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G.R. No.

76778 June 6, 1990


FRANCISCO
I.
CHAVEZ, petitioner,
vs.
JAIME B. ONGPIN, in his capacity as Minister of Finance
and FIDELINA CRUZ, in her capacity as Acting Municipal
Treasurer of the Municipality of Las Pias, respondents,
REALTY OWNERS ASSOCIATION OF THE PHILIPPINES,
INC., petitioner-intervenor.
Brotherhood of Nationalistic, Involved and Free Attorneys to
Combat Injustice and Oppression (Bonifacio) for petitioner.
Ambrosia Padilla, Mempin and Reyes Law Offices for movant
Realty Owners Association.

NOW, THEREFORE, I. CORAZON C.


AQUINO, President of the Philippines, do
hereby order:
SECTION 1. Real property values as of
December 31, 1984 as determined by the
local assessors during the latest general
revision of assessments shall take effect
beginning January 1, 1987 for purposes of
real property tax collection.
SEC. 2. The Minister of Finance shall
promulgate the necessary rules and
regulations to implement this Executive
Order.
SEC. 3. Executive Order No. 1019, dated
April 18, 1985, is hereby repealed.

MEDIALDEA, J.:
The petition seeks to declare unconstitutional Executive Order
No. 73 dated November 25, 1986, which We quote in full, as
follows (78 O.G. 5861):
EXECUTIVE ORDER No. 73
PROVIDING FOR THE COLLECTION OF
REAL PROPERTY TAXES BASED ON THE
1984 REAL PROPERTY VALUES, AS
PROVIDED FOR UNDER SECTION 21 OF
THE REAL PROPERTY TAX CODE, AS
AMENDED
WHEREAS, the collection of real property
taxes is still based on the 1978 revision of
property values;
WHEREAS, the latest general revision of
real property assessments completed in
1984 has rendered the 1978 revised values
obsolete;
WHEREAS, the collection of real property
taxes based on the 1984 real property
values was deferred to take effect on
January 1, 1988 instead of January 1, 1985,
thus depriving the local government units of
an additional source of revenue;
WHEREAS, there is an urgent need for local
governments to augment their financial
resources to meet the rising cost of
rendering effective services to the people;

SEC. 4. All laws, orders, issuances, and


rules and regulations or parts thereof
inconsistent with this Executive Order are
hereby repealed or modified accordingly.
SEC. 5. This Executive Order shall take
effect immediately.
On March 31, 1987, Memorandum Order No. 77 was issued
suspending the implementation of Executive Order No. 73 until
June 30, 1987.
The petitioner, Francisco I. Chavez, 1 is a taxpayer and an
owner of three parcels of land. He alleges the following: that
Executive Order No. 73 accelerated the application of the
general revision of assessments to January 1, 1987 thereby
mandating an excessive increase in real property taxes by
100% to 400% on improvements, and up to 100% on land; that
any increase in the value of real property brought about by the
revision of real property values and assessments would
necessarily lead to a proportionate increase in real property
taxes; that sheer oppression is the result of increasing real
property taxes at a period of time when harsh economic
conditions prevail; and that the increase in the market values of
real property as reflected in the schedule of values was
brought about only by inflation and economic recession.
The intervenor Realty Owners Association of the Philippines,
Inc. (ROAP), which is the national association of ownerslessors, joins Chavez in his petition to declare unconstitutional
Executive Order No. 73, but additionally alleges the following:
that Presidential Decree No. 464 is unconstitutional insofar as
it imposes an additional one percent (1%) tax on all property
owners to raise funds for education, as real property tax is
admittedly a local tax for local governments; that the General
Revision of Assessments does not meet the requirements of
due process as regards publication, notice of hearing,
opportunity to be heard and insofar as it authorizes

"replacement cost" of buildings (improvements) which is not


provided in Presidential Decree No. 464, but only in an
administrative regulation of the Department of Finance; and
that the Joint Local Assessment/Treasury Regulations No. 286 2 is even more oppressive and unconstitutional as it
imposes successive increase of 150% over the 1986 tax.
The Office of the Solicitor General argues against the petition.
The petition is not impressed with merit.
Petitioner Chavez and intervenor ROAP question
constitutionality of Executive Order No. 73 insofar as
revision of the assessments and the effectivity thereof
concerned. It should be emphasized that Executive Order
73 merely directs, in Section 1 thereof, that:

the
the
are
No.

SECTION 1. Real property values as of


December 31, 1984 as determined by the
local assessors during the latest general
revision of assessments shall take effect
beginning January 1, 1987 for purposes of
real property tax collection. (emphasis
supplied)
The general revision of assessments completed in 1984 is
based on Section 21 of Presidential Decree No. 464 which
provides, as follows:
SEC. 21. General Revision of Assessments.
Beginning with the assessor shall make a
calendar year 1978, the provincial or city
general
revision
of
real
property
assessments in the province or city to take
effect January 1, 1979, and once every five
years thereafter: Provided; however, That if
property values in a province or city, or in
any municipality, have greatly changed since
the last general revision, the provincial or city
assesor may, with the approval of the
Secretary of Finance or upon bis direction,
undertake a general revision of assessments
in the province or city, or in any municipality
before the fifth year from the effectivity of the
last general revision.
Thus, We agree with the Office of the Solicitor General that the
attack on Executive Order No. 73 has no legal basis as the
general revision of assessments is a continuing process
mandated by Section 21 of Presidential Decree No. 464. If at
all, it is Presidential Decree No. 464 which should be
challenged as constitutionally infirm. However, Chavez failed to
raise any objection against said decree. It was ROAP which
questioned the constitutionality thereof. Furthermore,
Presidential Decree No. 464 furnishes the procedure by which
a tax assessment may be questioned:

SEC. 30. Local Board of Assessment


Appeals. Any owner who is not satisfied
with the action of the provincial or city
assessor in the assessment of his property
may, within sixty days from the date of
receipt by him of the written notice of
assessment as provided in this Code, appeal
to the Board of Assessment Appeals of the
province or city, by filing with it a petition
under oath using the form prescribed for the
purpose, together with copies of the tax
declarations and such affidavit or documents
submitted in support of the appeal.
xxx xxx xxx
SEC. 34. Action by the Local Board of
assessment Appeals. The Local Board of
Assessment Appeals shall decide the appeal
within one hundred and twenty days from the
date of receipt of such appeal. The decision
rendered must be based on substantial
evidence presented at the hearing or at least
contained in the record and disclosed to the
parties or such relevant evidence as a
reasonable mind might accept as adequate
to support the conclusion.
In the exercise of its appellate jurisdiction,
the Board shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue
subpoena and subpoenaduces tecum. The
proceedings of the Board shall be conducted
solely for the purpose of ascertaining the
truth
without-necessarily
adhering
to
technical rules applicable in judicial
proceedings.
The Secretary of the Board shall furnish the
property owner and the Provincial or City
Assessor with a copy each of the decision of
the Board. In case the provincial or city
assessor concurs in the revision or the
assessment, it shall be his duty to notify the
property owner of such fact using the form
prescribed for the purpose. The owner or
administrator of the property or the assessor
who is not satisfied with the decision of the
Board of Assessment Appeals, may, within
thirty days after receipt of the decision of the
local Board, appeal to the Central Board of
Assessment Appeals by filing his appeal
under oath with the Secretary of the proper
provincial or city Board of Assessment
Appeals using the prescribed form stating
therein the grounds and the reasons for the

appeal, and attaching thereto any evidence


pertinent to the case. A copy of the appeal
should be also furnished the Central Board
of Assessment Appeals, through its
Chairman, by the appellant.
Within ten (10) days from receipt of the
appeal, the Secretary of the Board of
Assessment Appeals concerned shall
forward the same and all papers related
thereto, to the Central Board of Assessment
Appeals through the Chairman thereof.
xxx xxx xxx
SEC. 36. Scope of Powers and Functions.
The Central Board of Assessment
Appeals shall have jurisdiction over
appealed assessment cases decided by the
Local Board of Assessment Appeals. The
said Board shall decide cases brought on
appeal within twelve (12) months from the
date of receipt, which decision shall become
final and executory after the lapse of fifteen
(15) days from the date of receipt of a copy
of the decision by the appellant.
In the exercise of its appellate jurisdiction,
the Central Board of Assessment Appeals, or
upon express authority, the Hearing
Commissioner, shall have the power to
summon witnesses, administer oaths, take
depositions,
and
issue subpoenas and subpoenas
duces
tecum.
The Central Board of assessment Appeals
shall adopt and promulgate rules of
procedure relative to the conduct of its
business.
Simply stated, within sixty days from the date of receipt of the,
written notice of assessment, any owner who doubts the
assessment of his property, may appeal to the Local Board of
Assessment Appeals. In case the, owner or administrator of
the property or the assessor is not satisfied with the decision of
the Local Board of Assessment Appeals, he may, within thirty
days from the receipt of the decision, appeal to the Central
Board of Assessment Appeals. The decision of the Central
Board of Assessment Appeals shall become final and
executory after the lapse of fifteen days from the date of
receipt of the decision.
Chavez argues further that the unreasonable increase in real
property taxes brought about by Executive Order No. 73
amounts to a confiscation of property repugnant to the
constitutional guarantee of due process, invoking the cases

of Ermita-Malate Hotel, et al. v. Mayor of Manila (G.R. No. L24693, July 31, 1967, 20 SCRA 849) andSison v. Ancheta, et
al. (G.R. No. 59431, July 25, 1984, 130 SCRA 654).
The reliance on these two cases is certainly misplaced
because the due process requirement called for therein applies
to the "power to tax." Executive Order No. 73 does not impose
new taxes nor increase taxes.
Indeed, the government recognized the financial burden to the
taxpayers that will result from an increase in real property
taxes. Hence, Executive Order No. 1019 was issued on April
18, 1985, deferring the implementation of the increase in real
property taxes resulting from the revised real property
assessments, from January 1, 1985 to January 1, 1988.
Section 5 thereof is quoted herein as follows:
SEC. 5. The increase in real property taxes
resulting from the revised real property
assessments as provided for under Section
21 of Presidential Decree No. 464, as
amended by Presidential Decree No. 1621,
shall be collected beginning January 1, 1988
instead of January 1, 1985 in order to enable
the Ministry of Finance and the Ministry of
Local Government to establish the new
systems of tax collection and assessment
provided herein and in order to alleviate the
condition of the people, including real
property owners, as a result of temporary
economic difficulties. (emphasis supplied)
The issuance of Executive Order No. 73 which changed the
date of implementation of the increase in real property taxes
from January 1, 1988 to January 1, 1987 and therefore
repealed Executive Order No. 1019, also finds ample
justification in its "whereas' clauses, as follows:
WHEREAS, the collection of real property
taxes based on the 1984 real property
values was deferred to take effect on
January 1, 1988 instead of January 1,
1985, thus depriving the local government
units of an additional source of revenue;
WHEREAS, there is an urgent need for local
governments to augment their financial
resources to meet the rising cost of
rendering
effective
services
to
the
people; (emphasis supplied)
xxx xxx xxx
The other allegation of ROAP that Presidential Decree No. 464
is unconstitutional, is not proper to be resolved in the present
petition. As stated at the outset, the issue here is limited to the
constitutionality of Executive Order No. 73. Intervention is not

an independent proceeding, but an ancillary and supplemental


one which, in the nature of things, unless otherwise provided
for by legislation (or Rules of Court), must be in subordination
to the main proceeding, and it may be laid down as a general
rule that an intervention is limited to the field of litigation open
to the original parties (59 Am. Jur. 950. Garcia, etc., et al. v.
David, et al., 67 Phil. 279).
We agree with the observation of the Office of the Solicitor
General that without Executive Order No. 73, the basis for
collection of real property taxes win still be the 1978 revision of
property values. Certainly, to continue collecting real property
taxes based on valuations arrived at several years ago, in
disregard of the increases in the value of real properties that
have occurred since then, is not in consonance with a sound
tax system. Fiscal adequacy, which is one of the characteristics
of a sound tax system, requires that sources of revenues must
be adequate to meet government expenditures and their
variations.
ACCORDINGLY, the petition and the petition-in-intervention
are hereby DISMISSED.
SO ORDERED.

ABAKADA GURO PARTY LIST (Formerly AASJAS)


OFFICERS
SAMSON S.
ALCANTARA and
ED
VINCENT S. ALBANO,
Petitioners,

- versus -

THE
HONORABLE
EXECUTIVE
SECRETARY
EDUARDO ERMITA; HONORABLE SECRETARY OF
THE DEPARTMENT OF FINANCE CESAR PURISIMA;
and HONORABLE COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,
Respondents.
x-------------------------x
AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITOESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL,
AND SERGIO R. OSMEA III,
Petitioners,
- versus EXECUTIVE SECRETARY EDUARDO R. ERMITA,
CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE,
Respondents.
x-------------------------x
ASSOCIATION OF PILIPINAS SHELL DEALERS, INC.
represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its
President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented
by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style
of ANB NORTH SHELL SERVICE STATION; LOURDES
MARTINEZ doing business under the name and style
of SHELL GATE N. DOMINGO; BETHZAIDA TAN doing
business under the name and style of ADVANCE
SHELL STATION; REYNALDO P. MONTOYA doing
business under the name and style of NEW LAMUAN
SHELL SERVICE STATION; EFREN SOTTO doing
business under the name and style of RED FIELD
SHELL SERVICE STATION; DONICA CORPORATION
represented by its President, DESI TOMACRUZ;
RUTH E. MARBIBI doing business under the name
and style of R&R PETRON STATION; PETER M.
UNGSON doing business under the name and style of
CLASSIC STAR GASOLINE SERVICE STATION;
MARIAN SHEILA A. LEE doing business under the

name and style of NTE GASOLINE & SERVICE


STATION; JULIAN CESAR P. POSADAS doing
business under the name and style of STARCARGA
ENTERPRISES; ADORACION MAEBO doing business
under the name and style of CMA MOTORISTS
CENTER; SUSAN M. ENTRATA doing business under
the name and style of LEONAS GASOLINE STATION
and SERVICE CENTER; CARMELITA BALDONADO
doing business under the name and style of FIRST
CHOICE SERVICE CENTER; MERCEDITAS A. GARCIA
doing business under the name and style of LORPED
SERVICE CENTER; RHEAMAR A. RAMOS doing
business under the name and style of RJRAM PTT
GAS STATION; MA. ISABEL VIOLAGO doing business
under the name and style of VIOLAGO-PTT SERVICE
CENTER; MOTORISTS HEART CORPORATION
represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; MOTORISTS HARVARD
CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; MOTORISTS
HERITAGE CORPORATION represented by its VicePresident for Operations, JOSELITO F. FLORDELIZA;
PHILIPPINE
STANDARD
OIL
CORPORATION
represented by its Vice-President for Operations,
JOSELITO F. FLORDELIZA; ROMEO MANUEL doing
business under the name and style of ROMMAN
GASOLINE STATION; ANTHONY ALBERT CRUZ III
doing business under the name and style of TRUE
SERVICE STATION,
Petitioners,
- versus CESAR V. PURISIMA, in his capacity as Secretary of
the Department of Finance and GUILLERMO L.
PARAYNO, JR., in his capacity as Commissioner of
Internal Revenue,
Respondents.
x-------------------------x
FRANCIS JOSEPH G. ESCUDERO, VINCENT
CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO G. PLAZA, DARLENE ANTONINOCUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN
MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV S.
HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY ELIAS
C. LOPEZ, RODOLFO Q. AGBAYANI and TEODORO A.
CASIO,
Petitioners,

G.R.

- versus CESAR V. PURISIMA, in his capacity as Secretary of


Finance, GUILLERMO L. PARAYNO, JR., in his
capacity as Commissioner of Internal Revenue, and
EDUARDO R. ERMITA, in his capacity as Executive
Secretary,
Respondents.
x-------------------------x
BATAAN GOVERNOR ENRIQUE T. GARCIA, JR.
Petitioner,

G.R.

- versus HON. EDUARDO R. ERMITA, in his capacity as the


Executive Secretary; HON. MARGARITO TEVES, in
his capacity as Secretary of Finance; HON. JOSE
MARIO BUNAG, in his capacity as the OIC
Commissioner of the Bureau of Internal Revenue;
and HON. ALEXANDER AREVALO, in his capacity as
the OIC Commissioner of the Bureau of Customs,
Respondents.
x----------------------------------------------------------x
DECISION

Its mother bill is House Bill No. 3555. The House Committee
on Ways and Means approved the bill on February 2, 2005.
The President also certified it as urgent onFebruary 8, 2005.
The House of Representatives approved the bill on second and
third reading on February 28, 2005.
Meanwhile, the Senate Committee on Ways and
Means approved Senate Bill No. 1950[4] on March 7, 2005, in
substitution of Senate Bill Nos. 1337, 1838 and 1873, taking
into consideration House Bill Nos. 3555 and 3705. Senator
Ralph G. Recto sponsored Senate Bill No. 1337, while Senate
Bill Nos. 1838 and 1873 were both sponsored by Sens.
Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan.
The President certified the bill on March 11, 2005, and was
approved by the Senate on second and third reading on April
13, 2005.
On the same date, April 13, 2005, the Senate agreed
to the request of the House of Representatives for a committee
conference on the disagreeing provisions of the proposed bills.

AUSTRIA-MARTINEZ, J.:

The expenses of government,


having for their object the interest of all,
should be borne by everyone, and the more
man enjoys the advantages of society, the
more he ought to hold himself honored in
contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist
Mounting budget deficit, revenue generation,
inadequate fiscal allocation for education, increased
emoluments for health workers, and wider coverage for full
value-added tax benefits these are the reasons why Republic
Act No. 9337 (R.A. No. 9337)[1] was enacted. Reasons, the
wisdom of which, the Court even with its extensive
constitutional power of review, cannot probe. The petitioners in
these cases, however, question not only the wisdom of the law,
but also perceived constitutional infirmities in its passage.
Every law enjoys in its favor the presumption of
constitutionality. Their arguments notwithstanding, petitioners
failed to justify their call for the invalidity of the law. Hence,
R.A. No. 9337 is not unconstitutional.
LEGISLATIVE HISTORY
R.A. No. 9337 is a consolidation of three legislative
bills namely, House Bill Nos. 3555 and 3705, and Senate Bill
No. 1950.
House Bill No. 3555[2] was introduced on first reading
on January 7, 2005. The House Committee on Ways and
Means approved the bill, in substitution of House Bill No. 1468,
which Representative (Rep.) Eric D. Singson introduced
on August 8, 2004. The President certified the bill on January
7, 2005 for immediate enactment. On January 27, 2005, the
House of Representatives approved the bill on second and
third reading.
House Bill No. 3705[3] on the other hand, substituted
House Bill No. 3105 introduced by Rep. Salacnib F. Baterina,
and House Bill No. 3381 introduced by Rep. Jacinto V. Paras.

Before long, the Conference Committee on the


Disagreeing Provisions of House Bill No. 3555, House Bill No.
3705, and Senate Bill No. 1950, after having met and
discussed in full free and conference, recommended the
approval of its report, which the Senate did on May 10, 2005,
and with the House of Representatives agreeing thereto the
next day, May 11, 2005.
On May 23, 2005, the enrolled copy of the
consolidated House and Senate version was transmitted to the
President, who signed the same into law on May 24, 2005.
Thus, came R.A. No. 9337.
July 1, 2005 is the effectivity date of R.A. No. 9337.
When said date came, the Court issued a temporary
restraining order, effective immediately and continuing until
further orders, enjoining respondents from enforcing and
implementing the law.
[5]

Oral arguments were held on July 14, 2005.


Significantly, during the hearing, the Court speaking through
Mr. Justice Artemio V. Panganiban, voiced the rationale for its
issuance of the temporary restraining order on July 1, 2005, to
wit:
J. PANGANIBAN : . . . But before I go into the details
of your presentation, let me just tell you a little
background. You know when the law took effect
on July 1, 2005, the Court issued a TRO at about 5
oclock in the afternoon. But before that, there was a
lot of complaints aired on television and on radio.
Some people in a gas station were complaining that
the gas prices went up by 10%. Some people were
complaining that their electric bill will go up by 10%.
Other times people riding in domestic air carrier were
complaining that the prices that theyll have to pay
would have to go up by 10%. While all that was being
aired, per your presentation and per our own
understanding of the law, thats not true. Its not true
that the e-vat law necessarily increased prices by
10% uniformly isnt it?
ATTY. BANIQUED : No, Your Honor.
J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your


Honor, there is an
Executive Order
that granted the
Petroleum
companies some
subsidy . . .
interrupted
J. PANGANIBAN : Thats correct . . .
ATTY. BANIQUED : . . . and therefore that
was meant to
temper
the
impact . . .
interrupted
J.

PANGANIBAN

. . mitigating
measures . . .

J. PANGANIBAN : Now. For instance,


Domestic Airline
companies, Mr.
Counsel, are at
present imposed
a Sales Tax of
3%. When this EVat
law
took
effect the Sales
Tax was also
removed as a
mitigating
measure.
So,
therefore, there is
no justification to
increase the fares
by 10% at best
7%, correct?
ATTY. BANIQUED : I guess so, Your Honor,
yes.

ATTY. BANIQUED : Yes, Your Honor.


J. PANGANIBAN : As a matter of fact a part
of the mitigating
measures would
be the elimination
of the Excise Tax
and the import
duties. That is
why, it is not
correct to say that
the VAT as to
petroleum
dealers increased
prices by 10%.
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : And therefore, there is no
justification
for
increasing
the
retail price by
10% to cover the
E-Vat tax. If you
consider
the
excise tax and
the import duties,
the Net Tax would
probably be in the
neighborhood of
7%? We are not
going into exact
figures I am just
trying to deliver a
point that different
industries,
different products,
different services
are hit differently.
So its not correct
to say that all
prices must go up
by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : There are other products


that the people
were complaining
on that first day,
were
being
increased
arbitrarily
by
10%. And thats
one
reason
among
many
others this Court
had to issue TRO
because of the
confusion in the
implementation.
Thats why we
added
as
an
issue in this case,
even
if
its
tangentially taken
up
by
the
pleadings of the
parties,
the
confusion in the
implementation of
the E-vat. Our
people
were
subjected to the
mercy of that
confusion of an
across the board
increase of 10%,
which
you
yourself
now
admit and I think
even
the
Government will
admit is incorrect.
In some cases, it
should be 3%
only, in some
cases it should
be 6% depending
on
these

mitigating
measures
and
the location and
situation of each
product, of each
service, of each
company, isnt it?
ATTY. BANIQUED : Yes, Your Honor.
J. PANGANIBAN : Alright. So thats one
reason why we
had to issue a
TRO pending the
clarification of all
these and we
wish
the
government will
take
time
to
clarify all these by
means of a more
detailed
implementing
rules, in case the
law is upheld by
this Court. . . .[6]

to fix the rate of taxes under Article VI, Section 28(2) of the
1987 Philippine Constitution.
G.R. No. 168207
On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al.,
filed
a
petition
for certiorari likewise
assailing
the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337.
Aside from questioning the so-called stand-by
authority of the President to increase the VAT rate to 12%, on
the ground that it amounts to an undue delegation of legislative
power, petitioners also contend that the increase in the VAT
rate to 12% contingent on any of the two conditions being
satisfied violates the due process clause embodied in Article
III, Section 1 of the Constitution, as it imposes an unfair and
additional tax burden on the people, in that: (1) the 12%
increase is ambiguous because it does not state if the rate
would be returned to the original 10% if the conditions are no
longer satisfied; (2) the rate is unfair and unreasonable, as the
people are unsure of the applicable VAT rate from year to year;
and (3) the increase in the VAT rate, which is supposed to be
an incentive to the President to raise the VAT collection to at
least 2 4/5 of the GDP of the previous year, should only be
based on fiscal adequacy.

The Court also directed the parties to file their


respective Memoranda.

Petitioners further claim that the inclusion of a standby authority granted to the President by the Bicameral
Conference Committee is a violation of the no-amendment rule
upon last reading of a bill laid down in Article VI, Section 26(2)
of the Constitution.

G.R. No. 168056

G.R. No. 168461

Before
R.A.
No.
9337
took
effect,
petitioners ABAKADA GURO Party List, et al., filed a petition
for prohibition on May 27, 2005. They question the
constitutionality of Sections 4, 5 and 6 of R.A. No. 9337,
amending Sections 106, 107 and 108, respectively, of the
National Internal Revenue Code (NIRC). Section 4 imposes a
10% VAT on sale of goods and properties, Section 5 imposes a
10% VAT on importation of goods, and Section 6 imposes a
10% VAT on sale of services and use or lease of properties.
These
questioned
provisions
contain
a
uniform proviso authorizing
the
President,
upon
recommendation of the Secretary of Finance, to raise the VAT
rate to 12%, effective January 1, 2006, after any of the
following conditions have been satisfied, to wit:

Thereafter, a petition for prohibition was filed on June


29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et
al., assailing the following provisions of R.A. No. 9337:
1) Section 8, amending Section 110 (A)(2) of
the NIRC, requiring that the input
tax on depreciable goods shall be
amortized over a 60-month period,
if the acquisition, excluding the VAT
components, exceeds One Million
Pesos (P1, 000,000.00);

. . . That the President, upon the


recommendation of the Secretary of
Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve
percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a
percentage of Gross Domestic Product
(GDP) of the previous year exceeds two and
four-fifth percent (2 4/5%); or
(ii) National government deficit as a
percentage of GDP of the previous year
exceeds one and one-half percent (1 %).
Petitioners argue that the law is unconstitutional, as it
constitutes abandonment by Congress of its exclusive authority

2) Section 8, amending Section 110 (B) of


the NIRC, imposing a 70% limit on
the amount of input tax to be
credited against the output tax; and
3) Section 12, amending Section 114 (c) of
the
NIRC,
authorizing
the
Government or any of its political
subdivisions, instrumentalities or
agencies, including GOCCs, to
deduct a 5% final withholding tax on
gross payments of goods and
services, which are subject to 10%
VAT under Sections 106 (sale of
goods and properties) and 108
(sale of services and use or lease
of properties) of the NIRC.
Petitioners contend that these provisions are
unconstitutional for being arbitrary, oppressive, excessive, and
confiscatory.

Petitioners argument is premised on the constitutional


right of non-deprivation of life, liberty or property without due
process of law under Article III, Section 1 of the Constitution.
According to petitioners, the contested sections impose
limitations on the amount of input tax that may be claimed.
Petitioners also argue that the input tax partakes the nature of
a property that may not be confiscated, appropriated, or limited
without due process of law. Petitioners further contend that like
any other property or property right, the input tax credit may be
transferred or disposed of, and that by limiting the same, the
government gets to tax a profit or value-added even if there is
no profit or value-added.

expenditures. Petitioner Garcia further claims that allowing


these establishments to pass on the tax to the consumers is
inequitable, in violation of Article VI, Section 28(1) of the
Constitution.

Petitioners also believe that these provisions violate


the constitutional guarantee of equal protection of the law
under Article III, Section 1 of the Constitution, as the limitation
on the creditable input tax if: (1) the entity has a high ratio of
input tax; or (2) invests in capital equipment; or (3) has several
transactions with the government, is not based on real and
substantial differences to meet a valid classification.

Relying on the case of Tolentino vs. Secretary of


Finance, 235 SCRA
630 (1994), respondents argue that the procedural issues
raised by petitioners, i.e., legality of the bicameral proceedings,
exclusive origination of revenue measures and the power of
the Senate concomitant thereto, have already been settled.
With regard to the issue of undue delegation of legislative
power to the President, respondents contend that the law is
complete and leaves no discretion to the President but to
increase the rate to 12% once any of the two conditions
provided therein arise.

Lastly, petitioners contend that the 70% limit is


anything but progressive, violative of Article VI, Section 28(1)
of the Constitution, and that it is the smaller businesses with
higher input tax to output tax ratio that will suffer the
consequences thereof for it wipes out whatever meager
margins the petitioners make.
G.R. No. 168463
Several members of the House of Representatives
led by Rep. Francis Joseph G. Escudero filed this petition
for certiorari on June
30,
2005.
They question
the
constitutionality of R.A. No. 9337 on the following grounds:
1) Sections 4, 5, and 6 of R.A. No. 9337
constitute an undue delegation of
legislative power, in violation of
Article VI, Section 28(2) of the
Constitution;
2) The Bicameral Conference Committee
acted without jurisdiction in deleting
the no pass on provisions present
in Senate Bill No. 1950 and House
Bill No. 3705; and
3) Insertion by the Bicameral Conference
Committee of Sections 27, 28, 34,
116, 117, 119, 121, 125,[7] 148, 151,
236, 237 and 288, which were
present in Senate Bill No. 1950,
violates Article VI, Section 24(1) of
the Constitution, which provides
that all appropriation, revenue or
tariff bills shall originate exclusively
in the House of Representatives
G.R. No. 168730
On the eleventh hour, Governor Enrique T. Garcia
filed a petition for certiorari and prohibition on July 20, 2005,
alleging unconstitutionality of the law on the ground that the
limitation on the creditable input tax in effect allows VATregistered establishments to retain a portion of the taxes they
collect, thus violating the principle that tax collection and
revenue should be solely allocated for public purposes and

RESPONDENTS COMMENT
The Office of the Solicitor General (OSG) filed a
Comment in behalf of respondents. Preliminarily, respondents
contend that R.A. No. 9337 enjoys the presumption of
constitutionality and petitioners failed to cast doubt on its
validity.

Respondents also refute petitioners argument that the


increase to 12%, as well as the 70% limitation on the creditable
input tax, the 60-month amortization on the purchase or
importation of capital goods exceeding P1,000,000.00, and the
5% final withholding tax by government agencies, is arbitrary,
oppressive, and confiscatory, and that it violates the
constitutional principle on progressive taxation, among others.
Finally, respondents manifest that R.A. No. 9337 is
the anchor of the governments fiscal reform agenda. A reform
in the value-added system of taxation is the core revenue
measure that will tilt the balance towards a sustainable
macroeconomic environment necessary for economic growth.
ISSUES
The Court defined the issues, as follows:
PROCEDURAL ISSUE
Whether R.A. No. 9337 violates the
following provisions of the Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
SUBSTANTIVE ISSUES
1. Whether Sections 4, 5 and 6 of R.A. No.
9337, amending Sections 106, 107 and 108
of the NIRC, violate the following provisions
of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
2. Whether Section 8 of R.A. No. 9337,
amending Sections 110(A)(2) and 110(B) of
the NIRC; and Section 12 of R.A. No. 9337,
amending Section 114(C) of the NIRC,
violate the following provisions of the
Constitution:

a. Article VI, Section 28(1), and


b. Article III, Section 1
RULING OF THE COURT
As a prelude, the Court deems it apt to restate the
general principles and concepts of value-added tax (VAT), as
the confusion and inevitably, litigation, breeds from a fallacious
notion of its nature.
The VAT is a tax on spending or consumption. It is
levied on the sale, barter, exchange or lease of goods or
properties and services.[8] Being an indirect tax on expenditure,
the seller of goods or services may pass on the amount of tax
paid to the buyer,[9] with the seller acting merely as a tax
collector.[10] The burden of VAT is intended to fall on the
immediate buyers and ultimately, the end-consumers.
In contrast, a direct tax is a tax for which a taxpayer is
directly liable on the transaction or business it engages in,
without transferring the burden to someone else. [11]Examples
are individual and corporate income taxes, transfer taxes, and
residence taxes.[12]
In the Philippines, the value-added system of sales
taxation has long been in existence, albeit in a different mode.
Prior to 1978, the system was a single-stage tax computed
under the cost deduction method and was payable only by the
original sellers. The single-stage system was subsequently
modified, and a mixture of the cost deduction method and tax
credit method was used to determine the value-added tax
payable.[13] Under the tax credit method, an entity can credit
against or subtract from the VAT charged on its sales or
outputs the VAT paid on its purchases, inputs and imports.[14]
It was only in 1987, when President Corazon C.
Aquino issued Executive Order No. 273, that the VAT system
was rationalized by imposing a multi-stage tax rate of 0% or
10% on all sales using the tax credit method.[15]
E.O. No. 273 was followed by R.A. No. 7716 or the
Expanded VAT Law,[16] R.A. No. 8241 or the Improved VAT
Law,[17] R.A. No. 8424 or the Tax Reform Act of 1997,[18] and
finally, the presently beleaguered R.A. No. 9337, also referred
to by respondents as the VAT Reform Act.
The Court will now discuss the issues in logical
sequence.
PROCEDURAL ISSUE
I.
Whether R.A. No. 9337 violates the following provisions of the
Constitution:
a. Article VI, Section 24, and
b. Article VI, Section 26(2)
A.
The
Bicameral
Conference Committee
Petitioners Escudero, et al., and Pimentel, et al.,
allege that the Bicameral Conference Committee exceeded its
authority by:

1) Inserting the stand-by authority in favor of


the President in Sections 4, 5, and 6 of R.A.
No. 9337;
2)
Deleting
entirely
the no
passon provisions found in both the House and
Senate bills;
3) Inserting the provision imposing a 70%
limit on the amount of input tax to be credited
against the output tax; and
4) Including the amendments introduced only
by Senate Bill No. 1950 regarding other
kinds of taxes in addition to the value-added
tax.
Petitioners now beseech the Court to define the
powers of the Bicameral Conference Committee.
It should be borne in mind that the power of internal
regulation and discipline are intrinsic in any legislative body for,
as unerringly elucidated by Justice Story, [i]f the power did
not exist, it would be utterly impracticable to transact the
business of the nation, either at all, or at least with
decency, deliberation, and order.[19] Thus, Article VI, Section
16 (3) of the Constitution provides that each House may
determine the rules of its proceedings. Pursuant to this
inherent constitutional power to promulgate and implement its
own rules of procedure, the respective rules of each house of
Congress provided for the creation of a Bicameral Conference
Committee.
Thus, Rule XIV, Sections 88 and 89 of the Rules of
House of Representatives provides as follows:
Sec. 88. Conference Committee. In
the event that the House does not agree with
the Senate on the amendment to any bill or
joint resolution, the differences may be
settled by the conference committees of both
chambers.
In resolving the differences with the
Senate, the House panel shall, as much as
possible, adhere to and support the House
Bill. If the differences with the Senate are so
substantial that they materially impair the
House Bill, the panel shall report such fact to
the House for the latters appropriate action.
Sec. 89. Conference Committee
Reports. . . . Each report shall contain a
detailed, sufficiently explicit statement of the
changes in or amendments to the subject
measure.
...
The Chairman of the House panel
may be interpellated on the Conference
Committee Report prior to the voting
thereon. The House shall vote on the
Conference Committee Report in the same
manner and procedure as it votes on a bill
on third and final reading.

10

Rule XII, Section 35 of the Rules of the Senate states:


Sec. 35. In the event that the
Senate does not agree with the House of
Representatives on the provision of any bill
or joint resolution, the differences shall be
settled by a conference committee of both
Houses which shall meet within ten (10)
days after their composition. The President
shall designate the members of the Senate
Panel in the conference committee with the
approval of the Senate.
Each
Conference
Committee
Report shall contain a detailed and
sufficiently explicit statement of the changes
in, or amendments to the subject measure,
and shall be signed by a majority of the
members of each House panel, voting
separately.
A comparative presentation of the
conflicting House and Senate provisions and
a reconciled version thereof with the
explanatory statement of the conference
committee shall be attached to the report.
...
The creation of such conference committee was
apparently in response to a problem, not addressed by any
constitutional provision, where the two houses of Congress find
themselves in disagreement over changes or amendments
introduced by the other house in a legislative bill. Given that
one of the most basic powers of the legislative branch is to
formulate and implement its own rules of proceedings and to
discipline its members, may the Court then delve into the
details of how Congress complies with its internal rules or how
it conducts its business of passing legislation? Note that in the
present petitions, the issue is not whether provisions of the
rules of both houses creating the bicameral conference
committee are unconstitutional, but whether the bicameral
conference committee has strictly complied with the rules
of both houses, thereby remaining within the jurisdiction
conferred upon it by Congress.
In the recent case of Farias vs. The Executive
Secretary,[20] the Court En Banc, unanimously reiterated and
emphasized its adherence to the enrolled bill doctrine, thus,
declining therein petitioners plea for the Court to go behind the
enrolled copy of the bill. Assailed in said case was Congresss
creation of two sets of bicameral conference committees, the
lack of records of said committees proceedings, the alleged
violation of said committees of the rules of both houses, and
the disappearance or deletion of one of the provisions in the
compromise bill submitted by the bicameral conference
committee. It was argued that such irregularities in the
passage of the law nullified R.A. No. 9006, or the Fair Election
Act.
Striking down such argument, the Court held thus:
Under the enrolled bill doctrine, the
signing of a bill by the Speaker of the House

and the Senate President and the


certification of the Secretaries of both
Houses of Congress that it was passed are
conclusive of its due enactment. A review of
cases reveals the Courts consistent
adherence to the rule. The Court finds no
reason to deviate from the salutary rule in
this case where the irregularities alleged
by the petitioners mostly involved the
internal rules of Congress, e.g., creation
of the 2nd or 3rd Bicameral Conference
Committee by the House. This Court is
not the proper forum for the enforcement
of these internal rules of Congress,
whether House or Senate. Parliamentary
rules are merely procedural and with their
observance the courts have no concern.
Whatever doubts there may be as to the
formal validity of Rep. Act No. 9006 must
be resolved in its favor. The Court
reiterates its ruling inArroyo vs. De
Venecia, viz.:
But
the cases,
both here and abroad, in
varying
forms
of
expression, all deny to
the courts the power to
inquire into allegations
that, in enacting a law, a
House
of
Congress
failed to comply with its
own
rules,
in
the
absence of showing that
there was a violation of a
constitutional provision
or the rights of private
individuals. InOsmea v.
Pendatun, it was held: At
any rate, courts have
declared that the rules
adopted by deliberative
bodies are subject to
revocation, modification or
waiver at the pleasure of
the
body
adopting
them. And it has been
said that Parliamentary
rules
are
merely
procedural, and with
their observance, the
courts have no concern.
They may be waived or
disregarded
by
the
legislative
body.
Consequently,
mere
failure to conform to
parliamentary usage will
not invalidate the action
(taken by a deliberative
body) when the requisite
number of members
have
agreed
to
a
particular
measure.
[21]
(Emphasis supplied)

11

The foregoing declaration is exactly in point with the


present cases, where petitioners allege irregularities committed
by the conference committee in introducing changes or
deleting provisions in the House and Senate bills. Akin to
the Farias case,[22] the present petitions also raise an issue
regarding the actions taken by the conference committee on
matters regarding Congress compliance with its own internal
rules. As stated earlier, one of the most basic and inherent
power of the legislature is the power to formulate rules for its
proceedings and the discipline of its members. Congress is the
best judge of how it should conduct its own business
expeditiously and in the most orderly manner. It is also the sole
concern of Congress to instill discipline among the members of
its conference committee if it believes that said members
violated any of its rules of proceedings. Even the expanded
jurisdiction of this Court cannot apply to questions regarding
only the internal operation of Congress, thus, the Court is wont
to deny a review of the internal proceedings of a co-equal
branch of government.
Moreover, as far back as 1994 or more than ten years
ago, in the case of Tolentino vs. Secretary of Finance,[23] the
Court already made the pronouncement that [i]f a change is
desired in the practice [of the Bicameral Conference
Committee] it must be sought in Congress since this
question is not covered by any constitutional provision
but is only an internal rule of each house. [24] To date,
Congress has not seen it fit to make such changes adverted to
by the Court. It seems, therefore, that Congress finds the
practices of the bicameral conference committee to be very
useful for purposes of prompt and efficient legislative action.
Nevertheless, just to put minds at ease that no blatant
irregularities tainted the proceedings of the bicameral
conference committees, the Court deems it necessary to dwell
on the issue. The Court observes that there was a necessity
for a conference committee because a comparison of the
provisions of House Bill Nos. 3555 and 3705 on one hand, and
Senate Bill No. 1950 on the other, reveals that there were
indeed disagreements. As pointed out in the petitions, said
disagreements were as follows:
House
Bill
No. 3555

House
No.3705

Bill

Senate Bill No.


1950

With regard to Stand-By Authority in favor of


President

Provides for
12% VAT on
every sale of
goods
or
properties
(amending
Sec. 106 of
NIRC); 12%
VAT
on
importation of
goods
(amending
Sec. 107 of
NIRC);
and
12% VAT on

Provides
for
12% VAT in
general on sales
of
goods
or
properties and
reduced
rates
for
sale
of
certain
locally
manufactured
goods
and
petroleum
products
and
raw materials to
be used in the
manufacture

Provides for a
single rate of
10% VAT on sale
of
goods
or
properties
(amending Sec.
106 of NIRC),
10% VAT on sale
of
services
including sale of
electricity
by
generation
companies,
transmission and
distribution

sale
of
services and
use or lease
of properties
(amending
Sec. 108 of
NIRC)

thereof
(amending Sec.
106 of NIRC);
12% VAT on
importation
of
goods
and
reduced
rates
for
certain
imported
products
including
petroleum
products
(amending Sec.
107 of NIRC);
and 12% VAT on
sale of services
and use or lease
of
properties
and a reduced
rate for certain
services
including power
generation
(amending Sec.
108 of NIRC)

companies, and
use or lease of
properties
(amending Sec.
108 of NIRC)

With regard to the no pass-on provision

No
similar
provision

Provides
that
the
VAT
imposed
on
power
generation and
on the sale of
petroleum
products
shall
be absorbed by
generation
companies
or
sellers,
respectively, and
shall not be
passed on to
consumers

Provides that the


VAT imposed on
sales
of
electricity
by
generation
companies and
services
of
transmission
companies and
distribution
companies,
as
well as those of
franchise
grantees
of
electric
utilities
shall not apply to
residential
end-users. VAT
shall
be
absorbed
by
generation,
transmission,
and distribution
companies.
With regard to 70% limit on input tax credit

Provides that
the input tax
credit
for
capital goods
on which a
VAT has been
paid shall be

No
similar
provision

Provides that the


input tax credit
for capital goods
on which a VAT
has been paid
shall be equally
distributed over 5

12

equally
distributed
over 5 years
or
the
depreciable
life of such
capital goods;
the input tax
credit
for
goods
and
services other
than
capital
goods
shall
not
exceed
5% of the
total amount
of such goods
and services;
and
for
persons
engaged
in
retail trading
of goods, the
allowable
input
tax
credit
shall
not
exceed
11% of the
total amount
of
goods
purchased.

years
or
the
depreciable life
of such capital
goods; the input
tax credit for
goods
and
services
other
than
capital
goods shall not
exceed 90% of
the output VAT.

1. With regard to the disagreement on the rate of VAT


to be imposed, it would appear from the Conference
Committee Report that the Bicameral Conference Committee
tried to bridge the gap in the difference between the 10% VAT
rate proposed by the Senate, and the various rates with 12%
as the highest VAT rate proposed by the House, by striking a
compromise whereby the present 10% VAT rate would be
retained until certain conditions arise, i.e., the value-added tax
collection as a percentage of gross domestic product (GDP) of
the previous year exceeds 2 4/5%, or National Government
deficit as a percentage of GDP of the previous year exceeds
1%, when the President, upon recommendation of the
Secretary of Finance shall raise the rate of VAT to 12%
effective January 1, 2006.
2. With regard to the disagreement on whether only
the VAT imposed on electricity generation, transmission and
distribution companies should not be passed on to consumers
or whether both the VAT imposed on electricity generation,
transmission and distribution companies and the VAT imposed
on sale of petroleum products may be passed on to
consumers, the Bicameral Conference Committee chose to
settle such disagreement by altogether deleting from its Report
any no pass-on provision.

With regard to amendments to be made to NIRC


provisions regarding income and excise taxes

No
similar
provision

of both houses of Congress to act on the same by settling said


differences and/or disagreements. The Bicameral Conference
Committee acted on the disagreeing provisions by making the
following changes:

No
similar
provision

Provided
for
amendments to
several
NIRC
provisions
regarding
corporate
income,
percentage,
franchise
and
excise taxes

The disagreements between the provisions in the


House bills and the Senate bill were with regard to (1) what
rate of VAT is to be imposed; (2) whether only the VAT imposed
on electricity generation, transmission and distribution
companies should not be passed on to consumers, as
proposed in the Senate bill, or both the VAT imposed on
electricity generation, transmission and distribution companies
and the VAT imposed on sale of petroleum products should not
be passed on to consumers, as proposed in the House bill; (3)
in what manner input tax credits should be limited; (4) and
whether the NIRC provisions on corporate income taxes,
percentage, franchise and excise taxes should be amended.
There being differences and/or disagreements on the
foregoing provisions of the House and Senate bills, the
Bicameral Conference Committee was mandated by the rules

3. With regard to the disagreement on whether input


tax credits should be limited or not, the Bicameral Conference
Committee decided to adopt the position of the House by
putting a limitation on the amount of input tax that may be
credited against the output tax, although it crafted its own
language as to the amount of the limitation on input tax credits
and the manner of computing the same by providing thus:
(A) Creditable Input Tax. . .
.
...
Provided, The input tax on
goods
purchased
or
imported in a calendar
month for use in trade or
business
for
which
deduction for depreciation
is allowed under this
Code, shall be spread
evenly over the month of
acquisition and the fiftynine
(59)
succeeding
months if the aggregate
acquisition cost for such
goods, excluding the VAT
component
thereof,
exceeds one million Pesos
(P1,000,000.00):
PROVIDED, however, that
if the estimated useful life
of the capital good is less
than five (5) years, as
used
for
depreciation

13

purposes, then the input


VAT shall be spread over
such shorter period: . . .
(B) Excess Output or Input
Tax. If at the end of any
taxable quarter the output
tax exceeds the input tax,
the excess shall be paid
by
the
VAT-registered
person. If the input tax
exceeds the output tax,
the excess shall be carried
over to the succeeding
quarter
or
quarters:
PROVIDED that the input
tax inclusive of input VAT
carried over from the
previous quarter that may
be credited in every
quarter shall not exceed
seventy percent (70%) of
the
output
VAT:
PROVIDED, HOWEVER,
THAT any input tax
attributable to zero-rated
sales by a VAT-registered
person may at his option
be refunded or credited
against
other
internal
revenue taxes, . . .
4. With regard to the amendments to other provisions
of the NIRC on corporate income tax, franchise, percentage
and excise taxes, the conference committee decided to include
such amendments and basically adopted the provisions found
in Senate Bill No. 1950, with some changes as to the rate of
the tax to be imposed.
Under the provisions of both the Rules of the House
of Representatives and Senate Rules, the Bicameral
Conference Committee is mandated to settle the differences
between the disagreeing provisions in the House bill and the
Senate bill. The term settle is synonymous to reconcile and
harmonize.[25] To reconcile
or harmonize
disagreeing
provisions, the Bicameral Conference Committee may then (a)
adopt the specific provisions of either the House bill or Senate
bill, (b) decide that neither provisions in the House bill or the
provisions in the Senate bill would
be carried into the final form of the bill, and/or (c) try to arrive at
a compromise between the disagreeing provisions.
In the present case, the changes introduced by the
Bicameral Conference Committee on disagreeing provisions
were meant only to reconcile and harmonize the disagreeing
provisions for it did not inject any idea or intent that is wholly
foreign to the subject embraced by the original provisions.
The so-called stand-by authority in favor of the
President, whereby the rate of 10% VAT wanted by the Senate
is retained until such time that certain conditions arise when
the 12% VAT wanted by the House shall be imposed, appears
to be a compromise to try to bridge the difference in the rate of
VAT proposed by the two houses of Congress. Nevertheless,

such compromise is still totally within the subject of what rate


of VAT should be imposed on taxpayers.
The no pass-on provision was deleted altogether. In
the transcripts of the proceedings of the Bicameral Conference
Committee held on May 10, 2005, Sen. Ralph Recto,
Chairman of the Senate Panel, explained the reason for
deleting the no pass-on provision in this wise:
. . . the thinking was just to keep the
VAT law or the VAT bill simple. And we were
thinking that no sector should be a
beneficiary of legislative grace, neither
should any sector be discriminated on. The
VAT is an indirect tax. It is a pass on-tax.
And lets keep it plain and simple. Lets not
confuse the bill and put a no pass-on
provision. Two-thirds of the world have a VAT
system and in this two-thirds of the globe, I
have yet to see a VAT with a no pass-though
provision. So, the thinking of the Senate is
basically simple, lets keep the VAT simple.[26]
(Emphasis supplied)
Rep. Teodoro Locsin further made the manifestation
that the no pass-on provision never really enjoyed the support
of either House.[27]
With regard to the amount of input tax to be credited
against output tax, the Bicameral Conference Committee came
to a compromise on the percentage rate of the limitation or cap
on such input tax credit, but again, the change introduced by
the Bicameral Conference Committee was totally within the
intent of both houses to put a cap on input tax that may be
credited against the output tax. From the inception of the
subject revenue bill in the House of Representatives, one of
the major objectives was to plug a glaring loophole in the tax
policy and administration by creating vital restrictions on the
claiming of input VAT tax credits . . . and [b]y introducing
limitations on the claiming of tax credit, we are capping a major
leakage that has placed our collection efforts at an apparent
disadvantage.[28]
As to the amendments to NIRC provisions on taxes
other than the value-added tax proposed in Senate Bill No.
1950, since said provisions were among those referred to it,
the conference committee had to act on the same and it
basically adopted the version of the Senate.
Thus, all the changes or modifications made by the
Bicameral Conference Committee were germane to subjects of
the provisions referred
to it for reconciliation. Such being the case, the Court does not
see any grave abuse of discretion amounting to lack or excess
of jurisdiction committed by the Bicameral Conference
Committee. In the earlier cases of Philippine Judges
Association vs. Prado[29] and Tolentino vs. Secretary of
Finance,[30] the Court recognized the long-standing legislative
practice of giving said conference committee ample latitude for
compromising differences between the Senate and the House.
Thus, in the Tolentino case, it was held that:
. . . it is within the power of a
conference committee to include in its report
an entirely new provision that is not found
either in the House bill or in the Senate bill. If
the committee can propose an amendment

14

consisting of one or two provisions, there is


no reason why it cannot propose several
provisions, collectively considered as an
amendment in the nature of a substitute, so
long as such amendment is germane to the
subject of the bills before the committee.
After all, its report was not final but needed
the approval of both houses of Congress to
become valid as an act of the legislative
department. The charge that in this case
the Conference Committee acted as a
third legislative chamber is thus without
any basis.[31] (Emphasis supplied)
B. R.A. No. 9337 Does
Not Violate Article
VI, Section 26(2)
of
the
Constitution
on
the
NoAmendment Rule
Article VI, Sec. 26 (2) of the Constitution, states:
No bill passed by either House shall
become a law unless it has passed three
readings on separate days, and printed
copies thereof in its final form have been
distributed to its Members three days before
its passage, except when the President
certifies to the necessity of its immediate
enactment to meet a public calamity or
emergency. Upon the last reading of a bill,
no amendment thereto shall be allowed, and
the vote thereon shall be taken immediately
thereafter, and the yeas and nays entered in
the Journal.
Petitioners argument that the practice where a
bicameral conference committee is allowed to add or delete
provisions in the House bill and the Senate bill after these had
passed three readings is in effect a circumvention of the no
amendment rule (Sec. 26 (2), Art. VI of the 1987 Constitution),
fails to convince the Court to deviate from its ruling in
the Tolentino case that:
Nor is there any reason for
requiring that the Committees Report in
these cases must have undergone three
readings in each of the two houses. If that be
the case, there would be no end to
negotiation since each house may seek
modification of the compromise bill. . . .
Art. VI. 26 (2) must, therefore, be
construed as referring only to bills
introduced for the first time in either
house of Congress, not to the conference
committee report.[32](Emphasis supplied)
The Court reiterates here that the no-amendment
rule refers only to the procedure to be followed by each
house of Congress with regard to bills initiated in each of

said respective houses, before said bill is transmitted to


the other house for its concurrence or amendment. Verily,
to construe said provision in a way as to proscribe any further
changes to a bill after one house has voted on it would lead to
absurdity as this would mean that the other house of Congress
would be deprived of its constitutional power to amend or
introduce changes to said bill. Thus, Art. VI, Sec. 26 (2) of the
Constitution cannot be taken to mean that the introduction by
the Bicameral Conference Committee of amendments and
modifications to disagreeing provisions in bills that have been
acted upon by both houses of Congress is prohibited.
C. R.A. No. 9337 Does
Not Violate Article
VI, Section 24 of
the Constitution
on
Exclusive
Origination
of
Revenue Bills
Coming to the issue of the validity of the amendments
made regarding the NIRC provisions on corporate income
taxes and percentage, excise taxes. Petitioners refer to the
following provisions, to wit:
Section
27

Rates
of
Income Tax
on Domestic
Corporation

28(A)
(1)

Tax
on
Resident
Foreign
Corporation

28(B)
(1)

Intercorporate
Dividends

34(B)
(1)

Intercorporate
Dividends

116

Tax
on
Persons
Exempt from
VAT

117

Percentage
Tax
on
domestic
carriers and
keepers
of
Garage

119

Tax
on
franchises

121

Tax on banks
and
NonBank
Financial
Intermediarie
s

148

Excise
on

Tax

15

manufacture
d oils and
other fuels
151

Excise
Tax
on
mineral
products

236

Registration
requirements

237

Issuance of
receipts
or
sales
or
commercial
invoices

288

Disposition of
Incremental
Revenue

Petitioners claim that the amendments to these


provisions of the NIRC did not at all originate from the House.
They aver that House Bill No. 3555 proposed amendments
only regarding Sections 106, 107, 108, 110 and 114 of the
NIRC, while House Bill No. 3705 proposed amendments only
to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus,
the other sections of the NIRC which the Senate amended but
which amendments were not found in the House bills are not
intended to be amended by the House of Representatives.
Hence, they argue that since the proposed amendments did
not originate from the House, such amendments are a violation
of Article VI, Section 24 of the Constitution.
The argument does not hold water.
Article VI, Section 24 of the Constitution reads:
Sec. 24. 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.
In the present cases, petitioners admit that it was
indeed House Bill Nos. 3555 and 3705 that initiated the move
for amending provisions of the NIRC dealing mainly with the
value-added tax. Upon transmittal of said House bills to the
Senate, the Senate came out with Senate Bill No. 1950
proposing amendments not only to NIRC provisions on the
value-added tax but also amendments to NIRC provisions on
other kinds of taxes. Is the introduction by the Senate of
provisions not dealing directly with the value- added tax, which
is the only kind of tax being amended in the House bills, still
within the purview of the constitutional provision authorizing the
Senate to propose or concur with amendments to a revenue
bill that originated from the House?

emphasize this, because a bill originating in


the House may undergo such extensive
changes in the Senate that the result may be
a rewriting of the whole. . . . At this point,
what is important to note is that, as a result
of the Senate action, a distinct bill may be
produced. To insist that a revenue statute
and not only the bill which initiated the
legislative process culminating in the
enactment of the law must substantially
be the same as the House bill would be to
deny the Senates power not only
to concur with amendments but also
to propose amendments. It would be to
violate the coequality of legislative power of
the two houses of Congress and in fact
make the House superior to the Senate.
Given, then, the power of the
Senate to propose amendments, the
Senate can propose its own version even
with respect to bills which are required by
the Constitution to originate in the House.
...
Indeed, what the Constitution
simply means is that the initiative for filing
revenue, tariff or tax bills, bills authorizing an
increase of the public debt, private bills and
bills of local application must come from the
House of Representatives on the theory that,
elected as they are from the districts, the
members of the House can be expected
to be more sensitive to the local needs
and problems. On the other hand, the
senators, who are elected at large, are
expected to approach the same problems
from the national perspective. Both views
are thereby made to bear on the
enactment of such laws.[33] (Emphasis
supplied)
Since there is no question that the revenue bill
exclusively originated in the House of Representatives, the
Senate was acting within its
constitutional power to introduce amendments to the House bill
when it included provisions in Senate Bill No. 1950 amending
corporate income taxes, percentage, excise and franchise
taxes. Verily, Article VI, Section 24 of the Constitution does not
contain any prohibition or limitation on the extent of the
amendments that may be introduced by the Senate to the
House revenue bill.

The foregoing question had been squarely answered


in the Tolentino case, wherein the Court held, thus:

Furthermore, the amendments introduced by the


Senate to the NIRC provisions that had not been touched in
the House bills are still in furtherance of the intent of the House
in initiating the subject revenue bills. The Explanatory Note of
House Bill No. 1468, the very first House bill introduced on the
floor, which was later substituted by House Bill No. 3555,
stated:

. . . To begin with, it is not the law


but the revenue bill which is required by the
Constitution to originate exclusively in the
House of Representatives. It is important to

One of the challenges faced by the


present administration is the urgent and
daunting task of solving the countrys serious
financial problems. To do this, government

16

expenditures must be strictly monitored and


controlled and revenues must be significantly
increased. This may be easier said than
done, but our fiscal authorities are still
optimistic the government will be operating
on a balanced budget by the year 2009. In
fact, several measures that will result to
significant expenditure savings have been
identified by the administration. It is
supported with a credible package of
revenue measures that include measures
to improve tax administration and control
the leakages in revenues from income
taxes and the value-added tax (VAT).
(Emphasis supplied)
Rep. Eric D. Singson, in his sponsorship speech for
House Bill No. 3555, declared that:
In the budget message of our
President in the year 2005, she reiterated
that we all acknowledged that on top of our
agenda must be the restoration of the health
of our fiscal system.
In order to considerably lower the
consolidated public sector deficit and
eventually achieve a balanced budget by the
year 2009, we need to seize windows of
opportunities which might seem poignant
in the beginning, but in the long run
prove effective and beneficial to the
overall status of our economy. One such
opportunity is a review of existing tax
rates, evaluating the relevance given our
present conditions.[34] (Emphasis supplied)
Notably therefore, the main purpose of the bills
emanating from the House of Representatives is to bring in
sizeable revenues for the government
to supplement our countrys serious financial problems, and
improve tax administration and control of the leakages in
revenues from income taxes and value-added taxes. As these
house bills were transmitted to the Senate, the latter,
approaching the measures from the point of national
perspective, can introduce amendments within the purposes of
those bills. It can provide for ways that would soften the impact
of the VAT measure on the consumer, i.e., by distributing the
burden across all sectors instead of putting it entirely on the
shoulders of the consumers. The sponsorship speech of Sen.
Ralph Recto on why the provisions on income tax on
corporation were included is worth quoting:
All in all, the proposal of the Senate
Committee on Ways and Means will
raise P64.3 billion in additional revenues
annually even while by mitigating prices of
power, services and petroleum products.
However, not all of this will be
wrung out of VAT. In fact, only P48.7 billion
amount is from the VAT on twelve goods and
services. The rest of the tab P10.5 billionwill be picked by corporations.

What we therefore prescribe is a


burden
sharing
between
corporate Philippines and the consumer.
Why should the latter bear all the pain? Why
should the fiscal salvation be only on the
burden of the consumer?
The corporate worlds equity is in
form of the increase in the corporate income
tax from 32 to 35 percent, but up to 2008
only. This will raise P10.5 billion a year. After
that, the rate will slide back, not to its old rate
of 32 percent, but two notches lower, to 30
percent.
Clearly, we are telling those with the
capacity to pay, corporations, to bear with
this emergency provision that will be in effect
for 1,200 days, while we put our fiscal house
in order. This fiscal medicine will have an
expiry date.
For their assistance, a reward of tax
reduction awaits them. We intend to keep the
length of their sacrifice brief. We would like
to assure them that not because there is a
light at the end of the tunnel, this
government will keep on making the tunnel
long.
The responsibility will not rest solely
on the weary shoulders of the small man. Big
business will be there to share the burden.[35]
As the Court has said, the Senate can propose
amendments and in fact, the amendments made on provisions
in the tax on income of corporations are germane to the
purpose of the house bills which is to raise revenues for the
government.
Likewise, the Court finds the sections referring to
other percentage and excise taxes germane to the reforms to
the VAT system, as these sections would cushion the effects of
VAT on consumers. Considering that certain goods and
services which were subject to percentage tax and excise tax
would no longer be VAT-exempt, the consumer would be
burdened more as they would be paying the VAT in addition to
these taxes. Thus, there is a need to amend these sections to
soften the impact of VAT. Again, in his sponsorship speech,
Sen. Recto said:
However, for power plants that run
on oil, we will reduce to zero the present
excise tax on bunker fuel, to lessen the effect
of a VAT on this product.
For electric utilities like Meralco, we
will wipe out the franchise tax in exchange
for a VAT.
And in the case of petroleum, while
we will levy the VAT on oil products, so as
not to destroy the VAT chain, we will
however bring down the excise tax on

17

socially sensitive products such as diesel,


bunker, fuel and kerosene.
...
What do all these exercises point
to? These are not contortions of giving to the
left hand what was taken from the right.
Rather, these sprang from our concern of
softening the impact of VAT, so that the
people can cushion the blow of higher prices
they will have to pay as a result of VAT.[36]
The other sections amended by the Senate pertained
to matters of tax administration which are necessary for the
implementation of the changes in the VAT system.
To reiterate, the sections introduced by the Senate
are germane to the subject matter and purposes of the house
bills, which is to supplement our countrys fiscal deficit, among
others. Thus, the Senate acted within its power to propose
those amendments.
SUBSTANTIVE ISSUES
I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article VI, Section 28(2)
A.

No

Undue
Delegati
on
of
Legislati
ve
Power

or exchanged, such tax to


be paid by the seller or
transferor: provided,
that the President, upon
the recommendation of
the Secretary of Finance,
shall, effective January
1, 2006, raise the rate of
value-added
tax
to
twelve percent (12%),
after any of the following
conditions has been
satisfied.
(i)

value-added
tax collection as
a percentage of
Gross Domestic
Product (GDP)
of the previous
year
exceeds
two and fourfifth percent (2
4/5%) or

(ii) national government


deficit
as
a
percentage
of
GDP
of
the
previous
year
exceeds
one
and
one-half
percent (1 %).
SEC. 5. Section 107 of the same
Code, as amended, is hereby further
amended to read as follows:

Petitioners ABAKADA GURO Party List, et al.,


Pimentel, Jr., et al., and Escudero, et al. contend in common
that Sections 4, 5 and 6 of R.A. No. 9337, amending Sections
106, 107 and 108, respectively, of the NIRC giving the
President the stand-by authority to raise the VAT rate from 10%
to 12% when a certain condition is met, constitutes undue
delegation of the legislative power to tax.
The assailed provisions read as follows:
SEC. 4. Sec. 106 of the same
Code, as amended, is hereby further
amended to read as follows:
SEC. 106. Value-Added
on Sale of Goods or Properties.
(A) Rate and Base of Tax.
There shall be levied,
assessed and collected on
every sale, barter or
exchange of goods or
properties, a value-added
tax equivalent to ten
percent (10%) of the gross
selling price or gross value
in money of the goods or
properties sold, bartered

Tax

SEC. 107. Value-Added Tax on


Importation of Goods.
(A) In General. There shall
be levied, assessed and
collected
on
every
importation of goods a
value-added tax equivalent
to ten percent (10%)
based on the total value
used by the Bureau of
Customs in determining
tariff and customs duties,
plus
customs
duties,
excise taxes, if any, and
other charges, such tax to
be paid by the importer
prior to the release of such
goods
from
customs
custody: Provided, That
where the customs duties
are determined on the
basis of the quantity or
volume of the goods, the
value-added tax shall be
based on the landed cost
plus excise taxes, if
any: provided,
further,
that the President, upon
the recommendation of

18

the Secretary of Finance,


shall, effective January
1, 2006, raise the rate of
value-added
tax
to
twelve percent (12%)
after any of the following
conditions has been
satisfied.
(i)

value-added
tax
collection as a
percentage
of
Gross Domestic
Product (GDP)
of the previous
year
exceeds
two and fourfifth percent (2
4/5%) or
(ii) national government
deficit
as
a
percentage
of
GDP
of
the
previous
year
exceeds
one
and
one-half
percent (1 %).
SEC. 6. Section 108 of the same
Code, as amended, is hereby further
amended to read as follows:

SEC. 108. Value-added


Tax on Sale of Services
and Use or Lease of
Properties
(A) Rate and Base of Tax.
There shall be levied,
assessed and collected, a
value-added tax equivalent
to ten percent (10%) of
gross receipts derived
from the sale or exchange
of services: provided, that
the President, upon the
recommendation of the
Secretary of Finance,
shall, effective January
1, 2006, raise the rate of
value-added
tax
to
twelve percent (12%),
after any of the following
conditions has been
satisfied.
(i)

value-added
tax
collection as a
percentage
of
Gross Domestic
Product (GDP)
of the previous
year
exceeds
two and four-

fifth percent (2
4/5%) or
(ii) national government
deficit
as
a
percentage
of
GDP
of
the
previous
year
exceeds
one
and
one-half
percent
(1
%). (Emphasis
supplied)
Petitioners allege that the grant of the stand-by
authority to the President to increase the VAT rate is a virtual
abdication by Congress of its exclusive power to tax because
such delegation is not within the purview of Section 28 (2),
Article VI of the Constitution, which provides:
The Congress may, by law,
authorize the President to fix within specified
limits, and may impose, tariff rates, import
and export quotas, tonnage and wharfage
dues, and other duties or imposts within the
framework of the national development
program of the government.
They argue that the VAT is a tax levied on the sale,
barter or exchange of goods and properties as well as on the
sale or exchange of services, which cannot be included within
the purview of tariffs under the exempted delegation as the
latter refers to customs duties, tolls or tribute payable upon
merchandise to the government and usually imposed on goods
or merchandise imported or exported.
Petitioners ABAKADA GURO Party List, et al., further
contend that delegating to the President the legislative power
to tax is contrary to republicanism. They insist that
accountability, responsibility and transparency should dictate
the actions of Congress and they should not pass to the
President the decision to impose taxes. They also argue that
the law also effectively nullified the Presidents power of
control, which includes the authority to set aside and nullify the
acts of her subordinates like the Secretary of Finance, by
mandating the fixing of the tax rate by the President upon the
recommendation of the Secretary of Finance.
Petitioners Pimentel, et al. aver that the President has
ample powers to cause, influence or create the conditions
provided by the law to bring about either or both the conditions
precedent.
On the other hand, petitioners Escudero, et al. find
bizarre and revolting the situation that the imposition of the
12% rate would be subject to the whim of the Secretary of
Finance, an unelected bureaucrat, contrary to the principle of
no taxation without representation. They submit that the
Secretary of Finance is not mandated to give a favorable
recommendation and he may not even give his
recommendation. Moreover, they allege that no guiding
standards are provided in the law on what basis and as to how
he will make his recommendation. They claim, nonetheless,
that any recommendation of the Secretary of Finance can
easily be brushed aside by the President since the former is a
mere alter ego of the latter, such that, ultimately, it is the

19

President who decides whether to impose the increased tax


rate or not.
A brief discourse on the principle of non-delegation of
powers is instructive.
The principle of separation of powers ordains that
each of the three great branches of government has exclusive
cognizance of and is supreme in matters falling within its own
constitutionally allocated sphere.[37] A logical
corollary to the doctrine of separation of powers is the principle
of non-delegation of powers, as expressed in the Latin
maxim: potestas delegata non delegari potest which means
what has been delegated, cannot be delegated. [38] This
doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be
performed by the delegate through the instrumentality of his
own judgment and not through the intervening mind of another.
[39]

legislative command is to be effected.[43] Both tests are


intended to prevent a total transference of legislative authority
to the delegate, who is not allowed to step into the shoes of the
legislature and exercise a power essentially legislative.[44]
In People vs. Vera,[45] the Court, through eminent
Justice Jose P. Laurel, expounded on the concept and extent
of delegation of power in this wise:
In testing whether a statute
constitutes an undue delegation of legislative
power or not, it is usual to inquire whether
the statute was complete in all its terms and
provisions when it left the hands of the
legislature so that nothing was left to the
judgment of any other appointee or delegate
of the legislature.
...

With respect to the Legislature, Section 1 of Article VI


of the Constitution provides that the Legislative power shall be
vested in the Congress of the Philippines which shall consist of
a Senate and a House of Representatives. The powers which
Congress is prohibited from delegating are those which are
strictly, or inherently and exclusively, legislative. Purely
legislative power, which can never be delegated, has been
described as the authority to make a complete law
complete as to the time when it shall take effect and as to
whom it shall be applicable and to determine the
expediency of its enactment.[40] Thus, the rule is that in order
that a court may be justified in holding a statute
unconstitutional as a delegation of legislative power, it must
appear that the power involved is purely legislative in nature
that is, one appertaining exclusively to the legislative
department. It is the nature of the power, and not the liability of
its use or the manner of its exercise, which determines the
validity of its delegation.
Nonetheless, the general rule barring delegation of
legislative powers is subject to the following recognized
limitations or exceptions:
(1) Delegation of tariff powers to the
President under Section 28 (2) of
Article VI of the Constitution;
(2) Delegation of emergency powers to the
President under Section 23 (2) of
Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be


a showing that the delegation itself is valid. It is valid only if the
law (a) is complete in itself, setting forth therein the policy to be
executed, carried out, or implemented by the delegate;[41] and
(b) fixes a standard the limits of which are sufficiently
determinate and determinable to which the delegate must
conform in the performance of his functions. [42] A sufficient
standard is one which defines legislative policy, marks its
limits, maps out its boundaries and specifies the public agency
to apply it. It indicates the circumstances under which the

The true distinction, says Judge


Ranney, is between the delegation of
power to make the law, which necessarily
involves a discretion as to what it shall
be, and conferring an authority or
discretion as to its execution, to be
exercised under and in pursuance of the
law. The first cannot be done; to the latter
no valid objection can be made.
...
It is contended, however, that a
legislative act may be made to the effect as
law after it leaves the hands of the
legislature. It is true that laws may be made
effective on certain contingencies, as by
proclamation of the executive or the adoption
by the people of a particular community. In
Wayman vs. Southard, the Supreme Court of
the United States ruled that the legislature
may delegate a power not legislative which it
may itself rightfully exercise. The power to
ascertain facts is such a power which
may be delegated. There is nothing
essentially legislative in ascertaining the
existence of facts or conditions as the
basis of the taking into effect of a law.
That is a mental process common to all
branches
of
the
government.Notwithstanding the apparent
tendency, however, to relax the rule
prohibiting delegation of legislative authority
on account of the complexity arising from
social and economic forces at work in this
modern industrial age, the orthodox
pronouncement of Judge Cooley in his work
on
Constitutional
Limitations
finds
restatement in Prof. Willoughby's treatise on
the Constitution of the United States in the
following language speaking of declaration of
legislative
power
to
administrative
agencies: The principle which permits the
legislature
to
provide
that
the
administrative agent may determine when
the circumstances are such as require
the application of a law is defended upon

20

the ground that at the time this authority


is granted, the rule of public policy, which
is the essence of the legislative act, is
determined by the legislature. In other
words, the legislature, as it is its duty to
do, determines that, under given
circumstances, certain executive or
administrative action is to be taken, and
that, under other circumstances, different
or no action at all is to be taken. What is
thus left to the administrative official is
not the legislative determination of what
public policy demands, but simply the
ascertainment of what the facts of the
case require to be done according to the
terms of the law by which he is governed.
The efficiency of an Act as a declaration
of legislative will must, of course, come
from Congress, but the ascertainment of
the contingency upon which the Act shall
take effect may be left to such agencies
as it may designate. The legislature, then,
may provide that a law shall take effect
upon the happening of future specified
contingencies leaving to some other
person or body the power to determine
when the specified contingency has
arisen. (Emphasis supplied).[46]
In Edu vs. Ericta,[47] the Court reiterated:

limitations on their authority.[49] While the power to tax cannot


be delegated to executive agencies, details as to the
enforcement and administration of an exercise of such power
may be left to them, including the power to determine the
existence of facts on which its operation depends.[50]
The rationale for this is that the preliminary
ascertainment of facts as basis for the enactment of legislation
is not of itself a legislative function, but is simply ancillary to
legislation. Thus, the duty of correlating information and
making recommendations is the kind of subsidiary activity
which the legislature may perform through its members, or
which it may delegate to others to perform. Intelligent
legislation on the complicated problems of modern society is
impossible in the absence of accurate information on the part
of the legislators, and any reasonable method of securing such
information is proper.[51] The Constitution as a continuously
operative charter of government does not require that
Congress find for itself
every fact upon which it desires to base legislative action or
that it make for itself detailed determinations which it has
declared to be prerequisite to application of legislative policy to
particular facts and circumstances impossible for Congress
itself properly to investigate.[52]
In the present case, the challenged section of R.A.
No. 9337 is the common proviso in Sections 4, 5 and 6 which
reads as follows:
That the President, upon the
recommendation of the Secretary of
Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve
percent (12%), after any of the following
conditions has been satisfied:

What cannot be delegated is the


authority under the Constitution to make
laws and to alter and repeal them; the test is
the completeness of the statute in all its
terms and provisions when it leaves the
hands of the legislature. To determine
whether or not there is an undue delegation
of legislative power, the inquiry must be
directed to the scope and definiteness of the
measure enacted. The legislative does not
abdicate its functions when it describes
what job must be done, who is to do it,
and what is the scope of his authority. For
a complex economy, that may be the only
way in which the legislative process can go
forward. A distinction has rightfully been
made between delegation of power to
make the laws which necessarily involves
a discretion as to what it shall be, which
constitutionally may not be done, and
delegation of authority or discretion as to
its execution to be exercised under and in
pursuance of the law, to which no valid
objection can be made. The Constitution is
thus not to be regarded as denying the
legislature the necessary resources of
flexibility and practicability. (Emphasis
supplied).[48]

The case before the Court is not a delegation of


legislative power. It is simply a delegation of ascertainment of
facts upon which enforcement and administration of the
increase rate under the law is contingent. The legislature has
made the operation of the 12% rate effective January 1, 2006,
contingent upon a specified fact or condition. It leaves the
entire operation or non-operation of the 12% rate upon factual
matters outside of the control of the executive.

Clearly, the legislature may delegate to executive


officers or bodies the power to determine certain facts or
conditions, or the happening of contingencies, on which the
operation of a statute is, by its terms, made to depend, but the
legislature must prescribe sufficient standards, policies or

No discretion would be exercised by the President.


Highlighting the absence of discretion is the fact that the
word shall is used in the common proviso. The use of the
word shall connotes a mandatory order. Its use in a statute
denotes an imperative obligation and is inconsistent with the
idea of discretion.[53] Where the law is clear and unambiguous,

(i)
Value-added
tax
collection
as
a
percentage
of
Gross
Domestic Product (GDP)
of the previous year
exceeds two and four-fifth
percent (2 4/5%); or
(ii)
National
government deficit as a
percentage of GDP of the
previous year exceeds one
and one-half percent (1
%).

21

it must be taken to mean exactly what it says, and courts have


no choice but to see to it that the mandate is obeyed.[54]
Thus, it is the ministerial duty of the President to
immediately impose the 12% rate upon the existence of any of
the conditions specified by Congress. This is a duty which
cannot be evaded by the President. Inasmuch as the law
specifically uses the word shall, the exercise of discretion by
the President does not come into play. It is a clear directive to
impose the 12% VAT rate when the specified conditions are
present. The time of taking into effect of the 12% VAT rate is
based on the happening of a certain specified contingency, or
upon the ascertainment of certain facts or conditions by a
person or body other than the legislature itself.
The Court finds no merit to the contention of
petitioners ABAKADA GURO Party List, et al. that the law
effectively nullified the Presidents power of control over the
Secretary of Finance by mandating the fixing of the tax rate by
the President upon the recommendation of the Secretary of
Finance. The Court cannot also subscribe to the position of
petitioners
Pimentel, et al. that the word shall should be interpreted to
mean may in view of the phrase upon the recommendation of
the Secretary of Finance. Neither does the Court find
persuasive the submission of petitioners Escudero, et al. that
any recommendation by the Secretary of Finance can easily be
brushed aside by the President since the former is a mere alter
ego of the latter.
When one speaks of the Secretary of Finance as the
alter ego of the President, it simply means that as head of the
Department of Finance he is the assistant and agent of the
Chief Executive. The multifarious executive and administrative
functions of the Chief Executive are performed by and through
the executive departments, and the acts of the secretaries of
such departments, such as the Department of Finance,
performed and promulgated in the regular course of business,
are, unless disapproved or reprobated by the Chief Executive,
presumptively the acts of the Chief Executive. The Secretary of
Finance, as such, occupies a political position and holds office
in an advisory capacity, and, in the language of Thomas
Jefferson, "should be of the President's bosom confidence"
and, in the language of Attorney-General Cushing, is subject to
the direction of the President."[55]
In the present case, in making his recommendation to
the President on the existence of either of the two conditions,
the Secretary of Finance is not acting as the alter ego of the
President or even her subordinate. In such instance, he is not
subject to the power of control and direction of the
President. He is acting as the agent of the legislative
department, to determine and declare the event upon which its
expressed will is to take effect. [56] The Secretary of Finance
becomes the means or tool by which legislative policy is
determined and implemented, considering that he possesses
all the facilities to gather data and information and has a much
broader perspective to properly evaluate them. His function is
to gather and collate statistical data and other pertinent
information and verify if any of the two conditions laid out by
Congress is present. His personality in such instance is in
reality but a projection of that of Congress. Thus, being the
agent of Congress and not of the President, the President
cannot alter or modify or nullify, or set aside the findings of the
Secretary of Finance and to substitute the judgment of the
former for that of the latter.

Congress simply granted the Secretary of Finance the


authority to ascertain the existence of a fact, namely, whether
by December 31, 2005, the value-added tax collection as a
percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or the national
government deficit as a percentage of GDP of the previous
year exceeds one and one-half percent (1%). If either of these
two instances has occurred, the Secretary of Finance, by
legislative mandate, must submit such information to the
President. Then the 12% VAT rate must be imposed by the
President effective January 1, 2006. There is no undue
delegation of legislative power but only of the discretion
as to the execution of a law. This is constitutionally
permissible.[57] Congress does not abdicate its functions or
unduly delegate power when it describes what job must be
done, who must do it, and what is the scope of his authority; in
our complex economy that is frequently the only way in which
the legislative process can go forward.[58]
As to the argument of petitioners ABAKADA
GURO Party List, et al. that delegating to the President the
legislative power to tax is contrary to the principle of
republicanism, the same deserves scant consideration.
Congress did not delegate the power to tax but the mere
implementation of the law. The intent and will to increase the
VAT rate to 12% came from Congress and the task of the
President is to simply execute the legislative policy. That
Congress chose to do so in such a manner is not within the
province of the Court to inquire into, its task being to interpret
the law.[59]
The insinuation by petitioners Pimentel, et al. that the
President has ample powers to cause, influence or create the
conditions to bring about either or both the conditions
precedent does not deserve any merit as this argument is
highly speculative. The Court does not rule on allegations
which are manifestly conjectural, as these may not exist at
all.The Court deals with facts, not fancies; on realities, not
appearances. When the Court acts on appearances instead of
realities, justice and law will be short-lived.
B. The 12% Increase VAT
Rate Does Not
Impose an Unfair
and Unnecessary
Additional
Tax
Burden
Petitioners Pimentel, et al. argue that the 12%
increase in the VAT rate imposes an unfair and additional tax
burden on the people. Petitioners also argue that the 12%
increase, dependent on any of the 2 conditions set forth in the
contested provisions, is ambiguous because it does not state if
the VAT rate would be returned to the original 10% if the rates
are no longer satisfied. Petitioners also argue that such rate is
unfair and unreasonable, as the people are unsure of the
applicable VAT rate from year to year.
Under the common provisos of Sections 4, 5 and 6 of
R.A. No. 9337, if any of the two conditions set forth therein are
satisfied, the President shall increase the VAT rate to 12%. The
provisions of the law are clear. It does not provide for a return
to the 10% rate nor does it empower the President to so revert
if, after the rate is increased to 12%, the VAT collection goes
below the 24/5 of the GDP of the previous year or that the

22

national government deficit as a percentage of GDP of the


previous year does not exceed 1%.
Therefore, no statutory construction or interpretation
is needed. Neither can conditions or limitations be introduced
where none is provided for. Rewriting the law is a forbidden
ground that only Congress may tread upon.[60]
Thus, in the absence of any provision providing for a
return to the 10% rate, which in this case the Court finds none,
petitioners argument is, at best, purely speculative. There is no
basis for petitioners fear of a fluctuating VAT rate because the
law itself does not provide that the rate should go back to 10%
if the conditions provided in Sections 4, 5 and 6 are no longer
present. The rule is that where the provision of the law is clear
and unambiguous, so that there is no occasion for the court's
seeking the legislative intent, the law must be taken as it is,
devoid of judicial addition or subtraction.[61]
Petitioners also contend that the increase in the VAT
rate, which was allegedly an incentive to the President to raise
the VAT collection to at least 2 4/5 of the GDP of the previous
year, should be based on fiscal adequacy.
Petitioners obviously overlooked that increase in VAT
collection is not the only condition. There is another
condition, i.e., the national government deficit as a percentage
of GDP of the previous year exceeds one and one-half percent
(1 %).
Respondents explained the philosophy behind these
alternative conditions:
1.

VAT/GDP Ratio > 2.8%

The condition set for increasing VAT


rate to 12% have economic or fiscal
meaning. If VAT/GDP is less than 2.8%, it
means that government has weak or no
capability of implementing the VAT or that
VAT is not effective in the function of the tax
collection. Therefore, there is no value to
increase it to 12% because such action will
also be ineffectual.

The principle of fiscal adequacy as a characteristic of


a sound tax system was originally stated by Adam Smith in
his Canons of Taxation (1776), as:
IV. Every tax ought to be so contrived as
both to take out and to keep out of
the pockets of the people as little as
possible over and above what it
brings into the public treasury of the
state.[63]
It simply means that sources of revenues must be
adequate to meet government expenditures and their
variations.[64]
The dire need for revenue cannot be ignored. Our
country is in a quagmire of financial woe. During the Bicameral
Conference Committee hearing, then Finance Secretary
Purisima bluntly depicted the countrys gloomy state of
economic affairs, thus:
First, let me explain the position
that the Philippines finds itself in right now.
We are in a position where 90 percent of our
revenue is used for debt service. So, for
every peso of revenue that we currently
raise, 90 goes to debt service. Thats interest
plus amortization of our debt. So clearly, this
is not a sustainable situation. Thats the first
fact.
The second fact is that our debt to
GDP level is way out of line compared to
other peer countries that borrow money from
that international financial markets. Our debt
to GDP is approximately equal to our GDP.
Again, that shows you that this is not a
sustainable situation.
The third thing that Id like to point
out is the environment that we are presently
operating in is not as benign as what it used
to be the past five years.
What do I mean by that?

2.

Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT


when deficit/GDP is 1.5% or less means the
fiscal condition of government has reached a
relatively sound position or is towards the
direction of a balanced budget position.
Therefore, there is no need to increase the
VAT rate since the fiscal house is in a
relatively healthy position. Otherwise stated,
if the ratio is more than 1.5%, there is indeed
a need to increase the VAT rate.[62]
That the first condition amounts to an incentive to the
President to increase the VAT collection does not render it
unconstitutional so long as there is a public purpose for which
the law was passed, which in this case, is mainly to raise
revenue. In fact, fiscal adequacy dictated the need for a raise
in revenue.

In the past five years, weve been


lucky because we were operating in a period
of basically global growth and low interest
rates. The past few months, we have seen
an inching up, in fact, a rapid increase in the
interest rates in the leading economies of the
world. And, therefore, our ability to borrow at
reasonable prices is going to be challenged.
In fact, ultimately, the question is our ability
to access the financial markets.
When the President made her
speech in July last year, the environment
was not as bad as it is now, at least based
on the forecast of most financial institutions.
So, we were assuming that raising 80 billion
would put us in a position where we can then
convince them to improve our ability to
borrow at lower rates. But conditions have
changed on us because the interest rates
have gone up. In fact, just within this room,

23

we tried to access the market for a billion


dollars because for this year alone,
the Philippines will have to borrow 4 billion
dollars. Of that amount, we have borrowed
1.5 billion. We issued last January a 25-year
bond at 9.7 percent cost. We were trying to
access last week and the market was not as
favorable and up to now we have not
accessed and we might pull back because
the conditions are not very good.
So given this situation, we at the
Department of Finance believe that we really
need to front-end our deficit reduction.
Because it is deficit that is causing the
increase of the debt and we are in what we
call a debt spiral. The more debt you have,
the more deficit you have because interest
and debt service eats and eats more of your
revenue. We need to get out of this debt
spiral. And the only way, I think, we can get
out of this debt spiral is really have a frontend adjustment in our revenue base.[65]
The image portrayed is chilling. Congress passed the
law hoping for rescue from an inevitable catastrophe. Whether
the law is indeed sufficient to answer the states economic
dilemma is not for the Court to judge. In the Farias case, the
Court refused to consider the various arguments raised therein
that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The
Fair Election Act), pronouncing that:
. . . policy matters are not the
concern of the Court. Government policy is
within the exclusive dominion of the political
branches of the government. It is not for this
Court to look into the wisdom or propriety of
legislative determination. Indeed, whether an
enactment is wise or unwise, whether it is
based on sound economic theory, whether it
is the best means to achieve the desired
results, whether, in short, the legislative
discretion within its prescribed limits should
be exercised in a particular manner are
matters for the judgment of the legislature,
and the serious conflict of opinions does not
suffice to bring them within the range of
judicial cognizance.[66]
In the same vein, the Court in this case will not
dawdle on the purpose of Congress or the executive policy,
given that it is not for the judiciary to "pass upon questions of
wisdom, justice or expediency of legislation.[67]
II.
Whether Section 8 of R.A. No. 9337, amending Sections
110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the
following provisions of the Constitution:
a. Article VI, Section 28(1), and
b. Article III, Section 1

A. Due Process and Equal Protection Clauses


Petitioners Association of Pilipinas Shell Dealers,
Inc., et al. argue that Section 8 of R.A. No. 9337, amending
Sections 110 (A)(2), 110 (B), and Section 12 of R.A. No. 9337,
amending Section 114 (C) of the NIRC are arbitrary,
oppressive, excessive and confiscatory. Their argument is
premised on the constitutional right against deprivation of life,
liberty of property without due process of law, as embodied in
Article III, Section 1 of the Constitution.
Petitioners also contend that these provisions violate
the constitutional guarantee of equal protection of the law.
The doctrine is 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.[68]
Section 8 of R.A. No. 9337, amending Section 110(B)
of the NIRC imposes a limitation on the amount of input tax
that may be credited against the output tax. It states, in part:
[P]rovided, that the input tax inclusive of the input VAT carried
over from the previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of the output
VAT:
Input Tax is defined under Section 110(A) of the
NIRC,
as
amended,
as
the
value-added
tax
due from or paid by a VAT-registered person on the importation
of goods or local purchase of good and services, including
lease or use of property, in the course of trade or business,
from a VAT-registered person, and Output Tax is the valueadded taxdue on the sale or lease of taxable goods or
properties or services by any person registered or required to
register under the law.
Petitioners claim that the contested sections impose
limitations on the amount of input tax that may be claimed. In
effect, a portion of the input tax that has already been paid
cannot now be credited against the output tax.
Petitioners argument is not absolute. It assumes that
the input tax exceeds 70% of the output tax, and therefore, the
input tax in excess of 70% remains uncredited. However, to the
extent that the input tax is less than 70% of the output tax, then
100% of such input tax is still creditable.
More importantly, the excess input tax, if any, is
retained in a businesss books of accounts and remains
creditable in the succeeding quarter/s. This is explicitly allowed
by Section 110(B), which provides that if the input tax exceeds
the output tax, the excess shall be carried over to the
succeeding quarter or quarters. In addition, Section 112(B)
allows a VAT-registered person to apply for the issuance of a
tax credit certificate or refund for any unused input taxes, to the
extent that such input taxes have not been applied against the
output taxes. Such unused input tax may be used in payment
of his other internal revenue taxes.
The non-application of the unutilized input tax in a
given quarter is not ad infinitum, as petitioners exaggeratedly
contend. Their analysis of the effect of the 70% limitation is
incomplete and one-sided. It ends at the net effect that there

24

will be unapplied/unutilized inputs VAT for a given quarter. It


does not proceed further to the fact that such
unapplied/unutilized input tax may be credited in the
subsequent periods as allowed by the carry-over provision of
Section 110(B) or that it may later on be refunded through a tax
credit certificate under Section 112(B).
Therefore, petitioners argument must be rejected.
On the other hand, it appears that petitioner Garcia
failed to comprehend the operation of the 70% limitation on the
input tax. According to petitioner, the limitation on the
creditable input tax in effect allows VAT-registered
establishments to retain a portion of the taxes they collect,
which violates the principle that tax collection and revenue
should be for public purposes and expenditures
As earlier stated, the input tax is the tax paid by a
person, passed on to him by the seller, when he buys goods.
Output tax meanwhile is the tax due to the person when he
sells goods. In computing the VAT payable, three possible
scenarios may arise:
First, if at the end of a taxable quarter the output
taxes charged by the seller are equal to the input taxes that he
paid and passed on by the suppliers, then no payment is
required;
Second, when the output taxes exceed the input
taxes, the person shall be liable for the excess, which has to
be paid to the Bureau of Internal Revenue (BIR);[69] and
Third, if the input taxes exceed the output taxes, the
excess shall be carried over to the succeeding quarter or
quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions, any excess over the output
taxes shall instead be refunded to the taxpayer or credited
against other internal revenue taxes, at the taxpayers option.[70]
Section 8 of R.A. No. 9337 however, imposed a 70%
limitation on the input tax. Thus, a person can credit his input
tax only up to the extent of 70% of the output tax. In laymans
term, the value-added taxes that a person/taxpayer paid and
passed on to him by a seller can only be credited up to 70% of
the value-added taxes that is due to him on a taxable
transaction. There is no retention of any tax collection because
the person/taxpayer has already previously paid the input tax
to a seller, and the seller will subsequently remit such input tax
to the BIR. The party directly liable for the payment of the tax is
the seller.[71] What only needs to be done is for the
person/taxpayer to apply or credit these input taxes, as
evidenced by receipts, against his output taxes.
Petitioners Association of Pilipinas Shell Dealers,
Inc., et al. also argue that the input tax partakes the nature of a
property that may not be confiscated, appropriated, or limited
without due process of law.
The input tax is not a property or a property right
within the constitutional purview of the due process clause. A
VAT-registered persons entitlement to the creditable input tax is
a mere statutory privilege.
The distinction between statutory privileges and
vested rights must be borne in mind for persons have no
vested rights in statutory privileges. The state may change or
take away rights, which were created by the law of the state,

although it may not take away property, which was vested by


virtue of such rights.[72]
Under the previous system of single-stage taxation,
taxes paid at every level of distribution are not recoverable
from the taxes payable, although it becomes part of the cost,
which is deductible from the gross revenue. When Pres.
Aquino issued E.O. No. 273 imposing a 10% multi-stage tax on
all sales, it was then that the crediting of the input tax paid on
purchase or importation of goods and services by VATregistered persons against the output tax was introduced.
[73]
This was adopted by the Expanded VAT Law (R.A. No.
7716),[74] and The Tax Reform Act of 1997 (R.A. No. 8424).
[75]
The right to credit input tax as against the output tax is
clearly a privilege created by law, a privilege that also the law
can remove, or in this case, limit.
Petitioners also contest as arbitrary, oppressive,
excessive and confiscatory, Section 8 of R.A. No. 9337,
amending Section 110(A) of the NIRC, which provides:
SEC. 110. Tax Credits.
(A) Creditable Input Tax.
Provided, That the input tax on goods
purchased or imported in a calendar month
for use in trade or business for which
deduction for depreciation is allowed under
this Code, shall be spread evenly over the
month of acquisition and the fifty-nine (59)
succeeding months if the aggregate
acquisition cost for such goods, excluding
the VAT component thereof, exceeds One
million pesos (P1,000,000.00): Provided,
however, That if the estimated useful life of
the capital goods is less than five (5) years,
as used for depreciation purposes, then the
input VAT shall be spread over such a
shorter period: Provided, finally, That in the
case of purchase of services, lease or use of
properties, the input tax shall be creditable to
the purchaser, lessee or license upon
payment of the compensation, rental, royalty
or fee.
The foregoing section imposes a 60-month period
within which to amortize the creditable input tax on purchase or
importation of capital goods with acquisition cost of P1 Million
pesos, exclusive of the VAT component. Such spread out only
poses a delay in the crediting of the input tax. Petitioners
argument is without basis because the taxpayer is not
permanently deprived of his privilege to credit the input tax.
It is worth mentioning that Congress admitted that the
spread-out of the creditable input tax in this case amounts to a
4-year interest-free loan to the government.[76] In the same
breath, Congress also justified its move by saying that the
provision was designed to raise an annual revenue of 22.6
billion.[77] The legislature also dispelled the fear that the
provision will fend off foreign investments, saying that foreign
investors have other tax incentives provided by law, and citing
the case of China, where despite a 17.5% non-creditable VAT,
foreign investments were not deterred.[78] Again, for whatever is
the purpose of the 60-month amortization, this involves

25

executive economic policy and legislative wisdom in which the


Court cannot intervene.
With regard to the 5% creditable withholding tax
imposed on payments made by the government for taxable
transactions, Section 12 of R.A. No. 9337, which amended
Section 114 of the NIRC, reads:
SEC. 114. Return and Payment of
Value-added Tax.
(C) Withholding of Value-added Tax.
The Government or any of its political
subdivisions, instrumentalities or agencies,
including government-owned or controlled
corporations (GOCCs) shall, before making
payment on account of each purchase of
goods and services which are subject to the
value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold a
final value-added tax at the rate of five
percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use
of properties or property rights to
nonresident owners shall be subject to ten
percent (10%) withholding tax at the time of
payment. For purposes of this Section, the
payor or person in control of the payment
shall be considered as the withholding agent.
The value-added tax withheld under
this Section shall be remitted within ten (10)
days following the end of the month the
withholding was made.
Section 114(C) merely provides a method of
collection, or as stated by respondents, a more simplified VAT
withholding system. The government in this case is constituted
as a withholding agent with respect to their payments for goods
and services.
Prior to its amendment, Section 114(C) provided for
different rates of value-added taxes to be withheld -- 3% on
gross payments for purchases of goods; 6% on gross
payments for services supplied by contractors other than by
public works contractors; 8.5% on gross payments for services
supplied by public work contractors; or 10% on payment for the
lease or use of properties or property rights to nonresident
owners. Under the present Section 114(C), these different
rates, except for the 10% on lease or property rights payment
to nonresidents, were deleted, and a uniform rate of 5% is
applied.
The Court observes, however, that the law the used
the word final. In tax usage, final, as opposed to creditable,
means full. Thus, it is provided in Section 114(C): final valueadded tax at the rate of five percent (5%).
In Revenue Regulations No. 02-98, implementing
R.A. No. 8424 (The Tax Reform Act of 1997), the concept of
final withholding tax on income was explained, to wit:
SECTION 2.57. Withholding of Tax
at Source

(A) Final Withholding Tax. Under


the final withholding tax system the amount
of income tax withheld by the withholding
agent is constituted as full and final
payment of the income tax due from the
payee on the said income. The liability for
payment of the tax rests primarily on the
payor as a withholding agent. Thus, in case
of his failure to withhold the tax or in case of
underwithholding, the deficiency tax shall be
collected from the payor/withholding agent.
(B) Creditable Withholding Tax.
Under the creditable withholding tax system,
taxes withheld on certain income payments
are intended to equal or at least approximate
the tax due of the payee on said income.
Taxes withheld on income payments covered
by the expanded withholding tax (referred to
in Sec. 2.57.2 of these regulations) and
compensation income (referred to in Sec.
2.78 also of these regulations) are creditable
in nature.
As applied to value-added tax, this means that
taxable transactions with the government are subject to a 5%
rate, which constitutes as full payment of the tax payable on
the transaction. This represents the net VAT payable of the
seller. The other 5% effectively accounts for the standard input
VAT (deemed input VAT), in lieu of the actual input VAT directly
or attributable to the taxable transaction.[79]
The Court need not explore the rationale behind the
provision. It is clear that Congress intended to treat differently
taxable transactions with the government.[80] This is supported
by the fact that under the old provision, the 5% tax withheld by
the government remains creditable against the tax liability of
the seller or contractor, to wit:
SEC. 114. Return and Payment of
Value-added Tax.
(C) Withholding
of Creditable Value-added
Tax.
The
Government or any of its political
subdivisions, instrumentalities or agencies,
including government-owned or controlled
corporations (GOCCs) shall, before making
payment on account of each purchase of
goods from sellers and services rendered by
contractors which are subject to the valueadded tax imposed in Sections 106 and 108
of this Code, deduct and withhold the valueadded tax due at the rate of three percent
(3%) of the gross payment for the purchase
of goods and six percent (6%) on gross
receipts for services rendered by contractors
on every sale or installment payment which
shall be creditable against the valueadded tax liability of the seller or
contractor: Provided, however, That in the
case
of
government
public
works
contractors, the withholding rate shall be
eight and one-half percent (8.5%): Provided,
further, That the payment for lease or use of
properties or property rights to nonresident

26

owners shall be subject to ten percent (10%)


withholding tax at the time of payment. For
this purpose, the payor or person in control
of the payment shall be considered as the
withholding agent.
The valued-added tax withheld
under this Section shall be remitted within
ten (10) days following the end of the month
the withholding was made. (Emphasis
supplied)
As amended, the use of the word final and the
deletion of the word creditable exhibits Congresss intention to
treat transactions with the government differently. Since it has
not been shown that the class subject to the 5% final
withholding tax has been unreasonably narrowed, there is no
reason to invalidate the provision. Petitioners, as petroleum
dealers, are not the only ones subjected to the 5% final
withholding tax. It applies to all those who deal with the
government.
Moreover, the actual input tax is not totally lost or
uncreditable, as petitioners believe. Revenue Regulations No.
14-2005 or the Consolidated Value-Added Tax Regulations
2005 issued by the BIR, provides that should the actual input
tax exceed 5% of gross payments, the excess may form part of
the cost. Equally, should the actual input tax be less than 5%,
the difference is treated as income.[81]
Petitioners also argue that by imposing a limitation on
the creditable input tax, the government gets to tax a profit or
value-added even if there is no profit or value-added.
Petitioners
stance
is
purely
hypothetical,
argumentative, and again, one-sided. The Court will not
engage in a legal joust where premises are what ifs,
arguments, theoretical and facts, uncertain. Any disquisition by
the Court on this point will only be, as Shakespeare describes
life in Macbeth,[82] full of sound and fury, signifying nothing.
Whats more, petitioners contention assumes the
proposition that there is no profit or value-added. It need not
take an astute businessman to know that it is a matter of
exception that a business will sell goods or services without
profit or value-added. It cannot be overstressed that a business
is created precisely for profit.
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.[83]
The power of the State to make reasonable and
natural classifications for the purposes of taxation has long
been established. Whether it relates to the subject of taxation,
the kind of property, the rates to be levied, or the amounts to
be raised, the methods of assessment, valuation and
collection, the States power is entitled to presumption of
validity. As a rule, the judiciary will not interfere with such
power absent a clear showing of unreasonableness,
discrimination, or arbitrariness.[84]
Petitioners point out that the limitation on the
creditable input tax if the entity has a high ratio of input tax, or
invests in capital equipment, or has several transactions with

the government, is not based on real and substantial


differences to meet a valid classification.
The argument is pedantic, if not outright baseless.
The law does not make any classification in the subject of
taxation, the kind of property, the rates to be levied or the
amounts to be raised, the methods of assessment, valuation
and collection. Petitioners alleged distinctions are based on
variables that bear different consequences. While the
implementation of the law may yield varying end results
depending on ones profit margin and value-added, the Court
cannot go beyond what the legislature has laid down and
interfere with the affairs of business.
The equal protection clause does not require the
universal application of the laws on all persons or things
without distinction. This might in fact sometimes result in
unequal protection. What the clause requires is equality among
equals as determined according to a valid classification. By
classification is meant the grouping of persons or things similar
to each other in certain particulars and different from all others
in these same particulars.[85]
Petitioners brought to the Courts attention the
introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III
and Ma. Ana Consuelo A.S. Madrigal on June 6, 2005, and
House Bill No. 4493 by Rep. Eric D. Singson. The proposed
legislation seeks to amend the 70% limitation by increasing the
same to 90%. This, according to petitioners, supports their
stance that the 70% limitation is arbitrary and confiscatory. On
this score, suffice it to say that these are still proposed
legislations. Until Congress amends the law, and absent any
unequivocal basis for its unconstitutionality, the 70% limitation
stays.
B.
Uniformity
and
Equitability of Taxation
Article VI, Section 28(1) of the Constitution reads:
The rule of taxation shall be uniform
and equitable. The Congress shall evolve a
progressive system of taxation.
Uniformity in taxation means that all taxable articles or
kinds of property of the same class shall be taxed at the same
rate. Different articles may be taxed at different amounts
provided that the rate is uniform on the same class everywhere
with all people at all times.[86]
In this case, the tax law is uniform as it provides a
standard rate of 0% or 10% (or 12%) on all goods and
services. Sections 4, 5 and 6 of R.A. No. 9337, amending
Sections 106, 107 and 108, respectively, of the NIRC, provide
for a rate of 10% (or 12%) on sale of goods and properties,
importation of goods, and sale of services and use or lease of
properties. These same sections also provide for a 0% rate on
certain sales and transaction.
Neither does the law make any distinction as to the
type of industry or trade that will bear the 70% limitation on the
creditable input tax, 5-year amortization of input tax paid on
purchase of capital goods or the 5% final withholding tax by the
government. It must be stressed that the rule of uniform
taxation does not deprive Congress of the power to classify

27

subjects of taxation, and only demands uniformity within the


particular class.[87]
R.A. No. 9337 is also equitable. The law is equipped
with a threshold margin. The VAT rate of 0% or 10% (or 12%)
does not apply to sales of goods or services with gross annual
sales or receipts not exceeding P1,500,000.00.[88] Also, basic
marine and agricultural food products in their original state are
still not subject to the tax,[89] thus ensuring that prices at the
grassroots level will remain accessible. As was stated
in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas,
Inc. vs. Tan:[90]
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.
It is admitted that R.A. No. 9337 puts a premium on
businesses with low profit margins, and unduly favors those
with high profit margins. Congress was not oblivious to this.
Thus, to equalize the weighty burden the law entails, the law,
under Section 116, imposed a 3% percentage tax on VATexempt persons under Section 109(v), i.e., transactions with
gross annual sales and/or receipts not exceeding P1.5 Million.
This acts as a equalizer because in effect, bigger businesses
that qualify for VAT coverage and VAT-exempt taxpayers stand
on equal-footing.
Moreover, Congress provided mitigating measures to
cushion the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum products[91]and
natural gas[92] were reduced. Percentage tax on domestic
carriers was removed.[93] Power producers are now exempt
from paying franchise tax.[94]
Aside from these, Congress also increased the
income tax rates of corporations, in order to distribute the
burden of taxation. Domestic, foreign, and non-resident
corporations are now subject to a 35% income tax rate, from a
previous 32%.[95] Intercorporate dividends of non-resident
foreign corporations are still subject to 15% final withholding
tax but the tax credit allowed on the corporations domicile was
increased to 20%.[96] The Philippine Amusement and Gaming
Corporation (PAGCOR) is not exempt from income taxes
anymore.[97] Even the sale by an artist of his works or services
performed for the production of such works was not spared.
All these were designed to ease, as well as spread
out, the burden of taxation, which would otherwise rest largely
on the consumers. It cannot therefore be gainsaid that R.A.
No. 9337 is equitable.
C.

Progressivity of Taxation

Lastly, petitioners contend that the limitation on the


creditable input tax is anything but regressive. It is the smaller
business with higher input tax-output tax ratio that will suffer
the consequences.
Progressive taxation is built on the principle of the
taxpayers ability to pay. This principle was also lifted from
Adam Smiths Canons of Taxation, and it states:
I. The subjects of every state ought to
contribute towards the support of
the government, as nearly as
possible, in proportion to their
respective abilities; that is, in
proportion to the revenue which
they respectively enjoy under the
protection of the state.
Taxation is progressive when its rate goes up
depending on the resources of the person affected.[98]
The VAT is an antithesis of progressive taxation. By
its very nature, it is regressive. The principle of progressive
taxation has no relation with the VAT system inasmuch as the
VAT paid by the consumer or business for every goods bought
or services enjoyed is the same regardless of income. In
other words, the VAT paid eats the same portion of an income,
whether big or small. The disparity lies in the income earned by
a person or profit margin marked by a business, such that the
higher the income or profit margin, the smaller the portion of
the income or profit that is eaten by VAT. A converso, the lower
the income or profit margin, the bigger the part that the VAT
eats away. At the end of the day, it is really the lower income
group or businesses with low-profit margins that is always
hardest hit.
Nevertheless, the Constitution does not really prohibit
the imposition of indirect taxes, like the VAT. What it simply
provides is that Congress shall "evolve a progressive system of
taxation." The Court stated in the Tolentino case, thus:
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

28

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)[99]
CONCLUSION
It has been said that taxes are the lifeblood of the
government. In this case, it is just an enema, a first-aid
measure to resuscitate an economy in distress. The Court is
neither blind nor is it turning a deaf ear on the plight of the
masses. But it does not have the panacea for the malady that
the law seeks to remedy. As in other cases, the Court cannot
strike down a law as unconstitutional simply because of its
yokes.
Let us not be overly influenced by
the plea that for every wrong there is a
remedy, and that the judiciary should stand
ready to afford relief. There are undoubtedly
many wrongs the judicature may not correct,
for instance, those involving political
questions. . . .
Let us likewise disabuse our minds
from the notion that the judiciary is the
repository of remedies for all political or
social ills; We should not forget that the
Constitution has judiciously allocated the
powers of government to three distinct and
separate compartments; and that judicial
interpretation has tended to the preservation
of the independence of the three, and a
zealous regard of the prerogatives of each,
knowing full well that one is not the guardian
of the others and that, for official wrongdoing, each may be brought to account,
either by impeachment, trial or by the ballot
box.[100]
The words of the Court in Vera vs. Avelino[101] holds
true then, as it still holds true now. All things considered, there
is no raison d'tre for the unconstitutionality of R.A. No. 9337.
WHEREFORE, Republic Act No. 9337 not being
unconstitutional, the petitions in G.R. Nos. 168056, 168207,
168461, 168463, and 168730, are hereby DISMISSED.
There being no constitutional impediment to the full
enforcement and implementation of R.A. No. 9337, the
temporary restraining order issued by the Court on July 1,
2005 is LIFTED upon finality of herein decision.
SO ORDERED.

29

from notice.[2] Later, the Court issued another resolution


treating the petition as one for prohibition.[3]

RENATO V. DIAZ and AURORA MA. F. TIMBOL,


Petitioners, Present:
- versus .
THE SECRETARY OF FINANCE
and THE COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondents. July 19, 2011
x
--------------------------------------------------------------------------------------- x
DECISION
ABAD, J.:
May toll fees collected by tollway operators be subjected to
value- added tax?
The Facts and the Case
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol
(petitioners) filed this petition for declaratory relief[1] assailing
the validity of the impending imposition of value-added tax
(VAT) by the Bureau of Internal Revenue (BIR) on the
collections of tollway operators.
Petitioners claim that, since the VAT would result in
increased toll fees, they have an interest as regular users of
tollways in stopping the BIR action. Additionally, Diaz claims
that he sponsored the approval of Republic Act 7716 (the 1994
Expanded VAT Law or EVAT Law) and Republic Act 8424 (the
1997 National Internal Revenue Code or the NIRC) at the
House of Representatives. Timbol, on the other hand, claims
that she served as Assistant Secretary of the Department of
Trade and Industry and consultant of the Toll Regulatory Board
(TRB) in the past administration.
Petitioners allege that the BIR attempted during the
administration of President Gloria Macapagal-Arroyo to impose
VAT on toll fees. The imposition was deferred, however, in view
of the consistent opposition of Diaz and other sectors to such
move. But, upon President Benigno C. Aquino IIIs assumption
of office in 2010, the BIR revived the idea and would impose
the challenged tax on toll fees beginning August 16, 2010
unless judicially enjoined.
Petitioners hold the view that Congress did not, when
it enacted the NIRC, intend to include toll fees within the
meaning of sale of services that are subject to VAT; that a toll
fee is a users tax, not a sale of services; that to impose VAT on
toll fees would amount to a tax on public service; and that,
since VAT was never factored into the formula for computing
toll fees, its imposition would violate the non-impairment clause
of the constitution.
On August 13, 2010 the Court issued a temporary
restraining order (TRO), enjoining the implementation of the
VAT. The Court required the government, represented by
respondents Cesar V. Purisima, Secretary of the Department of
Finance, and Kim S. Jacinto-Henares, Commissioner of
Internal Revenue, to comment on the petition within 10 days

On August 23, 2010 the Office of the Solicitor General filed the
governments comment.[4] The government avers that the NIRC
imposes VAT on all kinds of services of franchise grantees,
including tollway operations, except where the law provides
otherwise; that the Court should seek the meaning and intent
of the law from the words used in the statute; and that the
imposition of VAT on tollway operations has been the subject
as early as 2003 of several BIR rulings and circulars.[5]
The government also argues that petitioners have no
right to invoke the non-impairment of contracts clause since
they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway
operators. At any rate, the non-impairment clause cannot limit
the States sovereign taxing power which is generally read into
contracts.
Finally, the government contends that the non-inclusion of VAT
in the parametric formula for computing toll rates cannot
exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate
of return will be impaired by the VAT since this is imposed on
top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.
In their reply[6] to the governments comment,
petitioners point out that tollway operators cannot be regarded
as franchise grantees under the NIRC since they do not hold
legislative franchises. Further, the BIR intends to collect the
VAT by rounding off the toll rate and putting any excess
collection in an escrow account. But this would be illegal since
only the Congress can modify VAT rates and authorize its
disbursement. Finally, BIR Revenue Memorandum Circular 632010 (BIR RMC 63-2010), which directs toll companies to
record an accumulated input VAT of zero balance in their
books as of August 16, 2010, contravenes Section 111 of the
NIRC which grants entities that first become liable to VAT a
transitional input tax credit of 2% on beginning inventory. For
this reason, the VAT on toll fees cannot be implemented.
The Issues Presented
The case presents two procedural issues:
1. Whether or not the Court may treat the petition for
declaratory relief as one for prohibition; and
2. Whether or not petitioners Diaz and Timbol have
legal standing to file the action.
The case also presents two substantive issues:
1. Whether or not the government is unlawfully
expanding VAT coverage by including tollway operators and
tollway operations in the terms franchise grantees and sale of
services under Section 108 of the Code; and
2. Whether or not the imposition of VAT on tollway
operators a) amounts to a tax on tax and not a tax on services;
b) will impair the tollway operators right to a reasonable return
of investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.
The Courts Rulings
A. On the Procedural Issues:

30

On August 24, 2010 the Court issued a resolution,


treating the petition as one for prohibition rather than one for
declaratory relief, the characterization that petitioners Diaz and
Timbol gave their action. The government has sought
reconsideration of the Courts resolution,[7] however, arguing
that petitioners allegations clearly made out a case for
declaratory relief, an action over which the Court has no
original jurisdiction. The government adds, moreover, that the
petition does not meet the requirements of Rule 65 for actions
for prohibition since the BIR did not exercise judicial, quasijudicial, or ministerial functions when it sought to impose VAT
on toll fees. Besides, petitioners Diaz and Timbol has a plain,
speedy, and adequate remedy in the ordinary course of law
against the BIR action in the form of an appeal to the Secretary
of Finance.
But there are precedents for treating a petition for declaratory
relief as one for prohibition if the case has far-reaching
implications and raises questions that need to be resolved for
the public good.[8] The Court has also held that a petition for
prohibition is a proper remedy to prohibit or nullify acts of
executive officials that amount to usurpation of legislative
authority.[9]
Here, the imposition of VAT on toll fees has farreaching implications. Its imposition would impact, not only on
the more than half a million motorists who use the tollways
everyday, but more so on the governments effort to raise
revenue for funding various projects and for reducing
budgetary deficits.
To dismiss the petition and resolve the issues later,
after the challenged VAT has been imposed, could cause more
mischief both to the tax-paying public and the government. A
belated declaration of nullity of the BIR action would make any
attempt to refund to the motorists what they paid an
administrative nightmare with no solution.Consequently, it is
not only the right, but the duty of the Court to take cognizance
of and resolve the issues that the petition raises.
Although the petition does not strictly comply with the
requirements of Rule 65, the Court has ample power to waive
such technical requirements when the legal questions to be
resolved are of great importance to the public. The same may
be said of the requirement of locus standi which is a mere
procedural requisite.[10]
B. On the Substantive Issues:
One. The relevant law in this case is Section 108 of
the NIRC, as amended. VAT is levied, assessed, and collected,
according to Section 108, on the gross receipts derived from
the sale or exchange of services as well as from the use or
lease of properties. The third paragraph of Section 108 defines
sale or exchange of services as follows:
The phrase sale or exchange of
services means the performance of all
kinds of services in the Philippines for
others for a fee, remuneration or
consideration, including those performed
or rendered by construction and service
contractors;
stock,
real
estate,
commercial, customs and immigration
brokers; lessors of property, whether
personal or real; warehousing services;
lessors
or
distributors
of

cinematographic films; persons engaged


in milling, processing, manufacturing or
repacking goods for others; proprietors,
operators or keepers of hotels, motels,
resthouses, pension houses, inns,
resorts; proprietors or operators of
restaurants, refreshment parlors, cafes
and other eating places, including clubs
and caterers; dealers in securities;
lending
investors;
transportation
contractors on their transport of goods or
cargoes, including persons who transport
goods or cargoes for hire and other
domestic common carriers by land
relative to their transport of goods or
cargoes; common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the
Philippines to another place in the
Philippines; sales of electricity by
generation companies, transmission, and
distribution
companies; services
of
franchise grantees of electric utilities,
telephone and telegraph, radio and
television broadcasting and all other
franchise grantees except those under
Section 119 of this Code and non-life
insurance companies (except their crop
insurances), including surety, fidelity,
indemnity and bonding companies; and
similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on
all kinds of services rendered in the Philippines for a fee,
including those specified in the list. The enumeration of
affected services is not exclusive.[11] By qualifying services with
the words all kinds, Congress has given the term services an
all-encompassing meaning. The listing of specific services are
intended to illustrate how pervasive and broad is the VATs
reach rather than establish concrete limits to its
application. Thus, every activity that can be imagined as a form
of service rendered for a fee should be deemed included
unless some provision of law especially excludes it.
Now, do tollway operators render services for a
fee? Presidential Decree (P.D.) 1112 or the Toll Operation
Decree establishes the legal basis for the services that tollway
operators render. Essentially, tollway operators construct,
maintain, and operate expressways, also called tollways, at the
operators expense. Tollways serve as alternatives to regular
public highways that meander through populated areas and
branch out to local roads. Traffic in the regular public highways
is for this reason slow-moving. In consideration for constructing
tollways at their expense, the operators are allowed to collect
government-approved fees from motorists using the tollways
until such operators could fully recover their expenses and
earn reasonable returns from their investments.
When a tollway operator takes a toll fee from a motorist, the
fee is in effect for the latters use of the tollway facilities over
which the operator enjoys private proprietary rights[12]that its
contract and the law recognize. In this sense, the tollway
operator is no different from the following service providers

31

under Section 108 who allow others to use their properties or


facilities for a fee:
1. Lessors of property, whether
personal or real;
2. Warehousing service operators;
3. Lessors
or
distributors
of
cinematographic films;
4. Proprietors, operators or keepers
of hotels, motels, resthouses, pension
houses, inns, resorts;
5. Lending investors (for use of
money);
6. Transportation contractors on
their transport of goods or cargoes, including
persons who transport goods or cargoes for
hire and other domestic common carriers by
land relative to their transport of goods or
cargoes; and
7. Common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in
the Philippines to
another
place
in
thePhilippines.
It does not help petitioners cause that Section 108
subjects to VAT all kinds of services rendered for a fee
regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. This
means that services to be subject to VAT need not fall under
the traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term
all kinds of services, they also come under the specific class
described in Section 108 as all other franchise grantees who
are subject to VAT, except those under Section 119 of this
Code.
Tollway operators are franchise grantees and they do
not belong to exceptions (the low-income radio and/or
television broadcasting companies with gross annual incomes
of less than P10 million and gas and water utilities) that
Section 119[13] spares from the payment of VAT. The word
franchise broadly covers government grants of a special right
to do an act or series of acts of public concern.[14]
Petitioners of course contend that tollway operators
cannot be considered franchise grantees under Section 108
since they do not hold legislative franchises. But nothing in
Section 108 indicates that the franchise grantees it speaks of
are those who hold legislative franchises. Petitioners give no
reason, and the Court cannot surmise any, for making a
distinction between franchises granted by Congress and
franchises granted by some other government agency. The
latter, properly constituted, may grant franchises. Indeed,
franchises conferred or granted by local authorities, as agents
of the state, constitute as much a legislative franchise as
though the grant had been made by Congress itself.[15] The
term franchise has been broadly construed as referring, not
only to authorizations that Congress directly issues in the form
of a special law, but also to those granted by administrative
agencies to which the power to grant franchises has been
delegated by Congress.[16]
Tollway operators are, owing to the nature and object
of their business, franchise grantees. The construction,

operation, and maintenance of toll facilities on public


improvements are activities of public consequence that
necessarily require a special grant of authority from the
state. Indeed, Congress granted special franchise for the
operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and
South Luzon Expressways. Apart from Congress, tollway
franchises may also be granted by the TRB, pursuant to the
exercise of its delegated powers under P.D. 1112.[17] The
franchise in this case is evidenced by a Toll Operation
Certificate.[18]
Petitioners contend that the public nature of the
services rendered by tollway operators excludes such services
from the term sale of services under Section 108 of the
Code.But, again, nothing in Section 108 supports this
contention. The reverse is true. In specifically including by way
of example electric utilities, telephone, telegraph, and
broadcasting companies in its list of VAT-covered businesses,
Section 108 opens other companies rendering public service
for a fee to the imposition of VAT. Businesses of a public nature
such as public utilities and the collection of tolls or charges for
its use or service is a franchise.[19]
Nor can petitioners cite as binding on the Court
statements made by certain lawmakers in the course of
congressional deliberations of the would-be law. As the Court
said in South African Airways v. Commissioner of Internal
Revenue,[20] statements made by individual members of
Congress in the consideration of a bill do not necessarily
reflect the sense of that body and are, consequently, not
controlling in the interpretation of law. The congressional will is
ultimately determined by the language of the law that the
lawmakers voted on. Consequently, the meaning and intention
of the law must first be sought in the words of the statute itself,
read and considered in their natural, ordinary, commonly
accepted and most obvious significations, according to good
and approved usage and without resorting to forced or subtle
construction.
Two. Petitioners argue that a toll fee is a users tax
and to impose VAT on toll fees is tantamount to taxing a tax.
[21]
Actually, petitioners base this argument on the following
discussion in Manila International Airport Authority (MIAA) v.
Court of Appeals:[22]
No one can dispute that
properties of public dominion mentioned
in Article 420 of the Civil Code, like roads,
canals, rivers, torrents, ports and bridges
constructed by the State,are owned by
the State. The term ports includes
seaports
and
airports.
The MIAA Airport Lands and
Buildings
constitute a port constructed by the
State. Under Article 420 of the Civil Code,
the MIAA Airport Lands and Buildings are
properties of public dominion and thus
owned by the State or the Republic of
the Philippines.
x x x The operation by the
government of a tollway does not change
the character of the road as one for
public use. Someone must pay for the
maintenance of the road, either the public
indirectly through the taxes they pay the

32

government, or only those among the


public who actually use the road through
the toll fees they pay upon using the
road. The tollway system is even a more
efficient and equitable manner of taxing
the public for the maintenance of public
roads.
The charging of fees to the
public does not determine the character
of the property whether it is for public
dominion or not. Article 420 of the Civil
Code defines property of public dominion
as one intended for public use. Even if
the government collects toll fees, the
road is still intended for public use if
anyone can use the road under the same
terms and conditions as the rest of the
public. The charging of fees, the
limitation on the kind of vehicles that can
use the road, the speed restrictions and
other conditions for the use of the road
do not affect the public character of the
road.
The terminal fees MIAA charges
to passengers, as well as the landing fees
MIAA charges to airlines, constitute the
bulk of the income that maintains the
operations of MIAA.The collection of
such fees does not change the character
of MIAA as an airport for public use. Such
fees are often termed users tax. This
means taxing those among the public
who actually use a public facility instead
of taxing all the public including those
who never use the particular public
facility. A users tax is more equitable a
principle of taxation mandated in the 1987
Constitution.[23] (Underscoring supplied)
Petitioners assume that what the Court said above,
equating terminal fees to a users tax must also pertain to
tollway fees. But the main issue in the MIAA case was whether
or not Paraaque City could sell airport lands and buildings
under MIAA administration at public auction to satisfy unpaid
real estate taxes. Since local governments have no power to
tax the national government, the Court held that the City could
not proceed with the auction sale. MIAA forms part of the
national government although not integrated in the department
framework.[24] Thus, its airport lands and buildings are
properties of public dominion beyond the commerce of man
under Article 420(1)[25] of the Civil Code and could not be sold
at public auction.
As can be seen, the discussion in the MIAA case on
toll roads and toll fees was made, not to establish a rule that
tollway fees are users tax, but to make the point that airport
lands and buildings are properties of public dominion and that
the collection of terminal fees for their use does not make them
private properties. Tollway fees are not taxes.Indeed, they are
not assessed and collected by the BIR and do not go to the
general coffers of the government.
It would of course be another matter if Congress
enacts a law imposing a users tax, collectible from motorists,
for the construction and maintenance of certain roadways.The
tax in such a case goes directly to the government for the

replenishment of resources it spends for the roadways. This is


not the case here. What the government seeks to tax here are
fees collected from tollways that are constructed, maintained,
and operated by private tollway operators at their own expense
under the build, operate, and transfer scheme that the
government has adopted for expressways.[26] Except for a
fraction given to the government, the toll fees essentially end
up as earnings of the tollway operators.
In sum, fees paid by the public to tollway operators for use of
the tollways, are not taxes in any sense. A tax is imposed
under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. [27] Toll
fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and operation of the
tollways, as well as to assure them a reasonable margin of
income. Although toll fees are charged for the use of public
facilities, therefore, they are not government exactions that can
be properly treated as a tax. Taxes may be imposed only by
the government under its sovereign authority, toll fees may be
demanded by either the government or private individuals or
entities, as an attribute of ownership.[28]
Parenthetically, VAT on tollway operations cannot be deemed a
tax on tax due to the nature of VAT as an indirect tax. In
indirect taxation, a distinction is made between the liability for
the tax and burden of the tax. The seller who is liable for the
VAT may shift or pass on the amount of VAT it paid on goods,
properties or services to the buyer. In such a case, what is
transferred is not the sellers liability but merely the burden of
the VAT.[29]
Thus, the seller remains directly and legally liable for
payment of the VAT, but the buyer bears its burden since the
amount of VAT paid by the former is added to the selling price.
Once shifted, the VAT ceases to be a tax [30] and simply
becomes part of the cost that the buyer must pay in order to
purchase the good, property or service.
Consequently, VAT on tollway operations is not really
a tax on the tollway user, but on the tollway operator. Under
Section 105 of the Code, [31] VAT is imposed on any person
who, in the course of trade or business, sells or renders
services for a fee. In other words, the seller of services, who in
this case is the tollway operator, is the person liable for VAT.
The latter merely shifts the burden of VAT to the tollway user
as part of the toll fees.
For this reason, VAT on tollway operations cannot be
a tax on tax even if toll fees were deemed as a users tax. VAT
is assessed against the tollway operators gross receipts and
not necessarily on the toll fees. Although the tollway operator
may shift the VAT burden to the tollway user, it will not make
the latter directly liable for the VAT. The shifted VAT burden
simply becomes part of the toll fees that one has to pay in
order to use the tollways.[32]
Three. Petitioner Timbol has no personality to invoke the nonimpairment of contract clause on behalf of private investors in
the tollway projects. She will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that
may result from the VAT imposition. She has no interest at all
in the profits to be earned under the TOAs. The interest in and
right to recover investments solely belongs to the private
tollway investors.

33

Besides, her allegation that the private investors rate


of recovery will be adversely affected by imposing VAT on
tollway operations is purely speculative. Equally presumptuous
is her assertion that a stipulation in the TOAs known as the
Material Adverse Grantor Action will be activated if VAT is thus
imposed. The Court cannot rule on matters that are manifestly
conjectural. Neither can it prohibit the State from exercising its
sovereign taxing power based on uncertain, prophetic grounds.
Four. Finally, petitioners assert that the substantiation
requirements for claiming input VAT make the VAT on tollway
operations impractical and incapable of implementation. They
cite the fact that, in order to claim input VAT, the name, address
and tax identification number of the tollway user must be
indicated in the VAT receipt or invoice. The manner by which
the BIR intends to implement the VAT by rounding off the toll
rate and putting any excess collection in an escrow account is
also illegal, while the alternative of giving change to thousands
of motorists in order to meet the exact toll rate would be a
logistical nightmare. Thus, according to them, the VAT on
tollway operations is not administratively feasible.[33]
Administrative feasibility is one of the canons of a
sound tax system. It simply means that the tax system should
be capable of being effectively administered and enforced with
the least inconvenience to the taxpayer. Non-observance of the
canon, however, will not render a tax imposition invalid except
to the extent that specific constitutional or statutory limitations
are impaired.[34] Thus, even if the imposition of VAT on tollway
operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate
any law or the Constitution.
Here, it remains to be seen how the taxing authority
will actually implement the VAT on tollway operations. Any
declaration by the Court that the manner of its implementation
is illegal or unconstitutional would be premature. Although the
transcript of the August 12, 2010 Senate hearing provides
some clue as to how the BIR intends to go about it,[35] the facts
pertaining to the matter are not sufficiently established for the
Court to pass judgment on. Besides, any concern about how
the VAT on tollway operations will be enforced must first be
addressed to the BIR on whom the task of implementing tax
laws primarily and exclusively rests. The Court cannot preempt
the BIRs discretion on the matter, absent any clear violation of
law or the Constitution.
For the same reason, the Court cannot prematurely
declare as illegal, BIR RMC 63-2010 which directs toll
companies to record an accumulated input VAT of zero
balance in their books as of August 16, 2010, the date when
the VAT imposition was supposed to take effect. The issuance
allegedly violates Section 111(A)[36] of the Code which grants
first time VAT payers a transitional input VAT of 2% on
beginning inventory.

Conclusion
In fine, the Commissioner of Internal Revenue did not
usurp legislative prerogative or expand the VAT laws coverage
when she sought to impose VAT on tollway operations. Section
108(A) of the Code clearly states that services of all other
franchise grantees are subject to VAT, except as may be
provided under Section 119 of the Code.Tollway operators are
not among the franchise grantees subject to franchise tax
under the latter provision. Neither are their services among the
VAT-exempt transactions under Section 109 of the Code.
If the legislative intent was to exempt tollway
operations from VAT, as petitioners so strongly allege, then it
would have been well for the law to clearly say so. Tax
exemptions must be justified by clear statutory grant and
based on language in the law too plain to be mistaken. [37] But
as the law is written, no such exemption obtains for tollway
operators. The Court is thus duty-bound to simply apply the
law as it is found.
Lastly, the grant of tax exemption is a matter of
legislative policy that is within the exclusive prerogative of
Congress. The Courts role is to merely uphold this legislative
policy, as reflected first and foremost in the language of the tax
statute. Thus, any unwarranted burden that may be perceived
to result from enforcing such policy must be properly referred
to Congress. The Court has no discretion on the matter but
simply applies the law.
The VAT on franchise grantees has been in the
statute books since 1994 when R.A. 7716 or the Expanded
Value-Added Tax law was passed. It is only now, however, that
the executive has earnestly pursued the VAT imposition
against tollway operators. The executive exercises exclusive
discretion in matters pertaining to the implementation and
execution of tax laws. Consequently, the executive is more
properly suited to deal with the immediate and practical
consequences of the VAT imposition.
WHEREFORE,
the
Court DENIES respondents
Secretary of Finance and Commissioner of Internal Revenues
motion for reconsideration of its August 24, 2010
resolution, DISMISSES the petitioners Renato V. Diaz and
Aurora Ma. F. Timbols petition for lack of merit, and SETS
ASIDE the Courts temporary restraining order dated August
13, 2010.
SO ORDERED.

In this connection, the BIR explained that BIR RMC


63-2010 is actually the product of negotiations with tollway
operators who have been assessed VAT as early as 2005, but
failed to charge VAT-inclusive toll fees which by now can no
longer be collected. The tollway operators agreed to waive the
2% transitional input VAT, in exchange for cancellation of their
past due VAT liabilities. Notably, the right to claim the 2%
transitional input VAT belongs to the tollway operators who
have not questioned the circulars validity. They are thus the
ones who have a right to challenge the circular in a direct and
proper action brought for the purpose.

34

ANGELES CITY,
Petitioner,

G.R. No. 166134


any national or local authority on earnings,
receipts, income and privilege of generation,
Present:
distribution and sale of electric current.

- versus -

CORONA, C.
VELASCO, JR.,On January 1, 1992, RA 7160 or the Local Government
LEONARDO-DE
Code (LGC)CASTRO,
of 1991 was passed into law, conferring upon provinces
DEL and cities the power, among others, to impose tax on businesses
PEREZ,
enjoying franchise.[4] In accordance with the LGC, the Sangguniang
Panlungsod of Angeles City enacted on December 23, 1993 Tax
Promulgated:
Ordinance No. 33, S-93, otherwise known as the Revised Revenue
June Code
29, 2010
of Angeles City (RRCAC).

ANGELES CITY ELECTRIC


CORPORATION and
REGIONAL TRIAL COURT
BRANCH 57, ANGELES CITY,
Respondents.
x------------------------------------------------------------------x

DECISION

DEL CASTILLO, J.:


The prohibition on the issuance of a writ of injunction to enjoin the
collection of taxes applies only to national internal revenue taxes, and
not to local taxes.
This Petition[1] for Certiorari under Rule 65 of the Rules of
Court seeks to set aside the Writ of Preliminary Injunction issued by
the Regional Trial Court (RTC) of Angeles City, Branch 57, in Civil
Case No. 11401, enjoining Angeles City and its City Treasurer from
levying, seizing, disposing and selling at public auction the properties
owned by Angeles Electric Corporation (AEC).
Factual Antecedents
On June 18, 1964, AEC was granted a legislative franchise
under Republic Act No. (RA) 4079 [2] to construct, maintain and
operate an electric light, heat, and power system for the purpose of
generating and distributing electric light, heat and power for sale
in Angeles City, Pampanga. Pursuant to Section 3-A thereof,[3] AECs
payment of franchise tax for gross earnings from electric current sold
was in lieu of all taxes, fees and assessments.
On September 11, 1974, Presidential Decree No. (PD) 551
reduced the franchise tax of electric franchise holders. Section 1 of
PD 551 provided that:
SECTION 1. 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
percent (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

On February 7, 1994, a petition seeking the reduction of the


tax rates and a review of the provisions of the RRCAC was filed with
the Sangguniang Panlungsod by Metro Angeles Chamber of
Commerce and Industry Inc. (MACCI) of which AEC is a member.
There being no action taken by the Sangguniang Panlungsod on the
matter, MACCI elevated the petition[5]to the Department of Finance,
which referred the same to the Bureau of Local Government Finance
(BLGF). In the petition, MACCI alleged that the RRCAC is
oppressive, excessive, unjust and confiscatory; that it was published
only once, simultaneously on January 22, 1994; and that no public
hearings were conducted prior to its enactment. Acting on the petition,
the BLGF issued a First Indorsement [6] to the City Treasurer of
Angeles City, instructing the latter to make representations with
the Sangguniang Panlungsod for the appropriate amendment of the
RRCAC in order to ensure compliance with the provisions of the LGC,
and to make a report on the action taken within five days.
Thereafter, starting July 1995, AEC has been paying the
local franchise tax to the Office of the City Treasurer on a quarterly
basis, in addition to the national franchise tax it pays every quarter to
the Bureau of Internal Revenue (BIR).
Proceedings before the City Treasurer
On January 22, 2004, the City Treasurer issued a Notice of
Assessment[7] to AEC for payment of business tax, license fee and
other charges for the period 1993 to 2004 in the total amount
of P94,861,194.10. Within the period prescribed by law, AEC
protested the assessment claiming that:
(a)

pursuant to RA 4079, it is exempt from


paying local business tax;

(b)

since it is already paying franchise tax on


business, the payment of business tax would result
in double taxation;

(c)

the period to assess had prescribed


because under the LGC, taxes and fees can only
be assessed and collected within five (5) years from
the date they become due; and

(d)

the assessment and collection of taxes under


the RRCAC cannot be made retroactive to 1993 or
prior to its effectivity.[8]

On February 17, 2004, the City Treasurer denied the


protest for lack of merit and requested AEC to settle its tax liabilities.[9]
Proceedings before the RTC
Aggrieved, AEC appealed the denial of its protest to the
RTC of Angeles City via a Petition for Declaratory Relief,[10] docketed
as Civil Case No. 11401.

35

On April 5, 2004, the City Treasurer levied on the real


properties of AEC.[11] A Notice of Auction Sale[12] was published and
posted announcing that a public auction of the levied properties of
AEC would be held on May 7, 2004.
This prompted AEC to file with the RTC, where the petition
for declaratory relief was pending, an Urgent Motion for Issuance of
Temporary Restraining Order and/or Writ of Preliminary
Injunction[13] to enjoin Angeles City and its City Treasurer from
levying, annotating the levy, seizing, confiscating, garnishing, selling
and disposing at public auction the properties of AEC.
Meanwhile, in response to the petition for declaratory relief
filed by AEC, Angeles City and its City Treasurer filed an Answer with
Counterclaim[14] to which AEC filed a Reply.[15]

hearing, and was necessary to prevent the petition from becoming


moot. In addition, AEC claims that the issuance of the writ of
injunction was proper since the tax assessment issued by the City
Treasurer is not yet final, having been seasonably appealed pursuant
to Section 195[24] of the LGC. AEC likewise points out that following
the case of Pantoja v. David,[25] proceedings to invalidate a warrant of
distraint and levy to restrain the collection of taxes do not violate the
prohibition against injunction to restrain the collection of taxes
because the proceedings are directed at the right of the City Treasurer
to collect the tax by distraint or levy. As to its tax liability, AEC
maintains that it is exempt from paying local business tax. In any
case, AEC counters that the issue of whether it is liable to pay the
assessed local business tax is a factual issue that should be
determined by the RTC and not by the Supreme Court via a petition
for certiorari under Rule 65 of the Rules of Court.
Our Ruling

After due notice and hearing, the RTC issued a Temporary


Restraining Order (TRO)[16] on May 4, 2004, followed by an
Order[17] dated May 24, 2004 granting the issuance of a Writ of
Preliminary Injunction, conditioned upon the filing of a bond in the
amount of P10,000,000.00. Upon AECs posting of the required
bond, the RTC issued a Writ of Preliminary Injunction on May 28,
2004,[18] which was amended on May 31, 2004 due to some clerical
errors.[19]
On August 5, 2004, Angeles City and its City Treasurer
filed a Motion for Dissolution of Preliminary Injunction and Motion for
Reconsideration of the Order dated May 24, 2004,[20]which was
opposed by AEC.[21]
Finding no compelling reason to disturb and reconsider its
previous findings, the RTC denied the joint motion on October 14,
2004.[22]

Issue
Being a special civil action for certiorari, the issue in the
instant case is limited to the determination of whether the RTC gravely
abused its discretion in issuing the writ of preliminary injunction
enjoining Angeles City and its City Treasurer from levying, selling, and
disposing the properties of AEC. All other matters pertaining to the
validity of the tax assessment and AECs tax exemption must
therefore be left for the determination of the RTC where the main case
is pending decision.
Petitioners Arguments
Petitioners main argument is that the collection of taxes
cannot be enjoined by the RTC, citing Valley Trading Co., Inc. v.
Court of First Instance of Isabela, Branch II, [23] wherein the lower
courts denial of a motion for the issuance of a writ of preliminary
injunction to enjoin the collection of a local tax was upheld. Petitioner
further reasons that since the levy and auction of the properties of a
delinquent taxpayer are proper and lawful acts specifically allowed by
the LGC, these cannot be the subject of an injunctive writ. Petitioner
likewise insists that AEC must first pay the tax before it can protest the
assessment. Finally, petitioner contends that the tax exemption
claimed by AEC has no legal basis because RA 4079 has been
expressly repealed by the LGC.
Private respondents Arguments
Private respondent AEC on the other hand asserts that there was no
grave abuse of discretion on the part of the RTC in issuing the writ of
preliminary injunction because it was issued after due notice and

We find the petition bereft of merit.


The LGC
does not
specificall
y prohibit
an
injunction
enjoining
the
collection
of taxes
A principle deeply embedded in our jurisprudence is that
taxes being the lifeblood of the government should be collected
promptly,[26] without unnecessary hindrance[27] or delay.[28]In line with
this principle, the National Internal Revenue Code of 1997 (NIRC)
expressly provides that no court shall have the authority to grant an
injunction to restrain the collection of any national internal revenue tax,
fee or charge imposed by the code.[29] An exception to this rule
obtains only when in the opinion of the Court of Tax Appeals (CTA) the
collection thereof may jeopardize the interest of the government
and/or the taxpayer.[30]
The situation, however, is different in the case of the
collection of local taxes as there is no express provision in the LGC
prohibiting courts from issuing an injunction to restrain local
governments from collecting taxes. Thus, in the case of Valley
Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, cited
by the petitioner, we ruled that:
Unlike the National Internal Revenue Code, the
Local Tax Code[31] does not contain any specific
provision prohibiting courts from enjoining the
collection of local taxes. Such statutory lapse or
intent, however it may be viewed, may have
allowed preliminary injunction where local taxes
are involved but cannot negate the procedural
rules and requirements under Rule 58.[32]
In light of the foregoing, petitioners reliance on the abovecited case to support its view that the collection of taxes cannot be
enjoined is misplaced. The lower courts denial of the motion for the
issuance of a writ of preliminary injunction to enjoin the collection of
the local tax was upheld in that case, not because courts are
prohibited from granting such injunction, but because the

36

circumstances required for the issuance of writ of injunction were not


present.
Nevertheless, it must be emphasized that although there is
no express prohibition in the LGC, injunctions enjoining the collection
of local taxes are frowned upon. Courts therefore should exercise
extreme caution in issuing such injunctions.
No grave
abuse of
discretion
was
committe
d by the
RTC
Section 3, Rule 58, of the Rules of Court lays down the
requirements for the issuance of a writ of preliminary injunction, viz:
(a) That the applicant is entitled to the
relief demanded, and the whole or part of such
relief consists in restraining the commission or
continuance of the acts complained of, or in the
performance of an act or acts, either for a limited
period or perpetually;
(b) That the commission, continuance
or non-performance of the act or acts complained
of during the litigation would probably work
injustice to the applicant; or
(c) That a party, court, or agency or a
person is doing, threatening, or attempting to do,
or is procuring or suffering to be done, some act
or acts probably in violation of the rights of the
applicant respecting the subject of the action or
proceeding, and tending to render the judgment
ineffectual.
Two requisites must exist to warrant the issuance of a writ of
preliminary injunction, namely: (1) the existence of a clear and
unmistakable right that must be protected; and (2) an urgent and
paramount necessity for the writ to prevent serious damage.[33]
In issuing the injunction, the RTC ratiocinated that:
It is very evident on record that
petitioner[34] resorted and filed an urgent motion
for issuance of a temporary restraining order and
preliminary injunction to stop the scheduled
auction sale only when a warrant of levy was
issued and published in the newspaper setting
the auction sale of petitioners property by the City
Treasurer, merely few weeks after the petition for
declaratory relief has been filed, because if the
respondent will not be restrained, it will render this
petition moot and academic. To the mind of the
Court, since there is no other plain, speedy and
adequate remedy available to the petitioner in the
ordinary course of law except this application for a
temporary restraining order and/or writ of
preliminary injunction to stop the auction sale
and/or to enjoin and/or restrain respondents from
levying, annotating the levy,seizing, confiscating,
garnishing, selling and disposing at public auction

the properties of petitioner, or otherwise


exercising other administrative remedies against
the petitioner and its properties, this alone justifies
the move of the petitioner in seeking the injunctive
reliefs sought for.
Petitioner in its petition is questioning
the assessment or the ruling of the City Treasurer
on the business tax and fees, and not the local
ordinance concerned. This being the case, the
Court opines that notice is not required to the
Solicitor General since what is involved is just a
violation of a private right involving the right of
ownership and possession of petitioners
properties. Petitioner, therefore, need not comply
with Section 4, Rule 63 requiring such notice to
the Office of the Solicitor General.
The Court is fully aware of the Supreme
Court pronouncement that injunction is not proper
to restrain the collection of taxes. The issue here
as of the moment is the restraining of the
respondent from pursuing its auction sale of the
petitioners properties. The right of ownership and
possession of the petitioner over the properties
subject of the auction sale is at stake.
Respondents assert that not one of the
witnesses presented by the petitioner have
proven what kind of right has been violated by the
respondent, but merely mentioned of an injury
which is only a scenario based on speculation
because of petitioners claim that electric power
may be disrupted.
Engr. Abordos testimony reveals and
even his Affidavit Exhibit S showed that if the
auction sale will push thru, petitioner will not only
lose control and operation of its facility, but its
employees will also be denied access to
equipments vital to petitioners operations, and
since only the petitioner has the capability to
operate Petersville sub station, there will be a
massive power failure or blackout which will
adversely affect business and economy, if not
lives and properties in Angeles City and
surrounding communities.
Petitioner, thru its witnesses, in the
hearing of the temporary restraining order,
presented sufficient and convincing evidence
proving irreparable damages and injury which
were already elaborated in the temporary
restraining order although the same may be
realized only if the auction sale will proceed. And
unless
prevented, restrained, and
enjoined, grave and irreparable damage will be
suffered not only by the petitioner but all its
electric consumers in Angeles, Clark, Dau and
Bacolor, Pampanga.
The purpose of injunction is to prevent
injury
and
damage
from
being
incurred, otherwise, it will render any judgment in
this case ineffectual.

37

As an extraordinary remedy, injunction


is calculated to preserve or maintain the status
quo of things and is generally availed of to
prevent actual or threatened acts, until the merits
of the case can be heard (Cagayan de Oro City
Landless Res. Assn. Inc. vs. CA, 254 SCRA 220)

must first be resolved before the properties of AEC can be levied. In


the meantime, AECs rights of ownership and possession must be
respected.
WHEREFORE, the petition is hereby DISMISSED.
SO ORDERED.

It appearing that the two essential


requisites of an injunction have been satisfied, as
there exists a right on the part of the petitioner to
be protected, its right[s] of ownership and
possession of the properties subject of the
auction sale, and that the acts (conducting an
auction sale) against which the injunction is to be
directed, are violative of the said rights of the
petitioner, the Court has no other recourse but to
grant the prayer for the issuance of a writ of
preliminary injunction considering that if the
respondent will not be restrained from doing the
acts complained of, it will preempt the Court from
properly adjudicating on the merits the various
issues between the parties, and will render moot
and academic the proceedings before this court.
[35]

As a rule, the issuance of a preliminary injunction rests


entirely within the discretion of the court taking cognizance of the case
and will not be interfered with, except where there is grave abuse of
discretion committed by the court.[36] For grave abuse of discretion to
prosper as a ground for certiorari, it must be demonstrated that the
lower court or tribunal has exercised its power in an arbitrary and
despotic manner, by reason of passion or personal hostility, and it
must be patent and gross as would amount to an evasion or to a
unilateral refusal to perform the duty enjoined or to act in
contemplation of law.[37] In other words, mere abuse of discretion is
not enough.[38]
Guided by the foregoing, we find no grave abuse of
discretion on the part of the RTC in issuing the writ of injunction.
Petitioner, who has the burden to prove grave abuse of discretion,
[39]
failed to show that the RTC acted arbitrarily and capriciously in
granting the injunction. Neither was petitioner able to prove that the
injunction was issued without any factual or legal justification. In
assailing the injunction, petitioner primarily relied on the prohibition on
the issuance of a writ of injunction to restrain the collection of
taxes. But as we have already said, there is no such prohibition in the
case of local taxes. Records also show that before issuing the
injunction, the RTC conducted a hearing where both parties were
given the opportunity to present their arguments. During the hearing,
AEC was able to show that it had a clear and unmistakable legal right
over the properties to be levied and that it would sustain serious
damage if these properties, which are vital to its operations, would be
sold at public auction. As we see it then, the writ of injunction was
properly issued.
A final note. While we are mindful that the damage to a
taxpayers property rights generally takes a back seat to the
paramount need of the State for funds to sustain governmental
functions,[40] this rule finds no application in the instant case where the
disputed
tax
assessment
is
not
yet
due
and
demandable. Considering that AEC was able to appeal the denial of
its protest within the period prescribed under Section 195 of the LGC,
the collection of business taxes[41] through levy at this time is, to our
mind, hasty, if not premature.[42] The issues of tax exemption, double
taxation, prescription and the alleged retroactive application of the
RRCAC, raised in the protest of AEC now pending with the RTC,

38

G.R. No. 154068

August 3, 2007

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
ROSEMARIE ACOSTA, as represented by Virgilio A.
Abogado, respondent.
DECISION
QUISUMBING, J.:
Assailed in this petition for review are the Decision1 and
Resolution2 dated February 13, 2002 and May 29, 2002,
respectively, of the Court of Appeals in CA-G.R. SP No. 55572
which had reversed the Resolution 3 dated August 4, 1999 of
the Court of Tax Appeals in C.T.A. Case No. 5828 and ordered
the latter to resolve respondents petition for review.
The facts are as follows:
Respondent is an employee of Intel Manufacturing Phils., Inc.
(Intel). For the period January 1, 1996 to December 31, 1996,
respondent was assigned in a foreign country. During that
period, Intel withheld the taxes due on respondents
compensation income and remitted to the Bureau of Internal
Revenue (BIR) the amount ofP308,084.56.

Accordingly[,]
the
hereby DISMISSED.

Petition

for

Review

is

SO ORDERED.7
Upon review, the Court of Appeals reversed the CTA and
directed the latter to resolve respondents petition for review.
Applying Section 204(c)8 of the 1997 National Internal
Revenue Code (NIRC), the Court of Appeals ruled that
respondents filing of an amended return indicating an
overpayment was sufficient compliance with the requirement of
a written claim for refund. 9 The decretal portion of the Court of
Appeals decision reads:
WHEREFORE, finding the petition to be meritorious,
this
Court GRANTS it
due
course
and REVERSES the
appealed
Resolutions
and DIRECTS the Court of Tax Appeal[s] to resolve
the petition for review on the merits.
SO ORDERED.10
Petitioner sought reconsideration, but it was denied. Hence,
the instant petition raising the following questions of law:
I.

On March 21, 1997, respondent and her husband filed with the
BIR their Joint Individual Income Tax Return for the year 1996.
Later, on June 17, 1997, respondent, through her
representative, filed an amended return and a Non-Resident
Citizen Income Tax Return, and paid the BIR P17,693.37 plus
interests in the amount ofP14,455.76. On October 8, 1997, she
filed another amended return indicating an overpayment
of P358,274.63.

WHETHER OR NOT THE 1997 TAX REFORM ACT


CAN BE APPLIED RETROACTIVELY.

Claiming that the income taxes withheld and paid by Intel and
respondent
resulted
in
an
overpayment
ofP340,918.92,4 respondent filed on April 15, 1999 a petition
for review docketed as C.T.A. Case No. 5828 with the Court of
Tax Appeals (CTA). The Commissioner of Internal Revenue
(CIR) moved to dismiss the petition for failure of respondent to
file the mandatory written claim for refund before the CIR.

While the main concern in this controversy is the CTAs


jurisdiction, we must first resolve two issues. First, does the
amended return filed by respondent indicating an overpayment
constitute the written claim for refund required by law, thereby
vesting the CTA with jurisdiction over this case? Second, can
the 1997 NIRC be applied retroactively?

In its Resolution dated August 4, 1999, the CTA dismissed


respondents petition. For one, the CTA ruled that respondent
failed to file a written claim for refund with the CIR, a condition
precedent to the filing of a petition for review before the
CTA.5 Second, the CTA noted that respondents omission,
inadvertently or otherwise, to allege in her petition the date of
filing the final adjustment return, deprived the court of its
jurisdiction over the subject matter of the case.6 The decretal
portion of the CTAs resolution states:
WHEREFORE, in view of all the foregoing,
Respondents Motion to Dismiss is GRANTED.

II.
WHETHER OR NOT THE CTA HAS JURISDICTION
TO TAKE [COGNIZANCE] OF RESPONDENTS
PETITION FOR REVIEW.11

Petitioner avers that an amended return showing an


overpayment does not constitute the written claim for refund
required under Section 23012 of the 1993 NIRC13 (old Tax
Code). He claims that an actual written claim for refund is
necessary before a suit for its recovery may proceed in any
court.
On the other hand, respondent contends that the filing of an
amended return indicating an overpayment ofP358,274.63
constitutes a written claim for refund pursuant to the clear
proviso stated in the last sentence of Section 204(c) of the
1997 NIRC (new Tax Code), to wit:

39

xxxx
Provided, however, That a return filed showing an
overpayment shall be considered as a written claim
for credit or refund.
xxxx
Along the same vein, respondent invokes the liberal application
of technicalities in tax refund cases, conformably with our
ruling in BPI-Family Savings Bank, Inc. v. Court of
Appeals.14 We are, however, unable to agree with respondents
submission on this score.
The applicable law on refund of taxes pertaining to the 1996
compensation income is Section 230 of the old Tax Code,
which was the law then in effect, and not Section 204(c) of the
new Tax Code, which was effective starting only on January 1,
1998.
Noteworthy, the requirements under Section 230 for refund
claims are as follows:
1. A written claim for refund or tax credit must be
filed by the taxpayer with the Commissioner;
2. The claim for refund must be a categorical
demand for reimbursement;
3. The claim for refund or tax credit must be filed, or
the suit or proceeding therefor must be commenced in
court within two (2) years from date of payment of
the tax or penalty regardless of any supervening
cause.15 (Emphasis ours.)
In our view, the law is clear. A claimant must first file a written
claim for refund, categorically demanding recovery of overpaid
taxes with the CIR, before resorting to an action in court. This
obviously is intended, first, to afford the CIR an opportunity to
correct the action of subordinate officers; and second, to notify
the government that such taxes have been questioned, and the
notice should then be borne in mind in estimating the revenue
available for expenditure.16
Thus, on the first issue, we rule against respondents
contention. Entrenched in our jurisprudence is the principle that
tax refunds are in the nature of tax exemptions which are
construed strictissimi juris against the taxpayer and liberally in
favor of the government. As tax refunds involve a return of
revenue from the government, the claimant must show
indubitably the specific provision of law from which her right
arises; it cannot be allowed to exist upon a mere vague
implication or inference17 nor can it be extended beyond the
ordinary and reasonable intendment of the language actually
used by the legislature in granting the refund.18 To repeat, strict
compliance with the conditions imposed for the return of

revenue collected is a doctrine consistently applied in this


jurisdiction.19
Under the circumstances of this case, we cannot agree that the
amended return filed by respondent constitutes the written
claim for refund required by the old Tax Code, the law
prevailing at that time. Neither can we apply the liberal
interpretation of the law based on our pronouncement in the
case of BPI-Family Savings Bank, Inc. v. Court of Appeals, as
the taxpayer therein filed a written claim for refund aside from
presenting other evidence to prove its claim, unlike this case
before us.
On the second issue, petitioner argues that the 1997 NIRC
cannot be applied retroactively as the instant case involved
refund of taxes withheld on a 1996 income. Respondent,
however, points out that when the petition was filed with the
CTA on April 15, 1999, the 1997 NIRC was already in effect,
hence, Section 204(c) should apply, despite the fact that the
refund being sought pertains to a 1996 income tax. Note that
the issue on the retroactivity of Section 204(c) of the 1997
NIRC arose because the last paragraph of Section 204(c) was
not found in Section 230 of the old Code. After a thorough
consideration of this matter, we find that we cannot give
retroactive application to Section 204(c) abovecited. We have
to stress that tax laws are prospective in operation, unless the
language of the statute clearly provides otherwise.20
Moreover, it should be emphasized that a party seeking an
administrative remedy must not merely initiate the prescribed
administrative procedure to obtain relief, but also pursue it to
its appropriate conclusion before seeking judicial intervention
in order to give the administrative agency an opportunity to
decide the matter itself correctly and prevent unnecessary and
premature resort to court action.21 This the respondent did not
follow through. Additionally, it could not escape notice that at
the time respondent filed her amended return, the 1997 NIRC
was not yet in effect. Hence, respondent had no reason at that
time to think that the filing of an amended return would
constitute the written claim for refund required by applicable
law.
Furthermore, as the CTA stressed, even the date of filing of the
Final Adjustment Return was omitted, inadvertently or
otherwise, by respondent in her petition for review. This
omission was fatal to respondents claim, for it deprived the
CTA of its jurisdiction over the subject matter of the case.
Finally, we cannot agree with the Court of Appeals finding that
the nature of the instant case calls for the application of
remedial laws. Revenue statutes are substantive laws and in
no sense must their application be equated with that of
remedial laws. As well said in a prior case, revenue laws are
not intended to be liberally construed.22 Considering that taxes
are the lifeblood of the government and in Holmess
memorable metaphor, the price we pay for civilization, tax laws
must be faithfully and strictly implemented.

40

WHEREFORE, the petition is GRANTED. Both the assailed


Decision and Resolution dated February 13, 2002 and May 29,
2002, respectively, of the Court of Appeals in CA-G.R. SP No.
55572 are REVERSED and SET ASIDE. The Resolution dated
August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No.
5828 is herebyREINSTATED.
No pronouncement as to costs.
SO ORDERED.

41

G.R. No. 167146

October 31, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
PHILIPPINE GLOBAL COMMUNICATION, INC., respondent.

DECISION

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the
Rules of Court, seeking to set aside the en bancDecision of the
Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22
February 2005,1 ordering the petitioner to withdraw and cancel
Assessment Notice No. 000688-80-7333 issued against
respondent Philippine Global Communication, Inc. for its 1990
income tax deficiency. The CTA, in its assailed en
banc Decision, affirmed the Decision of the First Division of the
CTA dated 9 June 20042 and its Resolution dated 22
September 2004 in C.T.A. Case No. 6568.
Respondent, a corporation engaged in telecommunications,
filed its Annual Income Tax Return for taxable year 1990 on 15
April 1991. On 13 April 1992, the Commissioner of Internal
Revenue (CIR) issued Letter of Authority No. 0002307,
authorizing the appropriate Bureau of Internal Revenue (BIR)
officials to examine the books of account and other accounting
records of respondent, in connection with the investigation of
respondents 1990 income tax liability. On 22 April 1992, the
BIR sent a letter to respondent requesting the latter to present
for examination certain records and documents, but
respondent failed to present any document. On 21 April 1994,
respondent received a Preliminary Assessment Notice dated
13 April 1994 for deficiency income tax in the amount
of P118,271,672.00, inclusive of surcharge, interest, and
compromise penalty, arising from deductions that were
disallowed for failure to pay the withholding tax and interest
expenses that were likewise disallowed. On the following day,
22 April 1994, respondent received a Formal Assessment
Notice with Assessment Notice No. 000688-80-7333, dated 14
April 1994, for deficiency income tax in the total amount
of P118,271,672.00.3
On 6 May 1994, respondent, through its counsel Ponce Enrile
Cayetano Reyes and Manalastas Law Offices, filed a formal
protest letter against Assessment Notice No. 000688-80-7333.
Respondent filed another protest letter on 23 May 1994,
through another counsel Siguion Reyna Montecillo & Ongsiako
Law Offices. In both letters, respondent requested for the
cancellation of the tax assessment, which they alleged was
invalid for lack of factual and legal basis.4
On 16 October 2002, more than eight years after the
assessment was presumably issued, the Ponce Enrile
Cayetano Reyes and Manalastas Law Offices received from
the CIR a Final Decision dated 8 October 2002 denying the

respondents protest against Assessment Notice No. 00068880-7333, and affirming the said assessment in toto.5
On 15 November 2002, respondent filed a Petition for Review
with the CTA. After due notice and hearing, the CTA rendered a
Decision in favor of respondent on 9 June 2004. 6 The CTA
ruled on the primary issue of prescription and found it
unnecessary to decide the issues on the validity and propriety
of the assessment. It decided that the protest letters filed by
the respondent cannot constitute a request for reinvestigation,
hence, they cannot toll the running of the prescriptive period to
collect the assessed deficiency income tax.7 Thus, since more
than three years had lapsed from the time Assessment Notice
No. 000688-80-7333 was issued in 1994, the CIRs right to
collect the same has prescribed in conformity with Section 269
of the National Internal Revenue Code of 19778 (Tax Code of
1977). The dispositive portion of this decision reads:
WHEREFORE, premises considered, judgment is
hereby rendered in favor of the petitioner. Accordingly,
respondents Final Decision dated October 8, 2002 is
hereby REVERSED and SET ASIDE and respondent
is hereby ORDERED to WITHDRAW and CANCEL
Assessment Notice No. 000688-80-7333 issued
against the petitioner for its 1990 income tax
deficiency because respondents right to collect the
same has prescribed.9
The CIR moved for reconsideration of the aforesaid Decision
but was denied by the CTA in a Resolution dated 22
September 2004.10 Thereafter, the CIR filed a Petition for
Review with the CTA en banc, questioning the aforesaid
Decision and Resolution. In its en banc Decision, the CTA
affirmed the Decision and Resolution in CTA Case No. 6568.
The dispositive part reads:
WHEREFORE, premises considered, the Petition for
Review is hereby DISMISSED for lack of merit.
Accordingly, the assailed Decision and Resolution in
CTA Case No. 6568 are hereby AFFIRMED in toto.11
Hence, this Petition for Review on Certiorari raising the
following grounds:
THE COURT OF TAX APPEALS, SITTING EN BANC,
COMMITTED REVERSIBLE ERROR IN AFFIRMING
THE ASSAILED DECISION AND RESOLUTION IN
CTA CASE NO. 6568 DECLARING THAT THE RIGHT
OF THE GOVERNMENT TO COLLECT THE
DEFICIENCY INCOME TAX FROM RESPONDENT
FOR THE YEAR 1990 HAS PRESCRIBED
A. THE PRESCRIPTIVE PERIOD WAS
INTERUPTED
WHEN
RESPONDENT
FILED TWO LETTERS OF PROTEST
DISPUTING IN DETAIL THE DEFICIENCY
ASSESSMENT
IN
QUESTION
AND
REQUESTING THE CANCELLATION OF
SAID ASSESSMENT. THE TWO LETTERS
OF PROTEST ARE, BY NATURE,
REQUESTS FOR REINVESTIGATION OF
THE DISPUTED ASSESSMENT.

42

B.
THE
REQUESTS
FOR
REINVESTIGATION OF RESPONDENT
WERE GRANTED BY THE BUREAU OF
INTERNAL REVENUE.12
This Court finds no merit in this Petition.
The main issue in this case is whether or not CIRs right to
collect respondents alleged deficiency income tax is barred by
prescription under Section 269(c) of the Tax Code of 1977,
which reads:
Section 269. Exceptions as to the period of limitation
of assessment and collection of taxes. x x x
xxxx
c. Any internal revenue tax which has been assessed
within the period of limitation above-prescribed may
be collected by distraint or levy or by a proceeding in
court within three years following the assessment of
the tax.
The law prescribed a period of three years from the date the
return was actually filed or from the last date prescribed by law
for the filing of such return, whichever came later, within which
the BIR may assess a national internal revenue tax.13 However,
the law increased the prescriptive period to assess or to begin
a court proceeding for the collection without an assessment to
ten years when a false or fraudulent return was filed with the
intent of evading the tax or when no return was filed at all.14 In
such cases, the ten-year period began to run only from the
date of discovery by the BIR of the falsity, fraud or omission.
If the BIR issued this assessment within the three-year period
or the ten-year period, whichever was applicable, the law
provided another three years after the assessment for the
collection of the tax due thereon through the administrative
process of distraint and/or levy or through judicial
proceedings.15 The three-year period for collection of the
assessed tax began to run on the date the assessment notice
had been released, mailed or sent by the BIR.16
The assessment, in this case, was presumably issued on 14
April 1994 since the respondent did not dispute the CIRs
claim. Therefore, the BIR had until 13 April 1997. However, as
there was no Warrant of Distraint and/or Levy served on the
respondents nor any judicial proceedings initiated by the BIR,
the earliest attempt of the BIR to collect the tax due based on
this assessment was when it filed its Answer in CTA Case No.
6568 on 9 January 2003, which was several years beyond the
three-year prescriptive period. Thus, the CIR is now prescribed
from collecting the assessed tax.
The provisions on prescription in the assessment and
collection of national internal revenue taxes became law upon
the recommendation of the tax commissioner of the
Philippines. The report submitted by the tax commission clearly
states that these provisions on prescription should be enacted
to benefit and protect taxpayers:
Under the former law, the right of the Government to
collect the tax does not prescribe. However, in

fairness to the taxpayer, the Government should be


estopped from collecting the tax where it failed to
make the necessary investigation and assessment
within 5 years after the filing of the return and where it
failed to collect the tax within 5 years from the date of
assessment thereof. Just as the government is
interested in the stability of its collections, so also are
the taxpayers entitled to an assurance that they will
not be subjected to further investigation for tax
purposes after the expiration of a reasonable period
of time. (Vol. II, Report of the Tax Commission of the
Philippines, pp. 321-322).17
In a number of cases, this Court has also clarified that the
statute of limitations on the collection of taxes should benefit
both the Government and the taxpayers. In these cases, the
Court further illustrated the harmful effects that the delay in the
assessment and collection of taxes inflicts upon taxpayers.
In Collector of Internal Revenue v. Suyoc Consolidated Mining
Company,18 Justice Montemayor, in his dissenting opinion,
identified the potential loss to the taxpayer if the assessment
and collection of taxes are not promptly made.
Prescription in the assessment and in the collection of
taxes is provided by the Legislature for the benefit of
both the Government and the taxpayer; for the
Government for the purpose of expediting the
collection of taxes, so that the agency charged with
the assessment and collection may not tarry too long
or indefinitely to the prejudice of the interests of the
Government, which needs taxes to run it; and for the
taxpayer so that within a reasonable time after filing
his return, he may know the amount of the
assessment he is required to pay, whether or not such
assessment is well founded and reasonable so that
he may either pay the amount of the assessment or
contest its validity in court x x x. It would surely be
prejudicial to the interest of the taxpayer for the
Government collecting agency to unduly delay the
assessment and the collection because by the time
the collecting agency finally gets around to making
the assessment or making the collection, the taxpayer
may then have lost his papers and books to support
his claim and contest that of the Government, and
what is more, the tax is in the meantime accumulating
interest which the taxpayer eventually has to pay .
In Republic of the Philippines v. Ablaza,19 this Court
emphatically explained that the statute of limitations of actions
for the collection of taxes is justified by the need to protect lawabiding citizens from possible harassment:
The law prescribing a limitation of actions for the
collection of the income tax is beneficial both to the
Government and to its citizens; to the Government
because tax officers would be obliged to act promptly
in the making of assessment, and to citizens because
after the lapse of the period of prescription citizens
would have a feeling of security against unscrupulous
tax agents who will always find an excuse to inspect
the books of taxpayers, not to determine the latters
real liability, but to take advantage of every
opportunity to molest, peaceful, law-abiding citizens.
Without such legal defense taxpayers would
furthermore be under obligation to always keep their

43

books and keep them open for inspection subject to


harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be
interpreted in a way conducive to bringing about the
beneficient purpose of affording protection to the
taxpayer within the contemplation of the Commission
which recommended the approval of the law.
And again in the recent case Bank of the Philippine Islands v.
Commissioner of Internal Revenue,20 this Court, in confirming
these earlier rulings, pronounced that:
Though the statute of limitations on assessment and
collection of national internal revenue taxes benefits
both the Government and the taxpayer, it principally
intends to afford protection to the taxpayer against
unreasonable investigation. The indefinite extension
of the period for assessment is unreasonable
because it deprives the said taxpayer of the
assurance that he will no longer be subjected to
further investigation for taxes after the expiration of a
reasonable period of time.
Thus, in Commissioner of Internal Revenue v. B.F.
Goodrich,21 this Court affirmed that the law on prescription
should be liberally construed in order to protect taxpayers and
that, as a corollary, the exceptions to the law on prescription
should be strictly construed.
The Tax Code of 1977, as amended, provides instances when
the running of the statute of limitations on the assessment and
collection of national internal revenue taxes could be
suspended, even in the absence of a waiver, under Section
271 thereof which reads:
Section 224. Suspension of running of statute. The running
of the statute of limitation provided in Sections 268 and 269 on
the making of assessments and the beginning of distraint or
levy or a proceeding in court for collection in respect of any
deficiency, shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court and for sixty
days thereafter; when the taxpayer requests for a
reinvestigation which is granted by the Commissioner;
when the taxpayer cannot be located in the address given by
him in the return filed upon which a tax is being assessed or
collected x x x. (Emphasis supplied.)
Among the exceptions provided by the aforecited section, and
invoked by the CIR as a ground for this petition, is the instance
when the taxpayer requests for a reinvestigation which is
granted by the Commissioner. However, this exception does
not apply to this case since the respondent never requested for
a reinvestigation. More importantly, the CIR could not have
conducted a reinvestigation where, as admitted by the CIR in
its Petition, the respondent refused to submit any new
evidence.
Revenue Regulations No. 12-85, the Procedure Governing
Administrative Protests of Assessment of the Bureau of
Internal Revenue, issued on 27 November 1985, defines the
two types of protest, the request for reconsideration and the
request for reinvestigation, and distinguishes one from the
other in this manner:

Section 6. Protest. - The taxpayer may protest


administratively an assessment by filing a written
request for reconsideration or reinvestigation
specifying the following particulars:
xxxx
For the purpose of protest herein
(a) Request for reconsideration-- refers to a plea for a
re-evaluation of an assessment on the basis of
existing records without need of additional evidence.
It may involve both a question of fact or of law or both.
(b) Request for reinvestigationrefers to a plea for
re-evaluation of an assessment on the basis of newlydiscovered evidence or additional evidence that a
taxpayer intends to present in the investigation. It may
also involve a question of fact or law or both.
The main difference between these two types of protests lies in
the records or evidence to be examined by internal revenue
officers, whether these are existing records or newly
discovered or additional evidence. A re-evaluation of existing
records which results from a request for reconsideration does
not toll the running of the prescription period for the collection
of an assessed tax. Section 271 distinctly limits the suspension
of the running of the statute of limitations to instances when
reinvestigation is requested by a taxpayer and is granted by
the CIR. The Court provided a clear-cut rationale in the case
of Bank of the Philippine Islands v. Commissioner of Internal
Revenue22 explaining why a request for reinvestigation, and
not a request for reconsideration, interrupts the running of the
statute of limitations on the collection of the assessed tax:
Undoubtedly, a reinvestigation, which entails the
reception and evaluation of additional evidence, will
take more time than a reconsideration of a tax
assessment, which will be limited to the evidence
already at hand; this justifies why the former can
suspend the running of the statute of limitations on
collection of the assessed tax, while the latter cannot.
In the present case, the separate letters of protest dated 6 May
1994 and 23 May 1994 are requests for reconsideration. The
CIRs allegation that there was a request for reinvestigation is
inconceivable since respondent consistently and categorically
refused to submit new evidence and cooperate in any
reinvestigation proceedings. This much was admitted in the
Decision dated 8 October 2002 issued by then CIR Guillermo
Payarno, Jr.
In the said conference-hearing, Revenue Officer
Alameda basically testified that Philcom, despite
repeated demands, failed to submit documentary
evidences in support of its claimed deductible
expenses. Hence, except for the item of interest
expense which was disallowed for being not ordinary
and necessary, the rest of the claimed expenses were
disallowed for non-withholding. In the same token,
Revenue Officer Escober testified that upon his
assignment to conduct the re-investigation, he
immediately requested the taxpayer to present
various accounting records for the year 1990, in

44

addition to other documents in relation to the


disallowed items (p.171). This was followed by other
requests for submission of documents (pp.199 &217)
but these were not heeded by the taxpayer.
Essentially, he stated that Philcom did not cooperate
in his reinvestigation of the case.
In response to the testimonies of the Revenue
Officers, Philcom thru Atty. Consunji, emphasized that
it was denied due process because of the issuance of
the Pre-Assessment Notice and the Assessment
Notice on successive dates. x x x Counsel for the
taxpayer even questioned the propriety of the
conference-hearing inasmuch as the only question to
resolved (sic) is the legality of the issuance of the
assessment. On the disallowed items, Philcom thru
counsel manifested that it has no intention to present
documents and/or evidences allegedly because of the
pending legal question on the validity of the
assessment.23
Prior to the issuance of Revenue Regulations No. 12-85, which
distinguishes a request for reconsideration and a request for
reinvestigation, there have been cases wherein these two
terms were used interchangeably. But upon closer
examination, these cases all involved a reinvestigation that
was requested by the taxpayer and granted by the BIR.
In Collector of Internal Revenue v. Suyoc Consolidated Mining
Company,24 the Court weighed the considerable time spent by
the BIR to actually conduct the reinvestigations requested by
the taxpayer in deciding that the prescription period was
suspended during this time.
Because of such requests, several reinvestigations
were made and a hearing was even held by the
Conference Staff organized in the collection office to
consider claims of such nature which, as the record
shows, lasted for several months. After inducing
petitioner to delay collection as he in fact did, it is
most unfair for respondent to now take advantage of
such desistance to elude his deficiency income tax
liability to the prejudice of the Government invoking
the technical ground of prescription.
Although the Court used the term "requests for
reconsideration" in reference to the letters sent by the taxpayer
in the case of Querol v. Collector of Internal Revenue,25 it took
into account the reinvestigation conducted soon after these
letters were received and the revised assessment that resulted
from the reinvestigations.
It is true that the Collector revised the original
assessment on February 9, 1955; and appellant avers
that this revision was invalid in that it was not made
within the five-year prescriptive period provided by
law (Collector vs. Pineda, 112 Phil. 321). But that fact
is that the revised assessment was merely a result of
petitioner Querols requests for reconsideration of the
original assessment, contained in his letters of
December 14, 1951 and May 25, 1953. The records
of the Bureau of Internal Revenue show that after
receiving the letters, the Bureau conducted a
reinvestigation of petitioners tax liabilities, and, in

fact, sent a tax examiner to San Fernando, La Union,


for that purpose; that because of the examiners
report, the Bureau revised the original assessment, x
x x. In other words, the reconsideration was granted
in part, and the original assessment was altered.
Consequently, the period between the petition for
reconsideration and the revised assessment should
be subtracted from the total prescriptive period
(Republic vs. Ablaza, 108 Phil 1105).
The Court, in Republic v. Lopez, 26 even gave a detailed
accounting of the time the BIR spent for each reinvestigation in
order to deduct it from the five-year period set at that time in
the statute of limitations:
It is now a settled ruled in our jurisdiction that the fiveyear prescriptive period fixed by Section 332(c) of the
Internal Revenue Code within which the Government
may sue to collect an assessed tax is to be computed
from the last revised assessment resulting from a
reinvestigation asked for by the taxpayer and (2) that
where a taxpayer demands a reinvestigation, the time
employed in reinvestigating should be deducted from
the total period of limitation.
xxxx
The first reinvestigation was granted, and a reduced
assessment issued on 29 May 1954, from which date
the Government had five years for bringing an action
to collect.
The second reinvestigation was asked on 16 January
1956, and lasted until it was decided on 22 April 1960,
or a period of 4 years, 3 months, and 6 days, during
which the limitation period was interrupted.
The Court reiterated the ruling in Republic v. Lopez in the case
of Commissioner of Internal Revenue v. Sison,27"that where a
taxpayer demands a reinvestigation, the time employed in
reinvestigating should be deducted from the total period of
limitation." Finally, in Republic v. Arcache,28 the Court
enumerated the reasons why the taxpayer is barred from
invoking the defense of prescription, one of which was that, "In
the first place, it appears obvious that the delay in the
collection of his 1946 tax liability was due to his own repeated
requests for reinvestigation and similarly repeated requests for
extension of time to pay."
In this case, the BIR admitted that there was no new or
additional evidence presented. Considering that the BIR issued
its Preliminary Assessment Notice on 13 April 1994 and its
Formal Assessment Notice on 14 April 1994, just one day
before the three-year prescription period for issuing the
assessment expired on 15 April 1994, it had ample time to
make a factually and legally well-founded assessment. Added
to the fact that the Final Decision that the CIR issued on 8
October 2002 merely affirmed its earlier findings, whatever
examination that the BIR may have conducted cannot possibly
outlast the entire three-year prescriptive period provided by law
to collect the assessed tax, not to mention the eight years it
actually took the BIR to decide the respondents protest. The
factual and legal issues involved in the assessment are
relatively simple, that is, whether certain income tax deductions

45

should be disallowed, mostly for failure to pay withholding


taxes. Thus, there is no reason to suspend the running of the
statute of limitations in this case.
The distinction between a request for reconsideration and a
request for reinvestigation is significant. It bears repetition that
a request for reconsideration, unlike a request for
reinvestigation, cannot suspend the statute of limitations on the
collection of an assessed tax. If both types of protest can
effectively interrupt the running of the statute of limitations, an
erroneous assessment may never prescribe. If the taxpayer
fails to file a protest, then the erroneous assessment would
become final and unappealable.29 On the other hand, if the
taxpayer does file the protest on a patently erroneous
assessment, the statute of limitations would automatically be
suspended and the tax thereon may be collected long after it
was assessed. Meanwhile the interest on the deficiencies and
the surcharges continue to accumulate. And for an unrestricted
number of years, the taxpayers remain uncertain and are
burdened with the costs of preserving their books and records.
This is the predicament that the law on the statute of limitations
seeks to prevent.
The Court, in sustaining for the first time the suspension of the
running of the statute of limitations in cases where the taxpayer
requested for a reinvestigation, gave this justification:
A taxpayer may be prevented from setting up the
defense of prescription even if he has not previously
waived it in writing as when by his repeated requests
or positive acts the Government has been, for good
reasons, persuaded to postpone collection to make
him feel that the demand was not unreasonable or
that no harassment or injustice is meant by the
Government.
xxxx
This case has no precedent in this jurisdiction for it is
the first time that such has risen, but there are several
precedents that may be invoked in American
jurisprudence. As Mr. Justice Cardozo has said: "The
applicable principle is fundamental and unquestioned.
He who prevents a thing from being done may
not avail himself of the nonperformance which he
himself occasioned, for the law says to him in
effect "this is your own act, and therefore you are
not damnified." (R.H. Stearns Co. v. U.S., 78 L. ed.,
647). (Emphasis supplied.)30
This rationale is not applicable to the present case where the
respondent did nothing to prevent the BIR from collecting the
tax. It did not present to the BIR any new evidence for its reevaluation. At the earliest opportunity, respondent insisted that
the assessment was invalid and made clear to the BIR its
refusal to produce documents that the BIR requested. On the
other hand, the BIR also communicated to the respondent its
unwavering stance that its assessment is correct. Given that
both parties were at a deadlock, the next logical step would
have been for the BIR to issue a Decision denying the
respondents protest and to initiate proceedings for the
collection of the assessed tax and, thus, allow the respondent,
should it so choose, to contest the assessment before the
CTA. Postponing the collection for eight long years could not

possibly make the taxpayer feel that the demand was not
unreasonable or that no harassment or injustice is meant by
the Government. There was no legal, or even a moral,
obligation preventing the CIR from collecting the assessed tax.
In a similar case, Cordero v. Conda,31 the Court did not
suspend the running of the prescription period where the acts
of the taxpayer did not prevent the government from collecting
the tax.
The government also urges that partial payment is
"acknowledgement of the tax obligation", hence a
"waiver on the defense of prescription." But partial
payment would not prevent the government from
suing the taxpayer. Because, by such act of payment,
the government is not thereby "persuaded to
postpone collection to make him feel that the demand
was not unreasonable or that no harassment or
injustice is meant." Which, as stated in Collector v.
Suyoc Consolidated Mining Co., et al., L-11527,
November 25, 1958, is the underlying reason behind
the rule that prescriptive period is arrested by the
taxpayers
request
for
reexamination
or
reinvestigation even if "he has not previously waived
it [prescription] in writing."
The Court reminds us, in the case of Commissioner of Internal
Revenue v. Algue, Inc., 32 of the need to balance the conflicting
interests of the government and the taxpayers.
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
interest of the authorities and the taxpayers so that
the real purpose of taxation, which is the promotion of
common good, may be achieved.
Thus, the three-year statute of limitations on the collection of
an assessed tax provided under Section 269(c) of the Tax
Code of 1977, a law enacted to protect the interests of the
taxpayer, must be given effect. In providing for exceptions to
such rule in Section 271, the law strictly limits the suspension
of the running of the prescription period to, among other
instances, protests wherein the taxpayer requests for a
reinvestigation. In this case, where the taxpayer merely filed
two protest letters requesting for a reconsideration, and where
the BIR could not have conducted a reinvestigation because
no new or additional evidence was submitted, the running of
statute of limitations cannot be interrupted. The tax which is the
subject of the Decision issued by the CIR on 8 October 2002
affirming the Formal Assessment issued on 14 April 1994 can
no longer be the subject of any proceeding for its collection.
Consequently, the right of the government to collect the alleged
deficiency tax is barred by prescription.
IN VIEW OF THE FOREGOING, the instant Petition
is DENIED. The assailed en banc Decision of the CTA in CTA
EB No. 37 dated 22 February 2005, cancelling Assessment
Notice No. 000688-80-7333 issued against Philippine Global
Communication, Inc. for its 1990 income tax deficiency for the
reason that it is barred by prescription, is hereby AFFIRMED.
No costs.

46

SO ORDERED.

47

THE CITY OF MANILA,LIBERTY M. TOLEDO,


in her capacity as THE TREASURER
OF MANILA and JOSEPHSANTIAGO, in his
capacity as the CHIEF OF THE LICENSE
DIVISION OF CITY OFMANILA,
Petitioners,

- versus -

G.R. No. 181845


Petitioner City of Manila is a public corporation
empowered to collect and assess business taxes, revenue
fees,
and
permit
fees,
through
its
officers,
petitioners Toledo andSantiago, in their capacities as City
Present:
Treasurer and Chief of the Licensing Division, respectively. On
the other hand, respondent Coca-Cola Bottlers Philippines, Inc.
is a corporation engaged in the business of manufacturing and
selling beverages, and which maintains a sales office in the
City of Manila.
YNARES-SANTIAGO,
Chairperson,

The case stemmed from the following facts:

CHICO-NAZARIO,

COCA-COLA BOTTLERS PHILIPPINES, INC.,

VELASCO, JR.,Prior to 25 February 2000, respondent had been


paying the City of Manila local business tax only under Section
NACHURA,
14 of and
Tax Ordinance No. 7794,[6] being expressly exempted
from the business tax under Section 21 of the same tax
PERALTA,
ordinance. Pertinent provisions of Tax Ordinance No. 7794
provide:

Respondent.

Promulgated:

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

Section 14. Tax on Manufacturers,


Assemblers and Other Processors. There is
hereby imposed a graduated tax on
assemblers,
repackers,
August 4, 2009 manufacturers,
processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits, and
wines or manufacturers of any article of
commerce of whatever kind or nature, in
accordance with any of the following
schedule:
xxxx

over P6,500,000.00 up to
P25,000,000.00 - - - - - - - - - - - - - - - - - - -- P36,000.00 plus 50% of 1%

This case is a Petition for Review on Certiorari under


Rule 45 of the Revised Rules of Civil Procedure seeking to
review and reverse the Decision[1] dated 18 January 2008 and
Resolution[2] dated 18 February 2008 of the Court of Tax
Appeals en banc (CTA en banc) in C.T.A. EB No. 307. In its
assailed Decision, the CTA en banc dismissed the Petition for
Review of herein petitioners City of Manila, Liberty M. Toledo
(Toledo), and Joseph Santiago (Santiago); and affirmed the
Resolutions dated 24 May 2007, [3] 8 June 2007,[4] and 26 July
2007,[5] of the CTA First Division in C.T.A. AC No. 31, which, in
turn, dismissed the Petition for Review of petitioners in said
case for being filed out of time. In its questioned Resolution,
the CTA en banc denied the Motion for Reconsideration of
petitioners.

in excess of P6,500,000.00

xxxx

Section 21. Tax on Businesses


Subject to the Excise, Value-Added or
Percentage Taxes under the NIRC. On any
of the following businesses and articles of

48

commerce subject to excise, value-added or


percentage taxes under the National Internal
Revenue Code hereinafter referred to as
NIRC, as amended, a tax of FIFTY
PERCENT (50%) of ONE PERCENT (1%)
per annum on the gross sales or receipts of
the preceding calendar year is hereby
imposed:

(A) On persons who sell goods and


services in the course of trade or business;
and those who import goods whether for
business or otherwise; as provided for in
Sections 100 to 103 of the NIRC as
administered and determined by the Bureau
of Internal Revenue pursuant to the pertinent
provisions of the said Code.

xxxx
(D) Excisable goods subject to VAT
(1) Distilled spirits
(2) Wines
xxxx

(8) Coal and coke


(9) Fermented
liquor,
brewers
wholesale price, excluding the ad valorem
tax

xxxx

PROVIDED, that all registered


businesses in the City of Manila that are
already paying the aforementioned tax shall
be exempted from payment thereof.

Petitioner City of Manila subsequently approved on 25


February 2000, Tax Ordinance No. 7988,[7] amending certain
sections of Tax Ordinance No. 7794, particularly: (1) Section
14, by increasing the tax rates applicable to certain
establishments operating within the territorial jurisdiction of the
City of Manila; and (2) Section 21, by deleting theproviso found
therein, which stated that all registered businesses in the City
of Manila that are already paying the aforementioned tax shall
be
exempted
from
payment
thereof.Petitioner City of Manila approved only after a year,
on 22 February 2001, another tax ordinance, Tax Ordinance
No. 8011, amending Tax Ordinance No. 7988.

Tax Ordinances No. 7988 and No. 8011 were later


declared by the Court null and void in Coca-Cola Bottlers
Philippines, Inc. v. City of Manila [8] (Coca-Cola case) for the
following reasons: (1) Tax Ordinance No. 7988 was enacted in
contravention of the provisions of the Local Government Code
(LGC) of 1991 and its implementing rules and regulations; and
(2) Tax Ordinance No. 8011 could not cure the defects of Tax
Ordinance No. 7988, which did not legally exist.

However, before the Court could declare Tax


Ordinance No. 7988 and Tax Ordinance No. 8011 null and
void, petitioner City of Manila assessed respondent on the
basis of Section 21 of Tax Ordinance No. 7794, as amended
by the aforementioned tax ordinances, for deficiency local
business taxes, penalties, and interest, in the total amount
ofP18,583,932.04, for the third and fourth quarters of the year
2000. Respondent filed a protest with petitioner Toledo on the
ground that the said assessment amounted to double taxation,
as respondent was taxed twice, i.e., under Sections 14 and 21
of Tax Ordinance No. 7794, as amended by Tax Ordinances
No. 7988 and No. 8011. Petitioner Toledo did not respond to
the protest of respondent.

Consequently, respondent filed with the Regional Trial


Court (RTC) of Manila, Branch 47, an action for the
cancellation of the assessment against respondent for
business taxes, which was docketed as Civil Case No. 03107088.

On 14 July 2006, the RTC rendered


a
Decision[9] dismissing Civil Case No. 03-107088. The RTC
ruled that the business taxes imposed upon the respondent
under Sections 14 and 21 of Tax Ordinance No. 7988, as
amended, were not of the same kind or character; therefore,
there was no double taxation. The RTC, though, in an
Order[10]dated 16 November 2006, granted the Motion for
Reconsideration of respondent, decreed the cancellation and
withdrawal of the assessment against the latter, and barred
petitioners from further imposing/assessing local business
taxes against respondent under Section 21 of Tax Ordinance
No. 7794, as amended by Tax Ordinance No. 7988 and Tax
Ordinance No. 8011. The 16 November 2006 Decision of the
RTC was in conformity with the ruling of this Court in the CocaCola case, in which Tax Ordinance No. 7988 and Tax
Ordinance No. 8011 were declared null and void. The Motion
for Reconsideration of petitioners was denied by the RTC in an

49

Order[11] dated 4 April 2007. Petitioners received a copy of


the 4 April 2007 Order of the RTC, denying their Motion for
Reconsideration of the 16 November 2006 Order of the same
court, on 20 April 2007.

Hence, the present Petition, where petitioners raise


the following issues:

I.
On 4 May 2007, petitioners filed with the CTA a
Motion for Extension of Time to File Petition for Review,
praying for a 15-day extension or until 20 May 2007 within
which to file their Petition. The Motion for Extension of
petitioners was docketed as C.T.A. AC No. 31, raffled to the
CTA First Division.
II.
Again, on 18 May 2007, petitioners filed, through
registered mail, a Second Motion for Extension of Time to File
a Petition for Review, praying for another 10-day extension, or
until 30 May 2007, within which to file their Petition.

On 24 May 2007, however, the CTA First Division


already issued a Resolution dismissing C.T.A. AC No. 31 for
failure of petitioners to timely file their Petition for Review on 20
May 2007.

Unaware of the 24 May 2007 Resolution of the CTA


First Division, petitioners filed their Petition for Review
therewith on 30 May 2007 via registered mail. On 8 June 2007,
the CTA First Division issued another Resolution, reiterating
the dismissal of the Petition for Review of petitioners.

Petitioners moved for the reconsideration of the


foregoing Resolutions dated 24 May 2007 and 8 June 2007,
but their motion was denied by the CTA First Division in a
Resolution dated 26 July 2007. The CTA First Division
reasoned that the Petition for Review of petitioners was not
only filed out of time -- it also failed to comply with the
provisions of Section 4, Rule 5; and Sections 2 and 3, Rule 6,
of the Revised Rules of the CTA.

Petitioners thereafter filed a Petition for Review before


the CTA en banc, docketed as C.T.A. EB No. 307, arguing that
the CTA First Division erred in dismissing their Petition for
Review in C.T.A. AC No. 31 for being filed out of time, without
considering the merits of their Petition.

The CTA en banc rendered its Decision on 18


January 2008, dismissing the Petition for Review of petitioners
and affirming the Resolutions dated 24 May 2007, 8 June
2007, and 26 July 2007 of the CTA First Division. The CTA en
banc similarly denied the Motion for Reconsideration of
petitioners in a Resolution dated 18 February 2008.

WHETHER OR NOT
PETITIONERS SUBSTANTIALLY
COMPLIED
WITH
THE
REGLEMENTARY PERIOD TO
TIMELY APPEAL THE CASE FOR
REVIEW BEFORE THE [CTA
DIVISION].

WHETHER OR NOT THE


RULING OF THIS COURT IN THE
EARLIER [COCA-COLA CASE] IS
DOCTRINAL AND CONTROLLING
IN THE INSTANT CASE.

III.

WHETHER
OR
NOT
PETITIONER
CITY
OF MANILA CAN STILL ASSESS
TAXES UNDER [SECTIONS] 14
AND 21 OF [TAX ORDINANCE NO.
7794, AS AMENDED].

IV.

WHETHER OR NOT THE


ENFORCEMENT OF [SECTION]
21 OF THE [TAX ORDINANCE NO.
7794,
AS
AMENDED]
CONSTITUTES
DOUBLE
TAXATION.

Petitioners assert that Section 1, Rule 7[12] of the


Revised Rules of the CTA refers to certain provisions of the
Rules of Court, such as Rule 42 of the latter, and makes them
applicable to the tax court. Petitioners then cannot be faulted in
relying on the provisions of Section 1, Rule 42[13] of the Rules
of Court as regards the period for filing a Petition for Review
with the CTA in division. Section 1, Rule 42 of the Rules of
Court provides for a 15-day period, reckoned from receipt of
the adverse decision of the trial court, within which to file a
Petition for Review with the Court of Appeals. The same rule
allows an additional 15-day period within which to file such a
Petition; and, only for the most compelling reasons, another
extension period not to exceed 15 days. Petitioners received
on 20 April 2007 a copy of the 4 April 2007 Order of the RTC,
denying their Motion for Reconsideration of the 16 November
2006 Order of the same court. On 4 May 2007, believing that
they only had 15 days to file a Petition for Review with the CTA
in division, petitioners moved for a 15-day extension, or until 20
May 2007, within which to file said Petition. Prior to the lapse of
their first extension period, or on 18 May 2007, petitioners
again moved for a 10-day extension, or until 30 May 2007,
within which to file their Petition for Review. Thus, when
petitioners filed their Petition for Review with the CTA

50

First Division on 30 May 2007, the same was filed well within
the reglementary period for doing so.

Petitioners argue in the alternative that even


assuming that Section 3(a), Rule 8[14] of the Revised Rules of
the CTA governs the period for filing a Petition for Review with
the CTA in division, still, their Petition for Review was filed
within the reglementary period. Petitioners call attention to the
fact that prior to the lapse of the 30-day period for filing a
Petition for Review under Section 3(a), Rule 8 of the Revised
Rules of the CTA, they had already moved for a 10-day
extension, or until 30 May 2007, within which to file their
Petition. Petitioners claim that there was sufficient justification
in equity for the grant of the 10-day extension they requested,
as the primordial consideration should be the substantive, and
not the procedural, aspect of the case. Moreover, Section 3(a),
Rule 8 of the Revised Rules of the CTA, is silent as to whether
the 30-day period for filing a Petition for Review with the CTA in
division may be extended or not.

Petitioners also contend that the Coca-Cola case is


not determinative of the issues in the present case because
the issue of nullity of Tax Ordinance No. 7988 and Tax
Ordinance No. 8011 is not the lis mota herein. The CocaCola case is not doctrinal and cannot be considered as the law
of the case.

Petitioners further insist that notwithstanding the


declaration of nullity of Tax Ordinance No. 7988 and Tax
Ordinance No. 8011, Tax Ordinance No. 7794 remains a valid
piece of local legislation. The nullity of Tax Ordinance No. 7988
and Tax Ordinance No. 8011 does not effectively bar
petitioners from imposing local business taxes upon
respondent under Sections 14 and 21 of Tax Ordinance No.
7794, as they were read prior to their being amended by the
foregoing null and void tax ordinances.

Petitioners finally maintain that imposing upon


respondent local business taxes under both Sections 14 and
21 of Tax Ordinance No. 7794 does not constitute direct double
taxation. Section 143 of the LGC gives municipal, as well as
city governments, the power to impose business taxes, to wit:

SECTION 143. Tax on Business.


The municipality may impose taxes on the
following businesses:

(a) On manufacturers, assemblers,


repackers, processors, brewers, distillers,
rectifiers, and compounders of liquors,
distilled spirits, and wines or manufacturers
of any article of commerce of whatever kind

or nature, in accordance with the following


schedule:

xxxx

(b) On wholesalers, distributors, or


dealers in any article of commerce of
whatever kind or nature in accordance with
the following schedule:

xxxx

(c) On
exporters,
and
on
manufacturers,
millers,
producers,
wholesalers, distributors, dealers or retailers
of essential commodities enumerated
hereunder at a rate not exceeding one-half
(1/2) of the rates prescribed under
subsections (a), (b) and (d) of this Section:

xxxx

Provided, however, That barangays


shall have the exclusive power to levy taxes,
as provided under Section 152 hereof, on
gross sales or receipts of the preceding
calendar year of Fifty thousand pesos
(P50,000.00) or less, in the case of cities,
and Thirty thousand pesos (P30,000) or less,
in the case of municipalities.

(e) On contractors and other


independent contractors, in accordance with
the following schedule:

xxxx

51

(f) On banks and other financial institutions,


at a rate not exceeding fifty percent (50%) of
one percent (1%) on the gross receipts of
the preceding calendar year derived from
interest, commissions and discounts from
lending activities, income from financial
leasing, dividends, rentals on property and
profit from exchange or sale of property,
insurance premium.

(g) On peddlers engaged in the sale


of any merchandise or article of commerce,
at a rate not exceeding Fifty pesos (P50.00)
per peddler annually.

(h) On any business, not otherwise specified


in the preceding paragraphs, which the
sanggunian concerned may deem proper to
tax: Provided, That on any business subject
to the excise, value-added or percentage tax
under the National Internal Revenue Code,
as amended, the rate of tax shall not exceed
two percent (2%) of gross sales or receipts
of the preceding calendar year.

Section 14 of Tax Ordinance No. 7794 imposes local


business tax on manufacturers, etc. of liquors, distilled spirits,
wines, and any other article of commerce, pursuant to Section
143(a) of the LGC. On the other hand, the local business tax
under Section 21 of Tax Ordinance No. 7794 is imposed upon
persons selling goods and services in the course of trade or
business, and those importing goods for business or otherwise,
who, pursuant to Section 143(h) of the LGC, are subject to
excise tax, value-added tax (VAT), or percentage tax under the
National Internal Revenue Code (NIRC). Thus, there can be no
double taxation when respondent is being taxed under both
Sections 14 and 21 of Tax Ordinance No. 7794, for under the
first, it is being taxed as a manufacturer; while under the
second, it is being taxed as a person selling goods in the
course of trade or business subject to excise, VAT, or
percentage tax.

Section 11 of Republic Act No. 9282 provides:

SEC. 11. Who May Appeal; Mode


of Appeal; Effect of Appeal. Any party
adversely affected by a decision, ruling or
inaction of the Commissioner of Internal
Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade
and Industry or the Secretary of Agriculture
or the Central Board of Assessment Appeals
or the Regional Trial Courts may file an
Appeal with the CTA within thirty (30)
days after the receipt of such decision or
ruling or after the expiration of the period
fixed by law for action as referred to in
Section 7(a)(2) herein.

Appeal shall be made by filing


a petition for review under a procedure
analogous to that provided for under Rule
42 of the 1997 Rules of Civil
Procedure with the CTA withinthirty (30)
days from the receipt of the decision or
ruling or in the case of inaction as herein
provided, from the expiration of the period
fixed by law to act thereon. x x x. (Emphasis
supplied.)

Section 3(a), Rule 8 of the Revised Rules of


the CTA states:

The Court first addresses the issue raised by


petitioners concerning the period within which to file with the
CTA a Petition for Review from an adverse decision or ruling of
the RTC.

SEC 3. Who may appeal; period to file


petition. (a) A party adversely affected by a
decision, ruling or the inaction of the
Commissioner of Internal Revenue on
disputed assessments or claims for refund of
internal revenue taxes, or by a decision or
ruling of the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade
and Industry, the Secretary of Agriculture, or
aRegional Trial Court in the exercise of its
original jurisdiction may appeal to the Court
by petition for review filed within thirty
days after receipt of a copy of such decision
or ruling, or expiration of the period fixed by
law for the Commissioner of Internal
Revenue
to
act on
the
disputed
assessments. x x x. (Emphasis supplied.)

The period to appeal the decision or ruling of the RTC


to the CTA via a Petition for Review is specifically governed by
Section 11 of Republic Act No. 9282, [15] and Section 3(a), Rule
8 of the Revised Rules of the CTA.

It is crystal clear from the afore-quoted provisions that


to appeal an adverse decision or ruling of the RTC to the CTA,

52

the taxpayer must file a Petition for Review with the


CTA within 30 days from receipt of said adverse decision or
ruling of the RTC.

It is also true that the same provisions are silent as to


whether such 30-day period can be extended or not. However,
Section 11 of Republic Act No. 9282 does state that the
Petition for Review shall be filed with the CTA following the
procedure analogous to Rule 42 of the Revised Rules of
Civil Procedure. Section 1, Rule 42[16] of the Revised Rules of
Civil Procedure provides that the Petition for Review of an
adverse judgment or final order of the RTC must be filed with
the Court of Appeals within: (1) the original 15-day period from
receipt of the judgment or final order to be appealed; (2) an
extended period of 15 days from the lapse of the original
period;
and
(3)
only for
the
most
compelling
reasons, another extended period not to exceed 15 days from
the lapse of the first extended period.

Following by analogy Section 1, Rule 42 of the


Revised Rules of Civil Procedure, the 30-day original period
for filing a Petition for Review with the CTA under Section 11 of
Republic Act No. 9282, as implemented by Section 3(a), Rule 8
of the Revised Rules of the CTA, may be extended for a period
of 15 days. No further extension shall be allowed thereafter,
except only for the most compelling reasons, in which case the
extended period shall not exceed 15 days.

Even the CTA en banc, in its Decision dated 18


January 2008, recognizes that the 30-day period within which
to file the Petition for Review with the CTA may, indeed, be
extended, thus:
Being suppletory to R.A. 9282, the 1997
Rules of Civil Procedure allow an additional
period of fifteen (15) days for the movant to
file a Petition for Review, upon Motion, and
payment of the full amount of the docket
fees. A further extension of fifteen (15) days
may be granted on compelling reasons in
accordance with the provision of Section 1,
Rule 42 of the 1997 Rules of Civil Procedure
x x x.[17]

In this case, the CTA First Division did indeed err in


finding that petitioners failed to file their Petition for Review in
C.T.A. AC No. 31 within the reglementary period.

From 20 April 2007, the date petitioners received a


copy of the 4 April 2007 Order of the RTC, denying their Motion
for Reconsideration of the 16 November 2006 Order,
petitioners had 30 days, or until 20 May 2007, within which to
file their Petition for Review with the CTA. Hence, the Motion
for Extension filed by petitioners on 4 May 2007 grounded on
their belief that the reglementary period for filing their Petition

for Review with the CTA was to expire on 5 May 2007, thus,
compelling them to seek an extension of 15 days, or until 20
May 2007, to file said Petition was unnecessary and
superfluous. Even without said Motion for Extension,
petitioners could file their Petition for Review until 20 May
2007, as it was still within the 30-day reglementary period
provided for under Section 11 of Republic Act No. 9282; and
implemented by Section 3(a), Rule 8 of the Revised Rules of
the CTA.

The Motion for Extension filed by the petitioners on 18


May 2007, prior to the lapse of the 30-day reglementary period
on 20 May 2007, in which they prayed for another extended
period of 10 days, or until 30 May 2007, to file their Petition for
Review was, in reality, only the first Motion for Extension of
petitioners. The CTA First Division should have granted the
same, as it was sanctioned by the rules of procedure. In fact,
petitioners were only praying for a 10-day extension, five days
less than the 15-day extended period allowed by the
rules. Thus, when petitioners filed via registered mail their
Petition for Review in C.T.A. AC No. 31 on 30 May 2007, they
were able to comply with the reglementary period for filing such
a petition.

Nevertheless, there were other reasons for which the


CTA First Division dismissed the Petition for Review of
petitioners in C.T.A. AC No. 31; i.e., petitioners failed to
conform to Section 4 of Rule 5, and Section 2 of Rule 6 of the
Revised Rules of the CTA. The Court sustains the CTA First
Division in this regard.

Section 4, Rule 5 of the Revised Rules of the CTA


requires that:

SEC. 4. Number of copies. The parties shall


file eleven signed copies of every paper for
cases before the Court en banc and six
signed copies for cases before a Division
of the Court in addition to the signed
original copy, except as otherwise directed
by the Court. Papers to be filed in more than
one case shall include one additional copy
for
each
additional
case. (Emphasis
supplied.)

Section 2, Rule 6 of the Revised Rules of the CTA


further necessitates that:

SEC. 2. Petition for review; contents. The


petition for review shall contain allegations
showing the jurisdiction of the Court, a
concise statement of the complete facts and
a summary statement of the issues involved

53

in the case, as well as the reasons relied


upon for the review of the challenged
decision. The petition shall be verified and
must contain a certification against forum
shopping as provided in Section 3, Rule 46
of the Rules of Court. A clearly legible
duplicate original or certified true copy of
the decision appealed from shall be
attached
to
the
petition.(Emphasis
supplied.)

The aforesaid provisions should be read in


conjunction with Section 1, Rule 7 of the Revised Rules of the
CTA, which provides:

SECTION 1. Applicability of the


Rules of Court on procedure in the Court of
Appeals, exception. The procedure in the
Court en banc or in Divisions in original or in
appealed cases shall be the same as those
in petitions for review and appeals before the
Court of Appeals pursuant to the applicable
provisions of Rules 42, 43, 44, and 46 of
the Rules of Court, except as otherwise
provided for in these Rules. (Emphasis
supplied.)

As found by the CTA First Division and affirmed by the


CTA en banc, the Petition for Review filed by
petitioners via registered mail on 30 May 2007 consisted only
of one copy and all the attachments thereto, including the
Decision dated 14 July 2006; and that the assailed Orders
dated 16 November 2006 and 4 April 2007 of the RTC in Civil
Case No. 03-107088 were mere machine copies. Evidently,
petitioners did not comply at all with the requirements set forth
under Section 4, Rule 5; or with Section 2, Rule 6 of the
Revised Rules of the CTA. Although the Revised Rules of the
CTA do not provide for the consequence of such noncompliance, Section 3, Rule 42 of the Rules of Court may be
applied suppletorily, as allowed by Section 1, Rule 7 of the
Revised Rules of the CTA. Section 3, Rule 42 of the Rules of
Court reads:

SEC. 3. Effect of failure to comply


with requirements. The failure of the
petitioner to comply with any of the foregoing
requirements regarding the payment of the
docket and other lawful fees, the deposit for
costs, proof of service of the petition, and the
contents of and the documents which should
accompany the petition shall be sufficient
ground for the dismissalthereof. (Emphasis
supplied.)

True, petitioners subsequently submitted certified


copies of the Decision dated 14 July 2006 and assailed Orders
dated 16 November 2006 and 4 April 2007 of the RTC in Civil
Case No. 03-107088, but a closer examination of the stamp on
said documents reveals that they were prepared and certified
only on 14 August 2007, about two months and a half after the
filing of the Petition for Review by petitioners.

Petitioners never offered an explanation for their noncompliance with Section 4 of Rule 5, and Section 2 of Rule 6 of
the Revised Rules of the CTA. Hence, although the Court had,
in previous instances, relaxed the application of rules of
procedure, it cannot do so in this case for lack of any
justification.

Even assuming arguendo that the Petition for Review


of petitioners in C.T.A. AC No. 31 should have been given due
course by the CTA First Division, it is still dismissible for lack of
merit.

Contrary to the assertions of petitioners, the CocaCola case is indeed applicable to the instant case. The pivotal
issue raised therein was whether Tax Ordinance No. 7988 and
Tax Ordinance No. 8011 were null and void, which this Court
resolved in the affirmative. Tax Ordinance No. 7988 was
declared by the Secretary of the Department of Justice (DOJ)
as null and void and without legal effect due to the failure of
herein petitioner City of Manila to satisfy the requirement under
the law that said ordinance be published for three consecutive
days. Petitioner City of Manila never appealed said declaration
of the DOJ Secretary; thus, it attained finality after the lapse of
the period for appeal of the same. The passage of Tax
Ordinance No. 8011, amending Tax Ordinance No. 7988, did
not cure the defects of the latter, which, in any way, did not
legally exist.

By virtue of the Coca-Cola case, Tax Ordinance No.


7988 and Tax Ordinance No. 8011 are null and void and
without any legal effect. Therefore, respondent cannot be
taxed and assessed under the amendatory laws--Tax
Ordinance No. 7988 and Tax Ordinance No. 8011.

Petitioners insist that even with the declaration of


nullity of Tax Ordinance No. 7988 and Tax Ordinance No. 8011,
respondent could still be made liable for local business taxes
under both Sections 14 and 21 of Tax Ordinance No. 7944 as
they were originally read, without the amendment by the null
and void tax ordinances.

Emphasis must be given to the fact that prior to the


passage of Tax Ordinance No. 7988 and Tax Ordinance No.
8011 by petitioner City of Manila, petitioners subjected and
assessed respondent only for the local business tax under

54

Section 14 of Tax Ordinance No. 7794, but never under


Section 21 of the same. This was due to the clear and
unambiguous proviso in Section 21 of Tax Ordinance No.
7794, which stated that all registered business in the City
of Manila that are already paying the aforementioned tax shall
be exempted from payment thereof. The aforementioned tax
referred to in said proviso refers to local business tax. Stated
differently, Section 21 of Tax Ordinance No. 7794 exempts
from the payment of the local business tax imposed by said
section, businesses that are already paying such tax under
other sections of the same tax ordinance. The saidproviso,
however, was deleted from Section 21 of Tax Ordinance No.
7794 by Tax Ordinances No. 7988 and No. 8011. Following this
deletion, petitioners began assessing respondent for the local
business tax under Section 21 of Tax Ordinance No. 7794, as
amended.

The Court easily infers from the foregoing


circumstances that petitioners themselves believed that prior to
Tax Ordinance No. 7988 and Tax Ordinance No. 8011,
respondent was exempt from the local business tax under
Section 21 of Tax Ordinance No. 7794. Hence, petitioners had
to wait for the deletion of the exempting proviso in Section 21
of Tax Ordinance No. 7794 by Tax Ordinance No. 7988 and
Tax Ordinance No. 8011 before they assessed respondent for
the local business tax under said section.Yet, with the
pronouncement by this Court in the Coca-Cola case that Tax
Ordinance No. 7988 and Tax Ordinance No. 8011 were null
and void and without legal effect, then Section 21 of Tax
Ordinance No. 7794, as it has been previously worded, with its
exempting proviso, is back in effect. Accordingly, respondent
should not have been subjected to the local business tax under
Section 21 of Tax Ordinance No. 7794 for the third and fourth
quarters of 2000, given its exemption therefrom since it was
already paying the local business tax under Section 14 of the
same ordinance.

Petitioners obstinately ignore the exempting proviso in


Section 21 of Tax Ordinance No. 7794, to their own
detriment. Said exempting proviso was precisely included in
said section so as to avoid double taxation.

same purpose to make persons conducting business within the


City of Manila contribute to city revenues; (3) by the same
taxing authority petitioner City of Manila; (4) within the same
taxing jurisdiction within the territorial jurisdiction of the City of
Manila; (5) for the same taxing periods per calendar year; and
(6) of the same kind or character a local business tax imposed
on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes


under Sections 14 and 21 of Tax Ordinance No. 7794 is
specious. The Court revisits Section 143 of the LGC, the very
source of the power of municipalities and cities to impose a
local business tax, and to which any local business tax
imposed
by petitioner City of Manila must
conform. It
is
apparent from a perusal thereof that when a municipality or city
has already imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other article of
commerce, pursuant to Section 143(a) of the LGC, said
municipality or city may no longer subject the same
manufacturers, etc. to a business tax under Section 143(h) of
the same Code. Section 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or percentage
tax under the NIRC, and that are not otherwise specified in
preceding paragraphs. In the same way, businesses such as
respondents, already subject to a local business tax under
Section 14 of Tax Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be made liable for
local business tax under Section 21 of the same Tax Ordinance
[which is based on Section 143(h) of the LGC].
WHEREFORE, premises considered, the instant Petition for
Review on Certiorari is hereby DENIED. No costs.

SO ORDERED.

Double taxation means taxing the same property


twice when it should be taxed only once; that is, taxing the
same person twice by the same jurisdiction for the same thing.
It is obnoxious when the taxpayer is taxed twice, when it
should be but once. Otherwise described as direct duplicate
taxation, the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing
authority, within the same jurisdiction, during the same
taxing period; and the taxes must be of the same kind or
character.[18]

Using the aforementioned test, the Court finds that there is


indeed double taxation if respondent is subjected to the taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794,
since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for the

55

G.R. No. 181277

July 3, 2013

SWEDISH
MATCH
PHILIPPINES,
INC., Petitioner,
vs.
THE TREASURER OF THE CITYOF MANILA, Respondent.
DECISION
SERENO, CJ.:
This is a Petition for Review on Certiorari1 filed by Swedish
Match Philippines, Inc. (petitioner) under Rule 45 of the 1997
Rules of Civil Procedure assailing the Court of Tax Appeals En
Bane (CTA En Bane) Decision2 dated 1 October 2007 and
Resolution3 dated 14 January 2008 in C.T.A. EB No. 241.
THE FACTS
On 20 October 2001, petitioner paid business taxes in the total
amount of P470,932.21.4 The assessed amount was based on
Sections 145 and 216 of Ordinance No. 7794, otherwise known
as the Manila Revenue Code, as amended by Ordinance Nos.
7988 and 8011. Out of that amount, P164,552.04
corresponded to the payment under Section 21.7
Assenting that it was not liable to pay taxes under Section 21,
petitioner wrote a letter8 dated 17 September 2003 to herein
respondent claiming a refund of business taxes the former had
paid pursuant to the said provision. Petitioner argued that
payment under Section 21 constituted double taxation in view
of its payment under Section 14.
On 17 October 2003, for the alleged failure of respondent to
act on its claim for a refund, petitioner filed a Petition for
Refund of Taxes9 with the RTC of Manila in accordance with
Section 196 of the Local Government Code of 1991. The
Petition was docketed as Civil Case No. 03-108163.
On 14 June 2004, the Regional Trial Court (RTC), Branch 21 of
Manila rendered a Decision10 in Civil Case No. 03-108163
dismissing the Petition for the failure of petitioner to plead the
latters capacity to sue and to state the authority of Tiarra T.
Batilaran-Beleno (Ms. Beleno), who had executed the
Verification and Certification of Non-Forum Shopping.
In denying petitioners Motion for Reconsideration, the RTC
went on to say that Sections 14 and 21 pertained to taxes of a
different nature and, thus, the elements of double taxation
were wanting in this case.
On appeal, the CTA Second Division affirmed the RTCs
dismissal of the Petition for Refund of Taxes on the ground that
petitioner had failed to state the authority of Ms. Beleno to
institute the suit.

The CTA En Banc likewise denied the Petition for Review,


ruling as follows:
In this case, the plaintiff is the Swedish Match Philippines, Inc.
However, as found by the RTC as well as the Court in Division,
the signatory of the verification and/or certification of non-forum
shopping is Ms. Beleno, the companys Finance Manager, and
that there was no board resolution or secretary's certificate
showing proof of Ms. Belenos authority in acting in behalf of
the corporation at the time the initiatory pleading was filed in
the RTC. It is therefore, correct that the case be dismissed.
WHEREFORE, premises considered, the petition for review is
hereby DENIED. Accordingly, the assailed Decision and the
Resolution dated August 8, 2006 and November 27, 2006,
respectively, are hereby AFFIRMED in toto.
SO ORDERED.11
ISSUES
In order to determine the entitlement of petitioner to a refund of
taxes, the instant Petition requires the resolution of two main
issues, to wit:
1) Whether Ms. Beleno was authorized to file the
Petition for Refund of Taxes with the RTC; and
2) Whether the imposition of tax under Section 21 of
the Manila Revenue Code constitutes double taxation
in view of the tax collected and paid under Section 14
of the same code.12
THE COURTS RULING
Authority
from
the
Verification
and
Non-Forum Shopping

board
to
sign
Certification

the
of

Anent the procedural issue, petitioner argues that there can be


no dispute that Ms. Beleno was acting within her authority
when she instituted the Petition for Refund before the RTC,
notwithstanding that the Petition was not accompanied by a
Secretarys Certificate. Her authority was ratified by the Board
in its Resolution adopted on 19 May 2004. Thus, even if she
was not authorized to execute the Verification and Certification
at the time of the filing of the Petition, the ratification by the
board of directors retroactively applied to the date of her
signing.
On the other hand, respondent contends that petitioner failed
to establish the authority of Ms. Beleno to institute the present
action on behalf of the corporation. Citing Philippine Airlines v.
Flight Attendants and Stewards Association of the Philippines
(PAL v. FASAP),13 respondent avers that the required
certification of non-forum shopping should have been valid at

56

the time of the filing of the Petition. The Petition, therefore, was
defective due to the flawed Verification and Certification of
Non-Forum Shopping, which were insufficient in form and
therefore a clear violation of Section 5, Rule 7 of the 1997
Rules of Civil Procedure.
We rule for petitioner.
Time and again, this Court has been faced with the issue of the
validity of the verification and certification of non-forum
shopping, absent any authority from the board of directors.
The power of a corporation to sue and be sued is lodged in the
board of directors, which exercises its corporate powers.14 It
necessarily follows that "an individual corporate officer cannot
solely exercise any corporate power pertaining to the
corporation
without
authority
from
the
board
of
directors."15 Thus, physical acts of the corporation, like the
signing of documents, can be performed only by natural
persons duly authorized for the purpose by corporate by-laws
or by a specific act of the board of directors.16
Consequently, a verification signed without an authority from
the board of directors is defective. However, the requirement of
verification is simply a condition affecting the form of the
pleading and non-compliance does not necessarily render the
pleading fatally defective.17 The court may in fact order the
correction of the pleading if verification is lacking or, it may act
on the pleading although it may not have been verified, where
it is made evident that strict compliance with the rules may be
dispensed with so that the ends of justice may be served.18
Respondent cites this Courts ruling in PAL v. FASAP,19 where
we held that only individuals vested with authority by a valid
board resolution may sign a certificate of non-forum shopping
on behalf of a corporation. The petition is subject to dismissal if
a certification was submitted unaccompanied by proof of the
signatorys authority.20 In a number of cases, however, we have
recognized exceptions to this rule. Cagayan Valley Drug
Corporation v. Commissioner of Internal Revenue21 provides:
In a slew of cases, however, we have recognized the authority
of some corporate officers to sign the verification and
certification against forum shopping. In Mactan-Cebu
International Airport Authority v. CA, we recognized the
authority of a general manager or acting general manager to
sign the verification and certificate against forum shopping; in
Pfizer v. Galan, we upheld the validity of a verification signed
by an "employment specialist" who had not even presented
any proof of her authority to represent the company; in Novelty
Philippines, Inc., v. CA, we ruled that a personnel officer who
signed the petition but did not attach the authority from the
company is authorized to sign the verification and non-forum
shopping certificate; and in Lepanto Consolidated Mining
Company v. WMC Resources International Pty. Ltd. (Lepanto),
we ruled that the Chairperson of the Board and President of
the Company can sign the verification and certificate against

non-forum shopping even without the submission of the


boards authorization.
In sum, we have held that the following officials or employees
of the company can sign the verification and certification
without need of a board resolution: (1) the Chairperson of the
Board of Directors, (2) the President of a corporation, (3) the
General Manager or Acting General Manager, (4) Personnel
Officer, and (5) an Employment Specialist in a labor case.
While the above cases do not provide a complete listing of
authorized signatories to the verification and certification
required by the rules, the determination of the sufficiency of the
authority was done on a case to case basis. The rationale
applied in the foregoing cases is to justify the authority of
corporate officers or representatives of the corporation to sign
the verification or certificate against forum shopping, being "in
a position to verify the truthfulness and correctness of the
allegations in the petition." (Emphases supplied)
Given the present factual circumstances, we find that the
liberal jurisprudential exception may be applied to this case.
A distinction between noncompliance and substantial
compliance with the requirements of a certificate of non-forum
shopping and verification as provided in the Rules of Court
must be made.22 In this case, it is undisputed that the Petition
filed with the RTC was accompanied by a Verification and
Certification of Non-Forum Shopping signed by Ms. Beleno,
although without proof of authority from the board. However,
this Court finds that the belated submission of the Secretarys
Certificate constitutes substantial compliance with Sections 4
and 5, Rule 7 of the 1997 Revised Rules on Civil Procedure.
A perusal of the Secretarys Certificate signed by petitioners
Corporate Secretary Rafael Khan and submitted to the RTC
shows that not only did the corporation authorize Ms. Beleno to
execute the required Verifications and/or Certifications of NonForum Shopping, but it likewise ratified her act of filing the
Petition with the RTC. The Minutes of the Special Meeting of
the Board of Directors of petitioner-corporation on 19 May
2004 reads:
RESOLVED, that Tiarra T. Batilaran-Beleno, Finance Director
of the Corporation, be authorized, as she is hereby authorized
and empowered to represent, act, negotiate, sign, conclude
and deliver, for and in the name of the Corporation, any and all
documents for the application, prosecution, defense,
arbitration, conciliation, execution, collection, compromise or
settlement of all local tax refund cases pertaining to payments
made to the City of Manila pursuant to Section 21 of the Manila
Revenue Code, as amended;
RESOLVED, FURTHER, that Tiarra T. Batilaran-Beleno be
authorized to execute Verifications and/or Certifications as to
Non-Forum Shopping of Complaints/Petitions that may be filed
by the Corporation in the above-mentioned tax-refund cases;

57

RESOLVED, FURTHER, that the previous institution by Tiarra


T. Batilaran-Beleno of tax refund cases on behalf of the
Corporation, specifically Civil Cases Nos. 01-102074, 03108163, and, 04-109044, all titled "Swedish Match Philippines,
Inc. v. The Treasurer of the City of Manila" and pending in the
Regional Trial Court of Manila, as well as her execution of the
Verifications and/or Certifications as to Non-Forum Shopping in
these tax refund cases, are hereby, approved and ratified in all
respects. (Emphasis supplied)
Clearly, this is not an ordinary case of belated submission of
proof of authority from the board of directors. Petitionercorporation ratified the authority of Ms. Beleno to represent it in
the Petition filed before the RTC, particularly in Civil Case No.
03-108163, and consequently to sign the verification and
certification of non-forum shopping on behalf of the
corporation. This fact confirms and affirms her authority and
gives this Court all the more reason to uphold that authority.23
Additionally, it may be remembered that the Petition filed with
the RTC was a claim for a refund of business taxes. It should
be noted that the nature of the position of Ms. Beleno as the
corporations finance director/manager is relevant to the
determination of her capability and sufficiency to verify the
truthfulness and correctness of the allegations in the Petition. A
finance director/manager looks after the overall management
of the financial operations of the organization and is normally in
charge of financial reports, which necessarily include taxes
assessed and paid by the corporation. Thus, for this particular
case, Ms. Beleno, as finance director, may be said to have
been in a position to verify the truthfulness and correctness of
the allegations in the claim for a refund of the corporations
business taxes.
In Mediserv v. Court of Appeals,24 we said that a liberal
construction of the rules may be invoked in situations in which
there may be some excusable formal deficiency or error in a
pleading, provided that the invocation thereof does not subvert
the essence of the proceeding, but at least connotes a
reasonable attempt at compliance with the rules. After all, rules
of procedure are not to be applied in a very rigid, technical
manner, but are used only to help secure substantial justice.25
More importantly, taking into consideration the substantial
issue of this case, we find a special circumstance or
compelling reason to justify the relaxation of the rule.
Therefore, we deem it more in accord with substantive justice
that the case be decided on the merits.
Double taxation
As to the substantive issues, petitioner maintains that the
enforcement of Section 21 of the Manila Revenue Code
constitutes double taxation in view of the taxes collected under
Section 14 of the same code. Petitioner points out that Section
21 is not in itself invalid, but the enforcement of this provision
would constitute double taxation if business taxes have already

been paid under Section 14 of the same revenue code.


Petitioner further argues that since Ordinance Nos. 7988 and
8011 have already been declared null and void in Coca-Cola
Bottlers Philippines, Inc. v. City of Manila, 26 all taxes collected
and paid on the basis of these ordinances should be refunded.
In turn, respondent argues that Sections 14 and 21 pertain to
two different objects of tax; thus, they are not of the same kind
and character so as to constitute double taxation. Section 14 is
a tax on manufacturers, assemblers, and other processors,
while Section 21 applies to businesses subject to excise,
value-added, or percentage tax. Respondent posits that under
Section 21, petitioner is merely a withholding tax agent of the
City of Manila.
At the outset, it must be pointed out that the issue of double
taxation is not novel, as it has already been settled by this
Court in The City of Manila v. Coca-Cola Bottlers Philippines,
Inc.,27 in this wise:
Petitioners obstinately ignore the exempting proviso in Section
21 of Tax Ordinance No. 7794, to their own detriment. Said
exempting proviso was precisely included in said section so as
to avoid double taxation.
Double taxation means taxing the same property twice when it
should be taxed only once; that is, "taxing the same person
twice by the same jurisdiction for the same thing." It is
obnoxious when the taxpayer is taxed twice, when it should be
but once. Otherwise described as "direct duplicate taxation,"
the two taxes must be imposed on the same subject matter, for
the same purpose, by the same taxing authority, within the
same jurisdiction, during the same taxing period; and the taxes
must be of the same kind or character.
Using the aforementioned test, the Court finds that there is
indeed double taxation if respondent is subjected to the taxes
under both Sections 14 and 21 of Tax Ordinance No. 7794,
since these are being imposed: (1) on the same subject matter
the privilege of doing business in the City of Manila; (2) for
the same purpose to make persons conducting business
within the City of Manila contribute to city revenues; (3) by the
same taxing authority petitioner City of Manila; (4) within the
same taxing jurisdiction within the territorial jurisdiction of the
City of Manila; (5) for the same taxing periods per calendar
year; and (6) of the same kind or character a local business
tax imposed on gross sales or receipts of the business.
The distinction petitioners attempt to make between the taxes
under Sections 14 and 21 of Tax Ordinance No. 7794 is
specious. The Court revisits Section 143 of the LGC, the very
source of the power of municipalities and cities to impose a
local business tax, and to which any local business tax
imposed by petitioner City of Manila must conform. It is
apparent from a perusal thereof that when a municipality or city
has already imposed a business tax on manufacturers, etc. of
liquors, distilled spirits, wines, and any other article of

58

commerce, pursuant to Section 143(a) of the LGC, said


municipality or city may no longer subject the same
manufacturers, etc. to a business tax under Section 143(h) of
the same Code. Section 143(h) may be imposed only on
businesses that are subject to excise tax, VAT, or percentage
tax under the NIRC, and that are "not otherwise specified in
preceding paragraphs." In the same way, businesses such as
respondents, already subject to a local business tax under
Section 14 of Tax Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be made liable for
local business tax under Section 21 of the same Tax Ordinance
[which is based on Section 143(h) of the LGC].28 (Emphases
supplied)
Based on the foregoing reasons, petitioner should not have
been subjected to taxes under Section 21 of the Manila
Revenue Code for the fourth quarter of 2001, considering that
it had already been paying local business tax under Section 14
of the same ordinance.
Further, we agree with petitioner that Ordinance Nos. 7988 and
8011 cannot be the basis for the collection of business taxes.
In Coca-Cola,29 this Court had the occasion to rule that
Ordinance Nos. 7988 and 8011 were null and void for failure to
comply with the required publication for three (3) consecutive
days. Pertinent portions of the ruling read:
It is undisputed from the facts of the case that Tax Ordinance
No. 7988 has already been declared by the DOJ Secretary, in
its Order, dated 17 August 2000, as null and void and without
legal effect due to respondents failure to satisfy the
requirement that said ordinance be published for three
consecutive days as required by law. Neither is there quibbling
on the fact that the said Order of the DOJ was never appealed
by the City of Manila, thus, it had attained finality after the
lapse of the period to appeal.1wphi1

measure which strictly complies with the requirements of law,


both procedural and substantive. The passage of the assailed
ordinance did not have the effect of curing the defects of
Ordinance No. 7988 which, any way, does not legally exist."
Said Resolution of the DOJ Secretary had, as well, attained
finality by virtue of the dismissal with finality by this Court of
respondents Petition for Review on Certiorari in G.R. No.
157490 assailing the dismissal by the RTC of Manila, Branch
17, of its appeal due to lack of jurisdiction in its Order, dated 11
August 2003.30 (Emphasis in the original)
Accordingly, respondents assessment under both Sections 14
and 21 had no basis. Petitioner is indeed liable to pay business
taxes to the City of Manila; nevertheless, considering that the
former has already paid these taxes under Section 14 of the
Manila Revenue Code, it is exempt from the same payments
under Section 21 of the same code. Hence, payments made
under Section 21 must be refunded in favor of petitioner.
It is undisputed that petitioner paid business taxes based on
Sections 14 and 21 for the fourth quarter of 2001 in the total
amount of P470,932.21.31 Therefore, it is entitled to a refund
of P164,552.0432 corresponding to the payment under Section
21 of the Manila Revenue Code.
WHEREFORE, premises considered, the instant Petition is
GRANTED. Accordingly, the Court of Tax Appeals En Banc
Decision dated 1 October 2007 and Resolution dated 14
January 2008 are REVERSED and SET ASIDE.
SO ORDERED.

Furthermore, the RTC of Manila, Branch 21, in its Decision


dated 28 November 2001, reiterated the findings of the DOJ
Secretary that respondents failed to follow the procedure in the
enactment of tax measures as mandated by Section 188 of the
Local Government Code of 1991, in that they failed to publish
Tax Ordinance No. 7988 for three consecutive days in a
newspaper of local circulation. From the foregoing, it is evident
that Tax Ordinance No. 7988 is null and void as said ordinance
was published only for one day in the 22 May 2000 issue of the
Philippine Post in contravention of the unmistakable directive
of the Local Government Code of 1991.
Despite the nullity of Tax Ordinance No. 7988, the court a quo,
in the assailed Order, dated 8 May 2002, went on to dismiss
petitioners case on the force of the enactment of Tax
Ordinance No. 8011, amending Tax Ordinance No. 7988.
Significantly, said amending ordinance was likewise declared
null and void by the DOJ Secretary in a Resolution, dated 5
July 2001, elucidating that "Instead of amending Ordinance No.
7988, herein respondent should have enacted another tax

59

ERICSSON TELECOMMUNI- G.R. NO. 176667


CATIONS, INC.,
Petitioner,
Present:
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
CITY OF PASIG, represented by
its City Mayor, Hon. Vicente P.
Eusebio, et al.* Promulgated:
Respondent. November 22, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
AUSTRIA-MARTINEZ, J.:
Ericsson Telecommunications, Inc. (petitioner), a corporation
with principal office in Pasig City, is engaged in the design,
engineering,
and
marketing
of
telecommunication
facilities/system. In an Assessment Notice dated October 25,
2000 issued by the City Treasurer of Pasig City, petitioner was
assessed a business tax deficiency for the years 1998 and
1999
amounting
to P9,466,885.00
and P4,993,682.00,
respectively, based on its gross revenues as reported in its
audited financial statements for the years 1997 and
1998.Petitioner filed a Protest dated December 21, 2000,
claiming that the computation of the local business tax should
be based on gross receipts and not on gross revenue.
The City of Pasig (respondent) issued another Notice of
Assessment to petitioner on November 19, 2001, this time
based on business tax deficiencies for the years 2000 and
2001, amounting to P4,665,775.51 and P4,710,242.93,
respectively, based on its gross revenues for the years 1999
and 2000. Again, petitioner filed a Protest on January 21,
2002, reiterating its position that the local business tax should
be based on gross receipts and not gross revenue.
Respondent denied petitioners protest and gave the latter 30
days within which to appeal the denial. This prompted
petitioner to file a petition for review[1] with the Regional Trial
Court (RTC) of Pasig, Branch 168, praying for the annulment
and cancellation of petitioners deficiency local business taxes
totaling P17,262,205.66.
Respondent and its City Treasurer filed a motion to dismiss on
the grounds that the court had no jurisdiction over the subject
matter and that petitioner had no legal capacity to sue. The
RTC denied the motion in an Order dated December 3,
2002 due to respondents failure to include a notice of
hearing. Thereafter, the RTC declared respondents in default
and allowed petitioner to present evidence ex- parte.
In a Decision[2] dated March 8, 2004, the RTC canceled and set
aside the assessments made by respondent and its City
Treasurer. The dispositive portion of the RTC Decision reads:

WHEREFORE,
premises
considered,
judgment is hereby rendered in favor of the
plaintiff and ordering defendants to CANCEL
and SET ASIDE Assessment Notice
dated October 25, 2000and Notice of
Assessment dated November 19, 2001.
SO ORDERED.[3]
On appeal, the Court of Appeals (CA) rendered its
Decision[4] dated November 20, 2006, the dispositive portion of
which reads:
WHEREFORE,
the
decision
appealed from is hereby ordered SET ASIDE
and a new one entered DISMISSING the
plaintiff/appellees complaint
WITHOUT
PREJUDICE.
SO ORDERED.[5]
The CA sustained respondents claim that the petition
filed with the RTC should have been dismissed due to
petitioners failure to show that Atty. Maria Theresa B. Ramos
(Atty. Ramos), petitioners Manager for Tax and Legal Affairs
and the person who signed the Verification and Certification of
Non-Forum Shopping, was duly authorized by the Board of
Directors.
Its motion for reconsideration having been denied in a
Resolution[6] dated February 9, 2007, petitioner now comes
before the Court via a Petition for Review on Certiorari under
Rule 45 of the Rules of Court, on the following grounds:
(1) THE COURT OF APPEALS ERRED IN
DISMISSING THE CASE FOR LACK
OF
SHOWING
THAT
THE
SIGNATORY OF THE VERIFICATION/
CERTIFICATION
IS
NOT
SPECIFICALLY AUTHORIZED FOR
AND IN BEHALF OF PETITIONER.
(2) THE COURT OF APPEALS ERRED IN
GIVING
DUE
COURSE
TO
RESPONDENTS
APPEAL,
CONSIDERING THAT IT HAS NO
JURISDICTION OVER THE SAME,
THE MATTERS TO BE RESOLVED
BEING PURE QUESTIONS OF LAW,
JURISDICTION OVER WHICH IS
VESTED
ONLY
WITH
THIS
HONORABLE COURT.
(3) ASSUMING THE COURT OF APPEALS
HAS
JURISDICTION
OVER
RESPONDENTS
APPEAL,
SAID
COURT ERRED IN NOT DECIDING
ON THE MERITS OF THE CASE FOR
THE
SPEEDY
DISPOSITION
THEREOF, CONSIDERING THAT THE
DEFICIENCY LOCAL BUSINESS TAX
ASSESSMENTS
ISSUED
BY
RESPONDENT
ARE
CLEARLY
INVALID AND CONTRARY TO THE
PROVISIONS
OF
THE
PASIG
REVENUE CODE AND THE LOCAL
GOVERNMENT CODE.[7]

60

After receipt by the Court of respondents complaint and


petitioners reply, the petition is given due course and
considered ready for decision without the need of memoranda
from the parties.
The Court grants the petition.
First, the complaint filed by petitioner with the RTC
was erroneously dismissed by the CA for failure of petitioner to
show that its Manager for Tax and Legal Affairs, Atty. Ramos,
was authorized by the Board of Directors to sign the
Verification and Certification of Non-Forum Shopping in behalf
of the petitioner corporation.
Time and again, the Court, under special circumstances and
for compelling reasons, sanctioned substantial compliance with
the rule on the submission of verification and certification
against non-forum shopping.[8]
In General Milling Corporation v. National Labor Relations
Commission,[9] the Court deemed as substantial compliance
the belated attempt of the petitioner to attach to the motion for
reconsideration the board resolution/secretarys certificate,
stating that there was no attempt on the part of the petitioner to
ignore the prescribed procedural requirements.
In Shipside Incorporated v. Court of Appeals,[10] the authority of
the petitioners resident manager to sign the certification
against forum shopping was submitted to the CA only after the
latter dismissed the petition. The Court considered the merits
of the case and the fact that the petitioner subsequently
submitted a secretarys certificate, as special circumstances or
compelling reasons that justify tempering the requirements in
regard to the certificate of non-forum shopping.[11]
There were also cases where there was complete noncompliance
with
the
rule
on certification
against forum shopping and yet the Court proceeded to decide
the case on the merits in order to serve the ends of substantial
justice.[12]
In the present case, petitioner submitted a Secretarys
Certificate signed on May 6, 2002, whereby Atty. Ramos was
authorized to file a protest at the local government level and to
sign, execute and deliver any and all papers, documents and
pleadings relative to the said protest and to do and perform all
such acts and things as may be necessary to effect the
foregoing.[13]
Applying the foregoing jurisprudence, the subsequent
submission of the Secretarys Certificate and the substantial
merits of the petition, which will be shown forthwith, justify a
relaxation of the rule.
Second, the CA should have dismissed the appeal of
respondent as it has no jurisdiction over the case since the
appeal involves a pure question of law. The CA seriously erred
in ruling that the appeal involves a mixed question of law and
fact necessitating an examination and evaluation of the audited
financial statements and other documents in order to
determine petitioners tax base.
There is a question of law when the doubt or difference is on
what the law is on a certain state of facts. On the other hand,
there is a question of fact when the doubt or difference is on
the truth or falsity of the facts alleged. [14] For a question to be
one of law, the same must not involve an examination of the

probative value of the evidence presented by the litigants or


any of them. The resolution of the issue must rest solely on
what the law provides on the given set of circumstances. Once
it is clear that the issue invites a review of the evidence
presented, the question posed is one of fact. Thus, the test of
whether a question is one of law or of fact is not the appellation
given to such question by the party raising the same; rather, it
is whether the appellate court can determine the issue raised
without reviewing or evaluating the evidence, in which case, it
is a question of law; otherwise it is a question of fact.[15]
There is no dispute as to the veracity of the facts involved in
the present case. While there is an issue as to the correct
amount of local business tax to be paid by petitioner, its
determination will not involve a look into petitioners audited
financial statements or documents, as these are not disputed;
rather, petitioners correct tax liability will be ascertained
through an interpretation of the pertinent tax laws, i.e., whether
the local business tax, as imposed by the Pasig City Revenue
Code (Ordinance No. 25-92) and the Local Government Code
of 1991, should be based on gross receipts, and not on gross
revenue which respondent relied on in computing petitioners
local business tax deficiency.This, clearly, is a question of law,
and beyond the jurisdiction of the CA.
Section 2(c), Rule 41 of the Rules of Court provides
that in all cases where questions of law are raised or involved,
the appeal shall be to this Court by petition for review
on certiorari under Rule 45.
Thus, as correctly pointed out by petitioner, the
appeal before the CA should have been dismissed, pursuant to
Section 5(f), Rule 56 of the Rules of Court, which provides:
Sec.
5. Grounds
for
dismissal
of
appeal.- The
appeal
may
be
dismissed motu proprio or on motion of the
respondent on the following grounds:
xxxx
(f) Error in the choice or mode of appeal.
xxxx
Third, the dismissal of the appeal, in effect, would have
sustained the RTC Decision ordering respondent to cancel the
Assessment Notices issued by respondent, and therefore,
would have rendered moot and academic the issue of whether
the local business tax on contractors should be based
on gross receipts or gross revenues.
However, the higher interest of substantial justice dictates that
this Court should resolve the same, to evade further repetition
of erroneous interpretation of the law,[16] for the guidance of the
bench and bar.
As earlier stated, the substantive issue in this case is whether
the local business tax on contractors should be based
on gross receipts or gross revenue.
Respondent assessed deficiency local business taxes on
petitioner based on the latters gross revenue as reported in its
financial
statements,
arguing
that gross
receipts is
synonymous with gross earnings/revenue, which, in
turn, includes uncollected earnings. Petitioner, however,
contends that only the portion of the revenues which were

61

actually and constructively received should be considered in


determining its tax base.
Respondent is authorized to levy business taxes under Section
143 in relation to Section 151 of the Local Government Code.
Insofar as petitioner is concerned, the applicable
provision is subsection (e), Section 143 of the same Code
covering contractors and other independent contractors, to wit:
SEC.
143. Tax
on
Business. The
municipality may impose taxes on the
following businesses:
xxxx
(e) On contractors and other independent
contractors, in accordance with the following
schedule:

With gross receipts for the


calendar year in the amount of:

preceding

xxxx
(Emphasis supplied)
The above provision specifically refers to gross receipts which
is defined under Section 131 of the Local Government Code,
as follows:
xxxx
(n) Gross Sales or Receipts include the total
amount of money or its equivalent
representing
the
contract
price,
compensation or service fee, including the
amount charged or materials supplied with
the services and the deposits or advance
payments actually or constructively received
during the taxable quarter for the services
performed or to be performed for another
person excluding discounts if determinable
at the time of sales, sales return, excise tax,
and value-added tax (VAT);
xxxx
The law is clear. Gross receipts include money or its equivalent
actually or constructively received in consideration of services
rendered or articles sold, exchanged or leased, whether actual
or constructive.
In Commissioner of Internal Revenue v. Bank of Commerce,
[17]
the Court interpreted gross receipts as including those
which were actually or constructively received, viz.:
Actual receipt of interest income is not
limited to physical receipt. Actual receipt
may either be physical receipt or
constructive receipt. When the depository
bank withholds the final tax to pay the tax
liability of the lending bank, there is prior to
the withholding a constructive receipt by the
lending bank of the amount withheld. From
the amount constructively received by the

lending bank, the depository bank deducts


the final withholding tax and remits it to the
government for the account of the lending
bank. Thus, the interest income actually
received by the lending bank, both physically
and constructively, is the net interest plus the
amount withheld as final tax.
The concept of a withholding tax on
income obviously and necessarily implies
that the amount of the tax withheld comes
from the income earned by the taxpayer.
Since the amount of the tax withheld
constitutes income earned by the taxpayer,
then that amount manifestly forms part of the
taxpayers gross receipts.
Because
the
amount withheld belongs to the taxpayer, he
can transfer its ownership to the government
in payment of his tax liability. The amount
withheld indubitably comes from income of
the taxpayer, and thus forms part of
his gross receipts. (Emphasis supplied)
Further elaboration was made by the Court in Commissioner of
Internal Revenue v. Bank of the Philippine Islands,[18] in this
wise:
Receipt of income may be actual or
constructive. We have held that the
withholding process results in the taxpayers
constructive receipt of the income withheld,
to wit:
By analogy, we apply to the receipt
of
income
the
rules
on actual and constructive possession
provided in Articles 531 and 532 of our Civil
Code.
Under Article 531:
Possession is acquired by
the material occupation of a thing or
the exercise of a right, or by the fact
that it is subject to the action of our
will, or by the proper acts and legal
formalities established for acquiring
such right.
Article 532 states:
Possession
may
be
acquired by the same person who
is to enjoy it, by his legal
representative, by his agent, or by
any person without any power
whatever; but in the last case, the
possession shall not be considered
as acquired until the person in
whose name the act of possession
was executed has ratified the same,
without prejudice to the juridical
consequences
of negotiorum gestio in a proper
case.

62

The
last
means
of
acquiring possession under Article
531 refers to juridical actsthe
acquisition of possession by
sufficient titleto which the law gives
the force of acts of possession.
Respondent argues that only items
of income actually received should
be included in its gross receipts. It
claims that since the amount had
already been withheld at source, it
did not have actualreceipt thereof.
We clarify. Article 531 of
the Civil Code clearly provides that
the acquisition of the right of
possession is through the proper
acts
and
legal
formalities
established therefor.
The
withholding process is one such
act. There may not be actual receipt
of the income withheld; however, as
provided for in Article 532,
possession by any person without
any power whatsoever shall be
considered as acquired when
ratified by the person in whose
name the act of possession is
executed.
In our withholding tax
system, possession is acquired by
the payor as the withholding agent
of the government, because the
taxpayer ratifies the very act of
possession for the government.
There is thus constructive receipt.
The processes of bookkeeping and
accounting for interest on deposits
and yield on deposit substitutes that
are subjected to FWT are indeedfor
legal
purposestantamount
to
delivery, receipt or remittance.[19]
Revenue Regulations No. 16-2005 dated September 1,
2005[20] defined and gave examples of constructive receipt, to
wit:
SEC. 4. 108-4. Definition of Gross Receipts.
-- x x x
Constructive receipt occurs when the
money consideration or its equivalent is
placed at the control of the person who
rendered the service without restrictions by
the payor. The following are examples of
constructive receipts:
(1) deposit in banks which are made
available to the seller of services without
restrictions;
(2) issuance by the debtor of a notice to
offset any debt or obligation and acceptance
thereof by the seller as payment for services
rendered; and

(3) transfer of the amounts retained by


the payor to the account of the contractor.
There is, therefore, constructive receipt, when the
consideration for the articles sold, exchanged or leased, or the
services rendered has already been placed under the control
of the person who sold the goods or rendered the services
without any restriction by the payor.
In contrast, gross revenue covers money or its equivalent
actually or constructively received, including the value of
services rendered or articles sold, exchanged or leased,
the payment of which is yet to be received. This is in
consonance with the International Financial Reporting
Standards,[21] which defines revenue as the gross inflow of
economic benefits (cash, receivables, and other assets)
arising from the ordinary operating activities of an enterprise
(such as sales of goods, sales of services, interest, royalties,
and dividends),[22] which is measured at the fair value of the
consideration received or receivable.[23]
As aptly stated by the RTC:
[R]evenue from
services rendered is
recognized when services have been
performed and are billable. It is recorded at
the amount received or expected to be
received. (Section E [17] of the Statements
of Financial Accounting Standards No. 1).[24]
In petitioners case, its audited financial statements reflect
income or revenue which accrued to it during the taxable
period although not yet actually or constructively received or
paid. This is because petitioner uses the accrual method of
accounting, where income is reportable when all the events
have occurred that fix the taxpayers right to receive the
income, and the amount can be determined with reasonable
accuracy; the right to receive income, and not the actual
receipt, determines when to include the amount in gross
income.[25]
The imposition of local business tax based on petitioners gross
revenue will inevitably result in the constitutionally proscribed
double taxation taxing of the same person twice by the same
jurisdiction for the same thing[26] inasmuch as petitioners
revenue or income for a taxable year will definitely include its
gross receipts already reported during the previous year and
for which local business tax has already been paid.
Thus, respondent committed a palpable error when it assessed
petitioners local business tax based on its gross revenue as
reported in its audited financial statements, as Section 143 of
the Local Government Code and Section 22(e) of
the Pasig Revenue Code clearly provide that the tax should be
computed based on gross receipts.
WHEREFORE, the petition is GRANTED. The Decision
dated November 20, 2006 and Resolution dated February 9,
2007 issued by the Court of Appeals are SET ASIDE, and the
Decision dated March 8, 2004 rendered by the Regional Trial
Court of Pasig, Branch 168 is REINSTATED.
SO ORDERED.

63

COMMISSIONER OF INTERNAL G.R. No. 147375


REVENUE,

Sec. 119. Tax on banks and non-bank


financial intermediaries. There shall be
collected a tax on gross receipts derived
from sources within the Philippines by all
banks and non-bank financial intermediaries
in accordance with the following schedule:

Petitioner, Present:

QUISUMBING, J.,
Chairperson,

(a)

- versus - CARPIO,
CARPIO MORALES,
TINGA, and
VELASCO
, JR.
BANK OF THE PHILIPPINE
ISLANDS,
Respondent. Promulgated:
June 26, 2006

x---------------------------------------------------------------------------x

On interest, commissions
and discounts from lending
activities as well as income
from financial leasing, on the
basis of remaining maturities
of instruments from which
such receipts are derived.

Short-term maturity not in excess


of two (2) years . . 5%
Medium-term
maturity over two
(2) years but not
exceeding four
years . . . . . . . . . . . . . 3%

(4)

Long term maturity


(i) Over four (4) years but
not
exceeding
seven
(7) years . . . . . . . . . . . . . .
. . . . . . . . 1%

DECISION
TINGA, J.:

At issue is the question of whether the 20% final tax on a


banks passive income, withheld from the bank at source, still
forms part of the banks gross income for the purpose of
computing its gross receipts tax liability. Both the Court of Tax
Appeals (CTA) and the Court of Appeals answered in the
negative. We reverse, in favor of petitioner, following our ruling
in China Banking Corporation v. Court of Appeals.[1]

(ii) Over
seven
(7)
years . . . . . . . . . . . . . . 0%
(b) On dividends . . . . . . . . . . . . .
. . . . . . . . . . 0%

(c) On royalties,
property, real or

rentals

of

personal, profits
from
exchange and all other items
treated
as gross income under
Section
28
of
this
Code . . . . . . . . . . . 5%

A brief background of the tax law involved is in order.

Domestic corporate taxpayers, including banks, are levied a


20% final withholding tax on bank deposits under Section 24(e)
(1)[2] in relation to Section 50(a)[3] of Presidential Decree No.
1158, otherwise known as the National Internal Revenue Code
of 1977 (Tax Code). Banks are also liable for a tax on gross
receipts derived from sources within thePhilippines under
Section 119[4] of the Tax Code, which provides, thus:

Provided, however, That in


case the maturity period referred to
in paragraph (a) is shortened
thru pretermination,
then
the
maturity period shall be reckoned to
end
as
of
the
date
ofpretermination for purposes of
classifying the transaction as short,
medium or long term and the correct
rate of tax shall be applied
accordingly.

64

Nothing in this Code shall


preclude the Commissioner from
imposing the same tax herein
provided on persons performing
similar banking activities.

As a domestic corporation, the interest earned by respondent


Bank of the Philippine Islands (BPI) from deposits and similar
arrangements are subjected to a final withholding tax of
20%. Consequently, the interest income it receives on amounts
that it lends out are always net of the 20% withheld tax. As a
bank, BPI is furthermore liable for a 5% gross receipts tax on
all its income.

For the four (4) quarters of the year 1996, BPI computed its 5%
gross receipts tax payments by including in its tax base the
20% final tax on interest income that had been withheld and
remitted directly to the Bureau of Internal Revenue (BIR).

On 30 January 1996, the CTA rendered a decision in Asian


Bank Corporation v. Commissioner of Internal Revenue,
[5]
holding that the 20% final tax withheld on a banks interest
income did not form part of its taxable gross receipts for the
purpose of computing gross receipts tax.

BPI wrote the BIR a letter dated 15 July 1998 citing the CTA
Decision in Asian Bank and requesting a refund of alleged
overpayment of taxes representing 5% gross receipts taxes
paid on the 20% final tax withheld at source.

Inaction by the BIR on this request prompted BPI to file a


Petition for Review against the Commissioner of Internal
Revenue (Commissioner) with the CTA on 19 January
1999.Conceding its claim for the first three quarters of the year
as having been barred by prescription, BPI only claimed
alleged overpaid taxes for the final quarter of 1996.

Following its own doctrine in Asian Bank, the CTA rendered a


Decision,[6] holding that the 20% final tax withheld did not form
part of the respondents taxable gross receipts and that gross
receipts taxes paid thereon are refundable. However, it found
that only P13,843,455.62 in withheld final taxes were
substantiated by BPI; it awarded a refund of the 5% gross
receipts tax paid thereon in the amount of P692,172.78.

On appeal, the Court of Appeals promulgated a


Decision[7] affirming the CTA. It cited this Courts decision
in Commissioner of Internal Revenue v. Tours Specialists, Inc.,
[8]
in which we held that the gross receipts subject to tax under
the Tax Code do not include monies or receipts entrusted to
the taxpayer which do not belong to them and do not redound
to the taxpayers benefit in concluding that it would be unjust
and confiscatory to include the withheld 20% final tax in the tax
base for purposes of computing the gross receipts tax since
the amount corresponding to said 20% final tax was not
received by the taxpayer and the latter derived no
benefit therefrom.[9]

The Court of Appeals also held that Section 4(e) of Revenue


Regulations No. 12-80 mandates the deduction of the final tax
paid on interest income in computing the tax base for the gross
receipts tax. Section 4(e) provides, thus:

Gross receipts tax on banks, nonbank financial intermediaries, financing


companies, and other non-bank financial
intermediaries, not performing quasi-banking
activities. The rates of taxes to be imposed
on the gross receipts of such financial
institutions shall be based on all items of
income actually received. Mere accrual
shall not be considered, but once
payment is received on such accrual or in
case of prepayment, then the amount
actually received shall be included in the
tax base of such financial institutions, as
provided hereunder.(Emphasis supplied.)

The present Petition for Review filed by the Commissioner


seeks to annul the adverse Decisions of the CTA and the Court
of Appeals and raises the sole issue of whether the 20% final
tax withheld on a banks passive income should be included in
the computation of the gross receipts tax.

In assailing the findings of the lower courts, the Commissioner


makes the following arguments: (1) the term gross receipts
must be applied in its ordinary meaning; (2) there is no
provision in the Tax Code or any special laws that excludes the
20% final tax in computing the tax base of the 5% gross
receipts tax; (3) Revenue Regulations No. 12-80, Section 4(e),
is inapplicable in the instant case; and (4) income need not
actually be received to form part of the taxable gross
receipts. Additionally, petitioner points out that the CTAAsian
Bank case cited by petitioner BPI has already been
superseded by the CTA decisions in Standard Chartered Bank
v. Commissioner of Internal Revenue and Far East Bank and
Trust Company v. Commissioner of Internal Revenue, both
promulgated on 16 November 2001.

65

The issues raised by the Commissioner have already


been ruled upon in his favor by this Court in China Banking
Corporation
v.
Court
of
Appeals[10] and
reiterated
inCommissioner
of
Internal
Revenue
v. Solidbank Corporation[11] and more recently in Commissioner
of Internal Revenue v. Bank of Commerce.[12] Consequently,
the petition must be granted.

The Tax Code does not provide a definition of the


term gross receipts.[13] Accordingly, the term is properly
understood in its plain and ordinary meaning[14] and must be
taken to comprise of the entire receipts without any deduction.
[15]
We, thus, made the following disquisition in Bank of
Commerce:[16]

The word gross must be used in its


plain and ordinary meaning. It is defined as
whole, entire, total, without deduction. A
common definition is without deduction.
Gross is also defined as taking in the whole;
having no deduction or abatement; whole,
total as opposed to a sum consisting of
separate or specified parts. Gross is the
antithesis of net. Indeed, in China Banking
Corporation v. Court of Appeals, the Court
defined the term in this wise:

As
commonly
understood, the term gross
receipts means the entire
receipts
without
any
deduction. Deducting any
amount from the gross
receipts
changes
the
result, and the meaning, to
net
receipts.
Any
deduction
from
gross
receipts is inconsistent
with a law that mandates a
tax on gross receipts,
unless the law itself makes
an
exception.
As
explained by the Supreme
Court of Pennsylvania in
Commonwealth
of
Pennsylvania
v. Koppers Company, Inc.,
Highly
refined and
technical tax
concepts
have
been
developed by
the
accountant
and
legal
technician
primarily

because of
the impact of
federal
income tax
legislation.
However,
this in no
way should
affect
or
control
the
normal
usage
of
words in the
construction
of
our
statutes; and
we
see
nothing that
would
require
us
not to include
the proceeds
here
in
question in
the
gross
receipts
allocation
unless
statutorily
such
inclusion is
prohibited. U
nder
the
ordinary
basic
methods of
handling
accounts,
the
term
gross
receipts, in
the absence
of
any
statutory
definition of
the
term,
must
be
taken
to
include the
whole total
gross
receipts
without any
deductions,
x x x.
[Citations
omitted]
(Emphasis
supplied)
Likewise,
in Laclede Gas Co. v. City
of St. Louis, the Supreme
Court of Missouri held:
word

The
gross

66

appearing in
the
term
gross
receipts, as
used in the
ordinance,
must
have
been
and
was
there
used as the
direct
antithesis of
the
word
net. In
its
usual
and
ordinary
meaning
gross
receipts of a
business is
the
whole
and
entire
amount
of
the receipts
without
deduction,
x x x.
On
the contrary,
net receipts
usually are
the receipts
which remain
after
deductions
are
made
from
the
gross
amount
thereof of the
expenses
and cost of
doing
business,
including
fixed charges
and
depreciation.
Gross
receipts
become net
receipts after
certain
proper
deductions
are
made
from
the
gross.
And
in the use of
the
words
gross
receipts, the
instant
ordinance, of
course,
precluded
plaintiff from
first

deducting its
costs
and
expenses of
doing
business, etc
., in arriving
at the higher
base figure
upon which it
must pay the
5% tax under
this
ordinance.
(Emphasis
supplied)
Absent
a
statutory definition, the
term gross receipts is
understood in its plain and
ordinary meaning. Words
in a statute are taken in
their usual and familiar
signification,
with
due
regard to their general and
popular
use.
The
Supreme Court of Hawaii
held
in Bishop
Trust
Company v. Burns that

xx
x It
is
fundamental
that
in
construing or
interpreting a
statute,
in
order
to
ascertain the
intent of the
legislature,
the language
used therein
is to be taken
in
the
generally
accepted
and
usual
sense.
Courts
will
presume that
the words in
a
statute
were used to
express their
meaning in
common
usage. This
principle
is
equally
applicable to
a
tax
statute. [Cita
tions omitted]

67

(Emphasis
supplied)

Additionally, we held in Solidbank, to wit:[17]

[W]e note that US cases have persuasive


effect in our jurisdiction, because Philippine
income tax law is patterned after
its US counterpart.
[G]ross receipts with respect to
any period means the sum of:
(a) The total amount received
or accrued during such period
from the sale, exchange, or
other disposition of x x x other
property of a kind which would
properly be included in the
inventory of the taxpayer if on
hand at the close of the
taxable year, or property held
by the taxpayer primarily for
sale to customers in the
ordinary
course
of
its
trade or business, and (b) The
gross income, attributable to a
trade or business, regularly
carried on by the taxpayer,
received or accrued during
such period x x x.
x x x [B]y gross earnings
from operations x x x was
intended all operations
x x x including incidental,
subordinate,
and
subsidiary operations, as
well
as
principal
operations.
When we speak of the
gross earnings of a person
or corporation, we mean
the entire earnings or
receipts of such person or
corporation
from
the
business or operations to
which we refer.
From
these
cases, gross receipts] refer
to the total, as opposed to
the net, income. These are
therefore the total receipts
before any deduction for

the
expenses
of
management.
Websters New
International Dictionary, in
fact,
defines gross as
whole or entire.

The legislative intent to apply the term in its ordinary


meaning may also be surmised from a historical perspective of
the levy on gross receipts. From the time the gross receipts tax
on banks was first imposed in 1946 under R.A. No. 39 and
throughout its successive reenactments,[18] the legislature has
not established a definition of the term gross receipts. Absent a
statutory definition of the term, the BIR had consistently
applied it in its ordinary meaning, i.e., without deduction. On
the presumption that the legislature is familiar with the
contemporaneous interpretation of a statute given by the
administrative agency tasked to enforce the statute,
subsequent legislative reenactments of the subject levy sans a
definition of the term gross receipts reflect that
the BIRs application of the term carries out the legislative
purpose.[19]

Furthermore, Section 119 (a)[20] of the Tax Code


expressly includes interest income as part of the base income
from which the gross receipts tax on banks is computed.This
express inclusion of interest income in taxable gross receipts
creates a presumption that the entire amount of the interest
income, without any deduction, is subject to the gross receipts
tax.[21]

The exclusion of the 20% final tax on passive income


from the taxpayers tax base is effectively a tax exemption, the
application of which is highly disfavored.[22] The rule is that
whoever claims an exemption must justify this right by the
clearest grant of organic or statute law.[23] Like the other banks
who have asserted a right tantamount
to exception under these circumstances, BPI has failed to
present a clear statutory basis for its claim to take away the
interest income withheld from the purview of the levy on gross
tax receipts.
Bereft of a clear statutory basis on which to hinge its
claim, BPIs view, as adopted by the Court of Appeals, is that
Section 4(e) of Revenue Regulations No. 12-80 establishes the
exclusion of the 20% final tax withheld from the banks taxable
gross receipts.

However, we agree with the Commissioner


that BPIs asserted right under Section 4(e) of Revenue
Regulations No. 12-80 presents a misconstruction of the
provision.While, indeed, the provision states that [t]he rates of
taxes to be imposed on the gross receipts of such financial
institutions shall be based on all items of income actually

68

received, it goes on to distinguish actual receipt from


accrual, i.e., that [m]ere accrual shall not be considered,
but once payment is received on such accrual or in case
of prepayment, then the amount actually received shall be
included in the tax base of such financial institutions x x x.

Section 4(e) recognizes that income could be recognized by


the taxpayer either at the time of its actual receipt or its
accrual,[24] depending
on the accounting method used by the taxpayer,[25] but
establishes the rule that, for purposes of gross receipts tax,
interest income is taxable upon actual receipt of the income, as
opposed to the time of its accrual. Section 4(e) does not
exclude accrued interest income from gross receipts but
merely postpones its inclusion until actual payment of the
interest to the lending bank, thus mandating that [m]ere
accrual shall not be considered, but once payment is received
on such accrual or in case of prepayment, then the amount
actually received shall be included in the tax base of such
financial institutions x x x.[26]

Even if Section 4(e) had been properly construed, it still cannot


be the basis for deducting the income tax withheld since
Section 4(e) has been superseded by Section 7 of Revenue
Regulations No. 17-84, which states, thus:

SECTION 7. Nature and Treatment of


Interest on Deposits and Yield on Deposit
Substitutes.

(a) The interest earned on


Philippine
Currency
bank
deposits and yield from deposit
substitutes subjected to the
withholding taxes in accordance
with these regulations need not
be included in the gross income
in
computing
the
depositor's/investor's
income
tax liability in accordance with the
provision of Section 29(b), (c) and
(d) of the National Internal
Revenue Code, as amended.
(b) Only interest paid or accrued on
bank deposits, or yield from
deposit substitutes declared for
purposes
of
imposing
the
withholding taxes in accordance
with these regulations shall be
allowed as interest expense
deductible
for
purposes
of
computing taxable net income of
the payor.

(c) If the recipient of the abovementioned items of income are


financial institutions, the same
shall be included as part of the
tax base upon which the gross
receipt
tax
is
imposed. (Emphasis supplied.)

The provision categorically provides that if the recipient of


interest subjected to withholding taxes is a financial
institution, the interest shall be included as part of the tax
base upon which the gross receipts tax is imposed.
The implied repeal of Section 4(e) is undeniable.
Section 4(e) imposes the gross receipts tax only on all items of
income actually received, as opposed to their mereaccrual,
while Section 7 of Revenue Regulations No. 17-84
includes all interest income (whether actual or accrued) in
computing the gross receipts tax.[27] Section 4(e) of Revenue
Regulations No. 12-80 was superseded by the later rule,
because Section 4(e) thereof is not restated in Revenue
Regulations No. 17-84.[28] Clearly, then, the current revenue
regulations requires interest income, whether actually
received or merely accrued, to form part of the banks
taxable gross receipts.[29]

The Commissioner correctly controverts the conclusion made


by the Court of Appeals that it would be unjust and confiscatory
to include the withheld 20% final tax in the tax base for
purposes of computing the gross receipts tax since the amount
corresponding to said 20% final tax was not received by the
taxpayer and the latter derived no benefittherefrom.[30]

Receipt of income may be actual or constructive. We


have held that the withholding process results in the taxpayers
constructive receipt of the income withheld, to wit:

By analogy, we apply to the receipt


of
income
the
rules
on actual and constructive possession
provided in Articles 531 and 532 of our Civil
Code.
Under Article 531:
Possession is acquired by
the material occupation of a
thing or the exercise of a

69

right, or by the fact that it is


subject to the action of our
will, or by the proper acts and
legal formalities established
for acquiring such right.
Article 532 states:
Possession may be acquired
by the same person who is to
enjoy it, by his legal
representative, by his agent,
or by any person without any
power whatever; but in the
last case, the possession
shall not be considered as
acquired until the person in
whose name the act of
possession was executed
has ratified the same, without
prejudice to the juridical
consequences
of negotiorum gestio in
a
proper case.
The last means of acquiring
possession under Article 531 refers
to juridical actsthe acquisition of
possession by sufficient titleto
which the law gives the force of
acts of possession. Respondent
argues that only items of
income actually received should be
included in its gross receipts. It
claims that since the amount had
already been withheld at source, it
did not have actual receipt thereof.
We clarify. Article 531 of the Civil
Code clearly provides that the
acquisition
of
the right of
possession is through the proper
acts
and
legal
formalities
established therefor. The
withholding process is one such
act. There
may
not
be actual receipt of the income
withheld; however, as provided for
in Article 532, possession by any
person
without
any
power
whatsoever shall be considered as
acquired when ratified by the
person in whose name the act of
possession is executed.

In our withholding tax system,


possession is acquired by the payor as
the withholding agent of the government,
because the taxpayer ratifies the very act
of possession for the government. There
is
thus constructive receipt. The
processes
of
bookkeeping
and
accounting for interest on deposits and
yield on deposit substitutes that are
subjected to FWT are indeedfor legal
purposestantamount to delivery, receipt
or remittance.[31] (Emphasis supplied.)

Thus, BPI constructively received income by virtue of its


acquiescence to the extinguishment of its 20% final tax liability
when the withholding agents remitted BPIs income to the
government. Consequently,
it
received
the
amounts
corresponding to the 20% final tax and benefited therefrom.

The cases cited by BPI, Commissioner of Internal Revenue v.


Tours Specialists, Inc.[32] and Commissioner of Internal
Revenue v. Manila Jockey Club, Inc.,[33] in which this Court held
that gross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which do
not belong to them and do not redound to the taxpayer's
benefit,[34] only
further
substantiate
the
fact
that
BPI benefited from the withheld amounts.

In Tours Specialists and Manila Jockey Club, the


taxable entities held the subject monies not as income earned
but as mere trustees. As such, they held the money entrusted
to them but which neither belonged to them nor redounded to
their benefit. On the other hand, BPI cannot be considered as
a mere trustee; it is the actual owner of the funds. As owner
thereof, it was BPIs tax obligation to the government that was
extinguished upon the withholding agents remittance of the
20% final tax. We elucidated on BPIs ownership of the funds
in China Banking, to wit:

Manila Jockey Club does not


support CBCs contention but rather the
Commissioners proposition. The Court ruled
in Manila Jockey Club that receipts not
owned by the Manila Jockey Club but merely
held by it in trust did not form part of Manila
Jockey Clubs gross receipts. Conversely,
receipts owned by the Manila Jockey Club
would form part of its gross receipts.

In the instant case, CBC owns


the interest income which is the source of
payment of the final withholding tax. The
government subsequently becomes the

70

owner of the money constituting the final


tax when CBC pays the final withholding
tax to extinguish its obligation to the
government. This is the consideration for
the transfer of ownership of the money
from CBC to the government. Thus, the
amount constituting the final tax, being
originally owned by CBC as part of its
interest income, should form part of its
taxable gross receipts.

In Commissioner v. Tours Specialists,


Inc., the Court excluded from gross receipts
money entrusted by foreign tour operators to
Tours Specialists to pay the hotel
accommodation of tourists booked in various
local hotels. The Court declared that Tours
Specialists did not own such entrusted
funds and thus the funds were not subject to
the 3% contractors tax payable by Tours
Specialists. The Court held:

x x x [G]ross receipts subject


to tax under the Tax Code do
not include monies or receipts
entrusted to the taxpayer which
do not belong to them and do
not redound to the taxpayers
benefit; and it is not necessary
that there must be a law or
regulation which would exempt
such monies and receipts
within the meaning of gross
receipts under the Tax Code.

x x x [T]he
room
charges
entrusted by the foreign travel
agencies
to
the
private
respondent do not form part of
its gross receipts within the
definition of the Tax Code. The
said receipts never belonged to
the private respondent. The
private
respondent
never
benefited from their payment to
the local hotels. x x x [T]his
arrangement was only to
accommodate
the
foreign
travel agencies.

Unless otherwise provided by


law, ownership is essential in determining
whether interest income forms part of
taxable gross receipts. Ownership is the
circumstance that makes interest income
part of the taxable gross receipts of the
taxpayer. When the taxpayer acquires

ownership
of
money
representing
interest, the money constitutes income or
receipt of the taxpayer.

In contrast, the trustee or agent does


not own the money received in trust and
such money does not constitute income or
receipt for which the trustee or agent is
taxable. This is a fundamental concept in
taxation. Thus, funds received by a money
remittance agency for transfer and delivery
to the beneficiary do not constitute income or
gross receipts of the money remittance
agency. Similarly, a travel agency that
collects ticket fares for an airline does not
include the ticket fare in its gross income or
receipts. In these cases, the money
remittance agency or travel agency does not
acquire ownership of the funds received.
[35]
(Emphasis supplied.)

BPI argues that to include the 20% final tax withheld in its
gross receipts tax base would be to tax twice its passive
income and would constitute double taxation. Granted that
interest income is being taxed twice, this, however, does not
amount to double taxation. There is no double taxation if the
law imposes two different taxes on the same income, business
or property. [36] In Solidbank, we ruled, thus:

Double taxation means taxing the


same property twice when it should be taxed
only once; that is, x x x taxing the same
person twice by the same jurisdiction for the
same thing. It is obnoxious when the
taxpayer is taxed twice, when it should be
but once. Otherwise described as direct
duplicate taxation, the two taxes must be
imposed on the same subject matter, for the
same purpose, by the same taxing authority,
within the same jurisdiction, during the same
taxing period; and they must be of the same
kind or character.

First, the taxes herein are imposed


on two different subject matters. The subject
matter of the FWT [Final Withholding
Tax] is the passive income generated in the
form of interest on deposits and yield on
deposit substitutes, while the subject matter
of the GRT [Gross Receipts Tax] is the
privilege of engaging in the business of
banking.

71

A tax based on receipts is a tax on


business rather than on the property; hence,
it is an excise rather than a property tax. It is
not an income tax, unlike the FWT. In fact,
we have already held that one can be taxed
for engaging in business and further taxed
differently for the income derived therefrom.
Akin to our ruling in Velilla v. Posadas, these
two taxes are entirely distinct and are
assessed under different provisions.

Internal Revenues denial of respondent Bank of Philippine


Islands claim for refund is SUSTAINED. No costs.

SO ORDERED.

Second, although both taxes are


national in scope because they are imposed
by the same taxing authoritythe national
government under the Tax Codeand operate
within the same Philippine jurisdiction for the
same purpose of raising revenues, the taxing
periods they affect are different. The FWT is
deducted and withheld as soon as the
income is earned, and is paid after
every calendar quarter in which it is earned.
On the other hand, the GRT is neither
deducted nor withheld, but is paid only after
every taxable quarter in which it is earned.

Third, these two taxes are of


different kinds or characters. The FWT is an
income tax subject to withholding, while the
GRT is a percentage tax not subject to
withholding.

In short, there is no double taxation,


because there is no taxing twice, by the
same taxing authority, within the same
jurisdiction, for the same purpose, in different
taxing periods, some of the property in the
territory. Subjecting interest income to a
20% FWT and including it in the computation
of the 5% GRT is clearly not double taxation.
[37]

Clearly, therefore, despite the fact that that interest income is


taxed twice, there is no double taxation present in this case.

An interpretation of the tax laws and relevant jurisprudence


shows that the tax on interest income of banks withheld at
source is included in the computation of their gross receipts tax
base.

WHEREFORE, the Petition is GRANTED. The assailed


Decisions of the Court of Appeals and the Court of Tax Appeals
are REVERSED AND SET ASIDE. Petitioner Commissioner of

72

G.R. No. 127105 June 25, 1999


COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
S.C. JOHNSON AND SON, INC., and COURT OF
APPEALS, respondents.

GONZAGA-REYES, J.:
This is a petition for review on certiorari under Rule 45 of the
Rules of Court seeking to set aside the decision of the Court of
Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case
No. 5136.
The antecedent facts as found by the Court of Tax Appeals are
not disputed, to wit:
[Respondent], a domestic corporation
organized and operating under the Philippine
laws, entered into a license agreement with
SC Johnson and Son, United States of
America (USA), a non-resident foreign
corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right
to use the trademark, patents and
technology owned by the latter including the
right to manufacture, package and distribute
the products covered by the Agreement and
secure
assistance
in
management,
marketing and production from SC Johnson
and Son, U. S. A.
The said License Agreement was duly
registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks
and Technology Transfer under Certificate of
Registration No. 8064 (Exh. "A").

case fall squarely within the same


circumstances under which saidMacGeorge
and Gillete rulings were issued. Since the
agreement was approved by the Technology
Transfer Board, the preferential tax rate of
10% should apply to the [respondent]. We
therefore submit that royalties paid by the
[respondent] to SC Johnson and Son, USA is
only subject to 10% withholding tax pursuant
to the most-favored nation clause of the RPUS Tax Treaty [Article 13 Paragraph 2 (b)
(iii)] in relation to the RP-West Germany Tax
Treaty [Article 12 (2) (b)]" (Petition for
Review [filed with the Court of Appeals], par.
12). [Respondent's] claim for there fund of
P963,266.00 was computed as follows:
Gross 25% 10%
Month/ Royalty Withholding Withholding
Year Fee Tax Paid Tax Balance

July 1992 559,878 139,970 55,988 83,982
August 567,935 141,984 56,794 85,190
September 595,956 148,989 59,596 89,393
October 634,405 158,601 63,441 95,161
November 620,885 155,221 62,089 93,133
December 383,276 95,819 36,328 57,491
Jan 1993 602,451 170,630 68,245 102,368
February 565,845 141,461 56,585 84,877

For the use of the trademark or technology,


[respondent] was obliged to pay SC Johnson
and Son, USA royalties based on a
percentage of net sales and subjected the
same to 25% withholding tax on royalty
payments which [respondent] paid for the
period covering July 1992 to May 1993 in the
total amount of P1,603,443.00 (Exhs. "B" to
"L" and submarkings).
On October 29, 1993, [respondent] filed with
the International Tax Affairs Division (ITAD)
of the BIR a claim for refund of overpaid
withholding tax on royalties arguing that, "the
antecedent facts attending [respondent's]

March 547,253 136,813 54,725 82,088


April 660,810 165,203 66,081 99,122
May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ========
The Commissioner did not act on said claim for refund. Private
respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed

73

a petition for review before the Court of Tax Appeals (CTA)


where the case was docketed as CTA Case No. 5136, to claim
a refund of the overpaid withholding tax on royalty payments
from July 1992 to May 1993.
On May 7, 1996, the Court of Tax Appeals rendered its
decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit
certificate in the amount of P963,266.00 representing overpaid
withholding tax on royalty payments, beginning July, 1992 to
May, 1993. 2
The Commissioner of Internal Revenue thus filed a petition for
review with the Court of Appeals which rendered the decision
subject of this appeal on November 7, 1996 finding no merit in
the petition and affirming in toto the CTA ruling. 3
This petition for review was filed by the Commissioner of
Internal Revenue raising the following issue:
THE COURT OF APPEALS ERRED IN
RULING THAT SC JOHNSON AND SON,
USA IS ENTITLED TO THE "MOST
FAVORED NATION" TAX RATE OF 10% ON
ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RPWEST GERMANY TAX TREATY.
Petitioner contends that under Article 13(2) (b) (iii) of the RPUS Tax Treaty, which is known as the "most favored nation"
clause, the lowest rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of the United States
from sources within the Philippines only if the circumstances of
the resident of the United States are similar to those of the
resident of West Germany. Since the RP-US Tax Treaty
contains no "matching credit" provision as that provided under
Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax
Treaty. Even assuming that the phrase "paid under similar
circumstances" refers to the payment of royalties, and not
taxes, as held by the Court of Appeals, still, the "most favored
nation" clause cannot be invoked for the reason that when a
tax treaty contemplates circumstances attendant to the
payment of a tax, or royalty remittances for that matter, these
must necessarily refer to circumstances that are tax-related.
Finally, petitioner argues that since S.C. Johnson's invocation
of the "most favored nation" clause is in the nature of a claim
for exemption from the application of the regular tax rate of
25% for royalties, the provisions of the treaty must be
construed strictly against it.
In its Comment, private respondent S.C. Johnson avers that
the instant petition should be denied (1) because it contains a
defective certification against forum shopping as required
under SC Circular No. 28-91, that is, the certification was not
executed by the petitioner herself but by her counsel; and (2)

that the "most favored nation" clause under the RP-US Tax
Treaty refers to royalties paid under similar circumstances as
those royalties subject to tax in other treaties; that the phrase
"paid under similar circumstances" does not refer to payment
of the tax but to the subject matter of the tax, that is, royalties,
because the "most favored nation" clause is intended to allow
the taxpayer in one state to avail of more liberal provisions
contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to
the basic condition that the subject matter of taxation in that
other tax treaty is the same as that in the original tax treaty
under which the taxpayer is liable; thus, the RP-US Tax Treaty
speaks of "royalties of the same kind paid under similar
circumstances". S.C. Johnson also contends that the
Commissioner is estopped from insisting on her interpretation
that the phrase "paid under similar circumstances" refers to the
manner in which the tax is paid, for the reason that said
interpretation is embodied in Revenue Memorandum Circular
("RMC") 39-92 which was already abandoned by the
Commissioner's predecessor in 1993; and was expressly
revoked in BIR Ruling No. 052-95 which stated that royalties
paid to an American licensor are subject only to 10%
withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty. Said
ruling should be given retroactive effect except if such is
prejudicial to the taxpayer pursuant to Section 246 of the
National Internal Revenue Code.
Petitioner filed Reply alleging that the fact that the certification
against forum shopping was signed by petitioner's counsel is
not a fatal defect as to warrant the dismissal of this petition
since Circular No. 28-91 applies only to original actions and not
to appeals, as in the instant case. Moreover, the requirement
that the certification should be signed by petitioner and not by
counsel does not apply to petitioner who has only the Office of
the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances"
embodied in the most favored nation clause of the RP-US Tax
Treaty refers to the payment of royalties and not taxes, still the
presence or absence of a "matching credit" provision in the
said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of
the said clause's application.1wphi1.nt
We address first the objection raised by private respondent
that the certification against forum shopping was not executed
by the petitioner herself but by her counsel, the Office of the
Solicitor General (O.S.G.) through one of its Solicitors, Atty.
Tomas M. Navarro.
SC Circular No. 28-91 provides:
SUBJEC
T:
ADDITIO
NAL
REQUISI

74

TES
The circular expressly requires that a certificate of non-forum
FOR
shopping should be attached to petitions filed before this Court
PETITIO and the Court of Appeals. Petitioner's allegation that Circular
NS
No. 28-91 applies only to original actions and not to appeals as
FILED in the instant case is not supported by the text nor by the
WITH
obvious intent of the Circular which is to prevent multiple
THE
petitions that will result in the same issue being resolved by
SUPRE different courts.
ME
COURT Anent the requirement that the party, not counsel, must certify
AND
under oath that he has not commenced any other action
THE
involving the same issues in this Court or the Court of Appeals
COURT or any other tribunal or agency, we are inclined to accept
OF
petitioner's submission that since the OSG is the only lawyer
APPEAL for the petitioner, which is a government agency mandated
S
TOunder Section 35, Chapter 12, title III, Book IV of the 1987
PREVENAdministrative Code 4 to be represented only by the Solicitor
T
General, the certification executed by the OSG in this case
FORUM constitutes substantial compliance with Circular No. 28-91.
SHOPPI
NG ORWith respect to the merits of this petition, the main point of
MULTIPLcontention in this appeal is the interpretation of Article 13 (2)
E FILING(b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
OF
imposed by the Philippines upon royalties received by a nonPETITIO resident foreign corporation. The provision states insofar as
NS ANDpertinent
COMPLAthat
INTS
TO: xxx
xxx xxx
The attention of the Court has been called to
the filing of multiple petitions and complaints
involving the same issues in the Supreme
Court, the Court of Appeals or other tribunals
or agencies, with the result that said courts,
tribunals or agencies have to resolve the
same issues.
(1) To avoid the foregoing, in every petition
filed with the Supreme Court or the Court of
Appeals, the petitioner aside from complying
with pertinent provisions of the Rules of
Court and existing circulars, must certify
under oath to all of the following facts or
undertakings: (a) he has not theretofore
commenced any other action or proceeding
involving the same issues in the Supreme
Court, the Court of Appeals, or any tribunal
or
agency; . . .
(2) Any violation of this revised Circular will
entail the following sanctions: (a) it shall be a
cause for the summary dismissal of the
multiple petitions or complaints; . . .

1) Royalties derived by a
resident of one of the
Contracting States from
sources within the other
Contracting State may be
taxed by both Contracting
States.
2) However, the tax
imposed
by
that
Contracting State shall not
exceed.
a) In the
case of
the
United
States,
15
percent
of
the
gross
amount
of
the
royalties
, and
b) In the
case of

75

the
Philippin
es, the
least of:
(i)
25
percent
of
the
gross
amount
of
the
royalties;

ances to
a
resident
of a third
State.
xxx xxx xxx
(emphas
is
supplied
)

(ii)
15Respondent S. C. Johnson and Son, Inc. claims that on the
percent basis of the quoted provision, it is entitled to the concessional
of
thetax rate of 10 percent on royalties based on Article 12 (2) (b) of
gross
the RP-Germany Tax Treaty which provides:
amount
of
the
(2)
However,
such
royalties,
royalties may also be
where
taxed in the Contracting
the
State in which they arise,
royalties
and according to the law of
are paid
that State, but the tax so
by
a
charged shall not exceed:
corporati
on
xxx xxx xxx
registere
d
with
b)
10
the
percent
Philippin
of
the
e Board
gross
of
amount
Investme
of
nts and
royalties
engaged
arising
in
from the
preferred
use of,
areas of
or
the
activities;
right
to
and
use, any
patent,
(iii)
tradema
lowest
rk,
rate
of
design
Philippin
or
e tax that
model,
may be
plan,
imposed
secret
on
formula
royalties
or
of
the
process,
same
or from
kind paid
the use
under
of or the
similar
right to
circumst
use,

76

industria
l,
commer
cial, or
scientific
equipme
nt, or for
informati
on
concerni
ng
industria
l,
commer
cial
or
scientific
experien
ce.

as
a
credit
against
German
income
and
corporati
on
tax
payable
in
respect
of
the
following
items of
income
arising
in
the
Republic
of
the
Philippin
es, the
tax paid
under
the laws
of
the
Philippin
es
in
accorda
nce with
this
Agreem
ent on:

For as long as the transfer of technology,


under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under
b) shall, in the case of royalties arising in the
Republic of the Philippines, only apply if the
contract giving rise to such royalties has
been approved by the Philippine competent
authorities.
Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty
allows a tax credit of 20 percent of the gross amount of such
royalties against German income and corporation tax for the
taxes payable in the Philippines on such royalties where the
tax rate is reduced to 10 or 15 percent under such treaty.
Article 24 of the RP-Germany Tax Treaty states

xxx xxx xxx

dd)
royalties,
as
defined
in
paragrap
h 3 of
Article
12;

1) Tax shall be determined


in the case of a resident of
the Federal Republic of
Germany as follows:
xxx xxx xxx
b)
Subject
to
the
provisio
ns
of
German
tax law
regardin
g credit
for
foreign
tax,
there
shall be
allowed

xxx xxx xxx


c)
For
the
purpose
of
the
credit
referred
in
subpara
graph;
b)
the

77

Philippin
e
tax
shall be
deemed
to be
xxx xxx xxx

royalty under certain conditions. The rate of


10% is imposed if credit against the German
income and corporation tax on said royalty is
allowed in favor of the German resident. That
means the rate of 10% is granted to the
German taxpayer if he is similarly granted a
credit against the income and corporation tax
of West Germany. The clear intent of the
"matching credit" is to soften the impact of
double taxation by different jurisdictions.

cc) in the
case of
royalties
The RP-US Tax Treaty contains no similar
for which
"matching credit" as that provided under the
the tax is
RP-West Germany Tax Treaty. Hence, the
reduced
tax on royalties under the RP-US Tax Treaty
to 10 or
is not paid under similar circumstances as
15
per
those obtaining in the RP-West Germany Tax
cent
Treaty. Therefore, the "most favored nation"
accordin
clause in the RP-West Germany Tax Treaty
g
to
cannot be availed of in interpreting the
paragrap
provisions of the RP-US Tax Treaty. 5
h 2 of
Article
12,
20
The petition is meritorious.
percent
of
theWe are unable to sustain the position of the Court of Tax
gross
Appeals, which was upheld by the Court of Appeals, that the
amount phrase "paid under similar circumstances in Article 13 (2) (b),
of such(iii) of the RP-US Tax Treaty should be interpreted to refer to
royalties. payment of royalty, and not to the payment of the tax, for the
xxx xxx xxx
According to petitioner, the taxes upon royalties under the RPUS Tax Treaty are not paid under circumstances similar to
those in the RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in the former
convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored
nation clause in the RP-US Tax Treaty. Petitioner's position is
explained thus:
Under the foregoing provision of the RPWest Germany Tax Treaty, the Philippine tax
paid on income from sources within the
Philippines is allowed as a credit against
German income and corporation tax on the
same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent
according to paragraph 2 of Article 12 of the
RP-West Germany Tax Treaty, the credit
shall be 20% of the gross amount of such
royalty. To illustrate, the royalty income of a
German resident from sources within the
Philippines arising from the use of, or the
right to use, any patent, trade mark, design
or model, plan, secret formula or process, is
taxed at 10% of the gross amount of said

reason that the phrase "paid under similar circumstances" is


followed by the phrase "to a resident of a third state". The
respondent court held that "Words are to be understood in the
context in which they are used", and since what is paid to a
resident of a third state is not a tax but a royalty "logic
instructs" that the treaty provision in question should refer to
royalties of the same kind paid under similar circumstances.
The above construction is based principally on syntax or
sentence structure but fails to take into account the purpose
animating the treaty provisions in point. To begin with, we are
not aware of any law or rule pertinent to the payment of
royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the
circumstances of payment thereof are the same for all the
recipients of such royalties and there is no disparity based on
nationality in the circumstances of such payment. 6 On the
other hand, a cursory reading of the various tax treaties will
show that there is no similarity in the provisions on relief from
or avoidance of double taxation 7 as this is a matter of
negotiation between the contracting parties. 8 As will be shown
later, this dissimilarity is true particularly in the treaties between
the Philippines and the United States and between the
Philippines and West Germany.
The RP-US Tax Treaty is just one of a number of bilateral
treaties which the Philippines has entered into for the

78

avoidance of double taxation. 9 The purpose of these


international agreements is to reconcile the national fiscal
legislations of the contracting parties in order to help the
taxpayer avoid simultaneous taxation in two different
jurisdictions. 10 More precisely, the tax conventions are drafted
with a view towards the elimination of international juridical
double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical
periods. 11 The apparent rationale for doing away with double
taxation is of encourage the free flow of goods and services
and the movement of capital, technology and persons between
countries, conditions deemed vital in creating robust and
dynamic economies. 12 Foreign investments will only thrive in a
fairly predictable and reasonable international investment
climate and the protection against double taxation is crucial in
creating such a climate. 13
Double taxation usually takes place when a person is resident
of a contracting state and derives income from, or owns capital
in, the other contracting state and both states impose tax on
that income or capital. In order to eliminate double taxation, a
tax treaty resorts to several methods. First, it sets out the
respective rights to tax of the state of source or situs and of the
state of residence with regard to certain classes of income or
capital. In some cases, an exclusive right to tax is conferred on
one of the contracting states; however, for other items of
income or capital, both states are given the right to tax,
although the amount of tax that may be imposed by the state of
source is limited. 14
The second method for the elimination of double taxation
applies whenever the state of source is given a full or limited
right to tax together with the state of residence. In this case,
the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation. There are two
methods of relief the exemption method and the credit
method. In the exemption method, the income or capital which
is taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be taken
into account in determining the rate of tax applicable to the
taxpayer's remaining income or capital. On the other hand, in
the credit method, although the income or capital which is
taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax
levied in the latter. The basic difference between the two
methods is that in the exemption method, the focus is on the
income or capital itself, whereas the credit method focuses
upon the tax. 15
In negotiating tax treaties, the underlying rationale for reducing
the tax rate is that the Philippines will give up a part of the tax
in the expectation that the tax given up for this particular
investment
is
not
taxed
by
the
other
country. 16 Thus the petitioner correctly opined that the phrase
"royalties paid under similar circumstances" in the most

favored nation clause of the US-RP Tax Treaty necessarily


contemplated "circumstances that are tax-related".
In the case at bar, the state of source is the Philippines
because the royalties are paid for the right to use property or
rights, i.e. trademarks, patents and technology, located within
the Philippines. 17 The United States is the state of residence
since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and
the state of source are both permitted to tax the royalties, with
a restraint on the tax that may be collected by the state of
source. 18 Furthermore, the method employed to give relief
from double taxation is the allowance of a tax credit to citizens
or residents of the United States (in an appropriate amount
based upon the taxes paid or accrued to the Philippines)
against the United States tax, but such amount shall not
exceed the limitations provided by United States law for the
taxable year. 19 Under Article 13 thereof, the Philippines may
impose one of three rates 25 percent of the gross amount of
the royalties; 15 percent when the royalties are paid by a
corporation registered with the Philippine Board of Investments
and engaged in preferred areas of activities; or the lowest rate
of Philippine tax that may be imposed on royalties of the same
kind paid under similar circumstances to a resident of a third
state.
Given the purpose underlying tax treaties and the rationale for
the most favored nation clause, the concessional tax rate of 10
percent provided for in the RP-Germany Tax Treaty should
apply only if the taxes imposed upon royalties in the RP-US
Tax Treaty and in the RP-Germany Tax Treaty are paid under
similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants
similar tax reliefs to residents of the United States in respect of
the taxes imposable upon royalties earned from sources within
the Philippines as those allowed to their German counterparts
under the RP-Germany Tax Treaty.
The RP-US and the RP-West Germany Tax Treaties do not
contain similar provisions on tax crediting. Article 24 of the RPGermany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross
amount of royalties paid under the law of the Philippines. On
the other hand, Article 23 of the RP-US Tax Treaty, which is the
counterpart provision with respect to relief for double taxation,
does not provide for similar crediting of 20% of the gross
amount of royalties paid. Said Article 23 reads:
Article 23
Relief from double taxation
Double taxation of income shall be avoided
in the following manner:
1) In accordance with the
provisions and subject to

79

the limitations of the law of


the United States (as it
may be amended from
time to time without
changing
the
general
principle
thereof),
the
United States shall allow
to a citizen or resident of
the United States as a
credit against the United
States tax the appropriate
amount of taxes paid or
accrued to the Philippines
and, in the case of a
United States corporation
owning at least 10 percent
of the voting stock of a
Philippine corporation from
which it receives dividends
in any taxable year, shall
allow
credit
for
the
appropriate amount of
taxes paid or accrued to
the Philippines by the
Philippine
corporation
paying such dividends with
respect to the profits out of
which such dividends are
paid. Such appropriate
amount shall be based
upon the amount of tax
paid or accrued to the
Philippines, but the credit
shall not exceed the
limitations (for the purpose
of limiting the credit to the
United States tax on
income
from
sources
within the Philippines or on
income
from
sources
outside the United States)
provided by United States
law
for
the
taxable
year. . . .
The reason for construing the phrase "paid under similar
circumstances" as used in Article 13 (2) (b) (iii) of the RP-US
Tax Treaty as referring to taxes is anchored upon a logical
reading of the text in the light of the fundamental purpose of
such treaty which is to grant an incentive to the foreign investor
by lowering the tax and at the same time crediting against the
domestic tax abroad a figure higher than what was collected in
the Philippines.
In one case, the Supreme Court pointed out that laws are not
just mere compositions, but have ends to be achieved and that
the general purpose is a more important aid to the meaning of
a law than any rule which grammar may lay down. 20 It is the

duty of the courts to look to the object to be accomplished, the


evils to be remedied, or the purpose to be subserved, and
should give the law a reasonable or liberal construction which
will best effectuate its purpose. 21 The Vienna Convention on
the Law of Treaties states that a treaty shall be interpreted in
good faith in accordance with the ordinary meaning to be given
to the terms of the treaty in their context and in the light of its
object
and
purpose. 22
As stated earlier, the ultimate reason for avoiding double
taxation is to encourage foreign investors to invest in the
Philippines a crucial economic goal for developing
countries. 23 The goal of double taxation conventions would be
thwarted if such treaties did not provide for effective measures
to minimize, if not completely eliminate, the tax burden laid
upon the income or capital of the investor. Thus, if the rates of
tax are lowered by the state of source, in this case, by the
Philippines, there should be a concomitant commitment on the
part of the state of residence to grant some form of tax relief,
whether this be in the form of a tax credit or
exemption. 24 Otherwise, the tax which could have been
collected by the Philippine government will simply be collected
by another state, defeating the object of the tax treaty since the
tax burden imposed upon the investor would remain
unrelieved. If the state of residence does not grant some form
of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a
favorable tax regime, should it impose a lower tax rate on the
royalty earnings of the investor, and it would be better to
impose the regular rate rather than lose much-needed
revenues to another country.
At the same time, the intention behind the adoption of the
provision on "relief from double taxation" in the two tax treaties
in question should be considered in light of the purpose behind
the most favored nation clause.
The purpose of a most favored nation clause is to grant to the
contracting party treatment not less favorable than that which
has been or may be granted to the "most favored" among other
countries. 25 The most favored nation clause is intended to
establish the principle of equality of international treatment by
providing that the citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of
the most favored nation.26 The essence of the principle is to
allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of
residence of such taxpayer is also a party provided that the
subject matter of taxation, in this case royalty income, is the
same as that in the tax treaty under which the taxpayer is
liable. Both Article 13 of the RP-US Tax Treaty and Article 12
(2) (b) of the RP-West Germany Tax Treaty, above-quoted,
speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms
despite the absence of a matching credit (20% for royalties)
would derogate from the design behind the most grant equality

80

of international treatment since the tax burden laid upon the


income of the investor is not the same in the two countries.
The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment
precisely to underscore the need for equality of treatment.
We accordingly agree with petitioner that since the RP-US Tax
Treaty does not give a matching tax credit of 20 percent for the
taxes paid to the Philippines on royalties as allowed under the
RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10 percent rate granted under the latter
treaty for the reason that there is no payment of taxes on
royalties under similar circumstances.

grant of organic or statute law. 28 Private respondent is claiming


for a refund of the alleged overpayment of tax on royalties;
however, there is nothing on record to support a claim that the
tax on royalties under the RP-US Tax Treaty is paid under
similar circumstances as the tax on royalties under the RPWest Germany Tax Treaty.
WHEREFORE, for all the foregoing, the instant petition is
GRANTED. The decision dated May 7, 1996 of the Court of
Tax Appeals and the decision dated November 7, 1996 of the
Court of Appeals are hereby SET ASIDE.
SO ORDERED.

It bears stress that tax refunds are in the nature of tax


exemptions. As such they are regarded as in derogation of
sovereign authority and to be construed strictissimi
juris against the person or entity claiming the exemption. 27The
burden of proof is upon him who claims the exemption in his
favor and he must be able to justify his claim by the clearest

81