G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:
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," 9being
"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

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There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon. 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 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.

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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., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
MARTIN, J.:

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 onesixteenth (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."

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).

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.

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.

1. Is Section 2, Republic Act No. 2264 an undue delegation of power,

confiscatory and oppressive?

There are three capital questions raised in this appeal:

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?

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

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

3 | TA X c a s e s S e t 1

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, 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 defendantsappellees 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 tax except 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

4 | TA X c a s e s S e t 1

sale of the taxpayer imposes a sales tax and is null and void for being outside the power of
the municipality to enact. 20But, 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

SO ORDERED.
COMMISSIONER OF INTERNAL G.R. No. 134062
REVENUE,
Petitioner, Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.

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 petitionerappellant.

BANK OF THE PHILIPPINE

ISLANDS,
Respondent. Promulgated:
April 17, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CORONA, J.:
This is a petition for review on certiorari [1] of a decision[2] 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 resolution[4] 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

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Compromise penalty 15,000.00

TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50.[5]

xxx xxx xxx

this constitutes the final decision of this office on the matter. [8]

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
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.

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 CTA[14] 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 basestherefor. 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 1986 had already become final
and unappealable and
2)
whether or not BPI was liable for the said taxes.
The former Section 270[18] (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.
xxx xxx xxx (emphasis supplied)
WERE THE OCTOBER 28, 1988
NOTICES VALID ASSESSMENTS?
The first issue for our resolution is whether or not the October 28,
1988 notices[19] 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]

6 | TA X c a s e s S e t 1

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 provides that:
[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:
xxx xxx xxx
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.
xxx xxx xxx (emphasis supplied)
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.

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]

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'sfindings
was
changed
in

7 | TA X c a s e s S e t 1

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.

Sec. 270. Protesting of assessment.

xxx xxx xxx

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. JerryLazaro, 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]

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 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.

8 | TA X c a s e s S e t 1

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 REVERSEDand SET ASIDE.
G.R. No. 88291 June 8, 1993

ERNESTO
M.
MACEDA, petitioner,
vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of
the President, HON. VICENTE JAYME, ETC., ET AL., respondents.
NOCON, J.:
Just like lightning which does strike the same place twice in some instances, this matter of
indirect tax exemption of the private respondent National Power Corporation (NPC) is
brought to this Court a second time. Unfazed by the Decision We promulgated on May 31,
1991 1 petitioner Ernesto Maceda asks this Court to reconsider said Decision. Lest We be
criticized for denying due process to the petitioner. We have decided to take a second look
at the issues. In the process, a hearing was held on July 9, 1992 where all parties
presented their respective arguments. Etched in this Court's mind are the paradoxical
claims by both petitioner and private respondents that their respective positions are for
the benefit of the Filipino people.
I
A Chronological review of the relevant NPC laws, specially with respect to its tax exemption
provisions, at the risk of being repetitious is, therefore, in order.
On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National
Power Corporation, a public corporation, mainly to develop hydraulic power from all water
sources in the Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in
the Philippine Treasury for the purpose of organizing the NPC and conducting its
preliminary work. 3 The main source of funds for the NPC was the flotation of bonds in the
capital markets 4and these bonds
. . . issued under the authority of this Act shall be exempt from the
payment of all taxes by the Commonwealth of the Philippines, or by any
authority, branch, division or political subdivision thereof and subject to the
provisions of the Act of Congress, approved March 24, 1934, otherwise
known as the Tydings McDuffle Law, which facts shall be stated upon the
face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed
for the initial operations of the NPC and reiterating the provision of the flotation of bonds
as soon as the first construction of any hydraulic power project was to be decided by the
NPC Board. 6 The provision on tax exemption in relation to the issuance of the NPC bonds
was neither amended nor deleted.

9 | TA X c a s e s S e t 1

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment
of the bond's principal and interest in "gold coins" but adding that payment could be made
in United States dollars. 7 The provision on tax exemption in relation to the issuance of the
NPC bonds was neither amended nor deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans
NPC was authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in
R.A. No. 357. 17 The tax provision related to the repayment of these loans was not
amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the
Philippines to guarantee, absolutely and unconditionally, as primary obligor, the payment
of any and all NPC loans. 8 He was also authorized to contract on behalf of the NPC with the
International Bank for Reconstruction and Development (IBRD) for NPC loans for the
accomplishment of NPC's corporate objectives 9 and for the reconstruction and
development of the economy of the country. 10 It was expressly stated that:

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December
31, 2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No.
2058 were expressly repealed. 19

Any such loan or loans shall be exempt from taxes, duties, fees, imposts,
charges, contributions and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities. 11
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first
time, to incur other types of indebtedness, aside from indebtedness incurred by flotation of
bonds. 12 As to the pertinent tax exemption provision, the law stated as follows:
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. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the
IBRD, the President of the Philippines was authorized to negotiate, contract and guarantee
loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or any other international
financial institution. 14 The tax provision for repayment of these loans, as stated in R.A. No.
357, was not amended.
On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for
real estate taxes. As enacted, the law states as follows:
To facilitate payment of its indebtedness, the National Power Corporation
shall be exempt from all taxes, except real property tax, and from all
duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities, and municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be
funded by the increased indebtedness 16 should bear the National Economic Council's
stamp of approval. The tax exemption provision related to the payment of this total
indebtedness was not amended nor deleted.

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation
into a stock corporation with an authorized capital stock of P100,000,000.00 divided into
1,000.000 shares having a par value of P100.00 each, with said capital stock wholly
subscribed to by the Government. 20 No tax exemption was incorporated in said Act.
On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized
capital stock to P250,000,000.00 with the increase to be wholly subscribed by the
Government. 21 No tax provision was incorporated in said Act.
On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to
P300,000,000.00, the increase to be wholly subscribed by the Government. No tax
provision was incorporated in said Act. 22
On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A.
No. 120, as amended. Declared as primary objectives of the nation were:
Declaration of Policy. Congress 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 needs of industrial development and
dispersal and the needs 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 the financial
institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a)
(Authority to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign
Loans).
As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:
The bonds issued under the authority of this subsection shall be exempt
from the payment of all taxes by the Republic of the Philippines, or by any

10 | T A X c a s e s S e t 1

authority, branch, division or political subdivision thereof which facts shall

be stated upon the face of said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b),
states as follows:
The loans, credits and indebtedness contracted under this subsection and
the payment of the principal, interest and other charges thereon, as well as
the importation of machinery, equipment, materials and supplies by the
Corporation, paid from the proceeds of any loan, credit or indebtedeness
incurred under this Act, shall also be exempt from all taxes, fees, imposts,
other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political
subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395, which
declares the non-profit character and tax exemptions of NPC as follows:
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, and 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;

On November 7, 1972, Presidential Decree No. 40 was issued declaring

that the electrification of the entire country was one of the primary
concerns of the country. And in connection with this, it was specifically
stated that:
The setting up of transmission line grids and the construction of associated
generation facilities in Luzon, Mindanao and major islands of the country,
including the Visayas, shall be the responsibility of the National Power
Corporation (NPC) as the authorized implementing agency of the State. 27
xxx xxx xxx
It is the ultimate objective of the State for the NPC to own and operate as a
single integrated system all generating facilities supplying electric power
to the entire area embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it
fulfill its role under aforesaid P.D. No. 40. Its authorized capital stock was raised
P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a maximum
P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total
US$1,000,000,000.00 31 in foreign loans.

to
to
of
of

The relevant tax exemption provision for these foreign loans states as follows:
The loans, credits and indebtedness contracted under this subsection and
the payment of the principal, interest and other charges thereon, as well as
the importation of machinery, equipment, materials, supplies and services,
by the Corporation, paid from the proceeds of any loan, credit or
indebtedness incurred under this Act, shall also be exempt from all direct
and indirect taxes, fees, imposts, other charges and restrictions, including
import restrictions previously and presently imposed, and to be imposed by
the Republic of the Philippines, or any of its agencies and political
subdivisions. 32 (Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(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 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. 26

(a) From the payment of all taxes, duties, fees, imposts, charges and
restrictions to the Republic of the Philippines, its provinces, cities,
municipalities and other government agencies and instrumentalities
including the taxes, duties, fees, imposts and other charges provided for
under the Tariff and Customs Code of the Philippines, Republic Act
Numbered Nineteen Hundred Thirty-Seven, as amended, and as further
amended by Presidential Decree No. 34 dated October 27, 1972, and

11 | T A X c a s e s S e t 1

Presidential Decree No. 69, dated November 24, 1972, and costs and
service fees in any court or administrative proceedings in which it may be
a party;

Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic
indebtedness ceiling was increased to P12,000,000,000.00, 40 the total foreign loan ceiling
was raised to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was amended to
read as follows:

xxx xxx xxx

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 to 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 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. 42

(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 products used by the Corporation in the
generation,
transmission,
utilization
and
sale
of
electric
power. 33 (Emphasis supplied)
On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's
sale of electricity to its different customers. 34 No tax exemption provision was amended,
deleted or added.
On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be
appropriated annually to cover the unpaid subscription of the Government in the NPC
authorized capital stock, which amount would be taken from taxes accruing to the General
Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or notes
to be issued by the Secretary of Finance for this particular purpose. 35
On May 27, 1976 P.D. No. 938 was issued
(I)n view of the accelerated expansion programs for generation and
transmission facilities which includes nuclear power generation, the
present capitalization of National Power Corporation (NPC) and the ceilings
for domestic and foreign borrowings are deemed insufficient; 36

II
On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882,
1177, 1931 and Executive Order No. 93 (S'86).
On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with
regard to imports as follows:
WHEREAS, importations by certain government agencies, including
government-owned or controlled corporation, are exempt from the
payment of customs duties and compensating tax; and
WHEREAS, in order to reduce foreign exchange spending and to protect
domestic industries, it is necessary to restrict and regulate such tax-free
importations.

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter,
the non-profit character of NPC has not been fully utilized because of
restrictive interpretation of the taxing agencies of the government on said
provisions; 37
xxx xxx xxx
(I)n order to effect the accelerated expansion program and attain the
declared objective of total electrification of the country, further
amendments of certain sections of Republic Act No. 6395, as amended by
Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines,

by virtue of the powers vested in me by the Constitution, and do hereby
decree and order the following:
Sec. 1. All importations of any government agency, including governmentowned or controlled corporations which are exempt from the payment of
customs duties and internal revenue taxes, shall be subject to the prior
approval of an Inter-Agency Committee which shall insure compliance with
the following conditions:
(a) That no such article of local manufacture are available in sufficient
quantity and comparable quality at reasonable prices;

12 | T A X c a s e s S e t 1

(b) That the articles to be imported are directly and actually needed and
will be used exclusively by the grantee of the exemption for its operations
and projects or in the conduct of its functions; and
(c) The shipping documents covering the importation are in the name of
the grantee to whom the goods shall be delivered directly by customs
authorities.
xxx xxx xxx
Sec. 3. The Committee shall have the power to regulate and control the
tax-free importation of government agencies in accordance with the
conditions set forth in Section 1 hereof and the regulations to be
promulgated to implement the provisions of this Decree. Provided,
however, That any government agency or government-owned or controlled
corporation, or any local manufacturer or business firm adversely affected
by any decision or ruling of the Inter-Agency Committee may file an appeal
with the Office of the President within ten days from the date of notice
thereof. . . . .
xxx xxx xxx
Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar
provisions of all general and special laws and decrees are hereby amended
accordingly.
xxx xxx xxx
On July 30, 1977, P.D. 1177 was issued as it was
. . . declared the policy of the State to formulate and implement a National
Budget that is an instrument of national development, reflective of national
objectives, strategies and plans. The budget shall be supportive of and
consistent with the socio-economic development plan and shall be oriented
towards the achievement of explicit objectives and expected results, to
ensure that funds are utilized and operations are conducted effectively,
economically and efficiently. The national budget shall be formulated within
a context of a regionalized government structure and of the totality of
revenues and other receipts, expenditures and borrowings of all levels of
government-owned or controlled corporations. The budget shall likewise be
prepared within the context of the national long-term plan and of a longterm budget program. 43

In line with such policy, the law decreed that

All units of government, including government-owned or controlled corporations, shall pay
income taxes, customs duties and other taxes and fees are imposed under revenues laws:
provided, that organizations otherwise exempted by law from the payment of such
taxes/duties may ask for a subsidy from the General Fund in the exact amount of
taxes/duties due: provided, further, that a procedure shall be established by the Secretary
of Finance and the Commissioner of the Budget, whereby such subsidies shall
automatically be considered as both revenue and expenditure of the General Fund. 44
The law also declared that
[A]ll laws, decrees, executive orders, rules and regulations or parts thereof
which are inconsistent with the provisions of the Decree are hereby
repealed and/or modified accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found itself in
after the Aquino assassination, P.D. No. 1931 was issued to reiterate that:
WHEREAS, Presidential Decree No. 1177 has already expressly repealed
the grant of tax privileges to any government-owned or controlled
corporation and all other units of government; 46
and since there was a
. . . need for government-owned or controlled corporations and all other
units of government enjoying tax privileges to share in the requirements of
development, fiscal or otherwise, by paying the duties, taxes and other
charges due from them. 47
it was decreed that:
Sec. 1. The provisions of special on general law to the contrary
notwithstanding, all exemptions from the payment of duties, taxes, fees,
imposts and other charges heretofore granted in favor of governmentowned or controlled corporations including their subsidiaries, are hereby
withdrawn.
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon
the recommendation of the Fiscal Incentives Review Board created under
Presidential Decree No. 776, is hereby empowered to restore, partially or
totally, the exemptions withdrawn by Section 1 above, any applicable tax
and duty, taking into account, among others, any or all of the following:

13 | T A X c a s e s S e t 1

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation
effort;

It was thus ordered that:

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:

3) The nature of the activity in which the corporation is engaged in; or

a) those covered by the non-impairment clause of the Constitution;
4) In general the greater national interest to be served.
xxx xxx xxx
Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other
laws, decrees, executive orders, administrative orders, rules, regulations or
parts thereof which are inconsistent with this Decree are hereby repealed,
amended or modified accordingly.
On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential
restoration or grant of tax exemption to other government and private entities without
benefit of review by the Fiscal Incentives Review Board, to wit:
WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11,
1984 and October 14, 1984, respectively, withdrew the tax and duty
exemption privileges, including the preferential tax treatment, of
government and private entities with certain exceptions, in order that the
requirements of national economic development, in terms of fiscals and
other resources, may be met more adequately;
xxx xxx xxx
WHEREAS, in addition to those tax and duty exemption privileges were
restored by the Fiscal Incentives Review Board (FIRB), a number of affected
entities, government and private, had their tax and duty exemption
privileges restored or granted by Presidential action without benefit or
review by the Fiscal Incentives Review Board (FIRB);
xxx xxx xxx
Since it was decided that:
[A]ssistance to government and private entities may be better provided
where necessary by explicit subsidy and budgetary support rather than tax
and duty exemption privileges if only to improve the fiscal monitoring
aspects of government operations.

b) those conferred by effective internation agreement to which the

Government of the Republic of the Philippines is a signatory;
c) those enjoyed by enterprises registered with:
(i) the Board of Investment 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, was amended.
d) those enjoyed by the copper mining industry pursuant to the provisions
of Letter of Instructions 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:

14 | T A X c a s e s S e t 1

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in

part;
b) revise the scope and coverage of tax and/or duty exemption that may
be restored;

III
Now to some definitions. We refer to the very simplistic approach that all would-be
lawyers, learn in their TAXATION I course, which fro convenient reference, is as follows:
Classifications or kinds of Taxes:

c) impose conditions for the restoration of tax and/or duty exemption;

According to Persons who pay or who bear the burden:
d) prescribe the date of period of effectivity of the restoration of tax and/or
duty exemption;

a. Direct Tax the where the person supposed to pay the tax really pays
it. WITHOUT transferring the burden to someone else.

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 commitment of the Philippines and the
necessary precautions such that the grant of subsidies does not become
the basis for countervailing action.

Examples: Individual income tax, corporate income tax, transfer taxes

(estate tax, donor's tax), residence tax, immigration tax
b. Indirect Tax that where the tax is imposed upon
goods BEFORE reaching the consumer who ultimately pays for it, not as a
tax, but as a part of the purchase price.
Examples: the internal revenue indirect taxes (specific tax, percentage
taxes, (VAT) and the tariff and customs indirect taxes (import duties,
special import tax and other dues) 52

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;

IV

b) relative contribution of the beneficiary to the revenue generation effort;

To simply matter, the issues raised by petitioner in his motion for reconsideration can be
reduced to the following:

c) nature of the activity the beneficiary is engaged; and

(1) What kind of tax exemption privileges did NPC have?

d) in general, the greater national interest to be served.

(2) For what periods in time were these privileges being enjoyed?

xxx xxx xxx

(3) If there are taxes to be paid, who shall pay for these taxes?

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof
inconsistent with this Executive Order are hereby repealed or modified
accordingly.
E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and
regulations, to be issued by the Ministry of Finance. 49 Said rules and regulations were
promulgated
and
published
in
the
Official
Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50 in the
Official Gasetter, 51 which 15th day was March 10, 1987.

V
Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the
phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as
amended by P.D. No. 380, does not expressly include "indirect taxes."
His point is not well-taken.

15 | T A X c a s e s S e t 1

A chronological review of the NPC laws will show that it has been the lawmaker's intention
that the NPC was to be completely tax exempt from all forms of taxes direct and
indirect.
NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its
operations upon its creation by virtue of C.A. No. 120.
When the NPC was authorized to contract with the IBRD for foreign financing, any loans
obtained were to be completely tax exempt.
After the NPC was authorized to borrow from other sources of funds aside issuance of
bonds it was again specifically exempted from all types of taxes "to facilitate payment of
its indebtedness." Even when the ceilings for domestic and foreign borrowings were
periodically increased, the tax exemption privileges of the NPC were maintained.

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple
paragraph as follows:
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 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)
Petitioner reminds Us that:

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep.
Act No. 987, as above stated. The exemption was, however, restored by R.A. No. 6395.

[I]t must be borne in mind that Presidential Decree Nos. 380

and 938 were issued by one man, acting as such the Executive and
Legislative. 53

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax
exemptions allowed NPC. Its section 13(d) is the starting point of this bone of contention
among the parties. For easy reference, it is reproduced as follows:

xxx xxx xxx

[T]he Corporation is hereby declared exempt:

xxx xxx xxx
(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.
P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as
follows:

[S]ince both presidential decrees were made by the same person, it would
have been very easy for him to retain the same or similar language used in
P.D. No. 380 P.D. No. 938 if his intention were to preserve the indirect tax
exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter
what his fault were. It should be noted that section 13, R.A. No. 6395, provided for tax
exemptions for the following items:
13(a) : court or administrative proceedings;
13(b) : income, franchise, realty taxes;
13(c) : import of foreign goods required for its operations and projects;

xxx xxx xxx

13(d) : petroleum products used in generation of electric power.
(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 products used by the Corporation in the
generation, transmission, utilization and sale of electric power. (Emphasis
supplied)

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES,
ETC.,", included 13(a) under the "as well as" clause and added PNOC subsidiaries as
qualified for tax exemptions.

16 | T A X c a s e s S e t 1

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of
enactment or issuance as narrated above in part I hereof. President Marcos must have
considered all the NPC statutes from C.A. No. 120 up to its latest amendments, P.D. No.
380, P.D. No. 395 and P.D. No. 759, AND came up 55 with a very simple Section 13, R.A. No.
6395, as amended by P.D. No. 938.
One common theme in all these laws is that the NPC must be enable to pay its
indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness,
at any one time, and U$4 Billion in total foreign loans at any one time. The NPC must be
and has to be exempt from all forms of taxes if this goal is to be achieved.
By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be
remembered that to pay the government share in its capital stock P.D. No. 758 was issued
mandating that P200 Million would be appropriated annually to cover the said unpaid
subscription of the Government in NPC's authorized capital stock. And significantly one of
the sources of this annual appropriation of P200 million is TAX MONEY accruing to the
General Fund of the Government. It does not stand to reason then that former President
Marcos would order P200 Million to be taken partially or totally from tax money to be used
to pay the Government subscription in the NPC, on one hand, and then order the NPC to
pay all its indirect taxes, on the other.
The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d)
into the phrase "All FORMS OF" is supported by the fact that he did not do the same for the
tax exemption provision for the foreign loans to be incurred.
The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:
The loans, credits and indebtedness contracted under this subsection and
the payment of the principal, interest and other charges thereon, as well as
the importation of machinery, equipment, materials and supplies by the
Corporation, paid from the proceeds of any loan, credit or indebtedness
incurred under this Act, shall also be exempt from all taxes, fees, imposts,
other charges and restrictions, including import restrictions, by the
Republic of the Philippines, or any of its agencies and political
subdivisions. 57

indirect taxes, fees, imposts, other charges and restrictions, including

import restrictions previously and presently imposed, and to be
imposed by the Republic of the Philippines, or any of its agencies and
political subdivisions. 58(Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8
(b), R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this
particular Section 8 (b) had to do only with loans and machinery imported, paid for from
the proceeds of these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT
UP WITH, and so, the tax exemption stood as is with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege
extended to "taxes, fees, imposts, other charges . . . to be imposed" in the future surely,
an indication that the lawmakers wanted the NPC to be exempt from ALL FORMS of taxes
direct and indirect.
It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both
direct and indirect taxes under P.D. No. 938.
VI
Five (5) years on into the now discredited New Society, the Government decided to
rationalize government receipts and expenditures by formulating and implementing a
National Budget. 60 The NPC, being a government owned and controlled corporation had to
be shed off its tax exemption status privileges under P.D. No. 1177. It was, however,
allowed to ask for a subsidy from the General Fund in the exact amount of taxes/duties
due.
Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation
privileges. It allowed, however, NPC to appeal said repeal with the Office of the President
and to avail of tax-free importation privileges under its Section 1, subject to the prior
approval of an Inter-Agency Committed created by virtue of said P.D. No. 882. It is
presumed that the NPC, being the special creation of the State, was allowed to continue its
tax-free importations.

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the
payment of the principal, interest and other charges thereon, as well as the
importation of machinery, equipment, materials, supplies and services, by
the Corporation, paid from the proceeds of any loan, credit or indebtedness
incurred under this Act, shall also be exempt from all direct and

17 | T A X c a s e s S e t 1

This Court notes that petitioner brought to the attention of this Court, the matter of the
abolition of NPC's tax exemption privileges by P.D. No. 1177 61 only in his Common
Reply/Comment to private Respondents' "Opposition" and "Comment" to Motion for
Reconsideration, four (4) months AFTER the motion for Reconsideration had been filed.
During oral arguments heard on July 9, 1992, he proceeded to discuss this tax exemption
withdrawal as explained by then Secretary of Justice Vicente Abad Santos in opinion No.
133 (S '77). 62 A careful perusal of petitioner's senate Blue Ribbon Committee Report No.
474, the basis of the petition at bar, fails to yield any mention of said P.D. No. 1177's effect
on NPC's tax exemption privileges. 63 Applying by analogy Pulido vs. Pablo, 64 the court
declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption privileges was
not seasonably invoked 65 by the petitioner.
Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax
exemption privileges as this statute has been reiterated twice in P.D. No. 1931. The
express repeal of tax privileges of any government-owned or controlled corporation
(GOCC). NPC included, was reiterated in the fourth whereas clause of P.D. No. 1931's
preamble. The subsidy provided for in Section 23, P.D. No. 1177, being inconsistent with
Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue Board was
tasked with recommending the partial or total restoration of tax exemptions withdrawn by
Section 1, P.D. No. 1931.
The records before Us do not indicate whether or not NPC asked for the subsidy
contemplated in Section 23, P.D. No. 1177. Considering, however, that under Section 16 of
P.D. No. 1177, NPC had to submit to the Office of the President its request for the P200
million mandated by P.D. No. 758 to be appropriated annually by the Government to cover
its unpaid subscription to the NPC authorized capital stock and that under Section 22, of
the same P.D. No. NPC had to likewise submit to the Office of the President its internal
operating budget for review due to capital inputs of the government (P.D. No. 758) and to
the national government's guarantee of the domestic and foreign indebtedness of the NPC,
it is clear that NPC was covered by P.D. No. 1177.
There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that
suddenly found themselves having to pay taxes. It will be noted that Section 23, P.D. No.
1177, mandated that the Secretary of Finance and the Commissioner of the Budget had to
establish the necessary procedure to accomplish the tax payment/tax subsidy scheme of
the Government. In effect, NPC, did not put any cash to pay any tax as it got from the
General Fund the amounts necessary to pay different revenue collectors for the taxes it
had to pay.
In his memorandum filed July 16, 1992, petitioner submits:
[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost
all its duty and tax exemptions, whether direct or indirect. And so there
was nothing to be withdrawn or to be restored under P.D. No. 1931, issued

on June 11, 1984. This is evident from sections 1 and 2 of said P.D. No.
1931, which reads:
"Section 1. The provisions of special or general law to the
contrary notwithstanding, all exemptions from the payment
of duties, taxes, fees, imports and other charges heretofore
granted in favor of government-owned or controlled
corporations including their subsidiaries are hereby
withdrawn."
Sec. 2. The President of the Philippines and/or the Minister
of Finance, upon the recommendation of the Fiscal
Incentives Review Board created under P.D. No. 776, is
hereby empowered to restore partially or totally, the
exemptions withdrawn by section 1 above. . . .
Hence, P.D. No. 1931 did not have any effect or did it change NPC's status.
Since it had already lost all its tax exemptions privilege with the issuance
of P.D. No. 1177 seven (7) years earlier or on July 30, 1977, there were no
tax exemptions to be withdrawn by section 1 which could later be restored
by the Minister of Finance upon the recommendation of the FIRB under
Section 2 of P.D. No. 1931. Consequently, FIRB resolutions No. 10-85, and
1-86, were all illegally and validly issued since FIRB acted beyond their
statutory authority by creating and not merely restoring the tax exempt
status of NPC. The same is true for FIRB Res. No. 17-87 which restored
NPC's tax exemption under E.O. No. 93 which likewise abolished all duties
and tax exemptions but allowed the President upon recommendation of the
FIRB to restore those abolished.
The Court disagrees.
Applying by analogy the weight of authority that:
When a revised and consolidated act re-enacts in the same or substantially
the same terms the provisions of the act or acts so revised and
consolidated, the revision and consolidation shall be taken to be a
continuation of the former act or acts, although the former act or acts may
be expressly repealed by the revised and consolidated act; and all rights
and liabilities under the former act or acts are preserved and may be
enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of
Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said

18 | T A X c a s e s S e t 1

Section 1, P.D. No. 1931 was deemed to be a continuation of the first half of Section 23,
P.D. No. 1177, although the second half of Section 23, P.D. No. 177, on the subsidy scheme
for former tax exempt GOCCs had been expressly repealed by Section 2 with its institution
of the FIRB recommendation of partial/total restoration of tax exemption privileges.
The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same
NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer
obtain a subsidy for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for
a total restoration of its tax exemption privileges, which, it did, and the same were granted
under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.
Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86
were both legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not
created NPC's tax exemption status but merely restored it. 69
Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the
now rather infamous Amendment No. 6 70 as there was no showing that President Marcos'
encroachment on legislative prerogatives was justified under the then prevailing condition
that he could legislate "only if the Batasang Pambansa 'failed or was unable to act
inadequately on any matter that in his judgment required immediate action' to meet the
'exigency'. 71

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time,
President Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax
exemption privileges. The same was granted under FIRB Resolution No. 17-87 78 dated June
24, 1987 which restored NPC's tax exemption privileges effective, starting March 10, 1987,
the date of effectivity of E.O. No. 93 (S'86).
FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is
no indication, however, from the records of the case whether or not similar approvals were
given by then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led
some quarters to believe that a "travesty of justice" might have occurred when the
Minister of Finance approved his own recommendation as Chairman of the Fiscal Incentives
Review Board as what happened in Zambales Chromate vs. Court of Appeals 80 when the
Secretary of Agriculture and Natural Resources approved a decision earlier rendered by
him when he was the Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential
Executive Assistant Clave affirmed, on appeal to Malacaang, his own decision as
Chairman of the Civil Service Commission. 83
Upon deeper analysis, the question arises as to whether one can talk about "due process"
being violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister
of Finance when the same were recommended by him in his capacity as Chairman of the
Fiscal Incentives Review Board. 84

Actually under said Amendment No. 6, then President Marcos could issue decrees not only
when the Interim Batasang Pambansa failed or was unable to act adequately on any
matter for any reason that in his (Marcos') judgment required immediate action, but also
when there existed a grave emergency or a threat or thereof. It must be remembered that
said Presidential Decree was issued only around nine (9) months after the Philippines
unilaterally declared a moratorium on its foreign debt payments 72 as a result of the
economic crisis triggered by loss of confidence in the government brought about by the
Aquino assassination. The Philippines was then trying to reschedule its debt
payments. 73 One of the big borrowers was the NPC 74 which had a US$ 2.1 billion white
elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must have
been this grave emergency of a debt rescheduling which compelled Marcos to issue P.D.
No. 1931, under his Amendment 6 power. 76

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups
and scientist-doctors, respectively. Thus, there was a need for procedural due process to
be followed.

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption
shall be passed without the concurrence of a majority of all the members of the Batasang
Pambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim Batasang
Pambansa but by then President Marcos under His Amendment No. 6 power.

It should be noted that NPC was not asking to be granted tax exemption privileges for the
first time. It was just asking that its tax exemption privileges be restored. It is for these
reasons that, at least in NPC's case, the recommendation and approval of NPC's tax
exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done by the same person
acting in his dual capacities as Chairman of the Fiscal Incentives Review Board and Minister
of Finance, respectively, do not violate procedural due process.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his
Amendment No. 6 authority.

In the case of the tax exemption restoration of NPC, there is no other comparable entity
not even a single public or private corporation whose rights would be violated if NPC's
tax exemption privileges were to be restored. While there might have been a MERALCO
before Martial Law, it is of public knowledge that the MERALCO generating plants were sold
to the NPC in line with the State policy that NPC was to be the State implementing arm for
the electrification of the entire country. Besides, MERALCO was limited to Manila and its
environs. And as of 1984, there was no more MERALCO as a producer of electricity
which could have objected to the restoration of NPC's tax exemption privileges.

19 | T A X c a s e s S e t 1

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino
on October 5, 1987, the view has been expressed that President Aquino, at least with
regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB, which was allegedly
not a delegate of the legislature, the power delegated to her thereunder.
A misconception must be cleared up.
When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and
Legislative powers. Thus, there was no power delegated to her, rather it was she who was
delegating her power. She delegated it to the FIRB, which, for purposes of E.O No. 93
(S'86), is a delegate of the legislature. Clearly, she was not sub-delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete in itself it set forth the policy
to be carried out 85 and it fixed the standard to which the delegate had to conform in the
performance of his functions, 86 both qualities having been enunciated by this Court
in Pelaez vs. Auditor General. 87
Thus, after all has been said, it is clear that the NPC had its tax exemption privileges
restored from June 11, 1984 up to the present.
VII
The next question that projects itself is who pays the tax?
The answer to the question could be gleamed from the manner by which the Commissaries
of the Armed Forces of the Philippines sell their goods.
By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their
defendants but groceries and other goods free of all taxes and duties if bought from any
AFP Commissaries.
In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad
valorem and other taxes on the goods earmarked for AFP Commissaries as an added cost
of operation and distribute it over the total units of goods sold as it would any other cost.
Thus, even the ordinary supermarket buyer probably pays for the specific, ad valorem and
other taxes which theses suppliers do not charge the AFP Commissaries. 89
IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to
absorb the taxes they add to the bunker fuel oil they sell to NPC.
It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice
renders an opinion, 90wherein he stated and We quote:

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all
taxes, duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines and its provinces, cities, and municipalities." This exemption is
broad enough to include all taxes, whether direct or indirect, which the
National Power Corporation may be required to pay, such as the specific
tax on petroleum products. That it is indirect or is of no amount [should be
of no moment], for it is the corporation that ultimately pays it. The view
which refuses to accord the exemption because the tax is first paid by the
seller disregards realities and gives more importance to form than to
substance. Equity and law always exalt substance over from.
xxx xxx xxx
Tax exemptions are undoubtedly to be construed strictly but not so
grudgingly as knowledge that many impositions taxpayers have to pay are
in the nature of indirect taxes. To limit the exemption granted the National
Power Corporation to direct taxes notwithstanding the general and broad
language of the statue will be to thwrat the legislative intention in giving
exemption from all forms of taxes and impositions without distinguishing
between those that are direct and those that are not. (Emphasis supplied)
In view of all the foregoing, the Court rules and declares that the oil companies which
supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold
to NPC. By the very nature of indirect taxation, the economic burden of such taxation is
expected to be passed on through the channels of commerce to the user or consumer of
the goods sold. Because, however, the NPC has been exempted from both direct and
indirect taxation, the NPC must beheld exempted from absorbing the economic burden of
indirect taxation. This means, on the one hand, that the oil companies which wish to sell to
NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which
could they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also,
on the other hand, that the NPC may refuse to pay the part of the "normal" purchase price
of bunker fuel oil which represents all or part of the taxes previously paid by the oil
companies to BIR. If NPC nonetheless purchases such oil from the oil companies because
to do so may be more convenient and ultimately less costly for NPC than NPC itself
importing and hauling and storing the oil from overseas NPC is entitled to be reimbursed
by the BIR for that part of the buying price of NPC which verifiably represents the tax
already paid by the oil company-vendor to the BIR.
It should be noted at this point in time that the whole issue of who WILL pay these indirect
taxes HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987
by virtue of which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%)
PER CENTUM. Said E.O. no. 195 reads as follows:

20 | T A X c a s e s S e t 1

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL
REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF
CERTAIN PETROLEUM PRODUCTS.
xxx xxx xxx
Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code,
as amended, is hereby amended to read as follows:
Par. (b) For products subject to ad valorem tax only:
PRODUCT AD VALOREM TAX RATE
1. . . .
2. . . .
3. . . .
4. Fuel oil, commercially known as bunker oil and on similar fuel oils having
more or less the same generating power 0%
xxx xxx xxx
Sec. 3. This Executive Order shall take effect immediately.
Done in the city of Manila, this 17th day of June, in the year of Our Lord,
nineteen hundred and eighty-seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry about
who is going to bear the economic burden of the ad valorem taxes. What this Court will
now dispose of are petitioner's complaints that some indirect tax money has been illegally
refunded by the Bureau of Internal Revenue to the NPC and that more claims for refunds by
the NPC are being processed for payment by the BIR.
A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of
the NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific
and ad valorem taxes during the period from October 31, 1984 to April 27,
1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC did not have
indirect tax exemptions with the enactment of P.D. No. 938. As We have already ruled

otherwise, the only questions left are whether NPC Is entitled to a tax refund for the tax
component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc. and
whether the Bureau of Internal Revenue properly refunded the amount to NPC.
After
P.D.
No.
1931
was
issued
on
June
11,
1984
withdrawing
the
tax exemptions of all GOCCs NPC included, it was only on May 8, 1985 when the BIR
issues its letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from
the oil companies pursuant to FIRB Resolution No. 10-85. 92 Since the tax exemption
restoration was retroactive to June 11, 1984 there was a need. therefore, to recover said
amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific and ad valorem taxes
on the bunker oil it sold NPC during the period above indicated and had billed NPC
correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11,
1985 to the Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY
AND UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as part of the bunker fuel
oil price it purchased from Caltex (Phils) Inc. 94
The law governing recovery of erroneously or illegally, collected taxes is section 230 of the
National Internal Revenue Code of 1977, as amended which reads as follows:
Sec. 230. Recover of tax erroneously or illegally collected. No suit or
proceeding shall be maintained in any court for the recovery of any
national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessive
or in any Manner wrongfully collected. until a claim for refund or credit has
been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration
of two years from the date of payment of the tax or penalty regardless of
any supervening cause that may arise after payment; Provided, however,
That the Commissioner may, even without a written claim therefor, refund
or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly, to have been erroneously paid.
xxx xxx xxx
Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the
Commissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax
exemption.

21 | T A X c a s e s S e t 1

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's
claim for P410.580,000.00 which represents specific and ad valorem taxes paid by the oil
companies to the BIR from June 11, 1984 to the early part of 1986. 96
A careful examination of petitioner's pleadings and annexes attached thereto does not
reveal when the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated
In paragraph No. 2 of the Deed of Assignment 97 executed by and between NPC and Caltex
(Phils.) Inc., as follows:
That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of
Internal Revenue amounting to P442,887,716.16. P58.020,110.79 of which
is due to Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.)
Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot
restrain the BIR from refunding said amount because of Our ruling that NPC has both direct
and indirect tax exemption privileges. Neither can We order the BIR to refund said amount
to NPC as there is no pending petition for review on certiorariof a suit for its collection
before Us. At any rate, at this point in time, NPC can no longer file any suit to collect said
amount EVEN IF lt has previously filed a claim with the BIR because it is time-barred under
Section 230 of the National Internal Revenue Code of 1977. as amended, which states:
In any case, no such suit or proceeding shall be begun after the expiration
of two years from the date of payment of the tax or penalty REGARDLESS
of any supervening cause that may arise afterpayment. . . . (Emphasis
supplied)
The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that
payment by NPC for the amount of P410,580,000.00 had been made on said date. it is
clear that more than two (2) years had already elapsed from said date. At the same time,
We should note that there is no legal obstacle to the BIR granting, even without a suit by
NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had been made
seasonably, and assuming the amounts covered had actually been paid previously by the
oil companies to the BIR.
WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is
hereby DENIED for lack of merit and the decision of this Court promulgated on May 31,
1991 is hereby AFFIRMED.

PERFECTO, J.:
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 P0.0
P0.99
5

b. For every ticket sold the price of which is from P1 to 0.10

P1.99

c. For every ticket sold the price of which is from P2 to 0.15

P2.99

d. for every ticket sold the price of which is from P3 to 0.20

P4.99

SO ORDERED.
G.R. No. L-1104

EASTERN
THEATRICAL
CO.,
INC.,
ET
AL., plaintiffs-appellants,
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, defendantsappellees.

May 31, 1949

e. or every ticket sold the price of which is from P5 to P5.99 0.25

22 | T A X c a s e s S e t 1

f. For every ticket sold the price of which is from P0 to 0.35

P14.99

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.
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 overstepped 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

23 | T A X c a s e s S e t 1

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.

24 | T A X c a s e s S e t 1

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
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.

"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.

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.

G.R. No. 160756

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 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]

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

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., vs Romulo

DECISION
CORONA, J.:

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 and second, 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.

25 | T A X c a s e s S e t 1

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 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.

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
PROVISIONS

OF

THE

ASSAILED

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:
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

(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.

26 | T A X c a s e s S e t 1

(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.

Those which are exempt from a

withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

xxx xxx xxx

(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.

xxx xxx xxx

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
prescribed thereon:

payment

subject

to

[CWT]

and

rates

xxx xxx xxx

Exempt

With a selling price of five hundred

thousand pesos (P500,000.00) or
less.

(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
xxx xxx xxx

1.5%

With a selling price of more than five

hundred
thousand
pesos
(P500,000.00) but not more than
two million pesos (P2,000,000.00).

3.0%

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 theperiodic 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.

With selling price of more than two

million pesos (P2,000,000.00)
5.0%

This provision was amended by RR 6-2001 on July 31, 2001:

27 | T A X c a s e s S e t 1

Sec. 2.57.2. Income

prescribed thereon:

payment

subject

to

[CWT]

and

rates

xxx xxx xxx

(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. 2.57.5 of these
regulations.
Exempt

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%

3.0%

xxx xxx xxx

xxx xxx xxx

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)

With a selling price of more than Five Hundred

Thousand Pesos (P500,000.00) 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).

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.

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. 7-2003[8] 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:

5.0%

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

28 | T A X c a s e s S e t 1

the Code, depending on whether the subject properties are

classified as capital 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;
xxx xxx xxx
(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.

xxx xxx xxx

c.

In the case of domestic corporations.

xxx xxx xxx

(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.

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 in Didipio Earth-Savers MultiPurpose 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.

xxx xxx xxx

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 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

29 | T A X c a s e s S e t 1

that the association had legal standing because its members stood to be injured by the
enforcement of the assailed provisions:

income taxes year in and year out, through under-declaration of income or over-deduction
of expenses otherwise called tax shelters.[23]

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]

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]

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

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

30 | T A X c a s e s S e t 1

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 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 goods[48] 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]

31 | T A X c a s e s S e t 1

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

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.

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)

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

32 | T A X c a s e s S e t 1

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 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:

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;

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx
(B)

xxx xxx xxx

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 thirtytwo 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.

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;
xxx xxx xxx
(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.
xxx xxx xxx
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 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 same Code, whichever is applicable. (Emphasis supplied)

33 | T A X c a s e s S e t 1

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
BETWEEN ORDINARY
CAPITAL ASSETS

DISTINCTIONS
ASSETS AND

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
a) The amount of income
tax
withheld
by
the
withholding
agent
is
constituted as a full and
final payment of the
income tax due from the
payee on the said income.

CWT
a) Taxes withheld on certain
income
payments
are
intended to equal or at least
approximate the tax due of
the payee on said income.

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
return
for
the
particular income.[73]

c) The income recipient is

still required to file an
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.

b)The liability for payment

of the tax rests primarily
on
the
payor
as
a
withholding agent.

b) Payee of income is
required to report the
income and/or pay the
difference between the tax
withheld and the tax due on

(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);

34 | T A X c a s e s S e t 1

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 income [76]
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.

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.
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]

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) 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 courts [78] in view of the rulemaking authority given to those who formulate them and their specific expertise in their
respective fields.
NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

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.

35 | T A X c a s e s S e t 1

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. [89] As 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. 298
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-9637

April 30, 1957

AMERICAN
BIBLE
vs.
CITY OF MANILA, defendant-appellee.

SOCIETY, plaintiff-appellant,

FELIX, J.:
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,

36 | T A X c a s e s S e t 1

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 oftenrepeated ordinances.

4th quarter 1945

P1,244.21

1st quarter 1946

2,206.85

2nd quarter 1946

1,950.38

3rd quarter 1946

2,235.99

4th quarter 1946

3,256.04

1st quarter 1947

13,241.07

2nd quarter 1947

15,774.55

3rd quarter 1947

14,654.13

4th quarter 1947

12,590.94

1st quarter 1948

11,143.90

2nd quarter 1948

14,715.26

Before trial the parties submitted the following stipulation of facts:

COME NOW the parties in the above-entitled case, thru their undersigned attorneys
and respectfully submit the following stipulation of facts:
1. That the plaintiff sold for the use of the purchasers at its principal office at 636
Isaac Peral, Manila, Bibles, New Testaments, bible portions and bible concordance
in English and other foreign languages imported by it from the United States as
well as Bibles, New Testaments and bible portions in the local dialects imported
and/or purchased locally; that from the fourth quarter of 1945 to the first quarter of
1953 inclusive the sales made by the plaintiff were as follows:

Quarter

Amount of Sales

37 | T A X c a s e s S e t 1

3rd quarter 1948

38,333.83

2nd quarter 1951

29,103.98

4th quarter 1948

16,179.90

3rd quarter 1951

20,181.10

1st quarter 1949

23,975.10

4th quarter 1951

22,968.91

2nd quarter 1949

17,802.08

1st quarter 1952

23,002.65

3rd quarter 1949

16,640.79

2nd quarter 1952

17,626.96

4th quarter 1949

15,961.38

3rd quarter 1952

17,921.01

1st quarter 1950

18,562.46

4th quarter 1952

24,180.72

2nd quarter 1950

21,816.32

1st quarter 1953

29,516.21

3rd quarter 1950

25,004.55

2. That the parties hereby reserve the right to present evidence of other facts not
herein stipulated.

4th quarter 1950

1st quarter 1951

45,287.92

37,841.21

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. 1516).
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

38 | T A X c a s e s S e t 1

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 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

39 | T A X c a s e s S e t 1

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
mentioned
in
this
Ordinance,
except
City is not empowered to license or to tax P5.00

or
those

occupations
upon
which

not
the

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.
xxx

xxx

xxx

GROUP 2. Retail dealers in new (not yet used) merchandise, which dealers are
not yet subject to the payment of any municipal tax, such as (1) retail dealers in
general merchandise; (2) retail dealers exclusively engaged in the sale of . . .
books, including stationery.
xxx

xxx

xxx

As may be seen, the license fees required to be paid quarterly in Section 1 of said
Ordinance No. 2529, as amended, are not imposed directly upon any religious institution
but upon those engaged in any of the business or occupations therein enumerated, such
as retail "dealers in general merchandise" which, it is alleged, cover the business or
occupation of selling bibles, books, etc.
Chapter 60 of the Revised Administrative Code which includes section 2444, subsection
(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.

40 | T A X c a s e s S e t 1

Dealers in general merchandise shall be classified as (a) wholesale dealers and (b)
retail dealers. For purposes of the tax on retail dealers, general merchandise shall
be classified into four main classes: namely (1) luxury articles, (2) semi-luxury
articles, (3) essential commodities, and (4) miscellaneous articles. A separate
license shall be prescribed for each class but where commodities of different
classes are sold in the same establishment, it shall not be compulsory for the
owner to secure more than one license if he pays the higher or highest rate of tax
prescribed by ordinance. Wholesale dealers shall pay the license tax as such, as
may be provided by ordinance.
For purposes of this section, the term "General merchandise" shall include poultry
and livestock, agricultural products, fish and other allied products.
The only essential difference that We find between these two provisions that may have any
bearing on the case at bar, is that, while subsection (m-2) prescribes that the combined
total tax of any dealer or manufacturer, or both, enumerated under subsections (m-1) and
(m-2), whether dealing in one or all of the articles mentioned therein, shall not be in excess
of P500 per annum, the corresponding section 18, subsection (o) of Republic Act No. 409,
does not contain any limitation as to the amount of tax or license fee that the retail dealer
has to pay per annum. Hence, and in accordance with the weight of the authorities above
referred to that maintain that "all rights and liabilities which have accrued under the
original statute are preserved and may be enforced, since the reenactment neutralizes the
repeal, therefore continuing the law in force without interruption", We hold that the
questioned ordinances of the City of Manila are still in force and effect.
Plaintiff, however, argues that the questioned ordinances, to be valid, must first be
approved by the President of the Philippines as per section 18, subsection (ii) of Republic
Act No. 409, which reads as follows:
(ii) To tax, license and regulate any business, trade or occupation being conducted
within the City of Manila,not otherwise enumerated in the preceding subsections,
including percentage taxes based on gross sales or receipts, subject to the
approval of the PRESIDENT, except amusement taxes.
but this requirement of the President's approval was not contained in section 2444 of the
former Charter of the City of Manila under which Ordinance No. 2529 was promulgated.
Anyway, as stated by appellee's counsel, the business of "retail dealers in general
merchandise" is expressly enumerated in subsection (o), section 18 of Republic Act No.
409; hence, an ordinance prescribing a municipal tax on said business does not have to be
approved by the President to be effective, as it is not among those referred to in said
subsection (ii). Moreover, the questioned ordinances are still in force, having been
promulgated by the Municipal Board of the City of Manila under the authority granted to it
by law.
The question that now remains to be determined is whether said ordinances are
inapplicable, invalid or unconstitutional if applied to the alleged business of distribution
and sale of bibles to the people of the Philippines by a religious corporation like the
American Bible Society, plaintiff herein.

With regard to Ordinance No. 2529, as amended by Ordinances Nos. 2779, 2821 and 3028,
appellant contends that it is unconstitutional and illegal because it restrains the free
exercise and enjoyment of the religious profession and worship of appellant.
Article III, section 1, clause (7) of the Constitution of the Philippines aforequoted,
guarantees the freedom of religious profession and worship. "Religion has been spoken of
as a profession of faith to an active power that binds and elevates man to its Creator"
(Aglipay vs. Ruiz, 64 Phil., 201).It has reference to one's views of his relations to His
Creator and to the obligations they impose of reverence to His being and character, and
obedience to His Will (Davis vs. Beason, 133 U.S., 342). The constitutional guaranty of the
free exercise and enjoyment of religious profession and worship carries with it the right to
disseminate religious information. Any 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. . . .

41 | T A X c a s e s S e t 1

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."

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.

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.

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.

"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;

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:

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, plaintiff-appellant,
vs.
JNO. S. HORD, defendant-appellee.
WILLARD, J.:

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

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.

42 | T A X c a s e s S e t 1

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, 1902 1 (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:
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). The pertenencia 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.

43 | T A X c a s e s S e t 1

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

44 | T A X c a s e s S e t 1

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 Powersvs. 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 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 Welchvs. 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

45 | T A X c a s e s S e t 1

within this period shall be free and open to explorations and purchase under the
provisions of this act.2

franchise by the National Electrification Administration to operate an electric light and

power service in the Municipality of Calamba, Laguna.

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.

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:

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, petitioner vs. PROVINCE OF LAGUNA and BENITO R.
BALAZO, in his capacity as Provincial Treasurer of Laguna, respondents.
DECISION
VITUG, J.:
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

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[1]
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. In denying the claim, respondents relied on a more recent

46 | T A X c a s e s S e t 1

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 priority 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:

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.
xxxxxxxxx
Sec. 5. Each local government shall have the power to create its own sources of revenues
and to levy taxes, fees, and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the local 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]

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 nonimpairment clause of the Constitution and Section 1 of Presidential Decree No. 551.
2. Whether Republic Act. No. 7160, otherwise known as the Local Government Code of
1991, has repealed, amended or modified Presidential Decree No. 551.
3. Whether the doctrine of exhaustion 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:

Under the 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 overburdened 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

47 | T A X c a s e s S e t 1

provincial governments, notwithstanding any exemption granted by any law or other

special law, x x x (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:
Section 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:
Section 534. Repealing Clause. x x x.
(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:
x x x 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 of local government units for the delivery of basic service
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 similarly 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.[12]

48 | T A X c a s e s S e t 1

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.

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 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."

WHEREFORE, the instant petition is hereby DISMISSED. No costs.

The contention has no merit.

SO ORDERED.

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:

G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.
MENDOZA, J.:

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.

49 | T A X c a s e s S e t 1

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:

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)

1. R.A. NO. 7642

House Bill No. 5260, January 26, 1993
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

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)

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. 11024, November 3, 1993

House Bill No. 1503, September 3, 1992

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)

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)

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717

House Bill No. 1470, October 20, 1992

50 | T A X c a s e s S e t 1

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

xxx xxx xxx

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.

Senate Bill No. 1127, March 23, 1994

Art. I, 7, cl. 1 of the U.S. Constitution reads:
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the
exercise of its power to propose amendments to bills required to originate in the House,
passed its own version of a House revenue measure. It is noteworthy that, in the particular
case of S. No. 1630, petitioners Tolentino and Roco, as members of the Senate, voted to
approve it on second and third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner
Tolentino, concerns a mere matter of form. Petitioner has not shown what substantial
difference it would make if, as the Senate actually did in this case, a separate bill like S.
No.
1630
is
instead
enacted
as
a
substitute
measure,
"taking
into
Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS

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."

xxx xxx xxx

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.

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

51 | T A X c a s e s S e t 1

disapproval by the Senate of any such bills, the Assembly may repass the
same by a two-thirds vote of all its members, and thereupon, the bill so
repassed shall be deemed enacted and may be submitted to the President
for corresponding action. In the event that the Senate should fail to finally
act on any such bills, the Assembly may, after thirty days from the opening
of the next regular session of the same legislative term, reapprove the
same with a vote of two-thirds of all the members of the Assembly. And
upon such reapproval, the bill shall be deemed enacted and may be
submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was
approved by the National Assembly and embodied in Resolution No. 38, as amended by
Resolution No. 73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed
amendment was submitted to the people and ratified by them in the elections held on June
18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the
present Constitution was derived. It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine Constitution borrowed and why the
phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the
power of the Senate to propose amendments must be understood to be full, plenary and
complete "as on other Bills." Thus, because revenue bills are required to originate
exclusively in the House of Representatives, the Senate cannot enact revenue measures of
its own without such bills. After a revenue bill is passed and sent over to it by the House,
however, the Senate certainly can pass its own version on the same subject matter. This
follows from the coequality of the two chambers of Congress.
That this is also the understanding of book authors of the scope of the Senate's power to
concur is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is
apparently without restriction. It would seem that by virtue of this power,
the Senate can practically re-write a bill required to come from the House
and leave only a trace of the original bill. For example, a general revenue
bill passed by the lower house of the United States Congress contained
provisions for the imposition of an inheritance tax . This was changed by
the Senate into a corporation tax. The amending authority of the Senate
was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S.
107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247
(1961))

The above-mentioned bills are supposed to be initiated by the House of

Representatives because it is more numerous in membership and therefore
also more representative of the people. Moreover, its members are
presumed to be more familiar with the needs of the country in regard to
the enactment of the legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power
to propose or concur with amendments to the bills initiated by the House
of Representatives. Thus, in one case, a bill introduced in the U.S. House of
Representatives was changed by the Senate to make a proposed
inheritance tax a corporation tax. It is also accepted practice for the
Senate to introduce what is known as an amendment by substitution,
which may entirely replace the bill initiated in the House of
Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills
authorizing increase of the public debt, bills of local application, and private bills must
"originate exclusively in the House of Representatives," it also adds, "but the Senate may
propose or concur with amendments." In the exercise of this power, the Senate may
propose an entirely new bill as a substitute measure. As petitioner Tolentino states in a
high school text, a committee to which a bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill
omitting or adding sections or altering its language; (3) to make and
endorse an entirely new bill as a substitute, in which case it will be known
as a committee bill; or (4) to make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to originate in the
House by prescribing that the number of the House bill and its other parts up to the
enacting clause must be preserved although the text of the Senate amendment may be
incorporated in place of the original body of the bill is to insist on a mere technicality. At
any rate there is no rule prescribing this form. S. No. 1630, as a substitute measure, is
therefore as much an amendment of H. No. 11197 as any which the Senate could have
made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they
assume that S. No. 1630 is an independent and distinct bill. Hence their repeated
references to its certification that it was passed by the Senate "in substitution of
S.B. No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197," implying

52 | T A X c a s e s S e t 1

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."

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.

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.

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
momentwas 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.

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.

(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

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.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
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

(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

53 | T A X c a s e s S e t 1

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 yeasand nays entered in the
Journal.
The exception is based on the prudential consideration that if in all cases three readings on
separate days are required and a bill has to be printed in final form before it can be
passed, the need for a law may be rendered academic by the occurrence of the very
emergency or public calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially
in a country like the Philippines where budget deficit is a chronic condition. Even if this
were the case, an enormous budget deficit does not make the need for R.A. No. 7716 any
less urgent or the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases)
believed that there was an urgent need for consideration of S. No. 1630, because they
responded to the call of the President by voting on the bill on second and third readings on
the same day. While the judicial department is not bound by the Senate's acceptance of
the President's certification, the respect due coequal departments of the government in
matters committed to them by the Constitution and the absence of a clear showing of
grave abuse of discretion caution a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the
Senate where it was discussed for six days. Only its distribution in advance in its final
printed form was actually dispensed with by holding the voting on second and third
readings on the same day (March 24, 1994). Otherwise, sufficient time between the
submission of the bill on February 8, 1994 on second reading and its approval on March 24,
1994 elapsed before it was finally voted on by the Senate on third reading.

The purpose for which three readings on separate days is required is said to be two-fold:
(1) to inform the members of Congress of what they must vote on and (2) to give them
notice that a measure is progressing through the enacting process, thus enabling them and
others interested in the measure to prepare their positions with reference to it. (1 J. G.
SUTHERLAND, STATUTES AND STATUTORY CONSTRUCTION 10.04, p. 282 (1972)). These
purposes were substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in
violation of the constitutional policy of full public disclosure and the people's right to know
(Art. II, 28 and Art. III, 7) the Conference Committee met for two days in executive
session with only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold
such sessions with only the conferees and their staffs in attendance and it was only in
1975 when a new rule was adopted requiring open sessions. Unlike its American
counterpart, the Philippine Congress has not adopted a rule prescribing open hearings for
conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975,
at least staff members were present. These were staff members of the Senators and
Congressmen, however, who may be presumed to be their confidential men, not
stenographers as in this case who on the last two days of the conference were excluded.
There is no showing that the conferees themselves did not take notes of their proceedings
so as to give petitioner Kilosbayan basis for claiming that even in secret diplomatic
negotiations involving state 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

54 | T A X c a s e s S e t 1

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.

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."

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, butthis provision applies to those cases where only
portions of the bill have been amended. In this case before us an entire bill
is presented; therefore, it can be easily seen from the reading of the bill
what the provisions are. Besides, this procedure has been an established
practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the
reason for the provisions of the Rules, and the reason for the requirement
in the provision cited by the gentleman from Pangasinan is when there are
only certain words or phrases inserted in or deleted from the provisions of
the bill included in the conference report, and we cannot understand what
those words and phrases mean and their relation to the bill. In that case, it
is necessary to make a detailed statement on how those words and
phrases will affect the bill as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is not necessary. So when
the reason for the Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the ruling
was appealed, it was upheld by viva voce and when a division of the House was called, it
was
sustained
by
a
vote
of
48
to
5.
(Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions
as long as these are germane to the subject of the conference. As this Court held
in Philippine Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by
then Justice Cruz, the jurisdiction of the conference committee is not limited to resolving

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 copiesthereof in its final
form were not distributed among the members of each House. Both the
enrolled bill and the legislative journals certify that the measure was duly
enacted i.e., in accordance with Article VI, Sec. 26 (2) of the Constitution.
We are bound by such official assurances from a coordinate department of
the government, to which we owe, at the very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the
Philippines in a 1979 study:
Conference committees may be of two types: free or instructed. These
committees may be given instructions by their parent bodies or they may
be left without instructions. Normally the conference committees are
without instructions, and this is why they are often critically referred to as
"the little legislatures." Once bills have been sent to them, the conferees
have almost unlimited authority to change the clauses of the bills and in
fact sometimes introduce new measures that were not in the original
legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his
idealism put it this way: "I killed a bill on export incentives for my interest
group [copra] in the conference committee but I could not have done so
anywhere else." The conference committee submits a report to both
houses, and usually it is accepted. If the report is not accepted, then the
committee is discharged and new members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND
LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW,
eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We
cite it only to say that conference committees here are no different from their counterparts
in the United States whose vast powers we noted in Philippine Judges Association

55 | T A X c a s e s S e t 1

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:
xxx xxx xxx
(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:
xxx xxx xxx
(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 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

56 | T A X c a s e s S e t 1

connected with the subject as expressed in the title, it is

unnecessary that they should also have special mention in
the title. (Southern Pac. Co. v. Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general
proposition, the press is not exempt from the taxing power of the State and that what the
constitutional guarantee of free press prohibits are laws which single out the press or
target a group belonging to the press for special treatment or which in any way
discriminate against the press on the basis of the content of the publication, and R.A. No.
7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT
while maintaining those granted to others, the law discriminates against the press. At any
rate, it is averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom
is unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the
press a privilege, the law could take back the privilege anytime without offense to the
Constitution. The reason is simple: by granting exemptions, the State does not forever
waive the exercise of its sovereign prerogative.
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 specialuse 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
exceeding P500,000.00.

with

gross

annual

sale

or

receipt

not

57 | T A X c a s e s S e t 1

(Respondents' Consolidated Comment on the Motions for Reconsideration,

pp. 58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the
press because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The
protection afforded by the First Amendment is not so restricted. A license
tax certainly does not acquire constitutional validity because it classifies
the privileges protected by the First Amendment along with the wares and
merchandise of hucksters and peddlers and treats them all alike. Such
equality in treatment does not save the ordinance. Freedom of press,
freedom of speech, freedom of religion are in preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is
mainly for regulation. Its imposition on the press is unconstitutional because it lays a prior
restraint on the exercise of its right. Hence, although its application to others, such those
selling goods, is valid, its application to the press or to religious groups, such as the
Jehovah's Witnesses, in connection with the latter's sale of religious books and pamphlets,
is unconstitutional. As the U.S. Supreme Court put it, "it is one thing to impose a tax on
income or property of a preacher. It is quite another thing to exact a tax on him for
delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101
Phil. 386 (1957) which invalidated a city ordinance requiring a business license fee on
those engaged in the sale of general merchandise. It was held that the tax could not be
imposed on the sale of bibles by the American Bible Society without restraining the free
exercise of its right to propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or
exchange of goods or properties or the sale or exchange of services and the lease of
properties purely for revenue purposes. To subject the press to its payment is not to
burden the exercise of its right any more than to make the press pay income tax or subject
it to general regulation is not to violate its freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the
proceeds derived from the sales are used to subsidize the cost of printing copies which are
given free to those who cannot afford to pay so that to tax the sales would be to increase
the price, while reducing the volume of sale. Granting that to be the case, the resulting
burden on the exercise of religious freedom is so incidental as to make it difficult to

differentiate it from any other economic imposition that might make the right to
disseminate religious doctrines costly. Otherwise, to follow the petitioner's argument, to
increase the tax on the sale of vestments would be to lay an impermissible burden on the
right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as
amended by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the
expenses of registration and enforcement of provisions such as those relating to
accounting in 108 of the NIRC. That the PBS distributes free bibles and therefore is not
liable to pay the VAT does not excuse it from the payment of this fee because it also sells
some copies. At any rate whether the PBS is liable for the VAT must be decided in concrete
cases, in the event it is assessed this tax by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the
rule on taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts,
(2) classifies transactions as covered or exempt without reasonable basis and (3) violates
the rule that taxes should be uniform and equitable and that Congress shall "evolve a
progressive system of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would
result in substantial increases in the monthly amortizations to be paid because of the 10%
VAT. The additional amount, it is pointed out, is something that the buyer did not anticipate
at the time he entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a
new subject, or an increased tax on an old one, interferes with a contract or impairs its
obligation, within the meaning of the Constitution. Even though such taxation may affect
particular contracts, as it may increase the debt of one person and lessen the security of
another, or may impose additional burdens upon one class and release the burdens of
another, still the tax must be paid unless prohibited by the Constitution, nor can it be said
that it impairs the obligation of any existing contract in its true legal sense." (La Insular v.
Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not only existing
laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor
General, 22 SCRA 135, 147 (1968)) Contracts must be understood as having been made in
reference to the possible exercise of the rightful authority of the government and no
obligation of contract can extend to the defeat of that authority. (Norman v. Baltimore and
Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale
of agricultural products, food items, petroleum, and medical and veterinary services, it
grants no exemption on the sale of real property which is equally essential. The sale of real

58 | T A X c a s e s S e t 1

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.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative
Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law
contravenes the mandate of Congress to provide for a progressive system of taxation
because the law imposes a flat rate of 10% and thus places the tax burden on all
taxpayers without regard to their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the
VAT, are regressive. What it simply provides is that Congress shall "evolve a progressive
system of taxation." The constitutional provision has been interpreted to mean simply that
"direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized." (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed.
(1977)). Indeed, the mandate to Congress is not to prescribe, but to evolve, a progressive
tax system. Otherwise, sales taxes, which perhaps are the oldest form of indirect taxes,
would have been prohibited with the proclamation of Art. VIII, 17(1) of the 1973
Constitution from which the present Art. VI, 28(1) was taken. Sales taxes are also
regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult,
if not impossible, to avoid them by imposing such taxes according to the taxpayers' ability
to pay. In the case of the VAT, the law minimizes the regressive effects of this imposition by
providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of
the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4, amending
103 of the NIRC).
Thus, the following transactions involving basic and essential goods and services are
exempted from the VAT:
(a) Goods for consumption or use which are in their original state
(agricultural, marine and forest products, cotton seeds in their original
state, fertilizers, seeds, seedlings, fingerlings, fish, prawn livestock and
poultry feeds) and goods or services to enhance agriculture (milling of
palay, corn sugar cane and raw sugar, livestock, poultry feeds, fertilizer,
ingredients used for the manufacture of feeds).

59 | T A X c a s e s S e t 1

(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
exceeding P500,000.00.

with

gross

annual

sale

or

receipt

not

(Respondents' Consolidated Comment on the Motions for Reconsideration,

pp. 58-60)
On the other hand, the transactions which are subject to the VAT are those which involve
goods and services which are used or availed of mainly by higher income groups. These
include real properties held primarily for sale to customers or for lease in the ordinary
course of trade or business, the right or privilege to use patent, copyright, and other
similar property or right, the right or privilege to use industrial, commercial or scientific
equipment, motion picture films, tapes and discs, radio, television, satellite transmission
and cable television time, hotels, restaurants and similar places, securities, lending
investments, taxicabs, utility cars for rent, tourist buses, and other common carriers,
services of franchise grantees of telephone and telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional
violations by tendering issues not at retail but at wholesale and in the abstract. There is no
fully developed record which can impart to adjudication the impact of actuality. There is no
factual foundation to show in the concrete the application of the law to actual
contracts and exemplify its effect on property rights. For the fact is that petitioner's
members have not even been assessed the VAT. Petitioner's case is not made concrete by
a series of hypothetical questions asked which are no different from those dealt with in
advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges

arbitrariness. A mere allegation, as here, does not suffice. There must be a
factual foundation of such unconstitutional taint. Considering that
petitioner here would condemn such a provision as void on its face, he has
not made out a case. This is merely to adhere to the authoritative doctrine
that where the due process and equal protection clauses are invoked,
considering that they are not fixed rules but rather broad standards, there
is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must
prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It may
be that postponement of adjudication would result in a multiplicity of suits. This need not
be the case, however. Enforcement of the law may give rise to such a case. A test case,
provided it is an actual case and not an abstract or hypothetical one, may thus be
presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract
issues. Otherwise, adjudication would be no different from the giving of advisory opinion
that does not really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made
that "there has been a grave abuse of discretion amounting to lack or excess of jurisdiction
on the part of any branch or instrumentality of the government." This duty can only arise if
an actual case or controversy is before us. Under Art . VIII, 5 our jurisdiction is defined in
terms of "cases" and all that Art. VIII, 1, 2 can plausibly mean is that in the exercise of
that jurisdiction we have the judicial power to determine questions of grave abuse of
discretion by any branch or instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the
power of a court to hear and decide cases pending between parties who have the right to
sue and be sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559
(1912)), as distinguished from legislative and executive power. This power cannot be
directly appropriated until it is apportioned among several courts either by the
Constitution, as in the case of Art. VIII, 5, or by statute, as in the case of the Judiciary Act
of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P. Blg. 129). The
power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all
others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its
jurisdiction, this Court cannot inquire into any allegation of grave abuse of discretion by
the other departments of the government.

60 | T A X c a s e s S e t 1

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.

61 | T A X c a s e s S e t 1

SO ORDERED.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
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.

. . . [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.

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.

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.

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:

1980 Deficiency Fixed Tax P353,15;

xxx xxx xxx

WHEREFORE, in view of all the foregoing, the following assessments are
hereby dismissed for lack of merit:

1980 Deficiency Contractor's Tax P3,129.23;

62 | T A X c a s e s S e t 1

1980 Deficiency Income Tax P372,578.20.

While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
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

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.
xxx xxx xxx
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

1980 Deficiency Contractor's Tax P 3,129.23, &

The Issues
1980 Deficiency Income Tax P 372,578.20
Before us, petitioner imputes to the Court of Appeals the following errors:
but the same is AFFIRMED in all other respect.

I
Aggrieved, the YMCA asked for reconsideration based on the following grounds:
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

The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.

II

63 | T A X c a s e s S e t 1

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

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

This Court's Ruling

The petition is meritorious.

xxx xxx xxx

First
Factual Findings of the CTA

Issue:
(g) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;

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
Is the Rental Income of the YMCA Taxable?

Issue:

(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

64 | T A X c a s e s S e t 1

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, 20 the 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 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 abovequoted 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 propertytaxes 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.

65 | T A X c a s e s S e t 1

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 "ByLaws" 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

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]

Respondent Inapplicable

66 | T A X c a s e s S e t 1

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC.,

CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA
A. BENAFIN REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA
BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER
MRS. REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED
BY HER MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C.
PACALSO ALIAS KEVAB, BETTY I. STRASSER, RUBY C. GIRON, URSULA C.
PEREZ ALIAS BA-YAY, EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA
G. YARANON, DIANE MONDOC, petitioners, 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, respondents.
DECISION
CARPIO MORALES, J.:
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 REPUBLIC
ACT NO. 7227.
Republic Act 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 Authority[2] (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]
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 Agreement[6] 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 Resolution[7] 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 Resolution[8] 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]
Thesanggunians 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]

67 | T A X c a s e s S e t 1

BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the other
proposals of the sanggunian.[11] They 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]

Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs131102-000030

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
(the sanggunian) being of the view that such declaration would exempt the camps
property and the economic activity therein from local or national taxation.

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.

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:

-and-

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
Republic Act 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.

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 :

Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m)
and Section 15 of Republic Act 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 Republic Act 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.

68 | T A X c a s e s S e t 1

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 5 th day of July, in the year of Our Lord, nineteen hundred
and ninety-four.
The issuance of Proclamation No. 420 spawned
prohibition, mandamus and declaratory relief which was
challenging, in the main, its constitutionality or validity as
Memorandum of Agreement and Joint Venture Agreement
BCDA and private respondents TUNTEX andASIAWORLD.

the present petition [17] for

filed on April 25, 1995
well as the legality of the
between public respondent

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 Hays 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
notifiedTUNTEX 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 governments 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 present suit even as taxpayers and in the
absence of any actual case or controversy to warrant this Courts 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 taxpayers suit.
Public respondents have filed their Rejoinder [21] 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.

69 | T A X c a s e s S e t 1

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 Courts 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 countrys long awaited economic growth. For, as R.A. No. 7227
unequivocally declares, it is the governments 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 Citys 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 Hays 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 ecological andenvironmental standards. [28] 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 Courts
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;
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 interests. [31] 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

70 | T A X c a s e s S e t 1

or will sustain direct injury as a result of the government act being challenged. [33] Theirs is
a material interest, an interest in issue affected by the proclamation and not merely an
interest in the question involved or an incidental interest, [34] 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.

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:

Petitioners locus standi parallels that of the petitioner and other residents of Bataan,
specially of the town of Limay, in Garcia v. Board of Investments[35] 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
against[36] the sanggunian 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

Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m)
and Section 15 of Republic Act 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 Republic Act 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:
xxx
(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 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

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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;

xxx
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.

x x x (Emphasis supplied)

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.

It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was
granted by Congress with tax exemption, investment incentives and the like. There is no
express extension of the aforesaid benefits to other SEZs still to be created at the time
via presidential proclamation.

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?

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:

x x x (Underscoring supplied).

Senator Angara: Under this specific provision, yes, Mr. President. This provision now will
be confined only to Subic.[38]

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

72 | T A X c a s e s S e t 1

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]

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.

While the grant of economic incentives may be essential to the creation and success
of SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be
sustained. The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence,
the extension of the same to the John Hay SEZ finds no support therein. Neither does the
same grant of privileges to the John Hay SEZ find support in the other laws specified under
Section 3 of Proclamation No. 420, which laws were already extant before the issuance of
the proclamation or the enactment of R.A. No. 7227.

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 governments 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.

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 Constitutions 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 groundsinfringement of the Constitution or grave abuse of
discretion.[48]

With respect to the final issue raised by petitioners that Proclamation No. 420 is
unconstitutional for being in derogation of Baguio Citys 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 arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted
with, among other things, the following purpose: [50]
xxx
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace
Air Station, ODonnell 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 the sanggunian. The other provisions of the proclamation had
been proven to be consistent with R.A. No. 7227.

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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.

Proclamation No. 420, without the invalidated portion, remains valid and effective.
SO ORDERED.

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.

74 | T A X c a s e s S e t 1