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, AND THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC., G.R. NO. 141658 MARCH 18, 2005 FACTS: Respondents are domestic corporations licensed to transact INSURANCE business in the country. From August 1971 to September 1972, respondents paid the BIR under protest the 3% tax imposed

on lending investors by Section 195-A4 of Commonwealth Act No. 466 (the NIRC applicable at that time)

Respondents paid the certain amounts from Philippine American ("PHILAM") Accident Insurance
Company, PHILAM Assurance Company and PHILAM General Insurance Company. Such amounts

represented 3% of each companys interest income from mortgage and other loans. Respondents also paid the taxes required of insurance companies under CA 466.

respondents sent a letter-claim to CIR seeking a refund of the taxes paid under protest but did not receive a response, and so each respondent filed a petition for review with the CTA. RESPONDENTS ARGUED THAT THEY WERE NOT LENDING INVESTORS AND AS SUCH WERE NOT SUBJECT TO THE 3% LENDING INVESTORS TAX UNDER SECTION 195-A. CTA ruled that respondents were not taxable on their lending transactions independently of their insurance business and were entitled to their refund. Its decision stated that: respondents are not taxable as lending investors because the term "lending investors" does not embrace insurance companies. Originally, a person who was engaged in lending money at interest was taxed as a money lender.
The term money lenders was defined as including "all persons who make a practice of lending money for themselves or others at interest." [Sec. 1465(v), id.] Under this law, an insurance company was not considered a money lender and was not taxable as such. "The lending of money at interest by insurance companies constitutes a necessary incident of their regular business. For this reason, insurance companies are not liable to tax as money lenders or real estate brokers for making or negotiating loans secured by real property. The same rule has been applied to banks. The term "money lenders" was later changed to "lending investors" but the definition of the term remains the same. The practice of lending money at interest is part of the insurance business. CA 466 already

taxes the insurance business. The law recognizes and even regulates this practice of lending
money by insurance companies. CA 466 also treated differently insurance companies from lending investors in regard to

fixed taxes. Insurance companies were subject to the same fixed tax as banks and finance companies. The insurance companies were grouped with banks and finance companies

because the latters lending activities were also integral to their business. In contrast, lending
investors were taxed at a different fixed tax. Insurance companies had never been required by respondent to pay the fixed tax imposed on lending investors. CIR appealed to CA CA affirmed CTAs decision and ruled that respondents are not taxable as lending investors


SC ruled that respondents are not liable to the 3% tax, that insurance companies are not taxable as lending investors
In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner merely alleges that the definition of lending investors under CA 466 is broad enough to encompass insurance companies. Petitioner insists that the two principal activities of the insurance business, namely, underwriting and investment, are separately taxable. CA 466 states: (u) "Lending investor" includes all persons who make a practice of lending money for themselves or others at interest.

Above provision does not tax the practice of lending per se. It merely defines what lending investors are. The question is whether the lending activities of insurance companies make them lending investors for purposes of taxation.

The definition in 466 is not broad enough to include the business of insurance companies. The Insurance Code of 1978 is very clear on what constitutes an insurance company. It provides that an insurer or insurance company "shall include all individuals, partnerships, associations or corporations xxx engaged as principals in the insurance business, excepting mutual benefit associations." The respondents fall under the category of insurance corporations as defined in Section 185 of the Insurance Code.

Insurance companies and lending investors are different enterprises in the eyes of the law.
Lending investors cannot, for a consideration, hold anyone harmless from loss, damage or liability, nor provide compensation or indemnity for loss. The underwriting of risks is the prerogative of insurers, the great majority of which are incorporated insurance companies like respondents.

SC also stated that the Granting of Mortgage and other Loans are Investment Practices that are Part of the Insurance Business.

But this were not done independently of the insurance business. The granting of certain loans is one of several means of investment allowed to insurance companies. No less than the Insurance Code mandates and regulates this practice.

Unlike the practice of lending investors, the lending activities of insurance companies are circumscribed and strictly regulated by the State. Insurance companies cannot freely lend to "themselves or others" as lending investors can, nor can insurance companies grant simply any kind of loan.

The creation of investment income in the manner sanctioned by the laws on insurance is part of the business of insurance, and the fruits of these investments are essentially income from the insurance business.

The Court has also held that when a company is taxed on its main business, it is no longer taxable further for engaging in an activity or work which is merely a part of, incidental to and is necessary to its main business.

Respondents already paid percentage and fixed taxes on their insurance business. To require them to pay percentage and fixed taxes again for an activity which is necessarily a part of the same business, the law must expressly require such additional payment of tax. There is, however, no provision of law requiring such additional payment of tax.

CA 466 do not require insurance companies to pay double percentage and fixed taxes. They merely tax lending investors, not lending activities.
SC also ruled that there is a Different Tax Treatment of Insurance Companies and as provided in CA 466 SC also found no merit in petitioners contention that Congress intended to subject respondents to two percentage taxes and two fixed taxes. Petitioners argument goes against the doctrine of strict interpretation of tax impositions.



COMASERCO is a domestic corporation and an affiliate of PHILAMLIFE

It is organized by the letter to perform collection, consultative and other technical services,

including functioning as an internal auditor, of Philamlife and its other affiliates.

1/24/92: BIR issued an assessment to COMASERCO for deficiency VAT amounting to for 1988 , computed as follows: Taxable sale/receipt 10% tax due thereon 25% surcharge 20% interest per annum Compromise penalty for late payment TOTAL AMOUNT DUE AND COLLECTIBLE P1,679,155.00 167,915.50 41,978.88 125,936.63 16,000.00 P351,831.01

COMASERCO's annual corporate income tax return for 1988 indicated a NET LOSS in its operations in the amount of P6,077.00.
2/10/92: COMASERCO filed with the BIR, a letter-protest objecting to the latter's finding of

deficiency VAT.
8/20/92: CIR sent a collection letter to COMASERCO demanding payment of the deficiency VAT . 9/29/92: COMASERCO filed with CTA a petition for review contesting the CIRs assessment. COMASERCO asserted that the services it rendered to Philamlife and its affiliates, relating to collections, consultative and other technical assistance, including functioning as an internal auditor, were on a "noprofit, reimbursement-of-cost-only" basis. It averred that it was not engaged in the business of providing services to Philamlife and its affiliates. It was established to ensure operational orderliness and administrative efficiency of Philamlife and its affiliates, and not in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not engaged in business. In fact, it did not generate profit but suffered a net loss in taxable year 1988.

COMASERCO averred that since it was not engaged in business, it was not liable to pay VAT .
6/22/95: CTA rendered decision in favor of the CIR, ruling that: petitioner is ordered to pay CIR the amount of P335,831.01 inclusive of the 25% surcharge and interest plus 20% interest from January 24, 1992 until fully paid The compromise penalty of P16,000.00 imposed by the respondent in her assessment letter shall not be included in the payment as there was no compromise agreement entered into between petitioner and respondent with respect to the value-added tax deficiency.

7/26/95: respondent appealed to CA

CA reversed the ruling of CTA and ruled that:

The assessment for deficiency value-added tax for the taxable year 1988 inclusive of surcharge, interest and penalty charges are ordered CANCELLED for lack of legal and factual basis. COMASERCO was not liable to pay fixed and contractor's tax for services rendered to Philamlife and its affiliates. COMASERCO was not engaged in business of providing services to Philamlife and its affiliates. COMASERCO was not liable to pay VAT for it was not engaged in the business of selling services.

ISSUE : WON COMASERCO was engaged in the sale of services, and thus liable to pay VAT RULING: SC ruled in favor of CIR It held that every person who sells, barters, or exchanges goods and services, in the course of trade or business, as defined by law, is subject to VAT.
to "engage in business" and to "engage in the sale of services" are two different things. Services rendered by COMASERCO to Philamlife and its affiliates, for a fee or consideration, are subject to VAT. VAT is a

tax on the value added by the performance of the service. It is immaterial whether profit is derived from rendering the service.
Sec. 99 of the National Internal Revenue Code of 1986, as amended by Executive Order (E. O.) No. 273 in 1988: o Persons liable. Any person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and any person who, imports goods shall be subject to the value-added tax (VAT) imposed in Sections 100 to 102 of this Code.

Sec 105 NIRC of 1997 provides that: o Persons Liable. Any person who, in the course of trade or business, sells, barters,

exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and 108 of this Code.

VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing sale or lease of goods, properties or services at the time of the effectivity of Republic Act No. 7716.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members of their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall be considered as being rendered in the course of trade or business.

even a non-stock, non-profit, organization or government entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions, imposed at every stage of the distribution process on the sale,
barter, exchange of goods or property, and on the performance of services, even in the absence of profit attributable thereto.

The term "in the course of trade or business" requires the regular conduct or pursuit of a

commercial or an economic activity regardless of whether or not the entity is profit-oriented.

Sec. 108 of the National Internal Revenue Code of 1997 10 defines the phrase "sale of services" as the

"performance of all kinds of services for others for a fee, remuneration or consideration." It includes "the supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking or project."
BIR Ruling No. 010-98: a domestic corporation that provided technical, research, management and technical assistance to its affiliated companies and received payments on a reimbursement-of-cost basis, without any intention of realizing profit, was subject to VAT on services rendered.

It is immaterial whether the primary purpose of a corporation indicates that it receives payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without realizing profit, for purposes of determining liability for VAT on services rendered. As long as the entity provides service for a fee, remuneration or consideration,

then the service rendered is subject to VAT.

It is a rule that because taxes are the lifeblood of the nation, statutes that allow exemptions are construed strictly against the grantee and liberally in favor of the government. Any exemption from the payment of a tax must be

clearly stated in the language of the law; it cannot be merely implied therefrom. In the case of VAT, Section
109, Republic Act 8424 clearly enumerates the transactions exempted from VAT. The services rendered by

COMASERCO do not fall within the exemptions.

The performance of all kinds of services for others for a fee, remuneration or consideration is considered as sale of services subject to VAT.


Seagate is a resident foreign corporation duly registered with the SEC to do business in the Philippines, with principal office address at the new Cebu Township One, Special Economic Zone, Naga,

It registered with PEZA and has been issued PEZA Certificate to engage in the manufacture of

recording components primarily used in computers for export

Seagate Technology is a VAT -registered entity as evidenced by VAT Registration Certification No. 97083-000600-V issued on 2 April 1997.

It was able to file VAT returns for the period 1 April 1998 to 30 June 1999.
Thereafter, an administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review),

was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu but this was not acted upon by the CIR.

WoN respondent is exempt from tax

RULING: YES. Respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another.

Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt.

The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves. Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result for the following considerations: o The BIR regulations additionally requiring an approved prior application for effective zero rating cannot prevail over the clear VAT nature of respondent's transactions. The scope of such regulations is not within the statutory authority x x x granted by the legislature. A mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter. The courts will not countenance one that overrides the statute it seeks to apply and implement.

Special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone, which by law is considered as a separate customs territory .
As such, SEAGATE is exempt from all internal revenue taxes, including the VAT, and regulations

pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime.
As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for export may not be exempt, but like its purchase

transactions, they are zero-rated. No prior application for the effective zero rating of its transactions is

Being VAT-registered and having satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.

An exempt transaction, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VATexempt or not of the party to the transaction An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT



Toshiba was organized and established as a domestic corporation, duly-registered with the SEC
Its primary purpose is to engage in the business of manufacturing and exporting of electrical and mechanical machinery, equipment, systems, accessories, parts, components, materials and goods of all kinds, including, without limitation, to those relating to office automation and information technology, and all types of computer hardware and software, such as HDD, CD-ROM and personal computer printed circuit boards.

9/27/95: Toshiba registered with PEZA as an ECOZONE Export Enterprise, it registered with BIR

as a VAT taxpayer and a withholding agent.

Toshiba filed its VAT returns for the 1st & 2nd quarters of 1996 It alleged that the input VAT was from its purchases of capital goods and services which remained unutilized since it had not yet engaged in any business activity or transaction for which it may be liable for any output VAT.

3/27/98: Toshiba filed with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center

of the DOF applications for tax credit/refund of its unutilized input VAT

To toll the running of the two-year prescriptive period for judicially claiming a tax credit/refund, Toshiba, filed with the CTA a Petition for Review.
CIR raised several Special and Affirmative Defenses: 5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same is subject to investigation by the Bureau of Internal Revenue. 6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner must prove that the taxes sought to be refunded were erroneously or illegally collected. 7. Petitioner must prove the allegations supporting its entitlement to a refund. 8. Petitioner must show that it has complied with the provisions of Sections 204(c) and 229 of the 1997 Tax Code on the filing of a written claim for refund within two (2) years from the date of payment of the tax. 9. Claims for refund of taxes are construed strictly against claimants, the same being in the nature of an exemption from taxation.12

CTA ordered CIR to refund, or in the alternative, to issue a tax credit certificate to respondent Toshiba CA also dismissed petitioner CIRs Petition for Review and affirmed the CTA Decision

WON Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and services

RULING: SC RULED THAT TOSHIBA IS ENTITLES TO THE TAX CREDIT/REFUND OF ITS INPUT VAT An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero percent (0%).
Toshiba bases its claim for tax credit/refund on Section 106(b) Refunds or tax credits of creditable input tax, of the Tax Code of 1977: (b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit

certificate or refund of input taxes paid on capital goods imported or locally purchased, to the extent that such input taxes have not been applied against output taxes. The application may be made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods are used in VAT taxable business. If it is also used in exempt operations, the input tax refundable shall only be the ratable portion corresponding to the taxable operations.

Since Toshiba is a PEZA-registered enterprise, it is subject to the five percent (5%) preferential tax rate imposed RA 7916 or The Special Economic Zone Act of 1995
According to the special law, "[e]xcept for real property taxes on land owned by developers, no

taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, 5% of the gross income earned by all business enterprises within the ECOZONE shall be paid" The five percent (5%) preferential tax rate imposed on the gross income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT.


In the case of Commissioner of Internal Revenue v. Seagate Technology (Philippines),19 this Court already made such distinction

An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status VAT-exempt or not of the party to the transaction An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from VAT

The tax code provision relied upon by petitioner CIR, relates to VAT-exempt transactions. These are transactions exempted from VAT by special laws or international agreements to which the Philippines is a signatory. Since such transactions are not subject to VAT, the sellers cannot pass on any output
VAT to the purchasers of goods, properties, or services, and they may not claim tax credit/refund of the input VAT they had paid thereon.

Such provision cannot apply to transactions of respondent Toshiba because although the said section recognizes that transactions covered by special laws may be exempt from VAT, the very same section provides that those falling under PD. 66 are not.

PD. 66, creating the EPZA is the precursor of Rep. Act No. 7916, which the EPZA evolved into the PEZA. Thus, the exception of PD 66 extends likewise to RA 7916

SC agrees that PEZA-registered enterprises, which would necessarily be located within ECOZONES, are VAT-exempt entities, not because of Rep. Act No. 7916 provision, which imposes the five percent (5%) preferential tax rate on gross income of PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same statute which establishes the fiction that ECOZONES are foreign territory.

Toshiba is located within an ECOZONE.

An ECOZONE or a Special Economic Zone has been described as selected areas with highly developed or which have the potential to be developed into agro-industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones and tourist/recreational centers.

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE shall be referred to as the Customs Territory.22

what would be the VAT implication of sales made by a supplier from the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the CROSS BORDER DOCTRINE, according to which,

no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. Hence, actual export of goods and services from the Philippines to a foreign country must be free of VAT; while, those destined for use or consumption within the Philippines shall be imposed with ten percent (10%) VAT.
Applying said doctrine to the sale of goods, properties, and services to and from the ECOZONES, the BIR issued RMC No. 74-99. Section 3 thereof reads: SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The Customs Territory, To a PEZA Registered Enterprise.

(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended: a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code. b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998. (2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes under the NIRC rather than the 5% special tax regime: a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code. b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998. (3) In the final analysis, any sale of goods, property or services made by a VAT registered supplier from the Customs Territory to any registered enterprise operating in the ecozone, regardless of the class or type of the latters PEZA registration, is actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to such enterprise made by a VAT registered supplier from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT registered suppliers from the Customs Territory, shall be treated effectively subject to the 0% VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and the "Cross Border Doctrine" of the VAT system.

NO OUTPUT VAT MAY BE PASSED ON TO AN ECOZONE ENTERPRISE SINCE IT IS A VATEXEMPT ENTITY. The VAT treatment of sales to it, however, varies depending on whether the supplier
from the Customs Territory is VAT-registered or not.

zero percent (0%). In zero-rated transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter (i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT, making it internationally competitive by allowing it to credit/refund the input VAT attributable to its export sales.

Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier would

only be exempt from VAT and the supplier shall not be able to claim credit/refund of its input VAT.

Toshiba, as a PEZA-registered enterprise, is a VAT-exempt entity that could not have engaged in a VAT-taxable business, SC still believes, given the particular circumstances of the present case, that it is entitled to a credit/refund of its input VAT.

Prior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax holiday under Executive Order No. 226, as amended, were deemed subject to VAT.

"SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations."

the VAT-registered person who can avail as tax credit or refund of the input tax on his purchases of goods, services or properties is the seller whose sale is zero-rated.
Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed by PEZAregistered enterprises, availing of the income tax holiday, for input VAT on their purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies processing and possible approval thereof depending on whether the given conditions are met. Respondent Toshibas claim for tax credit/refund arose from the very same circumstances recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and unreasonable for petitioner CIR to oppose respondent Toshibas application for tax credit/refund of its input VAT, when such claim had already been determined and approved by the CTA after due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and even approve applications filed by other similarly-situated PEZA-registered enterprises at the administrative level.

5. MACEDA VS. MACARAIG, JR. 197 SCRA 771 GR NO. 88291 MAY 31, 1991

"A taxpayer may question the legality of a law or regulation when it involves illegal expenditure of public money."

Senator Ernesto Maceda sought to nullify certain decisions, orders, rulings, and resolutions of respondents Executive Secretary, SOF, CIR, Commissioner of Customs and the Fiscal Incentives Review
Board FIRB for exempting the National Power Corporation (NPC) from indirect tax and duties.

RA 358, RA 6395 and PD 380 expressly grant NPC exemptions from all taxes whether direct or indirect. In 1984, however, PD 1931 and EO 93 withdrew all tax exemptions granted to all GOCCs including the NPC but granted the President and/or the Secretary of Finance by recommendation of the FIRB the power to restore certain tax exemptions.

Pursuant to the latter law, FIRB issued a resolution restoring the tax and duty exemption privileges

of the NPC. The actions of the respondents were thus questioned by the petitioner for certiorari, prohibition and
mandamus with prayer for a writ of preliminary injunction and/or restraining order. To which public respondents argued, that petitioner does not have the standing to challenge the

questioned orders and resolution because he was not in any way affected by such grant of tax exemptions.

Has a taxpayer the capacity to question the legality of the resolution issued by the FIRB restoring the tax exemptions?
HELD: Yes. In this petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a

duly-elected Senator of the Philippines."

Public respondent argues that petitioner must show that he has sustained direct injury as a result of the action and that it is not sufficient for him to have a mere general interest common to all members of the public. The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the ruling in Lozada when it involves illegal expenditure of public money.

The petition questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned tax credits by respondent oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.

Other version: FACTS: Act 120 created NPC as a public corporation to undertake the development of hydraulic power and the production of power from other sources RA 358 granted NPC tax duty and exemption privileges RA 6395 revised the charter of NPC, tasking it to carry out the policy of the national electrification, and provided in detail NPC tax exemptions PD 380 specified that NPCs exemptions include all taxes, etc. imposed directly or indirectly PD 938 integrated the exemptions in favor of GOCCs including their subsidiaries, however, empowering the president or minister of finance, upon recommendation of FIRB to restore, partially or completely, the exemptions withdrawn or revised FIRB issued resolution 10-85 restoring the duty and tax exemptions privileges of NPC from june 1984 to june 1985 Resolution 1-86 restored such exemption indefinitely effective July 1985 EO 93 again withdraw the exemption FIRB issued Resolution 17-87 restoring NPCs exemption, which was approved by the president on October 1987 Since 1976, oil firms never paid excise or specific and ad valorem taxes for petroleum products sold and delivered to NPC Oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC only in 1984 NPC claimed for a refund (468.58M) Only portion thereof, corresponding ot Caltex, was approved and released by way of tax credit memo. The claim for refund of taxes paid by PetroPhil, Shell and Caltex amounting to 410.58M was denied NPC moved for reconsideration, starting that all deliveries of petroleum products to NPC are tax exempt, regardless of the period of delivery ISSUE: WON NPC cease to enjoy exemption from indirect tax when PD 938 stated exemption in general terms RULING:

NPC is a nonprofit public corporation created for the general good and welfare, and wholly owned by the Philippine govt From the very beginning of the corporations existence, NPC enjoyed preferential tax treatment to enable the corporation to pay the indebtedness and obligation and effective implementation if the policy enunciated in Sec. 1 of RA 6395

From the preamble of PD 938, it is evident that its provisions were not intended to be strictly construed against NPC On the contrary, the law mandates that it should be interpreted liberally so as to enhance the tax exempt status of NPC. It is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of government political subdivision or instrumentality In the case of property owned by the state or a city or other public corporations, the express exception should not be construed with the same degree of strictness that applies to exemptions contrary to the policy of the state, since as to such property, exception is the rule and taxation is the exception