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119775 October 24, 2003)

Facts: R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone
(Subic SEZ). It granted the Subic SEZ incentives ranging from tax and duty-free
importations, exemption of businesses therein from local and national taxes, to other
hallmarks of a liberalized financial and business climate. R.A. No. 7227 expressly gave
authority to the President to create through executive proclamation, subject to the
concurrence of the local government units directly affected, other Special Economic
Zones (SEZ) in the areas covered, such as Camp John Hay.

BCDA entered into a Memorandum of Agreement and Escrow Agreement with private
respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale Group,
Inc. (ASIAWORLD). Four months later, BCDA, TUNTEX and ASIAWORD executed a
Joint Venture Agreement whereby they bound themselves to put up a joint venture
company known as the Baguio International Development and Management Corporation
which would lease areas within Camp John Hay and Poro Point for the purpose of turning
such places into principal tourist and recreation spots.

Subsequently President Ramos issued Proclamation No. 420, the title of which was
earlier indicated, which established a SEZ on a portion of Camp John Hay.

The issuance of Proclamation No. 420 spawned the present petition for prohibition,
mandamus and declaratory relief. Petitioner alleges that Presidential Proclamation No.
420, in so far as it grants tax exemptions, is invalid and illegal as it is an unconstitutional
exercise by the president of a power granted only to the legislature.

Issue: W/N the tax exemptions and other financial incentives granted to the Subic SEZ
under Section 12 of RA 7227 are applicable to the John Hay SEZ?

Held: No.

It is the legislative branch which has the inherent power not only to select the subjects of
taxation but also grant exemptions. Paragraph 4, Section 28 of Article VI of the
Constitution provides: "No law granting tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress."

Thus, it is only the legislature, as limited by the provisions of the Constitution, that has
full power to exempt any person or corporation or class of property from taxation.

The Constitution may itself provide for specific tax exemptions or local governments
may pass ordinances providing for exemption from local taxes, but otherwise, it is only
the legislative branch which has the power to grant tax exemptions, its power to exempt
being as broad as its power to tax.

There is absolutely nothing in RA 7227 which can be considered a grant of tax exemption
in favor of public respondent BCDA. Rather, the beneficiaries of the tax exemptions and
other incentives in Section 12 (the only provision in RA 7227 which expressly grants tax
exemptions) are clearly the business enterprises located within the Subic SEZ.

Consequently, respondents' arguments for a liberal construction of RA 7227 in favor of

tax exemptions and incentives to business enterprises in the John Hay SEZ must
necessarily fail. As the Court, speaking through Justice Mendoza in the recent case of
PLDT v. city of Davao, has occasion to stress:

"Along with the police power and eminent domain, TAXATION is one of the three
necessary attributes of sovereignty. Consequently, statutes in derogation of sovereignty,
such as those containing exemption from taxation, should be strictly construed in favor of
the state. A state cannot be stripped of this most essential power by doubtful words and of
this highest attribute of sovereignty by ambiguous language."

Necessarily, respondents' arguments, dependent as they are on a liberal construction of

tax exemptions, also fail.

Public respondents' argument that tax exemptions are "inherent" in the term "special
economic zone" stands the concept on its head and cannot be accepted. The tax exempt
character of an SEZ proceeds from the statutory provisions expressly conferring such
exemptions, not vice versa.