the Revised
Administrative Code was repealed or the power therein contained was withdrawn by the National Assembly by
the enactment of Commonwealth Act No. 466 known as the National Internal Revenue Code.
In support of this contention, plaintiffs aver that the Charter of the City of Manila, containing section 2444(m)
of the Revised Administrative Code, was enacted on December 8, 1929. On April 25, 1940, the National
Assembly enacted Commonwealth Act No. 466, including provisions on amusement tax, covering the whole
field on taxation and provided for more than what the ordinance in question has provided. As a result, there are
two taxing powers seeking to occupy exactly the same field of legislation, and so the apparent conflict must be
resolved with the conclusion that, with the enactment of Commonwealth Act No. 466, as later amended by
Republic Act No. 39, section 2444(m) of the Revised Administrative Code has been impliedly repealed and the
power therein delegated to the City of Manila withdrawn.
We see absolutely no force in plaintiffs' contention. The conflict pointed out by them is imaginary. Both
provisions of law may stand together and be enforced at the same time without any incompatibility among
themselves.
Finally, plaintiffs contend that the trial court erred in not holding that Ordinance No. 2958 violated the principle
of equality and uniformity of taxation enjoined by the Constitution (sec. 22, sub-sec. 1, Art. VI, Constitution of
the philippines).
To support this contenttion, appellantts point out to the fact that the ordinance in question does not tax "many
more kinds of amusements" than those therein specified, such as "race tracks, cockpits, cabarets, concert halls,
circuses, and other places of amusement." the argument has absolutely no merit. The fact that some places of
amusement are not taxed while others, such as cinematographs, theaters, vaudeville companies, theatrical
shows, and boxing exhibitions and other kinds of amusements or places of amusement are taxed, is no
argument at all against the equality and uniformity of the tax imposition. Equality and uniformity of the tax
imposition. Equality and uniformity in taxation means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation; and the appellants cannot point out what places of amusement taxed
by the ordinance do not constitute a class by themselves and which can be confused with those not included in
the ordinance.
The judgment of the trial court is affirmed with costs against appellants.
G.R. No. L-9637 April 30, 1957
AMERICAN BIBLE SOCIETY, vs. CITY OF MANILA,
Plaintiff-appellant is a foreign, non-stock, non-profit, religious, missionary corporation duly registered and doing
business in the Philippines through its Philippine agency established in Manila in November, 1898, with its
principal office at 636 Isaac Peral in said City. The defendant appellee is a municipal corporation with powers
that are to be exercised in conformity with the provisions of Republic Act No. 409, known as the Revised
Charter of the City of Manila.
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles and/or gospel
portions thereof (except during the Japanese occupation) throughout the Philippines and translating the same
into several Philippine dialects. On May 29 1953, the acting City Treasurer of the City of Manila informed
plaintiff that it was conducting the business of general merchandise since November, 1945, without providing
itself with the necessary Mayor's permit and municipal license, in violation of Ordinance No. 3000, as amended,
and Ordinances Nos. 2529, 3028 and 3364, and required plaintiff to secure, within three days, the
corresponding permit and license fees, together with compromise covering the period from the 4th quarter of
1945 to the 2nd quarter of 1953, in the total sum of P5,821.45 (Annex A).
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit and pay
under protest the sum of P5,891.45, if suit was to be taken in court regarding the same (Annex B). To avoid
the closing of its business as well as further fines and penalties in the premises on October 24, 1953, plaintiff
paid to the defendant under protest the said permit and license fees in the aforementioned amount, giving at
the same time notice to the City Treasurer that suit would be taken in court to question the legality of the
ordinances under which, the said fees were being collected (Annex C), which was done on the same date by
filing the complaint that gave rise to this action. In its complaint plaintiff prays that judgment be rendered
declaring the said Municipal Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364
illegal and unconstitutional, and that the defendant be ordered to refund to the plaintiff the sum of P5,891.45
paid under protest, together with legal interest thereon, and the costs, plaintiff further praying for such other
relief and remedy as the court may deem just equitable.
Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the Municipal
Board of the City of Manila by virtue of the power granted to it by section 2444, subsection (m-2) of the
Revised Administrative Code, superseded on June 18, 1949, by section 18, subsection (1) of Republic Act No.
409, known as the Revised Charter of the City of Manila, and praying that the complaint be dismissed, with
costs against plaintiff. This answer was replied by the plaintiff reiterating the unconstitutionality of the often-
repeated ordinances.
Before trial the parties submitted the following stipulation of facts:
COME NOW the parties in the above-entitled case, thru their undersigned attorneys and respectfully submit
the following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its principal office at 636 Isaac Peral, Manila, Bibles,
New Testaments, bible portions and bible concordance in English and other foreign languages imported by it
from the United States as well as Bibles, New Testaments and bible portions in the local dialects imported
and/or purchased locally; that from the fourth quarter of 1945 to the first quarter of 1953 inclusive the sales
made by the plaintiff were as follows:
2. That the parties hereby reserve the right to present evidence of other facts not herein stipulated.
WHEREFORE, it is respectfully prayed that this case be set for hearing so that the parties may
present further evidence on their behalf. (Record on Appeal, pp. 15-16).
When the case was set for hearing, plaintiff proved, among other things, that it has been in existence in the
Philippines since 1899, and that its parent society is in New York, United States of America; that its, contiguous
real properties located at Isaac Peral are exempt from real estate taxes; and that it was never required to pay
any municipal license fee or tax before the war, nor does the American Bible Society in the United States pay
any license fee or sales tax for the sale of bible therein. Plaintiff further tried to establish that it never made
any profit from the sale of its bibles, which are disposed of for as low as one third of the cost, and that in order
to maintain its operating cost it obtains substantial remittances from its New York office and voluntary
contributions and gifts from certain churches, both in the United States and in the Philippines, which are
interested in its missionary work. Regarding plaintiff's contention of lack of profit in the sale of bibles,
defendant retorts that the admissions of plaintiff-appellant's lone witness who testified on cross-examination
that bibles bearing the price of 70 cents each from plaintiff-appellant's New York office are sold here by
plaintiff-appellant at P1.30 each; those bearing the price of $4.50 each are sold here at P10 each; those
bearing the price of $7 each are sold here at P15 each; and those bearing the price of $11 each are sold here
at P22 each, clearly show that plaintiff's contention that it never makes any profit from the sale of its bible, is
evidently untenable.
After hearing the Court rendered judgment, the last part of which is as follows:
As may be seen from the repealed section (m-2) of the Revised Administrative Code and the repealing
portions (o) of section 18 of Republic Act No. 409, although they seemingly differ in the way the legislative
intent is expressed, yet their meaning is practically the same for the purpose of taxing the merchandise
mentioned in said legal provisions, and that the taxes to be levied by said ordinances is in the nature of
percentage graduated taxes (Sec. 3 of Ordinance No. 3000, as amended, and Sec. 1, Group 2, of Ordinance
No. 2529, as amended by Ordinance No. 3364).
IN VIEW OF THE FOREGOING CONSIDERATIONS, this Court is of the opinion and so holds that this case
should be dismissed, as it is hereby dismissed, for lack of merits, with costs against the plaintiff.
Not satisfied with this verdict plaintiff took up the matter to the Court of Appeals which certified the case to Us
for the reason that the errors assigned to the lower Court involved only questions of law.
Appellant contends that the lower Court erred:
1. In holding that Ordinances Nos. 2529 and 3000, as respectively amended, are not unconstitutional;
2. In holding that subsection m-2 of Section 2444 of the Revised Administrative Code under which
Ordinances Nos. 2592 and 3000 were promulgated, was not repealed by Section 18 of Republic Act No. 409;
3. In not holding that an ordinance providing for taxes based on gross sales or receipts, in order to be valid
under the new Charter of the City of Manila, must first be approved by the President of the Philippines; and
4. In holding that, as the sales made by the plaintiff-appellant have assumed commercial proportions, it
cannot escape from the operation of said municipal ordinances under the cloak of religious privilege.
The issues. As may be seen from the proceeding statement of the case, the issues involved in the present
controversy may be reduced to the following: (1) whether or not the ordinances of the City of Manila, Nos.
3000, as amended, and 2529, 3028 and 3364, are constitutional and valid; and (2) whether the provisions of
said ordinances are applicable or not to the case at bar.
Section 1, subsection (7) of Article III of the Constitution of the Republic of the Philippines, provides that:
(7) No law shall be made respecting an establishment of religion, or prohibiting the free exercise thereof,
and the free exercise and enjoyment of religious profession and worship, without discrimination or
preference, shall forever be allowed. No religion test shall be required for the exercise of civil or political 19
rights.
Predicated on this constitutional mandate, plaintiff-appellant contends that Ordinances Nos. 2529 and 3000, as
respectively amended, are unconstitutional and illegal in so far as its society is concerned, because they
provide for religious censorship and restrain the free exercise and enjoyment of its religious profession, to wit:
the distribution and sale of bibles and other religious literature to the people of the Philippines.
Before entering into a discussion of the constitutional aspect of the case, We shall first consider the provisions
of the questioned ordinances in relation to their application to the sale of bibles, etc. by appellant. The records,
show that by letter of May 29, 1953 (Annex A), the City Treasurer required plaintiff to secure a Mayor's permit
in connection with the society's alleged business of distributing and selling bibles, etc. and to pay permit dues
in the sum of P35 for the period covered in this litigation, plus the sum of P35 for compromise on account of
plaintiff's failure to secure the permit required by Ordinance No. 3000 of the City of Manila, as amended. This
Ordinance is of general application and not particularly directed against institutions like the plaintiff, and it does
not contain any provisions whatever prescribing religious censorship nor restraining the free exercise and
enjoyment of any religious profession. Section 1 of Ordinance No. 3000 reads as follows:
SEC. 1. PERMITS NECESSARY. It shall be unlawful for any person or entity to conduct or engage in any of
the businesses, trades, or occupations enumerated in Section 3 of this Ordinance or other businesses,
trades, or occupations for which a permit is required for the proper supervision and enforcement of existing
laws and ordinances governing the sanitation, security, and welfare of the public and the health of the
employees engaged in the business specified in said section 3 hereof, WITHOUT FIRST HAVING OBTAINED A
PERMIT THEREFOR FROM THE MAYOR AND THE NECESSARY LICENSE FROM THE CITY TREASURER.
The business, trade or occupation of the plaintiff involved in this case is not particularly mentioned in Section 3
of the Ordinance, and the record does not show that a permit is required therefor under existing laws and
ordinances for the proper supervision and enforcement of their provisions governing the sanitation, security
and welfare of the public and the health of the employees engaged in the business of the plaintiff. However,
sections 3 of Ordinance 3000 contains item No. 79, which reads as follows:
79. All other businesses, trades or occupations not mentioned in this Ordinance, except those upon which
the
City is not empowered to license or to tax P5.00
Therefore, the necessity of the permit is made to depend upon the power of the City to license or tax said
business, trade or occupation.
As to the license fees that the Treasurer of the City of Manila required the society to pay from the 4th quarter
of 1945 to the 1st quarter of 1953 in the sum of P5,821.45, including the sum of P50 as compromise,
Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028 prescribes the following:
SEC. 1. FEES. Subject to the provisions of section 578 of the Revised Ordinances of the City of Manila, as
amended, there shall be paid to the City Treasurer for engaging in any of the businesses or occupations
below enumerated, quarterly, license fees based on gross sales or receipts realized during the preceding
quarter in accordance with the rates herein prescribed: PROVIDED, HOWEVER, That a person engaged in any
businesses or occupation for the first time shall pay the initial license fee based on the probable gross sales
or receipts for the first quarter beginning from the date of the opening of the business as indicated herein for
the corresponding business or occupation.
GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are not yet subject to the
payment of any municipal tax, such as (1) retail dealers in general merchandise; (2) retail dealers
exclusively engaged in the sale of . . . books, including stationery.
As may be seen, the license fees required to be paid quarterly in Section 1 of said Ordinance No. 2529, as
amended, are not imposed directly upon any religious institution but upon those engaged in any of the business
or occupations therein enumerated, such as retail "dealers in general merchandise" which, it is alleged, cover
the business or occupation of selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection (m-2) of said legal
body, as amended by Act No. 3659, approved on December 8, 1929, empowers the Municipal Board of the City
of Manila:
(M-2) To tax and fix the license fee on (a) dealers in new automobiles or accessories or both, and (b) retail
dealers in new (not yet used) merchandise, which dealers are not yet subject to the payment of any
municipal tax.
For the purpose of taxation, these retail dealers shall be classified as (1) retail dealers in general
merchandise, and (2) retail dealers exclusively engaged in the sale of (a) textiles . . . (e) books, including
stationery, paper and office supplies, . . .: PROVIDED, HOWEVER, That the combined total tax of any debtor
or manufacturer, or both, enumerated under these subsections (m-1) and (m-2), whether dealing in one or
all of the articles mentioned herein, SHALL NOT BE IN EXCESS OF FIVE HUNDRED PESOS PER ANNUM.
and appellee's counsel maintains that City Ordinances Nos. 2529 and 3000, as amended, were enacted in
virtue of the power that said Act No. 3669 conferred upon the City of Manila. Appellant, however, contends that
said ordinances are longer in force and effect as the law under which they were promulgated has been
expressly repealed by Section 102 of Republic Act No. 409 passed on June 18, 1949, known as the Revised
Manila Charter.
Passing upon this point the lower Court categorically stated that Republic Act No. 409 expressly repealed the
provisions of Chapter 60 of the Revised Administrative Code but in the opinion of the trial Judge, although
Section 2444 (m-2) of the former Manila Charter and section 18 (o) of the new seemingly differ in the way the
legislative intent was expressed, yet their meaning is practically the same for the purpose of taxing the
merchandise mentioned in both legal provisions and, consequently, Ordinances Nos. 2529 and 3000, as
amended, are to be considered as still in full force and effect uninterruptedly up to the present.
Often the legislature, instead of simply amending the pre-existing statute, will repeal the old statute in its
entirety and by the same enactment re-enact all or certain portions of the preexisting law. Of course, the
problem created by this sort of legislative action involves mainly the effect of the repeal upon rights and
liabilities which accrued under the original statute. Are those rights and liabilities destroyed or preserved?
The authorities are divided as to the effect of simultaneous repeals and re-enactments. Some adhere to the
view that the rights and liabilities accrued under the repealed act are destroyed, since the statutes from
which they sprang are actually terminated, even though for only a very short period of time. Others, and
they seem to be in the majority, refuse to accept this view of the situation, and consequently maintain that
all rights an liabilities which have accrued under the original statute are preserved and may be enforced,
since the re-enactment neutralizes the repeal, therefore, continuing the law in force without interruption.
(Crawford-Statutory Construction, Sec. 322).
Appellant's counsel states that section 18 (o) of Republic Act No, 409 introduces a new and wider concept of
taxation and is different from the provisions of Section 2444(m-2) that the former cannot be considered as a
substantial re-enactment of the provisions of the latter. We have quoted above the provisions of section
2444(m-2) of the Revised Administrative Code and We shall now copy hereunder the provisions of Section 18,
subdivision (o) of Republic Act No. 409, which reads as follows:
(o) To tax and fix the license fee on dealers in general merchandise, including importers and indentors,
except those dealers who may be expressly subject to the payment of some other municipal tax under the
provisions of this section.
Dealers in general merchandise shall be classified as (a) wholesale dealers and (b) retail dealers. For
purposes of the tax on retail dealers, general merchandise shall be classified into four main classes: namely
(1) luxury articles, (2) semi-luxury articles, (3) essential commodities, and (4) miscellaneous articles. A
separate license shall be prescribed for each class but where commodities of different classes are sold in the
same establishment, it shall not be compulsory for the owner to secure more than one license if he pays the
higher or highest rate of tax prescribed by ordinance. Wholesale dealers shall pay the license tax as such, as
may be provided by ordinance.
For purposes of this section, the term "General merchandise" shall include poultry and livestock, agricultural
products, fish and other allied products.
The only essential difference that We find between these two provisions that may have any bearing on the case
at bar, is that, while subsection (m-2) prescribes that the combined total tax of any dealer or manufacturer, or
both, enumerated under subsections (m-1) and (m-2), whether dealing in one or all of the articles mentioned
therein, shall not be in excess of P500 per annum, the corresponding section 18, subsection (o) of Republic Act
No. 409, does not contain any limitation as to the amount of tax or license fee that the retail dealer has to pay
per annum. Hence, and in accordance with the weight of the authorities above referred to that maintain that
"all rights and liabilities which have accrued under the original statute are preserved and may be enforced,
since the reenactment neutralizes the repeal, therefore continuing the law in force without interruption", We
hold that the questioned ordinances of the City of Manila are still in force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be approved by the President
of the Philippines as per section 18, subsection (ii) of Republic Act No. 409, which reads as follows:
(ii) To tax, license and regulate any business, trade or occupation being conducted within the City of
Manila,not otherwise enumerated in the preceding subsections, including percentage taxes based on
gross sales or receipts, subject to the approval of the PRESIDENT, except amusement taxes.
but this requirement of the President's approval was not contained in section 2444 of the former Charter of the
City of Manila under which Ordinance No. 2529 was promulgated. Anyway, as stated by appellee's counsel, the
business of "retail dealers in general merchandise" is expressly enumerated in subsection (o), section 18 of
Republic Act No. 409; hence, an ordinance prescribing a municipal tax on said business does not have to be
approved by the President to be effective, as it is not among those referred to in said subsection (ii). Moreover,
the questioned ordinances are still in force, having been promulgated by the Municipal Board of the City of
Manila under the authority granted to it by law.
The question that now remains to be determined is whether said ordinances are inapplicable, invalid or
unconstitutional if applied to the alleged business of distribution and sale of bibles to the people of the
Philippines by a religious corporation like the American Bible Society, plaintiff herein.
With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028, appellant contends 20
that it is unconstitutional and illegal because it restrains the free exercise and enjoyment of the religious
profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted, guarantees the freedom of
religious profession and worship. "Religion has been spoken of as a profession of faith to an active power that
binds and elevates man to its Creator" (Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his
relations to His Creator and to the obligations they impose of reverence to His being and character, and
obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of the free exercise and
enjoyment of religious profession and worship carries with it the right to disseminate religious information. Any
restraints of such right can only be justified like other restraints of freedom of expression on the grounds that
there is a clear and present danger of any substantive evil which the State has the right to prevent". (Taada
and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 297). In the case at bar the license fee
herein involved is imposed upon appellant for its distribution and sale of bibles and other religious literature:
In the case of Murdock vs. Pennsylvania, it was held that an ordinance requiring that a license be obtained
before a person could canvass or solicit orders for goods, paintings, pictures, wares or merchandise cannot
be made to apply to members of Jehovah's Witnesses who went about from door to door distributing
literature and soliciting people to "purchase" certain religious books and pamphlets, all published by the
Watch Tower Bible & Tract Society. The "price" of the books was twenty-five cents each, the "price" of the
pamphlets five cents each. It was shown that in making the solicitations there was a request for additional
"contribution" of twenty-five cents each for the books and five cents each for the pamphlets. Lesser sum
were accepted, however, and books were even donated in case interested persons were without funds.
On the above facts the Supreme Court held that it could not be said that petitioners were engaged in
commercial rather than a religious venture. Their activities could not be described as embraced in the
occupation of selling books and pamphlets. Then the Court continued:
"We do not mean to say that religious groups and the press are free from all financial burdens of
government. See Grosjean vs. American Press Co., 297 U.S., 233, 250, 80 L. ed. 660, 668, 56 S. Ct. 444.
We have here something quite different, for example, from a tax on the income of one who engages in
religious activities or a tax on property used or employed in connection with activities. It is one thing to
impose a tax on the income or property of a preacher. It is quite another to exact a tax from him for the
privilege of delivering a sermon. The tax imposed by the City of Jeannette is a flat license tax, payment of
which is a condition of the exercise of these constitutional privileges. The power to tax the exercise of a
 privilege is the power to control or suppress its enjoyment. . . . Those who can tax the exercise of this
religious practice can make its exercise so costly as to deprive it of the resources necessary for its
maintenance. Those who can tax the privilege of engaging in this form of missionary evangelism can close all
its doors to all those who do not have a full purse. Spreading religious beliefs in this ancient and honorable
manner would thus be denied the needy. . . .
It is contended however that the fact that the license tax can suppress or control this activity is unimportant
if it does not do so. But that is to disregard the nature of this tax. It is a license tax a flat tax imposed on
the exercise of a privilege granted by the Bill of Rights . . . The power to impose a license tax on the exercise
of these freedom is indeed as potent as the power of censorship which this Court has repeatedly struck
down. . . . It is not a nominal fee imposed as a regulatory measure to defray the expenses of policing the
activities in question. It is in no way apportioned. It is flat license tax levied and collected as a condition to
the pursuit of activities whose enjoyment is guaranteed by the constitutional liberties of press and religion
and inevitably tends to suppress their exercise. That is almost uniformly recognized as the inherent vice and
evil of this flat license tax."
Nor could dissemination of religious information be conditioned upon the approval of an official or manager
even if the town were owned by a corporation as held in the case of Marsh vs. State of Alabama (326 U.S.
501), or by the United States itself as held in the case of Tucker vs. Texas (326 U.S. 517). In the former
case the Supreme Court expressed the opinion that the right to enjoy freedom of the press and religion
occupies a preferred position as against the constitutional right of property owners.
"When we balance the constitutional rights of owners of property against those of the people to enjoy
freedom of press and religion, as we must here, we remain mindful of the fact that the latter occupy a
preferred position. . . . In our view the circumstance that the property rights to the premises where the
deprivation of property here involved, took place, were held by others than the public, is not sufficient to
justify the State's permitting a corporation to govern a community of citizens so as to restrict their
fundamental liberties and the enforcement of such restraint by the application of a State statute." (Taada
and Fernando on the Constitution of the Philippines, Vol. 1, 4th ed., p. 304-306).
Section 27 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, provides:
SEC. 27. EXEMPTIONS FROM TAX ON CORPORATIONS. The following organizations shall not be taxed
under this Title in respect to income received by them as such
(e) Corporations or associations organized and operated exclusively for religious, charitable, . . . or
educational purposes, . . .: Provided, however, That the income of whatever kind and character from any of
its properties, real or personal, or from any activity conducted for profit, regardless of the disposition made
of such income, shall be liable to the tax imposed under this Code;
Appellant's counsel claims that the Collector of Internal Revenue has exempted the plaintiff from this tax and
says that such exemption clearly indicates that the act of distributing and selling bibles, etc. is purely religious
and does not fall under the above legal provisions.
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets was in some
instances a little bit higher than the actual cost of the same but this cannot mean that appellant was engaged
in the business or occupation of selling said "merchandise" for profit. For this reason We believe that the
provisions of City of Manila Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it
would impair its free exercise and enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs.
With respect to Ordinance No. 3000, as amended, which requires the obtention the Mayor's permit before any
person can engage in any of the businesses, trades or occupations enumerated therein, We do not find that it
imposes any charge upon the enjoyment of a right granted by the Constitution, nor tax the exercise of religious
practices. In the case of Coleman vs. City of Griffin, 189 S.E. 427, this point was elucidated as follows:
An ordinance by the City of Griffin, declaring that the practice of distributing either by hand or otherwise,
circulars, handbooks, advertising, or literature of any kind, whether said articles are being delivered free, or
whether same are being sold within the city limits of the City of Griffin, without first obtaining written
permission from the city manager of the City of Griffin, shall be deemed a nuisance and punishable as an
offense against the City of Griffin, does not deprive defendant of his constitutional right of the free exercise
and enjoyment of religious profession and worship, even though it prohibits him from introducing and
carrying out a scheme or purpose which he sees fit to claim as a part of his religious system.
It seems clear, therefore, that Ordinance No. 3000 cannot be considered unconstitutional, even if applied to
plaintiff Society. But as Ordinance No. 2529 of the City of Manila, as amended, is not applicable to plaintiff-
appellant and defendant-appellee is powerless to license or tax the business of plaintiff Society involved herein
for, as stated before, it would impair plaintiff's right to the free exercise and enjoyment of its religious
profession and worship, as well as its rights of dissemination of religious beliefs, We find that Ordinance No.
3000, as amended is also inapplicable to said business, trade or occupation of the plaintiff.
Wherefore, and on the strength of the foregoing considerations, We hereby reverse the decision appealed from,
sentencing defendant return to plaintiff the sum of P5,891.45 unduly collected from it. Without pronouncement
as to costs. It is so ordered.
G.R. No. 3473 March 22, 1907
J. CASANOVAS, vs. JNO. S. HORD,
The plaintiff brought this action against the defendant, the Collector of Internal Revenue, 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. Judgment was rendered in the court below in favor of the defendant, and from that judgment the
plaintiff appealed.
There is no dispute about the facts.
In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of the 14th of
May, 1867, granted to the plaintiff certain mines in the said Province of Ambos Camarines, of which mines the
plaintiff is now the owner.
That there were valid perfected mining concessions granted prior to the 11th of April, 1899, is conceded. They
were so considered by the Collector of Internal Revenue and were by him said to fall within the provisions of
section 134 of Act No. 1189, known as the Internal Revenue Act. That section is as follows:
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.
The defendant accordingly imposed upon these properties the tax mentioned in section 134, which tax, as has
before been stated, plaintiff paid under protest.
The only question in the case is whether this section 134 is void or valid.
I. It is claimed by the plaintiff that it is void because it comes within the provision of section 5 of the act of
Congress of July 1, 19021 (32 U.S. Stat. L., 691), which provides "that no law impairing the obligation of
contracts shall be enacted." The royal decree of the 14th of May, 1867, provided, among other things, as
follows: 21
ART. 76. On each pertenencia minera (mining claim) of the area prescribed in the first paragraph of article
13 (sixty thousand square meters) there shall be paid annually a fixed tax of forty escudos (about P20.00).
Thepertenencia referred to in the second paragraph of the same article, though of greater area than the
others (one hundred and fifty thousand square meters), shall pay only twenty escudos (about P10.00).
ART. 78. Pertenencia of iron mines and mines of combustible minerals shall be exempt from the annual tax
for a period of thirty years from the date of publication of this decree.
ART. 80. A further tax of three per centum on the gross earnings shall be paid without deduction of costs of
any kind whatsoever. All substances enumerated in section one shall be exempt from said tax of three per
centum for a period of thirty years.
ART. 81. No other taxes than those herein mentioned shall be imposed upon mining and metallurgical
industries.
The royal decree and regulation for its enforcement provided that the deeds granted by the Government should
be in a particular form, which form was inserted in the regulations. It must be presumed that the deeds
granted to the plaintiff were made as provided by law, and, in fact, one of such concessions was exhibited
during the argument in this court, and was found to be in exact conformity with the form prescribed by law.
The deed is as follows:
Don Camilo Garcia de Polavieja, Marquez de Polavieja, Teniente General de los Ejercitos Nacionales,
Caballero Gran Cruz de la Real y Militar Orden de San Hermenegildo, de la Real y distinguida de Isabel la
Catolica, de la del Merito Militar Roja, de la de la Corona de Italia, Comendador de Carlos Tercero,
Bennemerito de la Patria en grado eminente, condecorado con varias cruses de distincion por meritos de
guerra, Capitan General y Gobernador General de Filipinas.
Whereas I have granted to Don Joaquin Casanovas y Llovet and to Don Martin Buck the concession of a gold
mine entitled "Nueva California Segunda" in the jurisdiction of Paracale, Province of Ambos Camarines: Now,
therefore, in the name of His Majesty the King (whom God preserve), and pursuant to the provisions of
article 37 of the royal decree of May 14, 1867, regulating mining in these Islands, I issue, this fifth day of
November, eighteen hundred and ninety-six, this title deed to four pertenencias, comprising an area of two
hundred and forty thousand square meters, as shown in the attached sketch map drafted by the engineer
Don Enrique Abella y Casariego, and dated at Manila December sixteenth of the said year, subject to the
following general terms and conditions:
 1. That the mine shall be worked in conformity with the rules in mining, the grantee and his laborers to be
governed by the police rules established by existing regulations.
2. That the grantee shall be liable for all damages to third parties that may be caused by his operations.
3. That the grantee shall likewise indemnify his neighbors for any damage they may suffer by reason of
water accumulated on his works, if, upon being requested, he fail to drain the same within the time
indicated.
4. That he shall contribute for the drainage of the adjacent mines and for the general galleries for drainage
or haulage in proportion to the benefit he derives therefrom, whenever, by authority of the Governor-
General, such works shall be opened for a group of pertenencias or for the entire mining locality in which the
mine is situated.
5. That he shall commence work on the mine immediately upon receipt of this concession unless prevented
by force majeure.
6. That he shall keep the mine in active operation by employing at the rate of at least four laborers for
eachpertenencia for at least six months of each year.
7. That he shall strengthen the walls of the mine within the time indicated whenever, by reason of
mismanagement of the work, it threatens to cave in, unless he be prevented by force majeure.
8. That he shall not render further profitable development of the mine difficult or impossible by avaricious
operation.
9. That he shall not suspend the operation of the mine with the intention of abandoning the same without
first informing the Governor of his intention, in which case he must leave the mine in a good state of
timbering.
10. That he shall pay taxes on the mine and its output as prescribed in the royal decree.
11. Finally, 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.
Without special conditions.
Now, therefore, by virtue of this title deed, I grant to Don Joaquin Casanovas y Llovet and to Don Martin
Buck the ownership of the said mine for an unlimited period of time so long as they shall comply with the
foregoing terms and conditions, to the end that they may develop the same and make free use and
disposition of the output thereof, with the right to alienate the said mine subject to the provisions of existing
laws, and to enjoy all the rights and benefits conceded to such grantees by the royal decree and by the
mining regulations. And for the prompt fulfillment and observance of the said conditions, both on the part of
the said grantees and by all authorities, courts, corporations, and private persons whom it may concern, I
have ordered this title deed to be issued given under my hand and the proper seal and countersigned by
the undersigned Director-General of Civil Administration.
It seems very clear to us that this deed constituted a contract between the Spanish Government and the
plaintiff, the obligation of which contract was impaired by the enactment of section 134 of the Internal Revenue
Law above cited, thereby infringing the provisions above quoted from section 5 of the act of Congress of July 1,
1902. This conclusion seems necessarily to result from the decisions of the Supreme Court of the United States
in similar cases. In the case of McGee vs. Mathis (4 Wallace, 143), it appeared that the State of Arkansas, by
an act of the legislature of 1851, provided for the sale of certain swamp lands granted to it by the United
States; for the issue of transferable scrip receivable for any lands not already taken up at the time of selection
by the holder; for contracts for the making of levees and drains, and for the payment of contractors in scrip
and otherwise. In the fourteenth section of this act it was provided that
To encourage by all just means the progress and completion of the reclaiming of such lands by offering
inducements to purchasers and contractors to take up said lands, all said swamp and overflowed lands shall
be exempt from taxation for the term of ten years or until they shall be reclaimed.
In 1855 this section was repealed and provision was made by law for the taxation of swamp and overflowed
lands, sold or to be sold, precisely as other lands. McGee, before this appeal, had become the owner by
transfer from contractors of a large amount of scrip issued under the Act of 1851, and with this scrip, after the
repeal, took up and paid for many sections and parts of sections of the granted lands. Taxes were levied by the
State on the lands so taken up by McGee. The Supreme Court held that these taxes could not be collected. The
Court said at page 156:
It seems quite clear that the Act of 1851 authorizing the issue of land scrip constituted a contract between
the State and the holders of the land scrip issued under the act.
In the case of the Home of the Friendless vs. Rouse (8 Wallace, 430), it appeared that on the 3d day of
February, 1853, the legislature of Missouri passed on act to incorporate the Home of the Friendless in the city
of St. Louis. Section 1 of the act provided that
All property of said corporation shall be exempt from taxation.
The court held that the State had no power afterwards to pass laws providing for the levying of taxes upon this
institution. The Court said among other things at page 438:
The validity of this contract is questioned at the bar on the ground that the legislature had no authority to
grant away the power of taxation. The answer to this position is, that the question is no longer open for
argument here, for it is settled by the repeated adjudications of this court, that a State may be contract
based on a consideration exempt the property of an individual or corporation from taxation, either for a
specified period or permanently. And it is equally well settled that the exemption is presumed to be on
sufficient consideration, and binds the State if the charter containing it is accepted.
In the case of The Asylum vs. The City of New Orleans (105 U.S., 362), it appears that St. Ariva's Asylum was
incorporated by an act of the legislature of Louisiana, approved April 29, 1853. The law incorporating it
provided that it should enjoy the same exemption from taxation which was enjoyed by the Orphan Boys'
Asylum of New Orleans. The law relating to the last named institution provided (page 364):
That, from and after the passage of this act, all the property, real and personal, belonging to the Orphan
Boys' Asylum of New Orleans be, and the same is hereby exempted from all taxation, either by the State,
parish, or city in which it is situated, any law to the contrary notwithstanding.
It was held that the State had no power by subsequent legislation to impose taxes upon the property of this
institution.
That the doctrine announced in these cases is still maintained in that court is apparent from the case of
Powers vs.The Detroit, Grand Haven and Milwaukee Railway which was decided on the 16th of April, 1906, and
reported in 201 U. S., 543. Section 9 of the act of the legislature of Michigan, incorporating the railway
company, provided:
Said company shall, on or before the 1st day of July, pay to the State treasurer, an annual tax of one
per cent on the capital stock of said company, pain in, which tax shall be in lieu of all other taxation.
The court said at page 556:
It has often been decided by this court, so often that a citation on authorities in unnecessary, that the
legislature of a State may, in the absence of special restrictions in its constitution, make a valid contract with
a corporation in respect to taxation, and that such contract can be enforced against the State at the instance
of the corporation.
The case at bar falls within the cases hereinbefore cited. It is to be distinguished from the case of the
Metropolitan Street Railway Company vs. The New York State Board of Tax Commissioners (199 U.S., 1). In
that case it was provided by various acts of the legislature, that the companies therein referred to, should pay
annually to the city of New York, a fixed amount or percentage, varying from 2 to 8 per cent of their gross
earnings additional taxes was sustained by the court. It was sustained on the ground that the prior legislation 22
did not expressly say that the taxes thus provided for should be in lieu of all other taxes. The court said at page
37:
Applying these well-established rules to the several contracts, it will be perceived that there was no express
relinquishment of the right of taxation. The plaintiff in error must rely upon some implication, and not upon
any direct stipulation. In each contract there was a grant of privileges, but the grant was specifically or
privileges in respect to the construction, operation and maintenance of the street railroad. These were all
that in terms were granted. As consideration for this grant, the grantees were to pay something, and such
payment is nowhere said to be in lieu of, or as an equivalent or substitute of taxes. All that can be extracted
from the language used, was a grant of privileges and a payment therefor. Other words must be written into
the contract before there can be found any relinquishment of the power of taxation.
But in the case at bar, there is found not only the provisions for the payment of certain taxes annually, but
there is also found the provision contained in article 81, above quoted, which expressly declares that no other
taxes shall be imposed upon these mines.
The present case is to be distinguished also from that class of cases of which Grands Lodge vs. The City of New
Orleans (166 U.S., 143) is a type, and which includes Salt Company vs. East Saginaw (13 Wall., 373) and
Welch vs.Cook (97 U.S., 541). In these cases the exemption was a mere bounty and did not form a part of any
contract.
The fact that this concession was made by the Government of Spain, and not by the Government of the United
States, is not important. (Trustees of Dartmouth College vs. Woodward, 4 Wheaton, 518.)
Our conclusion is that the concessions granted by the Government of Spain to the plaintiff, constitute contracts
between the parties; that section 134 of the Internal Revenue Law impairs the obligation of these contracts,
and is therefore void as to them.
II. We think that this section is also void because in conflict with section 60 of the act of Congress of July 1,
1902. This section is as follows:
That nothing in this Act shall be construed to effect the rights of any person, partnership, or corporation,
having a valid, perfected mining concession granted prior to April eleventh, eighteen hundred and ninety-
nine, but all such concessions shall be conducted under the provisions of the law in force at the time they
were granted, subject at all times to cancellation by reason of illegality in the procedure by which they were
obtained, or for failure to comply with the conditions prescribed as requisite to their retention in the laws
under which they were granted: Provided, That the owner or owners of every such concession shall cause
 the corners made by its boundaries to be distinctly marked with permanent monuments within six months
after this act has been promulgated in the Philippine Islands, and that any concessions, the boundaries of
which are not so marked within this period shall be free and open to explorations and purchase under the
provisions of this act.2
This section 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 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. 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 the plaintiff
has not complied with the conditions prescribed in the said royal decree of 1867.
III. In view of the result at which we have arrived, it is not necessary to consider the further claim made by the
plaintiff that the taxes imposed by article 134 above quoted, 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."
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.
After the expiration of twenty days let judgment be entered in accordance herewith and ten days thereafter let
the case be remanded to the court from whence it came for proper action. So ordered.
G.R. No. 131359 May 5, 1999
MANILA ELECTRIC COMPANY, vs. PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as
Provincial Treasurer of Laguna,
On various dates, certain municipalities of the Province of Laguna, including, Bian, Sta. Rosa, San Pedro,
Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutions through their
respective municipal councils granting franchise in favor of petitioner Manila Electric Company ("MERALCO") for
the supply of electric light, heat and power within their concerned areas. On 19 January 1983, MERALCO was
likewise granted a franchise by the National Electrification Administration to operate an electric light and power
service in the Municipality of Calamba, Laguna.
On 12 September 1991, Republic Act No. 7160, otherwise known as the "Local Government Code of 1991," was
enacted to take effect on 01 January 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:
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 the above ordinance, respondent Provincial Treasurer sent a demand letter to MERALCO for the
corresponding tax payment. Petitioner MERALCO paid the tax, which then amounted to P19,520.628.42, under
protest. A formal claim for refund was thereafter sent by MERALCO to the Provincial Treasurer of Laguna
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. MERALCO, contended that the
imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it
concerned MERALCO, contravened the provisions of Section 1 of P.D. 551 which read:
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 transactions incident
to the generation, distribution and sale of electric current.
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.
On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor Jose D. Lina
relied on a more recent law, i.e. Republic Act No. 7160 or the Local Government Code of 1991, than the old
decree invoked by petitioner.
On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta. Cruz, Laguna, a complaint
for refund, with a prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order,
against the Province of Laguna and also Benito R. Balazo in his capacity as the Provincial Treasurer of Laguna.
Aside from the amount of P19,520,628.42 for which petitioner MERALCO had priorly made a formal request for
refund, petitioner thereafter likewise made additional payments under protest on various dates totaling
P27,669,566.91.
The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and concluded:
WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is hereby rendered in
favor of the defendants and against the plaintiff, by:
1. Ordering the dismissal of the Complaint; and
2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable and enforceable. 2
In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:
1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92,
insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and Section 1
of Presidential Decree No. 551.
2. Whether Republic Act No. 7160, otherwise known Local Government Code of 1991, has repealed,
amended or modified Presidential Decree No. 551.
3. Whether the doctrine of administrative remedies is applicable in this case. 3
The petition lacks merit.
Prefatorily, it might be well to recall that local governments do not have the inherent power to tax 4 except to
the extent that such power might be delegated to them either by the basic law or by statute. Presently, under
Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local
government units. Thus:
Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and
accountable local government structure instituted through a system of decentralization with effective
mechanisms of recall, initiative, and referendum, allocate among the different local government units their
powers, responsibilities, and resources, and provide for the qualifications, election, appointment and
removal, term, salaries, powers and functions, and duties of local officials, and all other matters relating to
the organization and operation of the local units.
xxx xxx xxx
Sec. 5. Each local government unit shall have the power to create its own sources of revenues and to levy 23
taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.
The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a
similar delegation of revenue making powers to local governments. 5
Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and local government
units instead derived their tax powers under a limited statutory authority. Whereas, then, the delegation of tax
powers granted at that time by statute to local governments was confined and defined (outside of which the
power was deemed withheld), the present constitutional rule (starting with the 1973 Constitution), however,
would broadly confer such tax powers subject only to specific exceptions that the law might prescribe.
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. The basic
rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by
directly granting them general and broad tax powers. 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, 6 the legislature must still see to
it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b)
each local government unit will have its fair share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.
The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions of the now
repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by Presidential
Decree
No. 231 7 pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991 Code
explicitly authorizes provincial governments, notwithstanding "any exemption granted by any law or other
special law, . . . (to) impose a tax on businesses enjoying a franchise." Section 137 thereof provides:
Sec. 137. Franchise Tax Notwithstanding any exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%)
of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not
exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year,
 regardless of when the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereof, as provided herein. (Underscoring supplied for emphasis)
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 under Section 193 thereof, tax
exemptions or incentives theretofore enjoyed by certain entities. This law states:
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. (Underscoring supplied for emphasis)
The Code, in addition, contains a general repealing clause in its Section 534; thus:
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. (Underscoring supplied for emphasis) 8
To exemplify, in Mactan Cebu International Airport Authority vs. Marcos, 9 the Court upheld the withdrawal of
the real estate tax exemption previously enjoyed by Mactan Cebu International Airport Authority. The Court
ratiocinated:
. . . These policy considerations are consistent with the State policy to ensure autonomy to local
governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable
them to attain their fullest development as self-reliant communities and make them effective partners in the
attainment of national goals. The power to tax is the most effective instrument to raise needed revenues to
finance and support myriad activities if local government units for the delivery of basic services essential to
the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.
It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges
granted to government-owned and controlled corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the tax treatment of similarity situated
enterprises, and there was a need for these entities to share in the requirements of development, fiscal or
otherwise, by paying the taxes and other charges due from them. 10
Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of Misamis
Oriental vs. Cagayan Electric Power and Light Company, Inc.; 11 thus:
In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or collected
by any authority" found in the franchise of the Visayan Electric Company was held to exempt the company
from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code
(Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the franchise
of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment
of internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of
the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the
exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under
Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of
Internal Revenue, 91 Phil. 35).
Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant Company
from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power
Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to
pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39
(Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4]. 1068). This Court pointed out
that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public
service by the grantee. 2
In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V. Reyes, et al., 13 the
Court has held that the phrase in lieu of all taxes "have to give way to the peremptory language of the Local
Government Code specifically providing for the withdrawal of such exemptions, privileges," and that "upon the
effectivity of the Local Government Code all exemptions except only as provided therein can no longer be
invoked by MERALCO to disclaim liability for the local tax." In fine, the Court has viewed its previous rulings as
laying stress more on the legislative intent of the amendatory law whether the tax exemption privilege is to
be withdrawn or not rather than on whether the law can withdraw, without violating the Constitution, the tax
exemption or not.
While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in
the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions,
nevertheless, are far from being strictly contractual in nature. 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. 14 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. 15 Indeed, Article XII, Section 11, of
the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that 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.
WHEREFORE, the instant petition is hereby DISMISSED. No costs.SO ORDERED.
G.R. No. 115455 October 30, 1995
ARTURO M. TOLENTINO, vs.THE SECRETARY OF FINANCE and THE CIR
These are motions seeking reconsideration of our decision dismissing the petitions filed in these cases for the
declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded Value-Added Tax Law.
The motions, of which there are 10 in all, have been filed by the several petitioners in these cases, with the
exception of the Philippine Educational Publishers Association, Inc. and the Association of Philippine
Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to which the Philippine
Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc., petitioner in G.R. No.
115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply. In turn the Solicitor General filed
on June 1, 1995 a rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino, Kilosbayan,
Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders Association (CREBA)) reiterate
previous claims made by them that R.A. No. 7716 did not "originate exclusively" in the House of
Representatives as required by Art. VI, 24 of the Constitution. Although they admit that H. No. 11197 was
filed in the House of Representatives where it passed three readings and that afterward it was sent to the
Senate where after first reading it was referred to the Senate Ways and Means Committee, they complain that
the Senate did not pass it on second and third readings. Instead what the Senate did was to pass its own 24
version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds that what the Senate
committee should have done was to amend H. No. 11197 by striking out the text of the bill and substituting it
with the text of S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just
becomes the text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment to a House
revenue bill by enacting its own version of a revenue bill. On at least two occasions during the Eighth Congress,
the Senate passed its own version of revenue bills, which, in consolidation with House bills earlier passed,
became the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY EXTENDING FROM FIVE (5)
YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY EXEMPTION AND TAX CREDIT ON CAPITAL
EQUIPMENT) which was approved by the President on April 10, 1992. This Act is actually a consolidation of H.
No. 34254, which was approved by the House on January 29, 1992, and S. No. 1920, which was approved by
the Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD TO ANY FILIPINO
ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by the President on May 22, 1992. This
Act is a consolidation of H. No. 22232, which was approved by the House of Representatives on August 2,
1989, and S. No. 807, which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the consolidation of
House and Senate bills. These are the following, with indications of the dates on which the laws were approved
by the President and dates the separate bills of the two chambers of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR THIS PURPOSE THE PERTINENT
SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO REQUIRE THE PAYMENT OF THE
VALUE-ADDED TAX EVERY MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE,
 AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL INTERNAL REVENUE CODE
(December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO PRESCRIBE THE PLACE FOR
PAYMENT OF INTERNAL REVENUE TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL SUBDIVISIONS, INSTRUMENTALITIES OR
AGENCIES INCLUDING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO DEDUCT AND
WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR
THE PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES RENDERED BY
CONTRACTORS (April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS TO DECLARE DIVIDENDS
UNDER CERTAIN CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9,
1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION OF THE DOCUMENTARY STAMP
TAX, AMENDING FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED, ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23,
1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES OF STOCK LISTED AND
TRADED THROUGH THE LOCAL STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR
THE PURPOSE THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A NEW SECTION
AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of its power to
propose amendments to bills required to originate in the House, passed its own version of a House revenue
measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners Tolentino and Roco, as
members of the Senate, voted to approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino, concerns a mere
matter of form. Petitioner has not shown what substantial difference it would make if, as the Senate actually
did in this case, a separate bill like S. No. 1630 is instead enacted as a substitute measure, "taking into
Consideration . .
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
68. Not more than one amendment to the original amendment shall be considered.
No amendment by substitution shall be entertained unless the text thereof is submitted in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
69. No amendment which seeks the inclusion of a legislative provision foreign to the subject matter of a bill
(rider) shall be entertained.
70-A. A bill or resolution shall not be amended by substituting it with another which covers a subject
distinct from that proposed in the original bill or resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate possesses
less power than the U.S. Senate because of textual differences between constitutional provisions giving them
the power to propose or concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or
concur with amendments as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application,
and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or
concur with amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the phrase "as on
other Bills" in the American version, according to petitioners, shows the intention of the framers of our
Constitution to restrict the Senate's power to propose amendments to revenue bills. Petitioner Tolentino
contends that the word "exclusively" was inserted to modify "originate" and "the words 'as in any other bills'
(sic) were eliminated so as to show that these bills were not to be like other bills but must be treated as a
special kind."
The history of this provision does not support this contention. The supposed indicia of constitutional intent are
nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be recalled that the
1935 Constitution originally provided for a unicameral National Assembly. When it was decided in 1939 to
change to a bicameral legislature, it became necessary to provide for the procedure for lawmaking by the
Senate and the House of Representatives. The work of proposing amendments to the Constitution was done by
the National Assembly, acting as a constituent assembly, some of whose members, jealous of preserving the
Assembly's lawmaking powers, sought to curtail the powers of the proposed Senate. Accordingly they proposed
the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local application, and private bills shall
originate exclusively in the Assembly, but the Senate may propose or concur with amendments. In case of
disapproval by the Senate of any such bills, the Assembly may repass the same by a two-thirds vote of all its
members, and thereupon, the bill so repassed shall be deemed enacted and may be submitted to the
President for corresponding action. In the event that the Senate should fail to finally act on any such bills,
the Assembly may, after thirty days from the opening of the next regular session of the same legislative
term, reapprove the same with a vote of two-thirds of all the members of the Assembly. And upon such
reapproval, the bill shall be deemed enacted and may be submitted to the President for corresponding
action.
The special committee on the revision of laws of the Second National Assembly vetoed the proposal. It deleted
everything after the first sentence. As rewritten, the proposal was approved by the National Assembly and 25
embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION
65-66 (1950)). The proposed amendment was submitted to the people and ratified by them in the elections
held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the present
Constitution was derived. It explains why the word "exclusively" was added to the American text from which
the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was not copied.
Considering the defeat of the proposal, the power of the Senate to propose amendments must be understood
to be full, plenary and complete "as on other Bills." Thus, because revenue bills are required to originate
exclusively in the House of Representatives, the Senate cannot enact revenue measures of its own without such
bills. After a revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its
own version on the same subject matter. This follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to concur is clear from
the following commentaries:
The power of the Senate to propose or concur with amendments is apparently without restriction. It would
seem that by virtue of this power, the Senate can practically re-write a bill required to come from the House
and leave only a trace of the original bill. For example, a general revenue bill passed by the lower house of
the United States Congress contained provisions for the imposition of an inheritance tax . This was changed
by the Senate into a corporation tax. The amending authority of the Senate was declared by the United
States Supreme Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone Tracy
Company, 220 U.S. 107, 55 L. ed. 389].
The above-mentioned bills are supposed to be initiated by the House of Representatives because it is more
numerous in membership and therefore also more representative of the people. Moreover, its members are
presumed to be more familiar with the needs of the country in regard to the enactment of the legislation
involved.
The Senate is, however, allowed much leeway in the exercise of its power to propose or concur with
amendments to the bills initiated by the House of Representatives. Thus, in one case, a bill introduced in the
U.S. House of Representatives was changed by the Senate to make a proposed inheritance tax a corporation
tax. It is also accepted practice for the Senate to introduce what is known as an amendment by substitution,
which may entirely replace the bill initiated in the House of Representatives.
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing increase of the
public debt, bills of local application, and private bills must "originate exclusively in the House of
Representatives," it also adds, "but the Senate may propose or concur with amendments." In the exercise of
this power, the Senate may propose an entirely new bill as a substitute measure. As petitioner Tolentino states
in a high school text, a committee to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill omitting or adding sections or
altering its language; (3) to make and endorse an entirely new bill as a substitute, in which case it will be
known as a committee bill; or (4) to make no report at all.
To except from this procedure the amendment of bills which are required to originate in the House by
prescribing that the number of the House bill and its other parts up to the enacting clause must be preserved
although the text of the Senate amendment may be incorporated in place of the original body of the bill is to
insist on a mere technicality. At any rate there is no rule prescribing this form. S. No. 1630, as a substitute
measure, is therefore as much an amendment of H. No. 11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that S. No.
1630 is an independent and distinct bill. Hence their repeated references to its certification that it was passed
by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S. Res. No. 734
and H.B. No. 11197," implying that there is something substantially different between the reference to S. No.
1129 and the reference to H. No. 11197. From this premise, they conclude that R.A. No. 7716 originated both
in the House and in the Senate and that it is the product of two "half-baked bills because neither H. No. 11197
nor S. No. 1630 was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere amendments of
the corresponding provisions of H. No. 11197. The very tabular comparison of the provisions of H. No. 11197
and S. No. 1630 attached as Supplement A to the basic petition of petitioner Tolentino, while showing
differences between the two bills, at the same time indicates that the provisions of the Senate bill were
precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was a mere
amendment of the House bill, H. No. 11197 in its original form did not have to pass the Senate on second and
three readings. It was enough that after it was passed on first reading it was referred to the Senate Committee
on Ways and Means. Neither was it required that S. No. 1630 be passed by the House of Representatives
before the two bills could be referred to the Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When the House
bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank deposits), were
referred to a conference committee, the question was raised whether the two bills could be the subject of such
conference, considering that the bill from one house had not been passed by the other and vice versa. As
Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill is passed by the House
but not passed by the Senate, and a Senate bill of a similar nature is passed in the Senate but never passed
in the House, can the two bills be the subject of a conference, and can a law be enacted from these two
bills? I understand that the Senate bill in this particular instance does not refer to investments in
government securities, whereas the bill in the House, which was introduced by the Speaker, covers two
subject matters: not only investigation of deposits in banks but also investigation of investments in
government securities. Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is precisely in cases like this where a
conference should be had. If the House bill had been approved by the Senate, there would have been no
need of a conference; but precisely because the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now considering the report of that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct and
unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that because the
President separately certified to the need for the immediate enactment of these measures, his certification was
ineffectual and void. The certification had to be made of the version of the same revenue bill which at the
moment was being considered. Otherwise, to follow petitioners' theory, it would be necessary for the President
to certify as many bills as are presented in a house of Congress even though the bills are merely versions of
the bill he has already certified. It is enough that he certifies the bill which, at the time he makes the
certification, is under consideration. Since on March 22, 1994 the Senate was considering S. No. 1630, it was
that bill which had to be certified. For that matter on June 1, 1993 the President had earlier certified H. No.
9210 for immediate enactment because it was the one which at that time was being considered by the House.
This bill was later substituted, together with other bills, by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the main decision that the
phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, 26
(2) qualifies not only the requirement that "printed copies [of a bill] in its final form [must be] distributed to
the members three days before its passage" but also the requirement that before a bill can become a law it
must have passed "three readings on separate days." There is not only textual support for such construction
but historical basis as well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been printed and copies thereof in its final
form furnished its Members at least three calendar days prior to its passage, except when the President shall
have certified to the necessity of its immediate enactment. Upon the last reading of a bill, no amendment
thereof shall be allowed and the question upon its passage shall be taken immediately thereafter, and
the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless it has passed three readings on separate days, and printed copies
thereof in its final form have been distributed to the Members three days before its passage, except when
the Prime Minister certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon
shall be taken immediately thereafter, and the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26 (2) of the present
Constitution, thus:
(2) No bill passed by either House shall become a law unless it has passed three readings on separate days,
and printed copies thereof in its final form have been distributed to its Members three days before its
passage, except when the President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on separate days are
required and a bill has to be printed in final form before it can be passed, the need for a law may be rendered
academic by the occurrence of the very emergency or public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a country like the
Philippines where budget deficit is a chronic condition. Even if this were the case, an enormous budget deficit
does not make the need for R.A. No. 7716 any less urgent or the situation calling for its enactment any less an 26
emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases) believed that there
was an urgent need for consideration of S. No. 1630, because they responded to the call of the President by
voting on the bill on second and third readings on the same day. While the judicial department is not bound by
the Senate's acceptance of the President's certification, the respect due coequal departments of the
government in matters committed to them by the Constitution and the absence of a clear showing of grave
abuse of discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it was
discussed for six days. Only its distribution in advance in its final printed form was actually dispensed with by
holding the voting on second and third readings on the same day (March 24, 1994). Otherwise, sufficient time
between the submission of the bill on February 8, 1994 on second reading and its approval on March 24, 1994
elapsed before it was finally voted on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to inform the
members of Congress of what they must vote on and (2) to give them notice that a measure is progressing
through the enacting process, thus enabling them and others interested in the measure to prepare their
positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p.
282 (1972)). These purposes were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the Movement of
Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of the constitutional
policy of full public disclosure and the people's right to know (Art. II, 28 and Art. III, 7) the Conference
Committee met for two days in executive session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold such sessions with only
the conferees and their staffs in attendance and it was only in 1975 when a new rule was adopted requiring
open sessions. Unlike its American counterpart, the Philippine Congress has not adopted a rule prescribing open
hearings for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least staff
members were present. These were staff members of the Senators and Congressmen, however, who may be
presumed to be their confidential men, not stenographers as in this case who on the last two days of the
conference were excluded. There is no showing that the conferees themselves did not take notes of their
proceedings so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic negotiations
involving state interests, conferees keep notes of their meetings. Above all, the public's right to know was fully
served because the Conference Committee in this case submitted a report showing the changes made on the
differing versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must contain "a
detailed, sufficiently explicit statement of the changes in or other amendments." These changes are shown in
the bill attached to the Conference Committee Report. The members of both houses could thus ascertain what
changes had been made in the original bills without the need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400 (Land Reform Act of
1955) was reported by the Conference Committee. Congressman Bengzon raised a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the report of the conference committee
regarding House Bill No. 2557 by reason of the provision of Section 11, Article XII, of the Rules of this House
which provides specifically that the conference report must be accompanied by a detailed statement of the
effects of the amendment on the bill of the House. This conference committee report is not accompanied by
that detailed statement, Mr. Speaker. Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection with the point of order
raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from Pangasinan, but this
provision applies to those cases where only portions of the bill have been amended. In this case before us an
entire bill is presented; therefore, it can be easily seen from the reading of the bill what the provisions are.
Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for the provisions of the
Rules, and the reason for the requirement in the provision cited by the gentleman from Pangasinan is when
there are only certain words or phrases inserted in or deleted from the provisions of the bill included in the
conference report, and we cannot understand what those words and phrases mean and their relation to the
bill. In that case, it is necessary to make a detailed statement on how those words and phrases will affect
the bill as a whole; but when the entire bill itself is copied verbatim in the conference report, that is not
necessary. So when the reason for the Rule does not exist, the Rule does not exist.
Congressman Tolentino was sustained by the chair. The record shows that when the ruling was appealed, it
was upheld by viva voce and when a division of the House was called, it was sustained by a vote of 48 to 5.
(Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions as long as these
are germane to the subject of the conference. As this Court held in Philippine Judges Association v. Prado, 227
SCRA 703 (1993), in an opinion written by then Justice Cruz, the jurisdiction of the conference committee is
not limited to resolving differences between the Senate and the House. It may propose an entirely new
provision. What is important is that its report is subsequently approved by the respective houses of Congress.
This Court ruled that it would not entertain allegations that, because new provisions had been added by the
conference committee, there was thereby a violation of the constitutional injunction that "upon the last reading
of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners' charges that an amendment was made
upon the last reading of the bill that eventually became R.A. No. 7354 and that copies thereof in its final
form were not distributed among the members of each House. Both the enrolled bill and the legislative
journals certify that the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official assurances from a coordinate department of the government, to
which we owe, at the very least, a becoming courtesy.
It is interesting to note the following description of conference committees in the Philippines in a 1979 study:
Conference committees may be of two types: free or instructed. These committees may be given instructions
by their parent bodies or they may be left without instructions. Normally the conference committees are
without instructions, and this is why they are often critically referred to as "the little legislatures." Once bills
have been sent to them, the conferees have almost unlimited authority to change the clauses of the bills and
in fact sometimes introduce new measures that were not in the original legislation. No minutes are kept, and
members' activities on conference committees are difficult to determine. One congressman known for his
idealism put it this way: "I killed a bill on export incentives for my interest group [copra] in the conference
committee but I could not have done so anywhere else." The conference committee submits a report to both
houses, and usually it is accepted. If the report is not accepted, then the committee is discharged and new
members are appointed.
In citing this study, we pass no judgment on the methods of conference committees. We cite it only to say that
conference committees here are no different from their counterparts in the United States whose vast powers
we noted in Philippine Judges Association v. Prado, supra. At all events, under Art. VI, 16(3) each house has
the power "to determine the rules of its proceedings," including those of its committees. Any meaningful
change in the method and procedures of Congress or its committees must therefore be sought in that body
itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, 26 (1) of the
Constitution which provides that "Every bill passed by Congress shall embrace only one subject which shall be
expressed in the title thereof." PAL contends that the amendment of its franchise by the withdrawal of its
exemption from the VAT is not expressed in the title of the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all other
taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or description,
imposed, levied, established, assessed or collected by any municipal, city, provincial or national authority or
government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of the National Internal
Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
(q) Transactions which are exempt under special laws or international agreements to which the Philippines is
a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending 103, as
follows:
103. Exempt transactions. The following shall be exempt from the value-added tax:
(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos.
66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND
ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT) SYSTEM [BY]
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING
AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED
AND FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any provision of the
NIRC which stands in the way of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific reference to 27
P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional requirement, since it is
already stated in the title that the law seeks to amend the pertinent provisions of the NIRC, among which is
103(q), in order to widen the base of the VAT. Actually, it is the bill which becomes a law that is required to
express in its title the subject of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically
referred to 103 of the NIRC as among the provisions sought to be amended. We are satisfied that sufficient
notice had been given of the pendency of these bills in Congress before they were enacted into what is now
R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was rejected.
R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION, DEFINING ITS POWERS,
FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER
PURPOSES CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was
contended that the withdrawal of franking privileges was not expressed in the title of the law. In holding that
there was sufficient description of the subject of the law in its title, including the repeal of franking privileges,
this Court held:
To require every end and means necessary for the accomplishment of the general objectives of the statute to
be expressed in its title would not only be unreasonable but would actually render legislation impossible.
[Cooley, Constitutional Limitations, 8th Ed., p. 297] As has been correctly explained:
The details of a legislative act need not be specifically stated in its title, but matter germane to the subject
as expressed in the title, and adopted to the accomplishment of the object in view, may properly be included
in the act. Thus, it is proper to create in the same act the machinery by which the act is to be enforced, to
prescribe the penalties for its infraction, and to remove obstacles in the way of its execution. If such matters
are properly connected with the subject as expressed in the title, it is unnecessary that they should also
have special mention in the title.
VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the press is not
exempt from the taxing power of the State and that what the constitutional guarantee of free press prohibits
are laws which single out the press or target a group belonging to the press for special treatment or which in
any way discriminate against the press on the basis of the content of the publication, and R.A. No. 7716 is
none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while maintaining
those granted to others, the law discriminates against the press. At any rate, it is averred, "even
nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press a privilege, the
law could take back the privilege anytime without offense to the Constitution. The reason is simple: by granting
exemptions, the State does not forever waive the exercise of its sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to which
other businesses have long ago been subject. It is thus different from the tax involved in the cases invoked by
the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L. Ed. 660 (1936) was found to be
discriminatory because it was laid on the gross advertising receipts only of newspapers whose weekly
circulation was over 20,000, with the result that the tax applied only to 13 out of 124 publishers in Louisiana.
These large papers were critical of Senator Huey Long who controlled the state legislature which enacted the
license tax. The censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575, 75 L. Ed.
2d 295 (1983), the tax was found to be discriminatory because although it could have been made liable for the
sales tax or, in lieu thereof, for the use tax on the privilege of using, storing or consuming tangible goods, the
press was not. Instead, the press was exempted from both taxes. It was, however, later made to pay
a special use tax on the cost of paper and ink which made these items "the only items subject to the use tax
that were component of goods to be sold at retail." The U.S. Supreme Court held that the differential treatment
of the press "suggests that the goal of regulation is not related to suppression of expression, and such goal is
presumptively unconstitutional." It would therefore appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely and
unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously granted to PAL,
petroleum concessionaires, enterprises registered with the Export Processing Zone Authority, and many more
are likewise totally withdrawn, in addition to exemptions which are partially withdrawn, in an effort to broaden
the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that transactions, which
are profit oriented, continue to enjoy exemption under R.A. No. 7716. An enumeration of some of these
transactions will suffice to show that by and large this is not so and that the exemptions are granted for a
purpose. As the Solicitor General says, such exemptions are granted, in some cases, to encourage agricultural
production and, in other cases, for the personal benefit of the end-user rather than for profit. The exempt
transactions are:
(a) Goods for consumption or use which are in their original state (agricultural, marine and forest products,
cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance agriculture (milling of palay, corn, sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens returning to the
Philippines) or for professional use, like professional instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum
products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services rendered under
employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the press because
"even nondiscriminatory taxation on constitutionally guaranteed freedom is unconstitutional." PPI cites in
support of this assertion the following statement in Murdock v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292
(1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection afforded by the First
Amendment is not so restricted. A license tax certainly does not acquire constitutional validity because it
classifies the privileges protected by the First Amendment along with the wares and merchandise of
hucksters and peddlers and treats them all alike. Such equality in treatment does not save the ordinance.
Freedom of press, freedom of speech, freedom of religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for regulation. Its
imposition on the press is unconstitutional because it lays a prior restraint on the exercise of its right. Hence,
although its application to others, such those selling goods, is valid, its application to the press or to religious
groups, such as the Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets,
is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on income or property of
a preacher. It is quite another thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386 (1957) which
invalidated a city ordinance requiring a business license fee on those engaged in the sale of general
merchandise. It was held that the tax could not be imposed on the sale of bibles by the American Bible Society
without restraining the free exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege, much less a
constitutional right. It is imposed on the sale, barter, lease or exchange of goods or properties or the sale or
exchange of services and the lease of properties purely for revenue purposes. To subject the press to its
payment is not to burden the exercise of its right any more than to make the press pay income tax or subject it
to general regulation is not to violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds derived from the
sales are used to subsidize the cost of printing copies which are given free to those who cannot afford to pay so
that to tax the sales would be to increase the price, while reducing the volume of sale. Granting that to be the
case, the resulting burden on the exercise of religious freedom is so incidental as to make it difficult to
differentiate it from any other economic imposition that might make the right to disseminate religious doctrines
costly. Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments would be to
lay an impermissible burden on the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended by 7 of R.A.
No. 7716, although fixed in amount, is really just to pay for the expenses of registration and enforcement of
provisions such as those relating to accounting in 108 of the NIRC. That the PBS distributes free bibles and
therefore is not liable to pay the VAT does not excuse it from the payment of this fee because it also sells some
copies. At any rate whether the PBS is liable for the VAT must be decided in concrete cases, in the event it is
assessed this tax by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the rule on taxation.
CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies transactions as covered
or exempt without reasonable basis and (3) violates the rule that taxes should be uniform and equitable and
that Congress shall "evolve a progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing contracts of the sale
of real property by installment or on deferred payment basis would result in substantial increases in the 28
monthly amortizations to be paid because of the 10% VAT. The additional amount, it is pointed out, is
something that the buyer did not anticipate at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from numerous sources
are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an increased tax on an
old one, interferes with a contract or impairs its obligation, within the meaning of the Constitution. Even though
such taxation may affect particular contracts, as it may increase the debt of one person and lessen the security
of another, or may impose additional burdens upon one class and release the burdens of another, still the tax
must be paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any
existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567,
574 (1919)). Indeed not only existing laws but also "the reservation of the essential attributes of sovereignty,
is . . . read into contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor
General, 22 SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no obligation of contract can extend to the
defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of agricultural
products, food items, petroleum, and medical and veterinary services, it grants no exemption on the sale of
real property which is equally essential. The sale of real property for socialized and low-cost housing is
exempted from the tax, but CREBA claims that real estate transactions of "the less poor," i.e., the middle class,
who are equally homeless, should likewise be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods and services
was already exempt under 103, pars. (b) (d) (1) of the NIRC before the enactment of R.A. No. 7716.
Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these transactions, while subjecting
those of petitioner to the payment of the VAT. Moreover, there is a difference between the "homeless poor" and
the "homeless less poor" in the example given by petitioner, because the second group or middle class can
afford to rent houses in the meantime that they cannot yet buy their own homes. The two social classes are
thus differently situated in life. "It is inherent in the power to tax that the State be free to select the subjects of
taxation, and it has been repeatedly held that 'inequalities which result from a singling out of one particular
class for taxation, or exemption infringe no constitutional limitation.'" (Lutz v. Araneta, 98 Phil. 148, 153
(1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663
(1984); Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, 28(1) which
provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the same class be
taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation. To satisfy this requirement it is enough that the statute or ordinance applies equally to all
persons, forms and corporations placed in similar situation. (City of Baguio v. De Leon, supra; Sison, Jr. v.
Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A. No. 7716
merely expands the base of the tax. The validity of the original VAT Law was questioned in Kapatiran ng
Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on grounds similar to those made
in these cases, namely, that the law was "oppressive, discriminatory, unjust and regressive in violation of Art.
VI, 28(1) of the Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are
not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged
in business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities, spared as they are from the incidence of the
VAT, are expected to be relatively lower and within the reach of the general public.
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of the
Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the mandate of
Congress to provide for a progressive system of taxation because the law imposes a flat rate of 10% and thus
places the tax burden on all taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive.
What it simply provides is that Congress shall "evolve a progressive system of taxation." The constitutional
provision has been interpreted to mean simply that "direct taxes are . . . to be preferred [and] as much as
possible, indirect taxes should be minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221
(Second ed. (1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes, would have been
prohibited with the proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI,
28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law
minimizes the regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No.
7716, 3, amending 102 (b) of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716,
4, amending 103 of the NIRC).
Thus, the following transactions involving basic and essential goods and services are exempted from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural, marine and forest products,
cotton seeds in their original state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and poultry
feeds) and goods or services to enhance agriculture (milling of palay, corn sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects of citizens returning to the
Philippines) and or professional use, like professional instruments and implements, by persons coming to the
Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for manufacture of petroleum
products subject to excise tax and services subject to percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and services rendered under
employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.
On the other hand, the transactions which are subject to the VAT are those which involve goods and services
which are used or availed of mainly by higher income groups. These include real properties held primarily for
sale to customers or for lease in the ordinary course of trade or business, the right or privilege to use patent,
copyright, and other similar property or right, the right or privilege to use industrial, commercial or scientific
equipment, motion picture films, tapes and discs, radio, television, satellite transmission and cable television
time, hotels, restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent,
tourist buses, and other common carriers, services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional violations by tendering
issues not at retail but at wholesale and in the abstract. There is no fully developed record which can impart to
adjudication the impact of actuality. There is no factual foundation to show in the concrete the application of
the law to actual contracts and exemplify its effect on property rights. For the fact is that petitioner's members
have not even been assessed the VAT. Petitioner's case is not made concrete by a series of hypothetical
questions asked which are no different from those dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here,
does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void on its face, he has not made out a case. This is
merely to adhere to the authoritative doctrine that where the due process and equal protection clauses are
invoked, considering that they are not fixed rules but rather broad standards, there is a need for proof of
such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of
validity must prevail.
Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case, however.
Enforcement of the law may give rise to such a case. A test case, provided it is an actual case and not an
abstract or hypothetical one, may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues. Otherwise,
adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that "there has been
a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the government." This duty can only arise if an actual case or controversy is before us.
Under Art . VIII, 5 our jurisdiction is defined in terms of "cases" and all that Art. VIII, 1, 2 can plausibly
mean is that in the exercise of that jurisdiction we have the judicial power to determine questions of grave
abuse of discretion by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power of a court to
hear and decide cases pending between parties who have the right to sue and be sued in the courts of law and
equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from legislative and executive power. This
power cannot be directly appropriated until it is apportioned among several courts either by the Constitution, as
in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the
Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's 29
"jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizance of a case, to the
exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its
jurisdiction, this Court cannot inquire into any allegation of grave abuse of discretion by the other departments
of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of the
Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a definite policy
of granting tax exemption to cooperatives that the present Constitution embodies provisions on cooperatives.
To subject cooperatives to the VAT would therefore be to infringe a constitutional policy. Petitioner claims that
in 1973, P.D. No. 175 was promulgated exempting cooperatives from the payment of income taxes and sales
taxes but in 1984, because of the crisis which menaced the national economy, this exemption was withdrawn
by P.D. No. 1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and sales
taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in
1987 the framers of the Constitution "repudiated the previous actions of the government adverse to the
interests of the cooperatives, that is, the repeated revocation of the tax exemption to cooperatives and instead
upheld the policy of strengthening the cooperatives by way of the grant of tax exemptions," by providing the
following in Art. XII:
1. The goals of the national economy are a more equitable distribution of opportunities, income, and
wealth; a sustained increase in the amount of goods and services produced by the nation for the benefit of
the people; and an expanding productivity as the key to raising the quality of life for all, especially the
underprivileged.
The State shall promote industrialization and full employment based on sound agricultural development and
agrarian reform, through industries that make full and efficient use of human and natural resources, and
which are competitive in both domestic and foreign markets. However, the State shall protect Filipino
enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country shall be given
optimum opportunity to develop. Private enterprises, including corporations, cooperatives, and similar
collective organizations, shall be encouraged to broaden the base of their ownership.
15. The Congress shall create an agency to promote the viability and growth of cooperatives as instruments
for social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out cooperatives
by withdrawing their exemption from income and sales taxes under P.D. No. 175, 5. What P.D. No. 1955, 1
did was to withdraw the exemptions and preferential treatments theretofore granted to private business
enterprises in general, in view of the economic crisis which then beset the nation. It is true that after P.D. No.
2008, 2 had restored the tax exemptions of cooperatives in 1986, the exemption was again repealed by E.O.
No. 93, 1, but then again cooperatives were not the only ones whose exemptions were withdrawn. The
withdrawal of tax incentives applied to all, including government and private entities. In the second place, the
Constitution does not really require that cooperatives be granted tax exemptions in order to promote their
growth and viability. Hence, there is no basis for petitioner's assertion that the government's policy toward
cooperatives had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to
put an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter of policy
cooperatives should be granted tax exemptions, but that is left to the discretion of Congress. If Congress does
not grant exemption and there is no discrimination to cooperatives, no violation of any constitutional policy can
be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt from
taxation. Such theory is contrary to the Constitution under which only the following are exempt from taxation:
charitable institutions, churches and parsonages, by reason of Art. VI, 28 (3), and non-stock, non-profit
educational institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the equal
protection of the law because electric cooperatives are exempted from the VAT. The classification between
electric and other cooperatives (farmers cooperatives, producers cooperatives, marketing cooperatives, etc.)
apparently rests on a congressional determination that there is greater need to provide cheaper electric power
to as many people as possible, especially those living in the rural areas, than there is to provide them with
other necessities in life. We cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity of R.A. No. 7716. We
have in fact taken the extraordinary step of enjoining its enforcement pending resolution of these cases. We
have now come to the conclusion that the law suffers from none of the infirmities attributed to it by petitioners
and that its enactment by the other branches of the government does not constitute a grave abuse of
discretion. Any question as to its necessity, desirability or expediency must be addressed to Congress as the
body which is electorally responsible, remembering that, as Justice Holmes has said, "legislators are the
ultimate guardians of the liberties and welfare of the people in quite as great a degree as are the courts."
(Missouri, Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should enforce the public accountability of legislators,
that those who took part in passing the law in question by voting for it in Congress should later thrust to the
courts the burden of reviewing measures in the flush of enactment. This Court does not sit as a third branch of
the legislature, much less exercise a veto power over legislation. WHEREFORE, the motions for reconsideration
are denied with finality and the temporary restraining order previously issued is hereby lifted. SO ORDERED.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, vs. COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC.,
Is the income derived from rentals of real property owned by the Young Men's Christian Association of the
Philippines, Inc. (YMCA) established as "a welfare, educational and charitable non-profit corporation"
subject to income tax under the National Internal Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging two Resolutions
issued by the Court of Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR SP No. 32007.
Both Resolutions affirmed the Decision of the Court of Tax Appeals (CTA) allowing the YMCA to claim tax
exemption on the latter's income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock, non-profit institution, which conducts
various programs and activities that are beneficial to the public, especially the young people, pursuant to its
religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a portion of its
premises to small shop owners, like restaurants and canteen operators, and P44,259.00 from parking fees
collected from non-members. On July 2, 1984, the commissioner of internal revenue (CIR) issued an
assessment to private respondent, in the total amount of P415,615.01 including surcharge and interest, for
deficiency income tax, deficiency expanded withholding taxes on rentals and professional fees and deficiency
withholding tax on wages. Private respondent formally protested the assessment and, as a supplement to its
basic protest, filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax Appeals (CTA) on
March 14, 1989. In due course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the [private respondents]. It appears from the testimonies of the
witnesses for the [private respondent] particularly Mr. James C. Delote, former accountant of YMCA, that
these facilities were leased to members and that they have to service the needs of its members and their
guests. The rentals were minimal as for example, the barbershop was only charged P300 per month. He also
testified that there was actually no lot devoted for parking space but the parking was done at the sides of
the building. The parking was primarily for members with stickers on the windshields of their cars and they
charged P.50 for non-members. The rentals and parking fees were just enough to cover the costs of
operation and maintenance only. The earning[s] from these rentals and parking charges including those from
lodging and other charges for the use of the recreational facilities constitute [the] bulk of its income which
[is] channeled to support its many activities and attainment of its objectives. As pointed out earlier, the
membership dues are very insufficient to support its program. We find it reasonably necessary therefore for
[private respondent] to make [the] most out [of] its existing facilities to earn some income. It would have
been different if under the circumstances, [private respondent] will purchase a lot and convert it to a parking
lot to cater to the needs of the general public for a fee, or construct a building and lease it out to the highest
bidder or at the market rate for commercial purposes, or should it invest its funds in the buy and sell of
properties, real or personal. Under these circumstances, we could conclude that the activities are already
profit oriented, not incidental and reasonably necessary to the pursuit of the objectives of the association
and therefore, will fall under the last paragraph of Section 27 of the Tax Code and any income derived
therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the business of operating or
contracting [a] parking lot, we find no legal basis also for the imposition of [a] deficiency fixed tax and [a]
contractor's tax in the amount[s] of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93; 30
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid but not to exceed three
(3) years pursuant to Section 51(e)(2) & (3) of the National Internal Revenue Code effective as of 1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its Decision of
February 16, 1994, the CA 6 initially decided in favor of the CIR and disposed of the appeal in the following
manner:
Following the ruling in the afore-cited cases of Province of Abra vs. Hernando and Abra Valley College Inc.
vs. Aquino, the ruling of the respondent Court of Tax Appeals that "the leasing of petitioner's (herein
respondent's) facilities to small shop owners, to restaurant and canteen operators and the operation of the
parking lot are reasonably incidental to and reasonably necessary for the accomplishment of the objectives
of the petitioners, and the income derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I The findings of facts of the Public Respondent Court of Tax Appeals being supported by substantial
evidence [are] final and conclusive.
II The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent from the income on
rentals of small shops and parking fees [are] in accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and promulgated on
September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by evidence beyond what is
considered as substantial.
The second ground raised is that the respondent CTA did not err in saying that the rental from small shops
and parking fees do not result in the loss of the exemption. Not even the petitioner would hazard the
suggestion that YMCA is designed for profit. Consequently, the little income from small shops and parking
fees help[s] to keep its head above the water, so to speak, and allow it to continue with its laudable work.
 The Court, therefore, finds the second ground of the motion to be meritorious and in accord with law and
jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent CTA's decision is AFFIRMED in
toto. 9
The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent Court in its
second assailed Resolution of February 29, 1996. Hence, this petition for review under Rule 45 of the Rules of
Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I In holding that it had departed from the findings of fact of Respondent Court of Tax Appeals when it
rendered its Decision dated February 16, 1994; and
II In affirming the conclusion of Respondent Court of Tax Appeals that the income of private respondent from
rentals of small shops and parking fees [is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue: Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual findings of the CTA.
On the other hand, petitioner argues that the CA merely reversed the "ruling of the CTA that the leasing of
private respondent's facilities to small shop owners, to restaurant and canteen operators and the operation of
parking lots are reasonably incidental to and reasonably necessary for the accomplishment of the objectives of
the private respondent and that the income derived therefrom are tax exempt." 12 Petitioner insists that what
the appellate court reversed was the legal conclusion, not the factual finding, of the CTA. 13 The commissioner
has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by substantial
evidence, will be disturbed on appeal unless it is shown that the said court committed gross error in the
appreciation of facts. 14 In the present case, this Court finds that the February 16, 1994 Decision of the CA did
not deviate from this rule. The latter merely applied the law to the facts as found by the CTA and ruled on the
issue raised by the CIR: "Whether or not the collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue, as indeed it was
expected to. That it did so in a manner different from that of the CTA did not necessarily imply a reversal of
factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that "[t]here is a
question of law in a given case when the doubt or difference arises as to what the law is on a certain state of
facts; there is a question of fact when the doubt or difference arises as to the truth or falsehood of alleged
facts." 16 In the present case, the CA did not doubt, much less change, the facts narrated by the CTA. It merely
applied the law to the facts. That its interpretation or conclusion is different from that of the CTA is not
irregular or abnormal.
Second Issue: Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject to tax? At the
outset, we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following organizations shall not be taxed under this
Title in respect to income received by them as such
(g) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other non-profitable purposes, no
part of the net income of which inures to the benefit of any private stockholder or member;
xxx xxx xxx
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 any of their activities
conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed
under this Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27 (now 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 . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its properties, real
or personal, [is] not, therefore, exempt from income taxation, even if such income [is] exclusively used for the
accomplishment of its objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict in
interpretation in construing tax exemptions. 18 Furthermore, a claim of statutory exemption from taxation
should be manifest. and unmistakable from the language of the law on which it is based. Thus, the claimed
exemption "must expressly be granted in a statute stated in a language too clear to be mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very wording of the last
paragraph 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.
Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its
real property, 20the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to
any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms must be
applied. 21Parenthetically, a consideration of the question of construction must not even begin, particularly
when such question is on whether to apply a strict construction or a liberal one on statutes that grant tax
exemptions to "religious, charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that the income from
the properties must arise from activities 'conducted for profit' before it may be considered taxable." 23 This
argument is erroneous. As previously stated, a reading of said paragraph ineludibly shows that the income from
any property of exempt organizations, as well as that arising from any activity it conducts for profit, is taxable.
The phrase "any of their activities conducted for profit" does not qualify the word "properties." This makes from
the property of the organization taxable, regardless of how that income is used whether for profit or for lofty
non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible error when it
allowed, on reconsideration, the tax exemption claimed by YMCA on income it derived from renting out its real
property, on the solitary but unconvincing ground that the said income is not collected for profit but is merely
incidental to its operation. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of. Where the law does not distinguish, neither
should we.
Constitutional Provisions On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that Article VI, Section
28 of par. 3 of the 1987 Constitution, 24 exempts "charitable institutions" from the payment not only of
property taxes but also of income tax from any source. 25 In support of its novel theory, it compares the use of 31
the words "charitable institutions," "actually" and "directly" in the 1973 and the 1987 Constitutions, on the one
hand; and in Article VI, Section 22, par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present provision is divisible into two categories: (1)
"[c]haritable institutions, churches and parsonages or convents appurtenant thereto, mosques and non-profit
cemeteries," the incomes of which are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands, buildings
and improvements actually and directly used for religious, charitable or educational purposes," which are
exempt only from property taxes. 28 Second, Lladoc v. Commissioner of Internal Revenue, 29 which limited the
exemption only to the payment of property taxes, referred to the provision of the 1935 Constitution and not to
its counterparts in the 1973 and the 1987 Constitutions. 30 Third, the phrase "actually, directly and exclusively
used for religious, charitable or educational purposes" refers not only to "all lands, buildings and
improvements," but also to the above-quoted first category which includes charitable institutions like the
private respondent. 31
The Court is not persuaded. The debates, interpellations and expressions of opinion of the framers of the
Constitution reveal their intent which, in turn, may have guided the people in ratifying the Charter. 32 Such
intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a member of this
Court, stressed during the Concom debates that ". . . what is exempted is not the institution itself . . .; those
exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used
for religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the Constitution and also a member of the
Concom, adhered to the same view that the exemption created by said provision pertained only to property
taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers property taxes only." 35 Indeed, the income tax exemption claimed by private respondent finds no basis
in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character, 36 claiming that the YMCA "is a
non-stock, non-profit educational institution whose revenues and assets are used actually, directly and
exclusively for educational purposes so it is exempt from taxes on its properties and income." 37 We reiterate
that private respondent is exempt from the payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA to be
granted the exemption it claims under the aforecited provision, it must prove with substantial evidence that (1)
it falls under the classification non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly, and exclusively for educational purposes. However, the Court
notes that not a scintilla of evidence was submitted by private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of the Constitution?
We rule that it is not. The term "educational institution" or "institution of learning" has acquired a well-known
technical meaning, of which the members of the Constitutional Commission are deemed cognizant. 38 Under the
Education Act of 1982, such term refers to schools. 39 The school system is synonymous with formal
education, 40 which "refers to the hierarchically structured and chronologically graded learnings organized and
provided by the formal school system and for which certification is required in order for the learner to progress
through the grades or move to the higher levels." 41 The Court has examined the "Amended Articles of
Incorporation" and "By-Laws" 43 of the YMCA, but found nothing in them that even hints that it is a school or an
educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal education is understood to be school-based
and "private auspices such as foundations and civic-spirited organizations" are ruled out. 45 It is settled that the
term "educational institution," when used in laws granting tax exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." 46 Therefore, the private respondent cannot be deemed one of the
educational institutions covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation. While in its broadest and
best sense education embraces all forms and phases of instruction, improvement and development of mind
and body, and as well of religious and moral sentiments, yet in the common understanding and application it
means a place where systematic instruction in any or all of the useful branches of learning is given by
methods common to schools and institutions of learning. That we conceive to be the true intent and scope of
the term [educational institutions,] as used in the Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an educational institution, the Court also notes
that the former did not submit proof of the proportionate amount of the subject income that was actually,
directly and exclusively used for educational purposes. Article XIII, Section 5 of the YMCA by-laws, which
formed part of the evidence submitted, is patently insufficient, since the same merely signified that "[t]he net
income derived from the rentals of the commercial buildings shall be apportioned to the Federation and
Member Associations as the National Board may decide." 48 In sum, we find no basis for granting the YMCA
exemption from income tax under the constitutional provision invoked.
Cases Cited by Private Respondent Inapplicable
The cases 49 relied on by private respondent do not support its cause. YMCA of Manila v. Collector of Internal
Revenue 50and Abra Valley College, Inc. v. Aquino 51 are not applicable, because the controversy in both cases
involved exemption from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v.
Pasay City 52 is not in point either, because it involves a claim for exemption from the payment of regulatory
fees, specifically electrical inspection fees, imposed by an ordinance of Pasay City an issue not at all related
to that involved in a claimed exemption from the payment of income taxes imposed on property leases.
In Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the party therein, which claimed an exemption
from the payment of income tax, was an educational institution which submitted substantial evidence that the
income subject of the controversy had been devoted or used solely for educational purposes. On the other
hand, the private respondent in the present case has not given any proof that it is an educational institution, or
that part of its rent income is actually, directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It appreciates the
nobility of its cause. However, the Court's power and function are limited merely to applying the law fairly and
objectively. It cannot change the law or bend it to suit its sympathies and appreciations. Otherwise, it would be
overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help and the encouragement of the government. It needs
laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets that, given its limited
constitutional authority, it cannot rule on the wisdom or propriety of legislation. That prerogative belongs to the
political departments of government. Indeed, some of the members of the Court may even believe in the
wisdom and prudence of granting more tax exemptions to private respondent. But such belief, however well-
meaning and sincere, cannot bestow upon the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated September 28, 1995 and
February 29, 1996 are hereby REVERSED and SET ASIDE. The Decision of the Court of Appeals dated February
16, 1995 is REINSTATED, insofar as it ruled that the income derived by petitioner from rentals of its real
property is subject to income tax. No pronouncement as to costs. SO ORDERED.
G. R. No. 119775 October 24, 2003
JOHN HAY PEOPLES ALTERNATIVE COALITION, vs.VICTOR LIM, PRESIDENT, BASES CONVERSION
DEVELOPMENT AUTHORITY; JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF
BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF
ENVIRONMENT AND NATURAL RESOURCES,
By the present petition for prohibition, mandamus and declaratory relief with prayer for a temporary restraining
order (TRO) and/or writ of preliminary injunction, petitioners assail, in the main, the constitutionality of
Presidential Proclamation No. 420, Series of 1994, "CREATING AND DESIGNATING a portion of the area
covered by the former Camp John [Hay] as THE JOHN HAY Special Economic Zone pursuant to R.A. No. 7227."
R.A. No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER
PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE,
PROVIDING FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known as the "Bases Conversion and
Development Act of 1992," which was enacted on March 13, 1992, set 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 John Hay Station (Camp John Hay or the camp) in
the City of Baguio.1
As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development
Authority2(BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the ultimate
objective of utilizing the base areas in accordance with the declared government policy.
R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the metes and
bounds of which were to be delineated in a proclamation to be issued by the President of the Philippines.3
R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free importations, exemption of
businesses therein from local and national taxes, to other hallmarks of a liberalized financial and business
climate.4
And R.A. No. 7227 expressly gave authority to the President to create through executive proclamation, subject
to the concurrence of the local government units directly affected, other Special Economic Zones (SEZ) in the
areas covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La Union,
and Camp John Hay.5 32
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), private
corporations registered under the laws of the British Virgin Islands, 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 or on December 16, 1993, BCDA, TUNTEX and ASIAWORD executed a
Joint Venture Agreement6 whereby they bound themselves to put up a joint venture company known as the
Baguio International Development and Management Corporation which would lease areas within Camp John
Hay and Poro Point for the purpose of turning such places into principal tourist and recreation spots, as
originally envisioned by the parties under their Memorandum of Agreement.
The Baguio City government meanwhile passed a number of resolutions in response to the actions taken by
BCDA as owner and administrator of Camp John Hay.
By Resolution7 of September 29, 1993, the Sangguniang Panlungsod of Baguio City (the sanggunian) officially
asked BCDA to exclude all the barangays partly or totally located within Camp John Hay from the reach or
coverage of any plan or program for its development.
By a subsequent Resolution8 dated January 19, 1994, the sanggunian sought from BCDA an abdication, waiver
or quitclaim of its ownership over the home lots being occupied by residents of nine (9) barangays surrounding
the military reservation.
Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to BCDA a 15-
point concept for the development of Camp John Hay. 9 The sanggunian's vision expressed, among other things,
a kind of development that affords protection to the environment, the making of a family-oriented type of
tourist destination, priority in employment opportunities for Baguio residents and free access to the base area,
guaranteed participation of the city government in the management and operation of the camp, exclusion of
the previously named nine barangays from the area for development, and liability for local taxes of businesses
to be established within the camp.10
BCDA, Tuntex and AsiaWorld agreed to some, but rejected or modified the other proposals of
the sanggunian.11They stressed the need to declare Camp John Hay a SEZ as a condition precedent to its full
development in accordance with the mandate of R.A. No. 7227.12
On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the determination of
realty taxes which may otherwise be collected from real properties of Camp John Hay. 13 The resolution was
intended to intelligently guide the sanggunian in determining its position on whether Camp John Hay be
declared a SEZ, it (thesanggunian) being of the view that such declaration would exempt the camp's property
and the economic activity therein from local or national taxation.
More than a month later, however, the sanggunian passed Resolution No. 255, (Series of 1994),14 seeking and
supporting, subject to its concurrence, 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.
Together with this resolution was submitted a draft of the proposed proclamation for consideration by the
President.15
On July 5, 1994 then President Ramos issued Proclamation No. 420, 16 the title of which was earlier indicated,
which established a SEZ on a portion of Camp John Hay and which reads as follows:
xxx
Pursuant to the powers vested in me by the law and the resolution of concurrence by the City Council of
Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and designate a portion of the area
covered by the former John Hay reservation as embraced, covered, and defined by the 1947 Military Bases
Agreement between the Philippines and the United States of America, as amended, as the John Hay Special
Economic Zone, and accordingly order:
SECTION 1. Coverage of John Hay Special Economic Zone. - The John Hay Special Economic Zone shall cover
the area consisting of Two Hundred Eighty Eight and one/tenth (288.1) hectares, more or less, of the total of
Six Hundred Seventy-Seven (677) hectares of the John Hay Reservation, more or less, which have been
surveyed and verified by the Department of Environment and Natural Resources (DENR) as defined by the
following technical description:
A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and particularly described
in survey plans Psd-131102-002639 and Ccs-131102-000030 as approved on 16 August 1993 and 26 August
1993, respectively, by the Department of Environment and Natural Resources, in detail containing:
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030
-and-
Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and Lot 18 of Psd-
131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES (288.1 hectares);
Provided that the area consisting of approximately Six and two/tenth (6.2) hectares, more or less, presently
occupied by the VOA and the residence of the Ambassador of the United States, shall be considered as part of
the SEZ only upon turnover of the properties to the government of the Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone. - Pursuant to Section 15 of R.A. No. 7227, the
Bases Conversion and Development Authority is hereby established as the governing body of the John Hay
Special Economic Zone and, as such, authorized to determine the utilization and disposition of the lands
comprising it, subject to private rights, if any, and in consultation and coordination with the City Government of
Baguio after consultation with its inhabitants, and to promulgate the necessary policies, rules, and regulations
to govern and regulate the zone thru the John Hay Poro Point Development Corporation, which is its
implementing arm for its economic development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section 5(m) and Section 15 of
R.A. No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules,
and regulations governing the zone, including investment incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone
under Section 12 of R.A. No. 7227 and those applicable incentives granted in the Export Processing Zones, the
Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may
hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. - All Heads of departments,
bureaus, offices, agencies, and instrumentalities of the government are hereby directed to give full support to
Bases Conversion and Development Authority and/or its implementing subsidiary or joint venture to facilitate
the necessary approvals to expedite the implementation of various projects of the conversion program.
Sec. 5. Local Authority. - Except as herein provided, the affected local government units shall retain their basic
autonomy and identity.
Sec. 6. Repealing Clause. - All orders, rules, and regulations, or parts thereof, which are inconsistent with the
provisions of this Proclamation, are hereby repealed, amended, or modified accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.
Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundred and ninety-four.
The issuance of Proclamation No. 420 spawned the present petition 17 for prohibition, mandamus and
declaratory relief which was filed on April 25, 1995 challenging, in the main, its constitutionality or validity as
well as the legality of the Memorandum of Agreement and Joint Venture Agreement between public respondent
BCDA and private respondents Tuntex and AsiaWorld.
Petitioners allege as grounds for the allowance of the petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS IT GRANTS TAX EXEMPTIONS
IS INVALID AND ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER
GRANTED ONLY TO THE LEGISLATURE.
II .PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS AND INTERFERES WITH
THE AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL IN THAT IT VIOLATES
THE RULE THAT ALL TAXES SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC
RESPONDENTS BASES CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO ONLY BY
DIRECT NEGOTIATION IS ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN
PRIVATE AND PUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT AUTHORITY IS (sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING UNDERGONE ENVIRONMENTAL
IMPACT ASSESSMENT IS BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL IMPACT
ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin BCDA, John Hay
Poro Point Development Corporation and the city government from implementing Proclamation No. 420, and
Tuntex and AsiaWorld from proceeding with their plan respecting Camp John Hay's development pursuant to
their Joint Venture Agreement with BCDA.18
Public respondents, by their separate Comments, allege as moot and academic the issues raised by the
petition, the questioned Memorandum of Agreement and Joint Venture Agreement having already been deemed
abandoned by the inaction of the parties thereto prior to the filing of the petition as in fact, by letter of
November 21, 1995, BCDA formally notified Tuntex and AsiaWorld of the revocation of their said agreements. 19
In maintaining the validity of Proclamation No. 420, 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.
Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it is violative of
the constitutional guarantee of equal protection, respondents assail petitioners' lack of standing to bring the 33
present suit even as taxpayers and in the absence of any actual case or controversy to warrant this Court's
exercise of its power of judicial review over the proclamation.
Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of the
hierarchy of courts and of the doctrine of exhaustion of administrative remedies.
Replying,20 petitioners aver that the doctrine of exhaustion of administrative remedies finds no application
herein since they are invoking the exclusive authority of this Court under Section 21 of R.A. No. 7227 to enjoin
or restrain implementation of projects for conversion of the base areas; that the established exceptions to the
aforesaid doctrine obtain in the present petition; and that they possess the standing to bring the petition which
is a taxpayer's suit.
Public respondents have filed their Rejoinder21 and the parties have filed their respective memoranda.
Before dwelling on the core issues, this Court shall first address the preliminary procedural questions
confronting the petition.
The judicial policy is and has always been that this Court will not entertain direct resort to it except when the
redress sought cannot be obtained in the proper courts, or when exceptional and compelling circumstances
warrant availment of a remedy within and calling for the exercise of this Court's primary jurisdiction. 22 Neither
will it entertain an action for declaratory relief, which is partly the nature of this petition, over which it has no
original jurisdiction.
Nonetheless, as it is only this Court which has the power under Section 21 23 of R.A. No. 7227 to enjoin
implementation of projects for the development of the former US military reservations, the issuance of which
injunction petitioners pray for, petitioners' direct filing of the present petition with it is allowed. Over and above
this procedural objection to the present suit, this Court retains full discretionary power to take cognizance of a
petition filed directly to it if compelling reasons, or the nature and importance of the issues raised,
warrant.24 Besides, remanding the case to the lower courts now would just unduly prolong adjudication of the
issues.
The transformation of a portion of the area covered by Camp John Hay into a SEZ is not simply a re-
classification of an area, a mere ascription of a status to a place. It involves turning the former US military
reservation into a focal point for investments by both local and foreign entities. It is to be made a site of
vigorous business activity, ultimately serving as a spur to the country's long awaited economic growth. For, as
R.A. No. 7227 unequivocally declares, it is the government's policy to enhance the benefits to be derived from
the base areas in order to promote the economic and social development of Central Luzon in particular and the
country in general.25 Like the Subic SEZ, the John Hay SEZ should also be turned into a "self-sustaining,
industrial, commercial, financial and investment center." 26
More than the economic interests at stake, the development of Camp John Hay as well as of the other base
areas unquestionably has critical links to a host of environmental and social concerns. Whatever use to which
these lands will be devoted will set a chain of events that can affect one way or another the social and
economic way of life of the communities where the bases are located, and ultimately the nation in general.
Underscoring the fragility of Baguio City's ecology with its problem on the scarcity of its water supply,
petitioners point out that the local and national government are faced with the challenge of how to provide for
an ecologically sustainable, environmentally sound, equitable transition for the city in the wake of Camp John
Hay's reversion to the mass of government property. 27 But that is why R.A. No. 7227 emphasizes the "sound
and balanced conversion of the Clark and Subic military reservations and their extensions consistent with
28
ecological and environmental standards." It cannot thus be gainsaid that the matter of conversion of the US
bases into SEZs, in this case Camp John Hay, assumes importance of a national magnitude.
Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction over the
petition.
As far as the questioned agreements between BCDA and Tuntex and AsiaWorld are concerned, the legal
questions being raised thereon by petitioners have indeed been rendered moot and academic by the revocation
of such agreements. There are, however, other issues posed by the petition, those which center on the
constitutionality of Proclamation No. 420, which have not been mooted by the said supervening event upon
application of the rules for the judicial scrutiny of constitutional cases. The issues boil down to:
(1)
Whether the present petition complies with the requirements for this Court's exercise of jurisdiction over constitutional
issues;
(2) Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other
economic incentives to the John Hay Special Economic Zone; and
(3) Whether Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City; xxx
It is settled that when questions of constitutional significance are raised, the court can exercise its power of
judicial review only if the following requisites are present: (1) the existence of an actual and appropriate case;
(2) a personal and substantial interest of the party raising the constitutional question; (3) the exercise of
judicial review is pleaded at the earliest opportunity; and (4) the constitutional question is the lis mota of the
case.29
An actual case or controversy refers to an existing case or controversy that is appropriate or ripe for
determination, not conjectural or anticipatory. 30 The controversy needs to be definite and concrete, bearing
upon the legal relations of parties who are pitted against each other due to their adverse legal
31
interests. There is in the present case a real clash of interests and rights between petitioners and respondents
arising from the issuance of a presidential proclamation that converts a portion of the area covered by Camp
John Hay into a SEZ, the former insisting that such proclamation contains unconstitutional provisions, the latter
claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the affected local government units to the creation of
SEZs out of all the base areas in the country. 32 The grant by the law on local government units of the right of
concurrence on the bases' conversion is equivalent to vesting a legal standing on them, for it is in effect a
recognition of the real interests that communities nearby or surrounding a particular base area have in its
utilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation
No. 420, is personal and substantial such that they have sustained or will sustain direct injury as a result of the
33
government act being challenged. Theirs is a material interest, an interest in issue affected by the
34
proclamation and not merely an interest in the question involved or an incidental interest, for what is at stake
in the enforcement of Proclamation No. 420 is the very economic and social existence of the people of Baguio
City.
Petitioners' locus standi parallels that of the petitioner and other residents of Bataan, specially of the town of
35
Limay, in Garcia v. Board of Investments where this Court characterized their interest in the establishment of
a petrochemical plant in their place as actual, real, vital and legal, for it would affect not only their economic
life but even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected councilors of Baguio at the
time, engaged in the local governance of Baguio City and whose duties included deciding for and on behalf of
their constituents the question of whether to concur with the declaration of a portion of the area covered by
Camp John Hay as a SEZ. Certainly then, petitioners Claravall and Yaranon, as city officials who voted
against36 thesanggunian Resolution No. 255 (Series of 1994) supporting the issuance of the now challenged
Proclamation No. 420, have legal standing to bring the present petition.
That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of the issues
concerning the questioned agreements between public and private respondents is of no moment.
"By the mere enactment of the questioned law or the approval of the challenged act, the dispute is deemed to
have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of
the Constitution and/or the law is enough to awaken judicial duty." 37
As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they have been
complied with in the case at bar. This is an action filed purposely to bring forth constitutional issues, ruling on
which this Court must take up. Besides, respondents never raised issues with respect to these requisites,
hence, they are deemed waived.
Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as framed in the
second and third issues above, must now be addressed squarely.
The second issue refers to petitioners' objection against the creation by Proclamation No. 420 of a regime of
tax exemption within the John Hay SEZ. Petitioners argue 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."
Section 3 of Proclamation No. 420, the challenged provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. - Pursuant to Section 5(m) and Section 15 of
R.A. No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules,
and regulations governing the zone, including investment incentives, in consultation with pertinent government
departments. Among others, the zone shall have all the applicable incentives of the Special Economic
Zone under Section 12 of R.A. No. 7227 and those applicable incentives granted in the Export
Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and
new investment laws that may hereinafter be enacted. (Emphasis and underscoring supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent
provisions of the Local Government Code, the Subic Special Economic Zone shall 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;
b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory 34
ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special
Economic Zone, as well as provide incentives such as tax and duty free importations of raw materials, capital
and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic
Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the
Customs and Tariff Code and other relevant tax laws of the Philippines;
(c) 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. In lieu of paying taxes, three percent
(3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone
shall be remitted to the National Government, one percent (1%) each to the local government units affected by
the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other
municipalities contiguous to be base areas. In case of conflict between national and local laws with respect to
tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and
futures shall be allowed and maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and
other financial institutions within the Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than
Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21)
years of age, shall be granted permanent resident status within the Subic Special Economic Zone. They shall
have freedom of ingress and egress to and from the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority referred
to in Section 13 of this Act may also issue working visas renewable every two (2) years to foreign executives
and other aliens possessing highly-technical skills which no Filipino within the Subic Special Economic Zone
possesses, as certified by the Department of Labor and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after issuance thereof;
x x x (Emphasis supplied)
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 SEZsstill to be created at the time via presidential proclamation.
The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and investment privileges
accorded it under the law, as the following exchanges between our lawmakers show during the second reading
of the precursor bill of R.A. No. 7227 with respect to the investment policies that would govern Subic SEZ
which are now embodied in the aforesaid Section 12 thereof:
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Senator Maceda: This is what I was talking about. We get into problems here because all of these following
policies are centered around the concept of free port. And in the main paragraph above, we have declared both
Clark and Subic as special economic zones, subject to these policies which are, in effect, a free-port
arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these policies only
to Subic.
May I withdraw then my amendment, and instead provide that "THE SPECIAL ECONOMIC ZONE OF SUBIC
SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING POLICIES." Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent the
establishment of other special economic zones observing these policies.
Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the point that if
we give this delegation to the President to establish other economic zones, that may be an unwarranted
delegation.
So we agreed that we will simply limit the definition of powers and description of the zone to Subic, but that
does not exclude the possibility of creating other economic zones within the baselands.
Senator Paterno: But if that amendment is followed, no other special economic zone may be created under
authority of this particular bill. Is that correct, Mr. President?
Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be confined only to
Subic.38
x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given to Subic SEZ consist
principally of exemption from tariff or customs duties, national and local taxes of business entities therein
(paragraphs (b) and (c)), free market and trade of specified goods or properties (paragraph d), liberalized
banking and finance (paragraph f), and relaxed immigration rules for foreign investors (paragraph g). Yet,
apart from these, Proclamation No. 420 also makes available to the John Hay SEZ benefits existing in other
laws such as the privilege of export processing zone-based businesses of importing capital equipment and raw
materials free from taxes, duties and other restrictions;39 tax and duty exemptions, tax holiday, tax credit, and
other incentives under the Omnibus Investments Code of 1987;40 and the applicability to the subject zone of
rules governing foreign investments in the Philippines. 41
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
areexclusive 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. 42 Other than
Congress, the Constitution may itself provide for specific tax exemptions, 43 or local governments may pass
ordinances on exemption only from local taxes.44
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. 45 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.
Contrary to public respondents' suggestions, the claimed statutory exemption of the John Hay SEZ from
taxation should be manifest and unmistakable from the language of the law on which it is based; it must be
expressly granted in a statute stated in a language too clear to be mistaken. 46 Tax exemption cannot be
implied as it must be categorically and unmistakably expressed.47
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.
This Court no doubt can void an act or policy of the political departments of the government on either of two
grounds-infringement of the Constitution or grave abuse of discretion. 48
This Court then declares that the grant by Proclamation No. 420 of tax exemption and other privileges to the
John Hay SEZ is void for being violative of the Constitution. This renders it unnecessary to still dwell on
petitioners' claim that the same grant violates the equal protection guarantee.
With respect to the final issue raised by petitioners -- that Proclamation No. 420 is unconstitutional for being in
derogation of Baguio City's local autonomy, objection is specifically mounted against Section 2 thereof in which
BCDA is set up as the governing body of the John Hay SEZ.49
Petitioners argue that there is no authority of the President to subject the John Hay SEZ to the governance of
BCDA which has just oversight functions over SEZ; and that to do so is to diminish the city government's power
over an area within its jurisdiction, hence, Proclamation No. 420 unlawfully gives the President power of control
over the local government instead of just mere supervision.
Petitioners' arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted with, among other
things, the following purpose:50
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(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station,
O'Donnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa,
Bataan) and those portions of Metro Manila Camps which may be transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in BCDA over Camp John Hay, BCDA virtually
has control over it, subject to certain limitations provided for by law. By designating BCDA as the governing
agency of the John Hay SEZ, the law merely emphasizes or reiterates the statutory role or functions it has been
granted.
The unconstitutionality of the grant of tax immunity and financial incentives as contained in the second
sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be
declared unconstitutional, the other parts thereof not being repugnant to law or the Constitution. The
delineation and declaration of a portion of the area covered by Camp John Hay as a SEZ was well within the
powers of the President to do so by means of a proclamation. 51 The requisite prior concurrence by the Baguio
City government to such proclamation appears to have been given in the form of a duly enacted resolution by 35
the sanggunian. The other provisions of the proclamation had been proven to be consistent with R.A. No. 7227.
Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid portion, if
separable from the invalid, may stand and be enforced. 52 This Court finds that the other provisions in
Proclamation No. 420 converting a delineated portion of Camp John Hay into the John Hay SEZ are separable
from the invalid second sentence of Section 3 thereof, hence they stand.
WHEREFORE, 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. Public respondents are hereby enjoined from
implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains valid and effective.
SO ORDERED.