Thursday, January 26, 2017

Case Doctrines in Taxation Law (part II)

CASE DOCTRINES IN TAXATION LAW 1
(part II)
Prepared by: Glenn Rey Anino
University of Cebu- College of Law

Sison, Jr. vs. Ancheta, 130 SCRA 654 , July 25, 1984
Taxation; Constitutional Law; The Constitution sets forth the restrictions to the power to tax.—The power
to tax moreover, to borrow from Justice Malcolm, “is an attribute of sovereignty. It is the strongest of all
the powers of government.” It is, of course, to be admitted that for all its plenitude, the power to tax is not
unconfined. There are restrictions. The Constitution sets forth such limits. Adversely affecting as it does
property rights, both the due process and equal protection clauses may properly be invoked, as petitioner
does, to invalidate in appropriate cases a revenue measure. If it were otherwise, there would be truth to
the 1803 dictum of Chief Justice Marshall that “the power to tax involves the power to destroy.” In a
separate opinion in Graves v. New York, Justice Frankfurter, after referring to it as an “unfortunate
remark,” characterized it as “a flourish of rhetoric [attributable to] the intellectual fashion of the times
[allowing] a free use of absolutes.” This is merely to emphasize that it is not and there cannot be such a
constitutional mandate. Justice Frankfurter could rightfully conclude: “The web of unreality spun from
Marshall’s famous dictum was brushed away by one stroke of Mr. Justice Holmes’s pen: ‘The power to
tax is not the power to destroy while this Court sits.’ ” So it is in the Philippines.

Same; Same; A bare allegation that Batas 135, which sets different income tax schedules for fixed
income earners and business or professional income earners, is arbitrary does not suffice to invalidate
said tax statute.—The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere
allegation, as here, does not suffice. There must be a factual foundation of such unconstitutional taint.
Considering that petitioner here would condemn such a provision as void on its face, he has not made out
a case. This is merely to adhere to the authoritative doctrine that where the due process and equal
protection clauses are invoked, considering that they are not fixed rules but rather broad standards, there
is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a
showing, the presumption of validity must prevail.

Same; Same; Due process clause may be invoked where a tax statute is so arbitrary as to find no support
in Constitution.—It is undoubted that the due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to
amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of
this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That
properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax
measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive
statute is so harsh and unreasonable, it is subject to attack on due process grounds.

Same; Same; The State is free to select the subjects of taxation and inequalities consequent to its
exercise infringe no constitutional limitation.—The equal protection clause is, of course, inspired by the
noble concept of approximating the ideal of the laws’s benefits being available to all and the affairs of
men being governed by that serene and impartial uniformity, which is of the very essence of the idea of
law. There is, however, wisdom, as well as realism, in these words of Justice Frankfurter: “The equality at
which the ‘equal protection’ clause aims is not a disembodied equality. The Fourteenth Amendment
enjoins ‘the equal protection of the laws,’ and laws are not abstract propositions. They do not relate to
abstract units A, B and C, but are expressions of policy arising out of specific difficulties, addressed to the
attainment of specific ends by the use of specific remedies. The Constitution does not require things
which are different in fact or opinion to be treated in law as though they were the same.” Hence the
constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in
a leading case of Lutz V. Araneta, this Court, through Justice J.B.L. Reyes, went so far as to hold “at any
rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been
repeatedly held that ‘inequalities which result from a singling out of one particular class for taxation, or
exemption infringe no constitutional limitation.’ ”

Same; Same; Uniformity in taxation quite similar to the standard of equal protection.—Petitioner likewise
invoked the kindred concept of uniformity. According to the Constitution: “The rule of taxation shall be
uniform and equitable.” This requirement is met according to Justice Laurel in Philippine Trust Company
v. Yatco, decided in 1940, when the tax “operates with the same force and effect in every place where the
subject may be found.” He likewise added: “The rule of uniformity does not call for perfect uniformity or
perfect equality, because this is hardly attainable.” The problem of classification did not present itself in
that case. It did not arise until nine years later, when the Supreme Court held: “Equality and uniformity in
taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same
rate. The taxing power has the authority to make reasonable and natural classifications for purposes of
taxation, * * *. As clarified by Justice Tuason, where “the differentiation” complained of “conforms to the
practical dictates of justice and equity” it “is not discriminatory within the meaning of this clause and is
therefore uniform.” There is quite a similarity then to the standard of equal protection for all that is
required is that the tax “applies equally to all persons, firms and corporations placed in similar situation.”

Same; Same; Taxpayers may be classified into different categories where it rests on real differences.—
Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax
rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all
deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into
different categories. To repeat, it is enough that the classification must rest upon substantial distinctions
that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg.
135, the discernible basis of classification is the susceptibility of the income to the application of
generalized rules removing all deductible items for all taxpayers within the class and fixing a set of
reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are
set apart as a class. As there is practically no overhead expense, these taxpayers are not entitled to
make deductions for income tax purposes because they are in the same situation more or less. On the
other hand, in the case of professionals in the practice of their calling and businessmen, there is no
uniformity in the costs or expenses necessary to produce their income. It would not be just then to
disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the
same tax rates on the basis of gross income. There is ample justification then for the Batasang
Pambansa to adopt the gross system of income taxation to compensation income, while continuing the
system of net income taxation as regards professional and business income.

Lung Center of the Philippines vs. Quezon City, 433 SCRA 119 , June 29, 2004
Taxation; Lung Center of the Philippines; Charitable Institutions; Test of Charitable Character; Words and
Phrases; To determine whether an enterprise is a charitable institution/entity or not, the elements which
should be considered include the statute creating the enterprise, its corporate purpose, its constitution
and by-laws, the methods of administration, the nature of the actual work performed, the character of the
services rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties; In
the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or otherwise lessening
the burden of government. The test whether an enterprise is charitable or not is whether it exists to carry
out a purpose recognized in law as charitable or whether it is maintained for gain, profit, or private
advantage.—On the first issue, we hold that the petitioner is a charitable institution within the context of
the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or
not, the elements which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the actual work
performed, the character of the services rendered, the indefiniteness of the beneficiaries, and the use and
occupation of the properties. In the legal sense, a charity may be fully defined as a gift, to be applied
consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their
minds and hearts under the influence of education or religion, by assisting them to establish themselves
in life or otherwise lessening the burden of government. It may be applied to almost anything that tend to
promote the well-doing and well-being of social man. It embraces the improvement and promotion of the
happiness of man. The word “charitable” is not restricted to relief of the poor or sick. The test of a charity
and a charitable organization are in law the same. The test whether an enterprise is charitable or not is
whether it exists to carry out a purpose reorganized in law as charitable or whether it is maintained for
gain, profit, or private advantage.

Same; Same; Same; The Lung Center of the Philippines was organized for the welfare and benefit of the
Filipino people principally to help combat the high incidence of lung and pulmonary diseases in the
Philippines; Any person, the rich as well as the poor, may fall sick or be injured or wounded and become
a subject of charity.—Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the President of the
Philippines with the Ministry of Health and the Ministry of Human Settlements. It was organized for the
welfare and benefit of the Filipino people principally to help combat the high incidence of lung and
pulmonary diseases in the Philippines. The raison d’etre for the creation of the petitioner is stated in the
decree, viz: x x x Hence, the medical services of the petitioner are to be rendered to the public in general
in any and all walks of life including those who are poor and the needy without discrimination. After all,
any person, the rich as well as the poor, may fall sick or be injured or wounded and become a subject of
charity.

Same; Same; Same; As a general principle, a charitable institution does not lose its character as such
and its exemption from taxes simply because it derives income from paying patients, whether out-patient,
or confined in the hospital, or receives subsidies from the government, so long as the money received is
devoted or used altogether to the charitable object which it is intended to achieve, and no money inures
to the private benefit of the persons managing or operating the institution.—As a general principle, a
charitable institution does not lose its character as such and its exemption from taxes simply because it
derives income from paying patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution. In Congregational Sunday School, etc. v. Board of Review, the
State Supreme Court of Illinois held, thus: … [A]n institution does not lose its charitable character, and
consequent exemption from taxation, by reason of the fact that those recipients of its benefits who are
able to pay are required to do so, where no profit is made by the institution and the amounts so received
are applied in furthering its charitable purposes, and those benefits are refused to none on account of
inability to pay therefor. The fundamental ground upon which all exemptions in favor of charitable
institutions are based is the benefit conferred upon the public by them, and a consequent relief, to some
extent, of the burden upon the state to care for and advance the interests of its citizens.

Same; Same; Same; The Lung Center of the Philippines does not lose its character as a charitable
institution simply because the gift or donation is in the form of subsidies granted by the government.—
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its
character as a charitable institution simply because the gift or donation is in the form of subsidies granted
by the government. As held by the State Supreme Court of Utah in Yorgason v. County Board of
Equalization of Salt Lake County: Second, the … government subsidy payments are provided to the
project. Thus, those payments are like a gift or donation of any other kind except they come from the
government. In both Intermountain Health Care and the present case, the crux is the presence or
absence of material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a
private benefactor, chose to make up the deficit resulting from the exchange between St. Mark’s Tower
and the tenants by making a contribution to the landlord, just as it would have been irrelevant in
Intermountain Health Care if the patients’ income supplements had come from private individuals rather
than the government. Therefore, the fact that subsidization of part of the cost of furnishing such housing
is by the government rather than private charitable contributions does not dictate the denial of a charitable
exemption if the facts otherwise support such an exemption, as they do here.
Same; Same; Same; Those portions of Lung Center’s real property that are leased to private entities are
not exempt from real property taxes as these are not actually, directly and exclusively used for charitable
purposes.—Even as we find that the petitioner is a charitable institution, we hold, anent the second issue,
that those portions of its real property that are leased to private entities are not exempt from real property
taxes as these are not actually, directly and exclusively used for charitable purposes.

Same; Same; Same; Statutory Construction; Taxation is the rule and exemption is the exception—the
effect of an exemption is equivalent to an appropriation.—The settled rule in this jurisdiction is that laws
granting exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of
the taxing power. Taxation is the rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from tax payments must be clearly shown
and based on language in the law too plain to be mistaken. As held in Salvation Army v. Hoehn: An
intention on the part of the legislature to grant an exemption from the taxing power of the state will never
be implied from language which will admit of any other reasonable construction. Such an intention must
be expressed in clear and unmistakable terms, or must appear by necessary implication from the
language used, for it is a well settled principle that, when a special privilege or exemption is claimed
under a statute, charter or act of incorporation, it is to be construed strictly against the property owner and
in favor of the public. This principle applies with peculiar force to a claim of exemption from taxation . …

Same; Same; Same; Same; It is plain as day that under P.D. 1823, the Lung Center of the Philippines
does not enjoy any property tax exemption privileges for its real properties as well as the building
constructed thereon.—It is plain as day that under the decree (P.D. 1823), the petitioner does not enjoy
any property tax exemption privileges for its real properties as well as the building constructed thereon. If
the intentions were otherwise, the same should have been among the enumeration of tax exempt
privileges under Section 2: It is a settled rule of statutory construction that the express mention of one
person, thing, or consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius. The rule of expressio unius est exclusio alterius is
formulated in a number of ways. One variation of the rule is the principle that what is expressed puts an
end to that which is implied. Expressium facit cessare tacitum. Thus, where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or construction, be extended to other
matters. ... The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human mind. They are
predicated upon one’s own voluntary act and not upon that of others. They proceed from the premise that
the legislature would not have made specified enumeration in a statute had the intention been not to
restrict its meaning and confine its terms to those expressly mentioned.

Same; Same; Same; Same; The exemption must not be so enlarged by construction.—The exemption
must not be so enlarged by construction since the reasonable presumption is that the State has granted
in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of
the statute the favor would be intended beyond what was meant.

Same; Same; Same; Same; The tax exemption under Section 28 (3), Article VI of the 1987 Constitution
covers property taxes only.—Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for
religious, charitable or educational purposes shall be exempt from taxation. The tax exemption under this
constitutional provision covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member
of the 1986 Constitutional Commission, explained: “. . . what is exempted is not the institution itself . . .;
those exempted from real estate taxes are lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational purposes.”

Same; Same; Same; Same; Under the 1973 and the present Constitutions, for “lands, buildings, and
improvements” of the charitable institution to be considered exempt, the same should not only be
“exclusively” used for charitable purposes—it is required that such property be used “actually” and
“directly” for such purposes.—We note that under the 1935 Constitution, “. . . all lands, buildings, and
improvements used ‘exclusively’ for . . . charitable . . . purposes shall be exempt from taxation.” However,
under the 1973 and the present Constitutions, for “lands, buildings, and improvements” of the charitable
institution to be considered exempt, the same should not only be “exclusively” used for charitable
purposes; it is required that such property be used “actually” and “directly” for such purposes. In light of
the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling in Herrera v.
Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before the
1973 and 1987 Constitutions took effect.

Same; Same; Same; Same; Words and Phrases; If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted purposes but is subject to taxation—the words
“dominant use” or “principal use” cannot be substituted for the words “used exclusively” without doing
violence to the Constitutions and the law.—Under the 1973 and 1987 Constitutions and Rep. Act No.
7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and
unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY,
DIRECTLY and EXCLUSIVELY used for charitable purposes. “Exclusive” is defined as possessed and
enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined,
“in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The
words “dominant use” or “principal use” cannot be substituted for the words “used exclusively” without
doing violence to the Constitutions and the law. Solely is synonymous with exclusively. What is meant by
actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and
actual application of the property itself to the purposes for which the charitable institution is organized. It
is not the use of the income from the real property that is determinative of whether the property is used for
tax-exempt purposes.

Same; Same; Same; Portions of the land leased to private entities as well as those parts of Lung Center
leased to private individuals are not exempt from taxes but portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or non-paying, are exempt from real
property taxes.—We hold that the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other hand, the portions
of the land occupied by the hospital and portions of the hospital used for its patients, whether paying or
non-paying, are exempt from real property taxes.

Commissioner of Internal Revenue vs. Court of Appeals, 298 SCRA 83 , October 14, 1998
Taxation; Court of Tax Appeals; Factual findings of the CTA, when supported by substantial evidence, will
not be disturbed on appeal unless it is shown that the court committed gross error in the appreciation of
facts.—Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts. In the present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter merely applied the law to the facts as found by
the CTA and ruled on the issue raised by the CIR: “Whether or not the collection or earnings of rental
income from the lease of certain premises and income earned from parking fees shall fall under the last
paragraph of Section 27 of the National Internal Revenue Code of 1977, as amended.”

Same; Same; Distinction between a question of law and a question of fact.—The distinction between a
question of law and a question of fact is clear-cut. It has been held that “[t]here is a question of law in a
given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a
question of fact when the doubt or difference arises as to the truth or falsehood of alleged facts.”

Same; Tax Exemptions; Court has always applied the doctrine of strict interpretation in construing tax
exemptions.—Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of
strict interpretation in construing tax exemptions. Furthermore, a claim of statutory exemption from
taxation should be manifest and unmistakable from the language of the law on which it is based. Thus,
the claimed exemption “must expressly be granted in a statute stated in a language too clear to be
mistaken.”
Same; Same; The exemption claimed by the YMCA is expressly disallowed by the very wording of the
last paragraph of then Section 27 of the NIRC; Court is duty-bound to abide strictly by its literal meaning
and to refrain from resorting to any convoluted attempt at construction.—In the instant case, the
exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then
Section 27 of the NIRC which mandates that the income of exempt organizations (such as the YMCA)
from any of their properties, real or personal, be subject to the tax imposed by the same Code. Because
the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real
property, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any
convoluted attempt at construction.

Same; Same; Private respondent is exempt from the payment of property tax, but not income tax on the
rentals from its property.—Private respondent also invokes Article XIV, Section 4, par. 3 of the Charter,
claiming that the YMCA “is a non-stock, non-profit educational institution whose revenues and assets are
used actually, directly and exclusively for educational purposes so it is exempt from taxes on its
properties and income.” We reiterate that private respondent is exempt from the payment of property tax,
but not income tax on the rentals from its property. The bare allegation alone that it is a non-stock, non-
profit educational institution is insufficient to justify its exemption from the payment of income tax.

Same; Constitutional Law; YMCA is not a school or an educational institution.—The term “educational
institution” or “institution of learning” has acquired a well-known technical meaning, of which the members
of the Constitutional Commission are deemed cognizant. Under the Education Act of 1982, such term
refers to schools. The school system is synonymous with formal education, which “refers to the
hierarchically structured and chronologically graded learnings organized and provided by the formal
school system and for which certification is required in order for the learner to progress through the
grades or move to the higher levels.” The Court has examined the “Amended Articles of Incorporation”
and “By-Laws” of the YMCA, but found nothing in them that even hints that it is a school or an educational
institution.

Commissioner of Internal Revenue vs. S.C. Johnson and Son, Inc., 309 SCRA 87 , June 25, 1999
Taxation; Tax Treaties; Double Taxation; International Law; 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 as this
is a matter of negotiation between the contracting parties.—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. 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 as this is a matter of negotiation
between the contracting parties. 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.

Same; Same; Same; Same; Words and Phrases; International juridical double taxation 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; The apparent rationale for doing away with double taxation is to
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.—The RP-US Tax
Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance
of double taxation. 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. 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. The
apparent rationale for doing away with double taxation is to 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. 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.

Same; Same; Same; Same; Same; Methods resorted to in eliminating double taxation; Exemption and
Credit Methods, Explained.—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.
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.

Same; Same; Same; Same; 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.—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. 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.”

Same; Same; Same; Same; Most Favored Nation Clause; The concessional tax rate of 10 percent
provided for in the RP-Germany Tax Treaty could not apply to taxes imposed upon royalties in the RP-US
Tax Treaty since the two taxes imposed under the two tax treaties are not paid under similar
circumstances, they are not containing similar provisions on tax crediting.—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 RP-Germany 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.

Same; Same; Same; Same; Same; Statutory Construction; 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; 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.—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. 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. 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.

Same; Same; Same; Same; Same; 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.—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. 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. 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 favored nation clause to grant equality 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.

Same; Tax Refunds; Statutory Construction; Tax refunds are in the nature of tax exemptions, and 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.—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. The 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 grant of organic
or statute law. 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 RP-West Germany Tax
Treaty.

Duetsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, 704 SCRA 216 , August
28, 2013
Taxation; National Internal Revenue Code; Foreign Corporations; Under Section 28(A)(5) of the National
Internal Revenue Code (NIRC), any profit remitted to its head office shall be subject to a tax of 15%
based on the total profits applied for or earmarked for remittance without any deduction of the tax
component.―Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to
a tax of 15% based on the total profits applied for or earmarked for remittance without any deduction of
the tax component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty,
which provides that where a resident of the Federal Republic of Germany has a branch in the Republic of
the Philippines, this branch may be subjected to the branch profits remittance tax withheld at source in
accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by
that branch to the head office.
International Law; Treaties; Pacta Sunt Servanda; The time-honored international principle of pacta sunt
servanda demands the performance in good faith of treaty obligations on the part of the states that enter
into the agreement.―Our Constitution provides for adherence to the general principles of international
law as part of the law of the land. The time-honored international principle of pacta sunt servanda
demands the performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be
performed by them in good faith. More importantly, treaties have the force and effect of law in this
jurisdiction.

Same; Same; Taxation; Tax treaties are entered into to minimize, if not eliminate the harshness of
international juridical double taxation, which is why they are also known as double tax treaty or double tax
agreements.―Tax treaties are entered into “to reconcile the national fiscal legislations of the contracting
parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions.” CIR v.
S.C. Johnson and Son, Inc., 309 SCRA 37 (1999), further clarifies that “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. The apparent rationale for doing away with double taxation is to 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. 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.” Simply put, tax treaties are entered into to minimize, if not
eliminate the harshness of international juridical double taxation, which is why they are also known as
double tax treaty or double tax agreements.

Same; Same; Same; A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken.―“A state that has contracted valid international obligations is bound to make in its
legislations those modifications that may be necessary to ensure the fulfillment of the obligations
undertaken.” Thus, laws and issuances must ensure that the reliefs granted under tax treaties are
accorded to the parties entitled thereto. The BIR must not impose additional requirements that would
negate the availment of the reliefs provided for under international agreements. More so, when the RP-
Germany Tax Treaty does not provide for any pre-requisite for the availment of the benefits under said
agreement.

Same; Same; Same; Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to
the relief as it would constitute a violation of the duty required by good faith in complying with a tax
treaty.―Bearing in mind the rationale of tax treaties, the period of application for the availment of tax
treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it
would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of
the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the
administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty
relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.

Same; Tax Refunds; National Internal Revenue Code; Section 229 of the National Internal Revenue Code
(NIRC) provides the taxpayer a remedy for tax recovery when there has been an erroneous payment of
tax.―Section 229 of the NIRC provides the taxpayer a remedy for tax recovery when there has been an
erroneous payment of tax. The outright denial of petitioner’s claim for a refund, on the sole ground of
failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat the purpose of
Section 229.

City of Manila vs. Coca-Cola Bottlers Philippines, Inc., 595 SCRA 299 , August 04, 2009
Same; Double Taxation; Words and Phrases; 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”; 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.—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.

Same; Same; Municipal Corporations; Local Government Units; It is apparent from a perusal of Section
143 of the Local Government Code—the very source of the power of municipalities and cities to impose a
local business tax—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 Local Government Code (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.—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
respondent’s, 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].

Commissioner of Internal Revenue vs. Estate of Benigno P. Toda, Jr., 438 SCRA 290 , September
14, 2004
Taxation; Tax Avoidance Distinguished from Tax Evasion.— 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. This method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Same; Same; Factors to Determine Tax Evasion.—Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being “evil,” in “bad faith,” “willfull,” or “deliberate and not accidental”; and (3) a course of
action or failure of action which is unlawful.
Taxation; Tax Avoidance Distinguished from Tax Evasion.— 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. This method should be used by the taxpayer in good faith and at
arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.

Same; Same; Factors to Determine Tax Evasion.—Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or
the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is
described as being “evil,” in “bad faith,” “willfull,” or “deliberate and not accidental”; and (3) a course of
action or failure of action which is unlawful. [Commissioner of Internal Revenue vs. Estate of Benigno P.
Toda, Jr., 438 SCRA 290(2004)]

Francia vs. Intermediate Appellate Court, 162 SCRA 753 , June 28, 1988
Taxation; Obligations; Requisites of Legal Compensation under Arts. 1278 and 1279 of Civil Code; Case
at bar.—Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land was
expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of
October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of
persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art.
1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article
1279, to wit: “(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other; xxx xxx xxx “(3) that the two debts be due. xxx xxx xxx.

Taxation; Same; Internal Revenue Taxes can not be subject of setoff or compensation.—This principal
contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of
taxes against the claims that the taxpayer may have against the government. A person cannot refuse to
pay a tax on the ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case
of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not
be the subject of set-off or compensation. We stated that: “A claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state
or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject
of recoupment since they do not arise out of the contract or transaction sued on. x x x (80 C.J.S., 73-74).
‘The general rule based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of
duty to, and are the positive acts of the government to the making and enforcing of which, the personal
consent of individual taxpayer is not required. x x x’ ”

Same; Same; Same; Auction Sale; Purchaser has the burden of proof to show that all prescribed
requisites for tax sale were complied with.—We agree with the petitioner’s claim that Ho Fernandez, the
purchaser at the auction sale, has the burden of proof to show that there was compliance with all the
prescribed requisites for a tax sale. The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine
that: xxx xxx xxx “x x x [D]ue process of law to be followed in tax proceedings must be established by
proof and the general rule is that the purchaser of a tax title is bound to take upon himself the burden of
showing the regularity of all proceedings leading up to the sale.” (Italics supplied). There is no
presumption of the regularity of any administrative action which results in depriving a taxpayer of his
property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437; Denoga v. Insular Government, 19 Phil.
261). This is actually an exception to the rule that administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale.
The records sustain the lower court’s finding that: “[T]he plaintiff claimed that it was illegal and irregular.
He insisted that he was not properly notified of the auction sale. Surprisingly, however, he admitted in his
testimony that he received the letter dated November 21, 1977 (Exhibit “I”) as shown by his signature
(Exhibit “I-A”) thereof. He claimed further that he was not present on December 5, 1977 the date of the
auction sale because he went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed. x x x.”

Same; Same; Same; Same; General Rule that gross inadequacy of price is not material.—Petitioner’s
third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not
material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36
SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of
Appeals (109 SCRA 388) we held that “alleged gross inadequacy of price is not material when the law
gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the
lesser the price, the easier it is for the owner to effect redemption.” In Velasquez v. Coronel, (5 SCRA
985), this Court held: “x x x [R]espondent treasurer now claims that the prices for which the lands were
sold are unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for reasons of equity a
transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks
one’s conscience as to justify the courts to interfere, such does not follow when the law gives to the
owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the
price the easier it is for the owner to effect the redemption. And so it was aptly said: ‘When there is the
right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire
the property or also sell his right to redeem and thus recover the loss he claims to have suffered by
reason of the price obtained at the auction sale.” [Francia vs. Intermediate Appellate Court, 162 SCRA
753(1988)]

Domingo vs. Garlitos, 8 SCRA 443 , June 29, 1963

Taxation; Inheritance tax; Procedure in enforcement against estate of deceased person; Claim must be
filed before probate court.—The ordinary procedure by which to settle claims or indebtedness against the
estate of a deceased person, as an inheritance tax, is for the claimant to present a claim before the
probate court sa that said court may order the administrator to pay the amount hereof (Aldamiz vs. Judge
of the Court of First Instance of Mindoro, L-2360, Dec. 29, 1949).

Same; Same; Same; Same; Legal basis.—The legal basis for such a procedure is the fact that in the
testate or intestate proceedings to settle the estate of a deceased person, the properties belonging to the
estate are under the jurisdiction of the court and such jurisdiction continues until said properties havebeen
distributed among the heirs entitled thereto. During the pendency of the proceedings all the estate is in
custodia Iegis and the proper procedure is not to allow the sheriff. in case of a court judgment, to seize
the properties but to ask the court for an order to require the administrator to pay the amount due from the
estate and required to be paid.

Same; Same; Compensation between taxes and claims of intestate recognized and appropriated for by
law.—The fact that the court having jurisdiction of the estate had found that the claim of the estate against
the Government has been appropriated for the purpose by a corresponding law (Rep. Act No. 2700)
shows that both the claim of the Government for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and demandable as well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the provisions of Articles
1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount. [Domingo
vs. Garlitos, 8 SCRA 443(1963)]

Diaz vs. Secretary of Finance, 654 SCRA 96 , July 19, 2011

Taxation; Value Added Tax (VAT); Tollways; Declaratory Relief; Prohibition; A petition for declaratory
relief may be treated as one for prohibition if the case has far-reaching implications and raises questions
that need to be resolved for the public good; A petition for prohibition is a proper remedy to prohibit or
nullify acts of executive officials that amount to usurpation of legislative authority.—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 Court’s resolution, 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, quasi-judicial, 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. 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.

Same; Same; Same; Pleadings, Practice and Procedure; The imposition of value added tax (VAT) on toll
fees has far-reaching implications; The Supreme Court has ample power to waive technical requirements
when the legal questions to be resolved are of great importance to the public.—The imposition of VAT on
toll fees has far-reaching 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 government’s 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.

Same; Same; Same; Words and Phrases; The law imposes value added tax (VAT) on “all kinds of
services” rendered in the Philippines for a fee, including those specified in the list—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.—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. 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 VAT’s 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.

Same; Same; Same; When a tollway operator takes a toll fee from a motorist, the fee is in effect for the
latter’s use of the tollway facilities over which the operator enjoys private proprietary rights that its contract
and the law recognize.—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 latter’s use of the tollway facilities over which the
operator enjoys private proprietary rights that its contract and the law recognize. In this sense, the tollway
operator is no different from the following service providers 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);
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 the Philippines.

Same; Same; Same; Franchises; Words and Phrases; Tollway operators are franchise grantees and they
do not belong to exceptions that Section 119 spares from the payment of value added tax (VAT); The
word “franchise” broadly covers government grants of a special right to do an act or series of acts of
public concern.—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 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.

Same; Same; Same; Same; Nothing in Section 108 of the National Internal Revenue Code indicates that
the “franchise grantees” it speaks of are those who hold legislative franchises; 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.—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. 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.

Same; Same; Same; Statutory Construction; 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.—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, 612 SCRA 665 (2010), “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.”

Same; Same; Same; Tollway fees are not taxes.—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 user’s 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 user’s 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. Except for a fraction given to the government,
the toll fees essentially end up as earnings of the tollway operators.

Same; Same; Same; A tax is imposed under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures while toll fees 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.—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. 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.

Same; Same; Same; Value added tax (VAT) on tollway operations cannot be deemed a tax on tax due to
the nature of VAT as an indirect tax; Once shifted, the value added tax (VAT) ceases to be a tax and
simply becomes part of the cost that the buyer must pay in order to purchase the good, property or
service.—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 selle’s liability but
merely the burden of the VAT. 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 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, 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.

Same; Same; Same; Parties; Non-Impairment Clause; A person who will neither be prejudiced by nor be
affected by the alleged diminution in return of investments that may result from the value added tax (VAT)
imposition has no personality to invoke the non-impairment of contract clause on behalf of private
investors in the tollway projects.—Petitioner Timbol has no personality to invoke the non-impairment 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.

Same; Same; Same; The Court cannot rule on matters that are manifestly conjectural, and neither can it
prohibit the State from exercising its sovereign taxing power based on uncertain, prophetic grounds.—
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.

Same; Same; Same; Administrative feasibility, one of the canons of a sound tax system, simply means
that the tax system should be capable of being effectively administered and enforced with the least
inconvenience to the taxpayer; Even if the imposition of value added tax (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.—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.”
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, 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 BIR’s discretion on the matter, absent any clear violation
of law or the Constitution. [Diaz vs. Secretary of Finance, 654 SCRA 96(2011)]

Abaya vs. Ebdane, Jr., 515 SCRA 720 , February 14, 2007
Same; Same; Same; Same; Same; Taxpayer’s Suits; Locus standi is merely a matter of procedure and it
has been recognized that in some cases, suits are not brought by parties who have been personally
injured by the operation of a law or any other government act—the Supreme Court has invariably adopted
a liberal stance on locus standi; The prevailing doctrine in taxpayer’s suits is to allow taxpayers to
question contracts entered into by the national government or government-owned or controlled
corporations allegedly in contravention of law.—Locus standi, however, is merely a matter of procedure
and it has been recognized that in some cases, suits are not brought by parties who have been
personally injured by the operation of a law or any other government act but by concerned citizens,
taxpayers or voters who actually sue in the public interest. Consequently, the Court, in a catena of cases,
has invariably adopted a liberal stance on locus standi, including those cases involving taxpayers. The
prevailing doctrine in taxpayer’s suits is to allow taxpayers to question contracts entered into by the
national government or government-owned or controlled corporations allegedly in contravention of law. A
taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that public
money is being deflected to any improper purpose, or that there is a wastage of public funds through the
enforcement of an invalid or unconstitutional law. Significantly, a taxpayer need not be a party to the
contract to challenge its validity.

Gonzales vs. Marcos, 65 SCRA 624 , July 31, 1975

Constitutional law; Action; Taxpayer has no legal standing to question executive acts that do not involve
the use of public funds.—It may not be amiss though to consider briefly both the procedural and
substantive grounds that led to the lower court’s order of dismissal. It was therein pointed out as “one
more valid reason” why such an outcome was unavoidable that “the funds administered by the President
of the Philippines came from donations [and] contributions [not] by taxation.” Accordingly, there was that
absence of the “requisite pecuniary or monetary interest.” The stand of the lower court finds support in
judicial precedents. This is not to retreat from the liberal approach followed in Pascual vs. Secretary of
Public Works, foreshadowed by People v. Vera, where the doctrine of standing was first fully ‘discussed.
It is only to make clear that petitioner, judged by orthodox legal learning, has not satisfied the elemental
requisite for a taxpayer’s suit.

Same; Executive Department; The President had the power under the former Constitution, to administer a
trust created by an agreement with a foreign country.—Justice Malcolm in Government of the Philippine
Islands vs. Springer took pains to emphasize: “Just as surely as the duty of caring for governmental
property is neither judicial nor legislative in character is it as surely executive.” It would be an unduly
narrow or restrictive view of such a principle if the public funds that accrued by way of donation from the
United States and financial contributions for the Cultural Center project could not be legally considered as
“governmental property.” They may be acquired under the concept of dominium, the state as a persona in
law not being deprived of such an attribute, thereafter to be administered by virtue of its prerogative of
imperium. What is a more appropriate agency for assuring that they be not wasted or frittered away than
the Executive, the department precisely entrusted with management functions? It would thus appear that
for the President to refrain from taking positive steps and await the action of the then Congress could be
tantamount to dereliction of duty.

Same; Same; Legislative Department; Creation of rules governing the administration of a trust may be
concurrently exercised by the President and Congress.—While to the Presidency under the 1935
Constitution was entrusted the responsibility for administering public property, the then Congress could
provide guidelines for such a task. Relevant in this connection is the excerpt from an opinion of Justice
Jackson in Youngstown Sheet & Tube Co. vs. Sawyer: “When the President acts in absence of either a
congressional grant or denial of authority, he can only rely upon his own independent powers, but there is
a zone of twilight in which he and Congress may have concurrent authority, or in which its distribution is
uncertain. Therefore, congressional inertia, indifference or quiescence may sometimes, at least as a
practical matter, enable, if not invite, measures on independent presidential responsibility. In this area,
any actual test of power is likely to depend on the imperatives of events and contemporary imponderables
rather than on abstract theories of law.” To vary the phraseology, to recall Thomas Reed Powell, if
Congress would continue to keep its peace notwithstanding the action taken by the executive department,
it may be considered as silently vocal. In plainer language, it could be an instance of silence meaning
consent.

Action; Moot and academic; Action disputing the creation of the Cultural Center of the Philippines
rendered moot and academic by the passage of Presidential Decree No. 15.—The futility of this appeal
by certiorari becomes even more apparent with the issuance of Presidential Decree No. 15 on October 5,
1972. As contended by the Solicitor General, the matter, as of that date, became moot and academic.
Executive Order No. 30 was thus superseded. The institution known as the Cultural Center is other than
that assailed in this suit. In that sense a coup de grace was administered to this proceeding. The labored
attempt of petitioner could thus be set at rest. This particular litigation is at an end. There is, too,
relevance in the observation that the aforesaid decree is part of the law of the land. So the Constitution
provides.

Constitutional law; Arts and letters; Creation of Cultural Center of the Philippines promotes constitutional
policy encouraging arts and letters.—It only remains to be added that respondents as trustees lived up
fully to the weighty responsibility entrusted to them. The task imposed on them was performed with
competence, fidelity, and dedication. That was to be expected. It is not surprising then that the Cultural
Center became a reality, the massive and imposing structure constructed at a shorter period and at a
lower cost than at first thought possible. What is of even greater significance, with a portion thereof being
accessible at modest admission prices, musical and artistic performances of all kinds are within reach of
the lower-income groups. Only thus may meaning be imparted to the Constitutional provision that arts
and letters shall be under State patronage.

Vinzona-Chato vs. Fortune Tobacco Corporation, 575 SCRA 23 , December 23, 2008
Administrative Law; Public Officers; Damages; The general rule is that a public officer is not liable for
damages which a person may suffer arising from the just performance of his official duties and within the
scope of his assigned tasks; However, a public officer is by law not immune from damages in his/her
personal capacity for acts done in bad faith which being outside the scope of his authority, are no longer
protected by the mantle of immunity for official actions.— The general rule is that a public officer is not
liable for damages which a person may suffer arising from the just performance of his official duties and
within the scope of his assigned tasks. An officer who acts within his authority to administer the affairs of
the office which he/she heads is not liable for damages that may have been caused to another, as it
would virtually be a charge against the Republic, which is not amenable to judgment for monetary claims
without its consent. However, a public officer is by law not immune from damages in his/her personal
capacity for acts done in bad faith which, being outside the scope of his authority, are no longer protected
by the mantle of immunity for official actions.
Same; Same; Same; A public officer who directly or indirectly violates the constitutional rights of another,
may be validly sued for damages under Article 32 of the Civil Code even if his acts were not so tainted
with malice or bad faith; Instances Where a Public Officer May Be Validly Sued in His/Her Private
Capacity for Acts Done in the Course of the Performance of the Functions of the Office.—In addition, the
Court held in Cojuangco, Jr. v. Court of Appeals, 309 SCRA 602 (1999), that a public officer who directly
or indirectly violates the constitutional rights of another, may be validly sued for damages under Article 32
of the Civil Code even if his acts were not so tainted with malice or bad faith. Thus, the rule in this
jurisdiction is that a public officer may be validly sued in his/her private capacity for acts done in the
course of the performance of the functions of the office, where said public officer: (1) acted with malice,
bad faith, or negligence; or (2) where the public officer violated a constitutional right of the plaintiff.

Same; Same; Statutory Construction; Special law must prevail over a general law.—A general statute is
one which embraces a class of subjects or places and does not omit any subject or place naturally
belonging to such class. A special statute, as the term is generally understood, is one which relates to
particular persons or things of a class or to a particular portion or section of the state only. A general law
and a special law on the same subject are statutes inpari materia and should, accordingly, be read
together and harmonized, if possible, with a view to giving effect to both. The rule is that where there are
two acts, one of which is special and particular and the other general which, if standing alone, would
include the same matter and thus conflict with the special act, the special law must prevail since it evinces
the legislative intent more clearly than that of a general statute and must not be taken as intended to
affect the more particular and specific provisions of the earlier act, unless it is absolutely necessary so to
construe it in order to give its words any meaning at all.

Same; Same; Sections 38 and 39, Book I of the Administrative Code, laid down the rule on the civil
liability of superior and subordinate public officers for acts done in the performance of their duties; while
said provisions deal in particular with the liability of government officials, the subject thereof is general,
i.e., “acts” done in the performance of official duties, without specifying the action or omission that may
give rise to a civil suit against the official concerned.— On the other hand, Sections 38 and 39, Book I of
the Administrative Code, laid down the rule on the civil liability of superior and subordinate public officers
for acts done in the performance of their duties. For both superior and subordinate public officers, the
presence of bad faith, malice, and negligence are vital elements that will make them liable for damages.
Note that while said provisions deal in particular with the liability of government officials, the subject
thereof is general, i.e.,“acts” done in the performance of official duties, without specifying the action or
omission that may give rise to a civil suit against the official concerned.

Same; Same; Article 32 is the special provision that deals specifically with violation of constitutional rights
by public officers.— Contrarily, Article 32 of the Civil Code specifies in clear and unequivocal terms a
particular specie of an “act” that may give rise to an action for damages against a public officer, and that
is, a tort for impairment of rights and liberties. Indeed, Article 32 is the special provision that deals
specifically with violation of constitutional rights by public officers. All other actionable acts of public
officers are governed by Sections 38 and 39 of the Administrative Code. While the Civil Code,
specifically, the Chapter on Human Relations is a general law, Article 32 of the same Chapter is a special
and specific provision that holds a public officer liable for and allows redress from a particular class of
wrongful acts that may be committed by public officers. Compared thus with Section 38 of the
Administrative Code, which broadly deals with civil liability arising from errors in the performance of
duties, Article 32 of the Civil Code is the specific provision which must be applied in the instant case
precisely filed to seek damages for violation of constitutional rights.

Remedial Law; Cause of Action; Considering that bad faith and malice are not necessary in an action
based on Article 32 of the Civil Code, the failure to specifically allege the same will not amount to failure
to state a cause of action.—The complaint in the instant case was brought under Article 32 of the Civil
Code. Considering that bad faith and malice are not necessary in an action based on Article 32 of the
Civil Code, the failure to specifically allege the same will not amount to failure to state a cause of action.
The courts below therefore correctly denied the motion to dismiss on the ground of failure to state a
cause of action, since it is enough that the complaint avers a violation of a constitutional right of the
plaintiff.
 Commission of Internal Revenue vs. Javier, Jr., 199 SCRA 824 , July 31, 1991
Taxation; Court persuaded that there is no fraud in the filing of the return and agrees fully with the Court
of Tax Appeals’ interpretation of Javier’s notation on his income tax return filed on March 15, 1978.—We
are persuaded considerably by the private respondent’s contention that there is no fraud in the filing of
the return and agree fully with the Court of Tax Appeals’ interpretation of Javier’s notation on his income
tax return filed on March 15, 1978 thus: “Taxpayer was the recipient of some money from abroad which
he presumed to be a gift but turned out to be an error and is now subject of litigation;” that it was an “error
or mistake of fact or law” not constituting fraud, that such notation was practically an invitation for
investigation and that Javier had literally “laid his cards on the table.”

Same; Same; Fraud in relation to the filing of income tax return discussed in Aznar vs. Court of
Appeals.—In Aznar v. Court of Appeals, fraud in relation to the filing of income tax return, was discussed
in this manner: xxx The fraud contemplated by law is actual and not constructive. It must be intentional
fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to
give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to
evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of
avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and
if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making
entries in the returns and in the assessment, respectively, under the inventory method of determining tax
liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the
respondent as made in good faith.

Same; Same; Same; Courts never sustain findings of fraud upon circumstances which create only
suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion.—Fraud is never imputed and the courts never sustain find ings of fraud upon circumstances
which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for
the purpose of tax evasion.

Same; Same; Same; Same; There was no actual and intentional fraud through willful and deliberate
misleading of the Bureau of Internal Revenue, case at bar; Error or mistake of law is not fraud.—In the
case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the
government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The
government was not induced to give up some legal right and place itself at a disadvantage so as to
prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal
anything. Error or mistake of law is not fraud. The petitioner’s zealousness to collect taxes from the
unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in
this case is not justified by the extant facts.

Obillos, Jr. vs. Commissioner of Internal Revenue, 139 SCRA 436 , October 29, 1985
Taxation; The dictum that the power to tax involves the power to destroy should be obviated.—To regard
the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation
and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be
obviated.

Same; Partnership; Co-ownership; Where the father sold his rights over two parcels of land to his four
children so they can build their residence, but the latter after one (1) year sold them and paid the capital
gains, they should not be treated to have formed an unregistered partnership and taxed corporate income
tax on the sale and dividend income tax on their shares of the profit's from the sale.—Their original
purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of construction, then they had no choice but to resell the
same to dissolve the coownership. The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later.
Same; Same; Same; Mere sharing of gross income from an isolated transaction does not establish a
partnership.—Article 1769(3) of' the Civil Code provides that ''the sharing of gross returns does not of
itself establish a partnership, whether or not the persons sharing them have a j oint or common right or
interest in any property from which the returns are derived". There must be an unmistakable intention to
form a partnership or joint venture.
Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., 682 SCRA 66 , September
26, 2012
Taxation; Tax Exemptions; The Supreme Court holds that Section 27(B) of the National Internal Revenue
Code (NIRC) does not remove the income tax exemption of proprietary non-profit hospitals under Section
30(E) and (G).―The Court partly grants the petition of the BIR but on a different ground. We hold that
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit hospitals
under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on the other hand,
can be construed together without the removal of such tax exemption. The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among the institutions covered by Section 30,
to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate rate under the last
paragraph of Section 30 in relation to Section 27(A)(1).

Same; Preferential Tax Rate; Section 27(B) of the National Internal Revenue Code (NIRC) imposes a
10% preferential tax rate on the income of (1) proprietary non-profit educational institutions and (2)
proprietary non-profit hospitals.―Section 27(B) of the NIRC imposes a 10% preferential tax rate on the
income of (1) proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be proprietary and non-profit. “Proprietary” means
private, following the definition of a “proprietary educational institution” as “any private school maintained
and administered by private individuals or groups” with a government permit. “Non-profit” means no net
income or asset accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution’s purposes and all its activities conducted not for profit.

Same; “Non-profit” does not necessarily mean “charitable.”―“Non-profit” does not necessarily mean
“charitable.” In Collector of Internal Revenue v. Club Filipino Inc. de Cebu, 5 SCRA 321 (1962), this Court
considered as non-profit a sports club organized for recreation and entertainment of its stockholders and
members. The club was primarily funded by membership fees and dues. If it had profits, they were used
for overhead expenses and improving its golf course. The club was non-profit because of its purpose and
there was no evidence that it was engaged in a profit-making enterprise.

Same; Tax Exemptions; Charity is essentially a gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of government; The government forgoes taxes which
should have been spent to address public needs, because certain private entities already assume a part
of the burden.―To be a charitable institution, however, an organization must meet the substantive test of
charity in Lung Center of the Philippines vs. Quezon City, 433 SCRA 119 (2004). The issue in Lung
Center concerns exemption from real property tax and not income tax. However, it provides for the test of
charity in our jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens the
burden of government. In other words, charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of government. Thus, as a matter of efficiency, the
government forgoes taxes which should have been spent to address public needs, because certain
private entities already assume a part of the burden. This is the rationale for the tax exemption of
charitable institutions. The loss of taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the Treasury.

Same; Same; Charitable institutions are not ipso facto entitled to a tax exemption. The requirements for a
tax exemption are specified by the law granting it.―Charitable institutions, however, are not ipso facto
entitled to a tax exemption. The requirements for a tax exemption are specified by the law granting it. The
power of Congress to tax implies the power to exempt from tax. Congress can create tax exemptions,
subject to the constitutional provision that “[n]o law granting any tax exemption shall be passed without
the concurrence of a majority of all the Members of Congress.” The requirements for a tax exemption are
strictly construed against the taxpayer because an exemption restricts the collection of taxes necessary
for the existence of the government.

Same; Same; Income Taxation; Real Estate Taxes; For real property taxes, the incidental generation of
income is permissible because the test of exemption is the use of the property; The effect of failing to
meet the use requirement is simply to remove from the tax exemption that portion of the property not
devoted to charity.―For real property taxes, the incidental generation of income is permissible because
the test of exemption is the use of the property. The Constitution provides that “[c]haritable institutions,
churches and personages or convents appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes shall be exempt from taxation.” The test of exemption is not strictly a requirement
on the intrinsic nature or character of the institution. The test requires that the institution use the property
in a certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the Philippines
did not lose its charitable character when it used a portion of its lot for commercial purposes. The effect of
failing to meet the use requirement is simply to remove from the tax exemption that portion of the property
not devoted to charity.

Same; Same; The Constitution exempts charitable institutions only from real property taxes. In the
National Internal Revenue Code (NIRC), Congress decided to extend the exemption to income
taxes.―The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted Section
30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution. Section 30(E) of
the NIRC defines the corporation or association that is exempt from income tax. On the other hand,
Section 28(3), Article VI of the Constitution does not define a charitable institution, but requires that the
institution “actually, directly and exclusively” use the property for a charitable purpose.

Same; Same; Real Estate Taxes; Income Taxation; To be exempt from real property taxes, Section 28(3),
Article VI of the Constitution requires that a charitable institution use the property “actually, directly and
exclusively” for charitable purposes. To be exempt from income taxes, Section 30(E) of the National
Internal Revenue Code (NIRC) requires that a charitable institution must be “organized and operated
exclusively” for charitable purposes. Likewise, to be exempt from income taxes, Section 30(G) of the
National Internal Revenue Code (NIRC) requires that the institution be “operated exclusively” for social
welfare.―There is no dispute that St. Luke’s is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke’s from paying taxes. This only refers to
the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a charitable institution is not
ipso facto tax exempt. To be exempt from real property taxes, Section 28(3), Article VI of the Constitution
requires that a charitable institution use the property “actually, directly and exclusively” for charitable
purposes. To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively” for
social welfare.

Same; Same; Even if the charitable institution must be “organized and operated exclusively” for charitable
purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax
exempt status for its not-for-profit activities.―Even if the charitable institution must be “organized and
operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted
for profit” without losing its tax exempt status for its not-for-profit activities. The only consequence is that
the “income of whatever kind and character” of a charitable institution “from any of its activities conducted
for profit, regardless of the disposition made of such income, shall be subject to tax.” Prior to the
introduction of Section 27(B), the tax rate on such income from for-profit activities was the ordinary
corporate rate under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.

Same; Income Taxation; Preferential Tax Rate; The Supreme Court finds that St. Luke’s is a corporation
that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from
paying patients are concerned; Such income from for-profit activities, under the last paragraph of Section
30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential
10% rate pursuant to Section 27(B).―The Court finds that St. Luke’s is a corporation that is not “operated
exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption,
but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires
that an institution be “operated exclusively” for charitable or social welfare purposes to be completely
exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it
earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph
of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).

Same; Tax Exemptions; A tax exemption is effectively a social subsidy granted by the State because an
exempt institution is spared from sharing in the expenses of government and yet benefits from them.―A
tax exemption is effectively a social subsidy granted by the State because an exempt institution is spared
from sharing in the expenses of government and yet benefits from them. Tax exemptions for charitable
institutions should therefore be limited to institutions beneficial to the public and those which improve
social welfare. A profit-making entity should not be allowed to exploit this subsidy to the detriment of the
government and other taxpayers.