DOUBLE TAXATION/TAX EXEMPTION
1. HON. EXECUTIVE SECRETARY, ET AL. v. SOUTHWING
HEAVY INDUSTRIES, INC., ET AL.
FACTS:
On December 12, 2002, President Gloria Macapagal-
Arroyo, through Executive Secretary Alberto G. Romulo,
issued EO156, entitled "Providing for a comprehensive
industrial policy and directions for the motor vehicle
development programand its implementing guidelines."
The challenged provision states, among others, "Article 2,
Section 3.1. The importation into the country, inclusive of
the Freeport, of all types of used motor vehicles is
prohibited, except xxx" Southwing Heavy Industries, Inc.,
an entity classified as a Subic Bay Freeport Enterprise and
engaged in the business of, among others, importing
and/or trading used motor vehicles,' sought declaratory
relief before for the unconstitutionality of the above-cited
Section mainly contending that the importation ban is
illogical and unfair because it unreasonably drives them
out of business to the prejudice of the national economy.
The Government contends that the application of EO 156
should be extended to the Freeport because the
guarantee of RA 7227 on the free flow of goods into the
Freeport Zone is merely an exemption from customs
duties and taxes on items brought into the Freeport and
not an open floodgate for all kinds of goods and materials
without restriction.
ISSUE: Whether or not the prohibition may be applied to
entities operating in the Freeport Zone
HELD:
No. RA 7227 was enacted providing for, among other
things, (1) the sound and balanced conversion of the Clark
and Subic military reservations and their extensions into
alternative productive uses in the form of Special
Economic and Freeport Zone, or the Subic Bay Freeport,
(2) in order to promote the economic and social
development of Central Luzon in particular and the
country in general.
The Rules and Regulations Implementing RA 7227
specifically defines the territory comprising the Subic Bay
Freeport, referred to as the Special Economic and Freeport
Zone in Section 12 of RA 7227 as a separate customs
territory xxx.
Mindful of the legislative intent to attract investors,
enhance investment and boost the economy, the
legislature could not have limited the enticement only to
exemption from taxes. The minimum interference policy of
the government on the Freeport extends to the kind of
business that investors may embark on and the articles,
which they may import or export into and out of the zone.
A contrary interpretation would defeat the very purpose
of the Freeport and drive away investors. It does not
mean, however, that the right of Freeport enterprises to
import all types of goods and article is absolute.
Such right is of course subject to the limitation that articles
absolutely prohibited by law cannot be imported into the
Freeport. Nevertheless, in determining whether the
prohibition would apply to the Freeport, resort to the
purpose of the prohibition is necessary. The President
issued EO 156 to prevent further erosion of the already
depressed market base of the local motor vehicle industry
and to curtail the harmful effects of the increase in the
importation of used motor vehicles. The subject matter of
the laws authorizing the President to regulate or forbid
importation of used motor vehicles, is the domestic
industry. EO 156, however, exceeded the scope of its
application by extending the prohibition on the
importation of used cars to the Freeport, which RA 7227,
considers to some extent, a foreign territory. The domestic
industry which the EO seeks to protect is actually the
customs territory which is defined under the Rules and
Regulations Implementing RA 7227, as the portion of the
Philippines outside the Subic Bay Freeport where the Tariff
and Customs Code of the Philippines and other national
tariff and customs laws are in force and effect. The all
encompassing application of the assailed provision to the
Freeport which is outside the customs territory is illogical.
As long as the used motor vehicles do not enter the
customs territory, the injury or harm sought to be
prevented or remedied will not arise. To apply the
proscription to the Freeport would not serve the purpose
of the EO. Instead of improving the general economy of
the country, the application of the importation ban in the
Freeport would subvert the avowed purpose of RA 7227
which is to create a market that would draw investors and
ultimately boost the national economy. As to the
constitutionality of the assailed provision, said provision is
declared VALID insofar as it applies to the Philippine
territory outside the presently fenced-in former Subic
Naval Base area and VOID with respect to its application to
the secured fenced-in former Subic Naval Base area.
2. JOHN HAY PEOPLES ALTERNATIVE COALITION vs. LIM
FACTS:
RA 7227 or the Bases Conversion and Development Act of
1992, set out the policy of the govt to accelerate the
sound and balance conversion into alternative prouctive
uses of bases. It granted Subic SEZ incentives ranging from
tax and duty-free importations and exemptions of
business therein from local and national taxes. It also
expressly gave authority to the President to create other
SEZ including Clark military reservation, the Wallace Air
Station in SF, La Union, and Camp John Hay. through
executive proclamations subject to concurrence of the
local govt directly affected. BCDA, TUNEX and ASIAWORLD
executed a JVA to put up a JV company which would lease
areas within Camp John Hay and Poro Point for purposes
of turning those places into principal tourist and recreation
spots. President Ramos issued Proclamation No. 420 which
established a SEZ on 288.1 hectares of CJH. Under Section
3 of said act, CJH was given all the applicable incentives of
the SEZ under Section 12 of RA 7227 and those applicable
incentives granted to the Export Processing Zones, the
Omnibus Investment Code of 1987, the Foreign
Investment Act of 1991, and the new investment laws that
may hereinafter be enacted. RESPONDENTS contend that
by extending the CJH SEZ economic incentives similar to
those enjoyed by SUBIC SEZ, the proclamation is merely
implementing the legislative intent of said law and
underscore that the govt s policy of bases conversion
cannot be achieved without extending the same tax
exemptions granted.
 DOUBLE TAXATION/TAX EXEMPTION
ISSUE: Whether the grant of exemption to CHJ SEZ is valid
HELD:
While the grant of economic incentives may be essential
to the creation and success of SEZs, the grant thereof to
CHJ SEZ cannot be sustained. The incentives under RA
7227 are exclusive only to the SUBIC SEZ.It is the
legislature, unless limited by a provision in the
Constitution, that has full power to exempt any person or
corporation or a class of property from taxation, its power
to exempt being as broad as its power to tax. Other than
Congress, the Constitution may itself provide for specific
tax exemptions, or local govt may pass ordinances on
exemption only from local taxes. The challenged grant
would circumvent the Constitutions imposition that a law
granting tax exemption must have the concurrence of a
majority of all the members of Congress. Tax exemptions
cannot be implied as it must be categorically and
unmistakeably expressed.
3. DELPHER TRADES CORPORATION v. IAC
FACTS:
Petitioner Delpher Trades Corp. and Delphin Pacheco were
the owners of the Malinta Estate in the Municipality of
Polo, who leased to Construction Components
International Inc. the same property and providing that
during the existence or after the term of this lease the
lessor should he decide to sell the property leased shall
first offer the same to the lessee and the letter has the
priority to buy under similar conditions. Respondent Hydro
Pipes on the other hand, was assigned with the rights and
obligations of Construction Components under the above
lease contract with the signed conformity and consent of
lessors Delfin and Pelagia. Delpher Trades acquired the
property from Pelagia Pacheco and Delphin Pacheco (a
deed of exchange was executed between lessors Delfin
and Pelagia Pacheco and defendant Delpher Trades
Corporation whereby the former conveyed to the latter
the leased property together with another parcel of land
also located in Malinta Estate for 2,500 shares of stock of
defendant corporation with a total value of
P1,500,000.00). Respondent however filed an amended
complaint for reconveyance in its favor on the ground that
it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement.
ISSUE: Whether the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the
Delpher Trades Corporation on the other was meant to be
a contract of sale
HELD:
No the Deed of Exchange was not meant to be a contract
of sale. As explained by Eduardo Neria, a CPA and son-in-
law of the late Pelagia Pacheco who testified that Delpher
Trades Corp. is a family corporation [organized by the
children of the two spouses (spouses Pelagia Pacheco and
Benjamin Hernandez and spouses Delfin Pacheco and Pilar
Angeles) who owned in common the parcel of land leased
to Hydro Pipes Philippines in order to perpetuate their
control over the property through the corporation and to
avoid taxes then used the said Deed of Exchange. As
stated in Section 35 of the National Internal Revenue Code
under par. C-sub-par. (2) Exceptions regarding the
provision: "No gain or loss shall also be recognized if a
person exchanges his property for stock in a corporation of
which as a result of such exchange said person alone or
together with others not exceeding four persons gains
control of said corporation."
4. COMMISSIONER OF INTERNAL
REVENUE v. LINCOLN
PHILIPPINE LIFE INSURANCE
FACTS: Lincoln Philippine Life Insurance Co. is a domestic
corp. engaged in life insurance business. In the years prior
to 1984, Lincoln issued a special kind of life insurance
policy known as the JUNIOR ESTATE BUILDER POLICY, the
distinguishing feature of which is a clause which provides
for an automatic increase in the amount of life insurance
coverage upon the attainment of a certain age by the
insured w/o the need of issuing a new policy. The clause
was to take effect in 1984. Subsequently, petitioner CIR
issued deficiency documentary stamps tax assessment for
1984, corresponding to the (a) amount of automatic
increase of the sum assured on the policy issued by Lincoln
and (b) the amount corresponding to the book value in
excess of the par value of the stock dividends. CIR argues
that the automatic increase clause in the subject insurance
policy is separate and distinct from the main agreement
and involves another transaction; and that while no new
policy was issued, the original policy was essentially
reissued when additional obligation was assumed upon
the effectivity of the automatic increase clause in 1984.
Hence, a deficiency assessment based on the additional
insurance not covered in the main policy is in order.
ISSUE: Whether Lincoln should be made liable to pay for
the assessed tax deficiencies
HELD:
Although the automatic increase was to take effect later
on, the date of its effectivity as well as the amount was
already definite at the time of the issuance of the policy.
THUS, the amount insured by the policy at the time of
issuance necessarily included the additional sum covered
by the automatic increase clause because it was already
determinable at the time the transaction was entered into
and formed part of the policy. The clause is in the nature
of a conditional obligation, by which the increase of the
insurance coverage shall depend upon the happening of
the event constituting the obligation. In the instant case,
the additional insurance that took effect in 1984 was an
obligation subject to a suspensive condition, but still a part
of the insurance sold to which Lincoln was liable for the
payment of the documentary stamp tax.
While tax avoidance schemes and arrangements are not
prohibited, tax laws cannot be circumvented in order to
evade the payment of just taxes. In the case at bar, to
claim that the increase in the amount insured by virtue of
the automatic increase clause should not be included in
the computation of the DST dues on the policy would be a
clear evasion of the law requiring that the tax can be
computed on the basis of the amount insured by the
policy.
 DOUBLE TAXATION/TAX EXEMPTION
5. CIR VS. ESTATE OF BENIGNO TODA
FACTS:
On March 2, 1989 CIC authorized Benigno P. Toda, Jr.
President and owner of 99.991% of its issued and
outstanding capital stock, to sell the building and the two
parcels of land for an amount not less than 90 million. On
30 August 1989, Toda purportedly sold the property for
100 million to Rafael A. Altonga, who in turn sold the same
property on the same day to Royal Match Inc. for 200
million. For the sale of the property to RMI altonga paid
capital gains tax of 10 million.
On April 16, 1990 CIC filed its corporate annual income tax
return of the year 1989, declaring among other things its
gain form the sale of real property in the amount of
75,728.021.
On July 20 1990, Toda sold his entire shares of stocks in
CIC to Le Hun T. Choa for 12.5 million. On 29 March 1994,
the BIR sent an assessment notice and demand letter to
the CIC of deficiency income tax for the year 1989 in the
amount of 79,099,999.22.
The new CIC asked for reconsideration, asserting that the
assessment should be directed against the old CIC and not
against the new CIC which is owned by an entirely
different set of stockholders; moreover Toda had
undertaken to hold the buyer free from all tax liabilities for
the fiscal years 1987-1989. On 27 January 1995, the estate
of Benigno P. Toda received an assessment notice dated 9
January 1995 form the CIR. The estate thereafter filed a
letter of protest which was dismissed by the CIR, stating
that Toda by covering up the additional gain of 100 million,
which resulted in the change of income structure of the
proceeds of the sale of the two parcels of land and the
building thereon to an individual capital gains tax, thus
evading the higher corporate income tax rate of 35%.
ISSUE: Whether or not there was tax evasion
HELD:
Yes. Tax avoidance and Tax evasion are the two most
common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the
means sanctioned by law. Tax evasion on the other hand is
a scheme used outside those lawful means and when
availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors (1)
the end to be achieved (2) an accompanying state of mind
which is described as being evil, in bad faith, willful,
deliberate and not accidental (3) a course of action or
failure of action which is unlawful.
All these factors are present in the instant case. The
scheme resorted to by CIC in making it appear that there
were two sales of the subject properties, from CIC to
Altonaga, and then from ALtonaga to RMI cannot be
considered legitimate tax planning.
Fraud in its general sense, is deemed to compromise
anything calculated and concealment involving a breach of
legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue
and unconscionable advantage is taken of another. In a
nut shell the intermediary transaction, the sale of
altonaga, which was prompted more on the mitigation of
tax liabilities that for legitimate business purposes
constitutes one of tax evasion.
6. THE CITY OF ILOILO v. SMART
COMMUNICATIONS, INC. (SMART)
FACTS:
SMART received a letter of assessment dated February 12,
2002 from petitioner requiring it to pay deficiency local
franchise and business taxes, in the amount of
P764,545.29, which it incurred for the years 1997 to 2001.
SMART protested the assessment, claiming exemption
from payment of local franchise and business taxes based
on Section 9 of its legislative franchise under Republic Act
(R.A.) No. 7294 (SMARTs franchise). Under SMARTs
franchise, it was required to pay a franchise tax equivalent
to 3% of all gross receipts, which amount shall be in lieu of
all taxes. SMART contends that the in lieu of all taxes
clause covers local franchise and business taxes. SMART
similarly invoked R.A. No. 7925 or the Public
Telecommunications Policy Act (Public Telecoms Act)
whose Section 23 declares that any existing privilege,
incentive, advantage, or exemption granted under existing
franchises shall ipso facto become part of previously
granted-telecommunications franchise.
SMART contends that by virtue of Section 23, tax
exemptions granted by the legislature to other holders of
telecommunications franchise may be extended to and
availed of by SMART.
The petitioner posits that SMARTs claim for exemption
under its franchise is not equivocal enough to prevail over
the specific grant of power to local government units to
exact taxes from businesses operating within its territorial
jurisdiction under Section 137 in relation to Section 151 of
the LGC.
ISSUE: Whether SMART is exempt from the payment of
local franchise and business taxes under Section 9 of its
franchise and Section 23 of the Public Telecoms Act.
HELD:
The basic principle in the construction of laws granting tax
exemptions is he who claims an exemption from his share
of the common burden of taxation must justify his claim by
showing that the Legislature intended to exempt him by
words too plain to be beyond doubt or mistake.
The court fail to find a categorical and encompassing grant
of tax exemption to SMART covering exemption from both
national and local taxes since R.A. No 7294 does not
expressly provide what kind of taxes SMART is exempted
from. It is not clear whether the in lieu of all taxes
provision in the franchise of SMART would include
exemption from local or national taxation. What is clear is
that SMART shall pay franchise tax equivalent to three
percent (3%) of all gross receipts of the business
transacted under its franchise. But whether the franchise
tax exemption would include exemption from exactions by
both the local and the national government is not
unequivocal.
The uncertainty in the in lieu of all taxes clause in R.A.
No. 7294 on whether SMART is exempted from both local
and national franchise tax must be construed strictly
against SMART which claims the exemption.
 DOUBLE TAXATION/TAX EXEMPTION
SMARTs claim for exemption from local business and
franchise taxes based on Section 9 of its franchise is
therefore unfounded.

7. NAPOCOR v. CENTRAL BOARD

OF ASSESSMENT APPEALS (CBAA)
FACTS:
First Private Power Corporation (FPPC) entered into a BOT
agreement with NAPOCOR for the construction of the 215
Megawatt Bauang Diesel Power Plant in Payocpoc,
Bauang, La Union. The agreement provided for the
creation of the Bauang Private Power Plant Corporation
(BPPC), which will own, manage, and operate the power
plant. BPPC will convert NAPOCORs supplied diesel fuel
into electricity for a fee. BPPCs machineries were declared
tax exempt by the Municipal Assessors Office. This tax
exemption was questioned by Bauangs Vice Mayor. The
Deputy Executive Director of the Department of Finance
declared that the machineries and equipment are subject
to real property tax.
Thereafter, a Notice of Assessment was given to BPPC.
NAPOCOR filed a petition with the La Union Board of
Assessment Appeals (LBAA) invoking Sec. 234(c) of the
Local Government Code. The provision exempts from real
property tax all machineries and equipment that are
actually, directly, and exclusively used by the local water
districts and GOCCs engaged in the supply and distribution
of water or generation of electric power.
The LBAA denied the petition for exemption.

ISSUE: Whether the machineries and equipment are

exempted from real property tax

HELD:
Sec. 234(c) of the LGC is clear and unambiguous. It grants
tax exemption to machineries and equipment that are
actually, directly, and exclusively used by GOCCs.
NAPOCOR is not the one actually and directly using the
machines but BPPC. Further, applying the strictissimi juris
standard, NAPOCOR failed to prove its claim for
exemption. Strictissimi juris provides that the claimant
must show beyond doubt with clear and convincing
evidence, the factual basis of the claim. The terms of the
BOT provides that actual, direct, and immediate ownership
of the machineries lies with BPPC while that of NAPOCOR
is only contingent and not sufficient to support its claim
for exemption. Hence, the machineries and equipment are
not taxexempt.