TAXATION CASE DIGESTS

Contents
Lung Center of the Phils v Quezon City................................................................................................1
Luzon Stevedoring Corp v CTA.............................................................................................................5
Lutz v Araneta......................................................................................................................................6
Philex Mining Corp v CIR......................................................................................................................7
Maceda v Macaraig...........................................................................................................................10
SSS v City of Bacolod..........................................................................................................................11
Villegas v Hiu CHiong Tsai Pao...........................................................................................................12
Victorias Milling v Municipality of Victorias.......................................................................................14
Phil. Rural Electric Coop v Secretary of DILG......................................................................................17
Nitafan v CIR......................................................................................................................................21
CIR v BPI.............................................................................................................................................22
Pepsi Cola Bottling Co v Municipality of Tanauan..............................................................................26
Domingo v Garlitos............................................................................................................................29
Mamba v Lara....................................................................................................................................30
Tiu v CA..............................................................................................................................................31
Chamber of Real Estate and Builders Assn v Executive Secretary......................................................33
Commissioner v TODA.......................................................................................................................41
Smart Communications v City of Davao.............................................................................................45
PBCom v CIR......................................................................................................................................48
CIR v Hantex Trading..........................................................................................................................50

Lung Center of the Phils v Quezon City

FACTS: petitioner Lung Center of the Philippines is a non-stock and non-profit organization operating the
hospital, LCP.

A big space at the ground floor of the LCP is being leased to private parties, for canteen and small store
spaces, and to medical or professional practitioners who use the same as their private clinics for their
patients whom they charge for their professional services. Almost one-half of the entire area on the left
side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side, at the
corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private
enterprise known as the Elliptical Orchids and Garden Center.

petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both
paying and non-paying. Aside from its income from paying patients, the petitioner receives annual
subsidies from the government.

The City Assessor of QC assessed the land and the hospital building of the petitioner for real property
taxes worth 4.5M. Petitioner claimed tax exemption as a charitable institution. The claim was denied.

Petitioner filed a petition before the Local Board of Assessment Appeals of QC, invoking Section 28,
paragraph 3 of the 1987 Constitution that the property is exempt from real property taxes. It averred
that a minimum of 60% of its hospital beds are exclusively used for charity patients and that the major
thrust of its hospital operation is to serve charity patients. The LBAA-QC dismissed the petition.

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of
Quezon City (CBAA, for brevity) [7] which ruled that the petitioner was not a charitable institution and
that its real properties were not actually, directly and exclusively used for charitable purposes.

The petitioner sought relief from the Court of Appeals, which rendered judgment affirming the decision
of the CBAA. The CA held that petitioner was not entitled to real property tax exemption because its
land, building, and improvements are not actually, directly and exclusively used for charitable purposes
and because its charter PD 1823, did not declare petitioner as real property tax exempt.

Hence, the instant petition for review on certiorari under Rule 45.

Petitioner asserts that its character as a charitable institution is not altered by the fact that it admits
paying patients and renders medical services to them, leases portions of the land to private parties, and
rents out portions of the hospital to private medical practitioners from which it derives income to be
used for operational expenses. It contends that the exclusivity required in the Constitution does not
necessarily mean solely. 

Respondents contend that petitioner failed to prove it was a charitable institution. They assert that the
petitioner uses the subsidies granted by the government for charity patients and uses the rest of its
income from the property for the benefit of paying patients, among other purposes. They aver that the
petitioner failed to adduce substantial evidence that 100% of its out-patients and 170 beds in the
hospital are reserved for indigent patients. 

ISSUES: (a) whether the petitioner is a charitable institution within the context of Presidential Decree
No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act No. 7160; and (b)
whether the real properties of the petitioner are exempt from real property taxes.

HELD:

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:

1. the statute creating the enterprise,

 2. its corporate purposes,
3. its constitution and by-laws,
4. the methods of administration,
5. the nature of the actual work performed,
6. the character of the services rendered,
7. the indefiniteness of the beneficiaries, and
8. the use and occupation of the properties

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.
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 this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies
from the government for 1991 and 1992 for its patients and for the operation of the hospital. It even
incurred a net loss in 1991 and 1992 from its operations.
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.
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
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that
the petitioner shall enjoy the tax exemptions and privileges:
SEC. 2.  TAX EXEMPTIONS AND PRIVILEGES.  Being a non-profit, non-stock corporation organized
primarily to help combat the high incidence of lung and pulmonary diseases in the Philippines, all
donations, contributions, endowments and equipment and supplies to be imported by
authorized entities or persons and by the Board of Trustees of the Lung Center of the Philippines,
Inc., for the actual use and benefit of the Lung Center,  shall be exempt from income and gift
taxes, the same further deductible in full for the purpose of determining the maximum
deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.
The  Lung  Center  of the  Philippines  shall be exempt from the payment of taxes, charges and fees
imposed by the Government or any political subdivision or instrumentality thereof with respect
to equipment purchases made by, or for the  Lung  Center.[29]
It is plain as day that under the decree, 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.
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. [32]
The tax exemption under this constitutional provision covers property taxes only.[33]
Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160
(otherwise known as the Local Government Code of 1991) as follows:
SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:
...
(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit
or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used
for religious, charitable or educational purposes. [35]
We note that under the 1935 Constitution, ... all lands, buildings, and improvements used exclusively for
charitable purposes shall be exempt from taxation. [36] 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. [37]
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.[40] 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. [41] The words dominant use or principal use cannot be substituted for
the words used exclusively without doing violence to the Constitutions and the law. [42] Solely is
synonymous with exclusively.[43]
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.[44]
The petitioner failed to discharge its burden to prove that the entirety of its real property is actually,
directly and exclusively used for charitable purposes. While portions of the hospital are used for the
treatment of patients and the dispensation of medical services to them, whether paying or non-paying,
other portions thereof are being leased to private individuals for their clinics and a canteen. Further, a
portion of the land is being leased to a private individual for her business enterprise under the business
name Elliptical Orchids and Garden Center. Indeed, the petitioners evidence shows that it
collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, 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. [45] 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.

Luzon Stevedoring Corp v CTA

FACTS: Petitioner imported various engine parts and other equipment for which it paid, under protest,
the assessed compensating tax for the repair and maintenance of its tugboats.

Petitioner claimed for refund invoking an exemption under Section 190 of the NIRC:

Sec. 190. Compensating tax. — ... And Provided further, That the tax imposed in this section
shall not apply to articles to be used by the importer himself in the manufacture or preparation
of articles subject to specific tax or those for consignment abroad and are to form part thereof or
to articles to be used by the importer himself as passenger and/or cargo vessel, whether
coastwise or oceangoing, including engines and spare parts of said vessel. ....

Petitioner contends that tugboats  are embraced and included in the term cargo vessel under the tax
exemption provisions of Section 190 of the Revenue Code, as amended by Republic Act. No. 3176. He
argues that in legal contemplation, the tugboat and a barge loaded with cargoes with the former towing
the latter for loading and unloading of a vessel in part, constitute a single vessel. Accordingly, it
concludes that the engines, spare parts and equipment imported by it and used in the repair and
maintenance of its tugboats are exempt from compensating tax.

The claim for refund was denied by the CIR which was affirmed by the CTA

respondents-appellees counter that petitioner-appellant's "tugboats" are not "Cargo vessel" because
they are neither designed nor used for carrying and/or transporting persons or goods by themselves but
are mainly employed for towing and pulling purposes. As such, it cannot be claimed that the tugboats in
question are used in carrying and transporting passengers or cargoes as a common carrier by water,
either coastwise or oceangoing and, therefore, not within the purview of Section 190 of the Tax Code, as
amended by Republic Act No. 3176

ISSUE: whether or not petitioner's tugboats" can be interpreted to be included in the term "cargo
vessels" for purposes of the tax exemption provided for in Section 190 of the National Internal Revenue
Code, as amended by Republic Act No. 3176

HELD:

PRINCIPLE: This Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or dimunition thereof with
respect to its mode or its rate, must be strictly construed, and the same must be coached in clear and
unmistakable terms in order that it may be applied." (84 C.J.S. pp. 659-800), More specifically stated, the
general rule is that any claim for exemption from the tax statute should be strictly construed against the
taxpayer

As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the
Court of Tax Appeals, which is, by the very nature of its function, dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on the subject unless there
has been an abuse or improvident exercise of authority (Reyes v. Commissioner of Internal Revenue, 24
SCRA 199 [1981]), which is not present in the instant case.

RULING:

Tthe amendatory provisions of Republic Act No. 3176 limit tax exemption from the compensating tax to
imported items to be used by the importer himself as operator of passenger and/or cargo vessel

in order that the importations in question may be declared exempt from the compensating tax, it is
indispensable that the requirements of the amendatory law be complied with, namely: (1) the engines
and spare parts must be used by the importer himself as a passenger and/or cargo, vessel; and (2) the
said passenger and/or cargo vessel must be used in coastwise or oceangoing navigation

petitioner's tugboats clearly do not fall under the categories of passenger and/or cargo vessels. the
Court of Tax Appeals found that no evidence was adduced by petitioner-appellant that tugboats are
passenger and/or cargo vessels used in the shipping industry as an independent business. On the
contrary, petitioner-appellant's own evidence supports the view that it is engaged as a stevedore, that
is, the work of unloading and loading of a vessel in port; and towing of barges containing cargoes is a
part of petitioner's undertaking as a stevedore. In fact, even its trade name is indicative that its sole and
principal business is stevedoring and lighterage, taxed under Section 191 of the National Internal
Revenue Code as a contractor, and not an entity which transports passengers or freight for hire which is
taxed under Section 192 of the same Code as a common carrier by water

Lutz v Araneta
FACTS: The Tydings-McDuffie Act was passed and one of its effects was the loss of the preferential
position of Philippine sugar in the US Market.

To manage the loss, CA 567 or the Sugar Adjustment Act was enacted. In section 2, Commonwealth Act
567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on
each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands
devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise
— a tax equivalent to the difference between the money value of the rental or consideration collected
and the amount representing 12 per centum of the assessed value of such land.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme
Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the
estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that
such tax is unconstitutional and void, being levied for the aid and support of the sugar industry
exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutioally
levied. The action having been dismissed by the Court of First Instance, the plaintifs appealed the case
directly to this Court

ISSUE WON the Sugar Adjustment Act is unconstitutional because it is being levied for the aid and
support of the sugar industry exclusively which is allegedly not a public purpose

HELD: NO.
The basic defect in the plaintiff's position is his assumption that the tax provided for in Commonwealth
Act No. 567 is a pure exercise of the taxing power. Analysis of the Act, and particularly of section 6
(heretofore quoted in full), will show that the tax is levied with a regulatory purpose, to provide means
for the rehabilitation and stabilization of the threatened sugar industry. In other words, the act is
primarily an exercise of the police power.

This Court can take judicial notice of the fact that sugar production is one of the great industries of our
nation, sugar occupying a leading position among its export products; that it gives employment to
thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of the
important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a
regime committed to a policy of currency stability. Its promotion, protection and advancement,
therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find
that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide
field of its police power, the lawmaking body could provide that the distribution of benefits therefrom
be readjusted among its components to enable it to resist the added strain of the increase in taxes that
it had to sustain.

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of
complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be
benefited from the expenditure of the funds derived from it. 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"

Philex Mining Corp v CIR

FACTS: Philex was assessed of excise tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the
1st and 2nd quarter of 1992 in the total amount of P123,821,982.52.

Philex protested the demand for payment of the tax liabilities stating claiming offsetting because it has
pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount
of P119,977,037.02 plus interest.

BIR denied the claim because it has not yet been established or determined with certainty, hence no
legal compensation can take place. Philex raised the issue to the CTA.

The CTA ruled that legal compensation did not take place. For legal compensation to take place, both
obligations must be liquidated and demandable. Liquidated debts are those where the exact amount has
already been determined. In the instant case, the claims of the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated
debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated
claim which Petitioner conceived to exist in its favor. The CTA also held that taxes cannot be subject to
set-off on compensation since claim for taxes is not a debt or contract and ordered Philex to pay the
balance of its tax liability.

After its MR was denied, Philex finally obtained its VAT input credit/refund not only for the taxable year
1989 to 1991 but also for 1992 and 1994.
In view of the grant of its VAT input credit/refund, Philex now contends that the same should,  ipso jure,
off-set its excise tax liabilities[15] since both had already become due and demandable, as well as fully
liquidated;[16] hence, legal compensation can properly take place.

Philex also asserts that the imposition of surcharge and interest for the non-payment of the excise taxes
within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the
excise liabilities within the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR

Philex also argues that the BIR violated Section 106(e) [30] of the National Internal Revenue Code of 1977,
which requires the refund of input taxes within 60 days, [31] when it took five years for the latter to grant
its tax claim for VAT input credit/refund

ISSUE: WON the VAT input credit/refund, Philex now contends that the same should,  ipso jure, off-set its
excise tax liabilities

WON the imposition of surcharges for non-payment is justified

3. WON the inaction of the BIR to refund input taxes is a ground for non-payment

HELD:

1. No offsetting

taxes cannot be subject to compensation for the simple reason that the government and the taxpayer
are not creditors and debtors of each other. [17] There is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government
in its sovereign capacity.[18] We find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we categorically held that
taxes cannot be subject to set-off or compensation, thus:

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 tax
cannot await the results of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission
on Audit,[20] which reiterated that:

x x x a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and taxpayer are
not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

2. Surcharge justified

The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the
collection thereof. We fail to see the logic of Philexs claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance.[24] Evidently, to countenance Philexs whimsical reason would render ineffective
our tax collection system. Too simplistic, it finds no support in law or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the government which has not yet been granted.  It must
be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain.
[25]
 Hence, a tax does not depend upon the consent of the taxpayer. [26] If any payer can defer the
payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would
adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government. [27] Moreover, Philex's theory that
would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to
confusion and abuse, depriving the government of authority over the manner by which taxpayers credit
and offset their tax liabilities.

3. NO

In this regard, we agree with Philex. While there is no dispute that a claimant has  the burden of proof to
establish the factual basis of his or her claim for tax credit or refund, [33] however, once the claimant has
submitted all the required documents, it is the function of the BIR to assess these documents with
purposeful dispatch. After all, since taxpayers owe honesty to government it is but just that government
render fair service to the taxpayers.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled
rule that in the performance of governmental function, the State is not bound by the neglect of its
agents and officers. Nowhere is this more true than in the field of taxation. [37] Again, while we
understand Philex's predicament, it must be stressed that the same is not valid reason for the non-
payment of its tax liabilities.

To be sure, this is not state that the taxpayer is devoid of remedy against public servants or employees
especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if
the BIR takes time in acting upon the taxpayer's claims for refund, the latter can seek judicial remedy
before the Court of Tax Appeals in the manner prescribed by law. [38] Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be
availed of.

Article 27 of the Civil Code provides:

"Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or
neglects, without just cause, to perform his official duty may file an action for damages and other relief
against the latter, without prejudice to any disciplinary action that may be taken."

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

"xxx xxx xxx

(c) wilfully neglecting to give receipts, as by law required for any sum collected in the performance of
duty or  wilfully neglecting to perform, any other duties enjoined by law."
Maceda v Macaraig
PRINCIPLES
Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays it.  WITHOUT  transferring the
burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence
tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who
ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and
customs indirect taxes (import duties, special import tax and other dues) 

FACTS: NPC is exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of
the Philippines and its provinces, cities, and municipalities.

But petitioner, representing oil companies which sells bunker oil to NPC, contends that NPC is not
exempt from indirect taxes and should pay the ad valorem tax for the bunker oil.

ISSUE: WON an entity exempt from direct and indirect taxes, are liable to pay ad valorem tax for its
purchases

HELD: NO

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an
opinion, 90wherein he stated and We quote:

xxx xxx xxx

Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines and its provinces, cities, and municipalities."
This exemption is broad enough to include all taxes, whether direct or indirect, which the National
Power Corporation may be required to pay, such as the specific tax on petroleum products. That it is
indirect or is of no amount [should be of no moment], for it is the corporation that ultimately pays
it. The view which refuses to accord the exemption because the tax is first paid by the seller disregards
realities and gives more importance to form than to substance. Equity and law always exalt substance
over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge that many
impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption granted the
National Power Corporation to direct taxes notwithstanding the general and broad language of the
statue will be to thwrat the legislative intention in giving exemption from all forms of taxes and
impositions without distinguishing between those that are direct and those that are not. (Emphasis
supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker
fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature
of indirect taxation, the economic burden of such taxation is expected to be passed on through the
channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has been
exempted from both direct and indirect taxation, the NPC must beheld exempted from absorbing the
economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish
to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which could
they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other
hand, that the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil which
represents all or part of the taxes previously paid by the oil companies to BIR . If NPC nonetheless
purchases such oil from the oil companies — because to do so may be more convenient and ultimately
less costly for NPC than NPC itself importing and hauling and storing the oil from overseas — NPC is
entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents
the tax already paid by the oil company-vendor to the BIR.

SSS v City of Bacolod

FACTS: For petitioner's failure to pay the realty taxes for the years 1968, 1969 and 1970 which, including
penalties, amounted to P104,956.06, respondent city sometime in early 1970 levied upon said lands and
building; and on April 3, 1970, it declared said properties forfeited in its favor.

petitioner, being a government-owned and controlled corporation, is exempt from payment of real
estate taxes.

When no action thereon was taken by respondent city treasurer, petitioner filed an action in the Court
of First Instance of Negros Occidental for nullification of the forfeiture proceedings.

After due hearing, the lower court rendered a decision declaring —

... the properties of the Social Security System not exempt from the payment of real property tax
inasmuch as the SSS does not fall under the provisions of Section 29 of the Charter of the City of
Bacolod, and considering further that there is no law which exempts said entity from taxes, the same
should therefore be subject to taxation like any other corporation in accordance with Section 27 of the
City Charter of Bacolod City.

The court a quo  restricted the scope of the exemption contemplated by the above section exclusively to
those government agencies, entities and instrumentalities exercising governmental or sovereign
functions.

ISSUE: WON the SSS is exempt from real property taxes

HELD:

We hold that under Section 29 of the Charter of the City of Bacolod they are so exempt.

It bears emphasis that the said section does not contain any qualification whatsoever in providing for
the exemption from real estate taxes of "lands and buildings owned by the Commonwealth or Republic
of Philippines." Hence, when the legislature exempted lands and buildings owned by the government
from payment of said taxes, what it intended was a broad and comprehensive application of such
mandate, regardless of whether such property is devoted to governmental or proprietary purpose.

This conclusion is ineluctable from an examination of Commonwealth Act No. 470, a statute which deals
specifically with the incidence of real estate taxes and the exemption thereto. It is to be noted that
Section 3(a) of said statute contains a similarly worded exemption from the payment of realty taxes of
"properties owned by ... the Republic of the Philippines, any province, city, municipality or municipal
district ..." And in "Board of Assessment Appeals vs. Court of Tax Appeals" 5, this Court interpreted this
provision in this wise:

... in exempting from taxation 'property owned by the Republic of the Philippines, any province, city,
municipality or municipal district ... said section 3(a) of Republic Act No. 470 makes no distinction
between property held in a sovereign, governmental or political capacity and those possessed in a
private propriety or patrimonial character. And where the law does not distinguish neither may we,
unless there are facts and circumstances clearly showing that the lawmaker intended the contrary, but
no such facts and circumstances have been brought to our attention. Indeed, the noun 'property' and
the verb 'owned' used in said section, 3 (a) strongly suggest that the object of exemption is considered
more from the view point of dominion, than from that of domain. Moreover, taxes are financial burdens
imposed for the purpose of raising revenues with which to defray the cost of the operation of the
Government, and a tax on property of the Government, whether national or local, would merely have
the effect of taking money from one pocket to put it in another pocket (Cooley on Taxation, Sec. 621,
4th Edition). Hence, it would not serve, in the final analysis, the main purpose of taxation. What is more,
it would tend to defeat it, on account of the paper work, time and consequently, expenses it would
entail

In connection with the issue at hand, it would not be amiss to state that Presidential Decree No. 24,
which amended the Social Security Act of 1954, has already removed all doubts as to the exemption of
the SSS from taxation. Thus —

SEC. 16. Exemption from tax, legal process, and lien. — All laws to the contrary notwithstanding, the SSS
and all its assets, all contributions collected and all accruals thereto and income therefrom as well as all
benefit payments and all papers or documents which may be required in connection with the operation
or execution of this Act shall be exempt from any tax, assessment, fee, charge or customs or import
duty; and all benefit payments made by the SSS shall likewise be exempt from all kinds of taxes, fees or
charges, and shall not be liable to attachment, garnishments, levy or seizure by or under any legal or
equitable process whatsoever, either before or after receipt by the person or persons entitled thereto,
except to pay any debt of the covered employee to the SSS.
Villegas v Hiu CHiong Tsai Pao
FACTS: Petitioner is the Mayor of the City of Manila which passed Ordinance No. 6537 which prohibits
alien from working in the city unless an employment permit is secured from the Mayor of Manila and
the permit fee of P50.00 is paid.

private respondent Hiu Chiong Tsai Pao Ho who was employed in Manila, assailed the ordinance as
unconstitutional:

1) As a revenue measure imposed on aliens employed in the City of Manila, Ordinance No. 6537 is
discriminatory and violative of the rule of the uniformity in taxation;

2) As a police power measure, it makes no distinction between useful and non-useful occupations,
imposing a fixed P50.00 employment permit, which is out of proportion to the cost of registration and
that it fails to prescribe any standard to guide and/or limit the action of the Mayor, thus, violating the
fundamental principle on illegal delegation of legislative powers:

3) It is arbitrary, oppressive and unreasonable, being applied only to aliens who are thus, deprived of
their rights to life, liberty and property and therefore, violates the due process and equal protection
clauses of the Constitution. 7

The trial court declared the ordinance null and void. Hence the instant case

Petitioner Mayor Villegas argues that Ordinance No. 6537 cannot be declared null and void on the
ground that it violated the rule on uniformity of taxation because the rule on uniformity of taxation
applies only to purely tax or revenue measures and that Ordinance No. 6537 is not a tax or revenue
measure but is an exercise of the police power of the state, it being principally a regulatory measure in
nature.

ISSUE: WON the ordinance is valid

HELD: NO

The contention that Ordinance No. 6537 is not a purely tax or revenue measure because its principal
purpose is regulatory in nature has no merit. While it is true that the first part which requires that the
alien shall secure an employment permit from the Mayor involves the exercise of discretion and
judgment in the processing and approval or disapproval of applications for employment permits and
therefore is regulatory in character the second part which requires the payment of P50.00 as employee's
fee is not regulatory but a revenue measure. There is no logic or justification in exacting P50.00 from
aliens who have been cleared for employment. It is obvious that the purpose of the ordinance is to raise
money under the guise of regulation.

The P50.00 fee is unreasonable not only because it is excessive but because it fails to consider valid
substantial differences in situation among individual aliens who are required to pay it. Although the
equal protection clause of the Constitution does not forbid classification, it is imperative that the
classification should be based on real and substantial differences having a reasonable relation to the
subject of the particular legislation. The same amount of P50.00 is being collected from every employed
alien whether he is casual or permanent, part time or full time or whether he is a lowly employee or a
highly paid executive
Ordinance No. 6537 does not lay down any criterion or standard to guide the Mayor in the exercise of
his discretion. It has been held that where an ordinance of a municipality fails to state any policy or to
set up any standard to guide or limit the mayor's action, expresses no purpose to be attained by
requiring a permit, enumerates no conditions for its grant or refusal, and entirely lacks standard, thus
conferring upon the Mayor arbitrary and unrestricted power to grant or deny the issuance of building
permits, such ordinance is invalid, being an undefined and unlimited delegation of power to allow or
prevent an activity per se lawful. 10

Ordinance No. 6537 is void because it does not contain or suggest any standard or criterion to guide the
mayor in the exercise of the power which has been granted to him by the ordinance.

The ordinance in question violates the due process of law and equal protection rule of the Constitution.

Requiring a person before he can be employed to get a permit from the City Mayor of Manila who may
withhold or refuse it at will is tantamount to denying him the basic right of the people in the Philippines
to engage in a means of livelihood. While it is true that the Philippines as a State is not obliged to admit
aliens within its territory, once an alien is admitted, he cannot be deprived of life without due process of
law. This guarantee includes the means of livelihood. The shelter of protection under the due process
and equal protection clause is given to all persons, both aliens and citizens. 13

Victorias Milling v Municipality of Victorias

FACTS: Ordinances were passed by the Municipality of Victorias, Negros Occidental which increased the
rates of license taxes on sugar centrals and sugar refineries as well as the range of graduated schedule of
annual output capacity with respect to refineries alone.

Plaintiff filed suit below 4 to ask for judgment declaring Ordinance No. 1, series of 1956, null and void.

The reasons put forth by plaintiff are that: (a) the ordinance exceeds the amounts fixed in Provincial
Circular 12-A issued by the Finance Department on February 27, 1940; (b) it is discriminatory since it
singles out plaintiff which is the only operator of a sugar central and a sugar refinery within the
jurisdiction of defendant municipality; (c) it constitutes double taxation; and (d) the national
government has preempted the field of taxation with respect to sugar centrals or refineries.

After declaring that "[t]here is no doubt that" the ordinance in question refers to license taxes or fees,"
and that "[i]t is settled that a license tax should be limited to the cost of licensing, regulating and
surveillance," 7 the trial court ruled that said license taxes in dispute are unreasonable,  8 and held that: "If
the defendant has the power to tax the plaintiff for purposes of revenue, it may do so by proper
municipal legislation, but not in the guise of a license tax."  

ISSUE: Was Ordinance No. 1, series of 1956, passed by defendant's municipal council as a regulatory
enactment or as a revenue measure?

HELD:
Under the statute just quoted and pertinent jurisprudence, a municipality is authorized to impose three
kinds of licenses: (1) license for regulation of useful occupations or enterprises; (2) license for restriction
or regulation of non-useful occupations or enterprises; and (3) license for revenue. 12 The first two easily
fall within the broad police power granted under the general welfare clause.  13 The third class, however,
is for revenue purposes. It is not a license fee, properly speaking, and yet it is generally so termed. It
rests on the taxing power. That taxing power must be expressly conferred by statute upon the
municipality. 14 It is so granted under Commonwealth Act 472.

Given the purposes just mentioned, we find no warrant in logic to give our assent to the view that the
ordinance in question is solely for regulatory purpose. Plain is the meaning conveyed. The ordinance is
for raising money. To say otherwise is to misread the purpose of the ordinance.

We should not hang so heavy a meaning on the use of the term "municipal license tax". This does not
necessarily connote the idea that the tax is imposed — as the lower court would want it — to mean a
revenue measure in the guise of a license tax. For really, this runs counter to the declared purpose to
make money.

Besides, the term "license tax" has not acquired a fixed meaning. It is often "used indiscriminately to
designate impositions exacted for the exercise of various privileges." 19 It does not refer solely to a
license for regulation. In many instances, it refers to "revenue-raising exactions on privileges or
activities." 20 On the other hand, license fees are commonly called taxes. But, legally speaking, the latter
are "for the purpose of raising revenues," in contrast to the former which are imposed "in the exercise
of police power for purposes of regulation." 21

We accordingly say that the designation given by the municipal authorities does not decide whether the
imposition is properly a license tax or a license fee. The determining factors are the purpose and effect
of the imposition as may be apparent from the provisions of the ordinance.  22 Thus, "[w]hen no police
inspection, supervision, or regulation is provided, nor any standard set for the applicant 23 to establish,
or that he agrees to attain or maintain, but any and all persons engaged in the business designated,
without qualification or hindrance, may come, and a license on payment of the stipulated sum will issue,
to do business, subject to no prescribed rule of conduct and under no guardian eye, but according to the
unrestrained judgment or fancy of the applicant and licensee, the presumption is strong that the power
of taxation, and not the police power, is being exercised."  24

Precisely because of these considerations the present imposition must be treated as a levy for
revenue purposes. A quick glance at the big amount of maximum annual tax set forth in the ordinance,
P40,000.00 for sugar centrals, and P40,000.00 for sugar refineries, will readily convince one that the tax
is really a revenue tax. And then, we read in the ordinance nothing which would as much as indicate that
the tax imposed is merely for police inspection, supervision or regulation.

Our view that the tax imposed by the ordinance is for revenue purposes finds support in judicial
pronouncements which have gained foothold in this jurisdiction. In Standard Vacuum vs. Antigua, 25 this
Court had occasion to pass upon a similar ordinance. In categorical terms, we there stated: "We are
satisfied that the graduated license tax imposed by the ordinance in question is an occupation tax,
imposed not under the police or regulatory power of the municipality but by virtue of its taxing power
for purposes of revenue, and is in accordance with the last part of Section 1 of Commonwealth Act No.
472. It is, therefore, valid." 26

The present case is not to be analogized with Panaligan vs. City of Tacloban cited in the decision
below. 27 For there, the inspection fee sought to be collected — upon every head of specified animals to
be transported out of the City of Tacloban (P2.00 per hog, P10.00 per cow and 20.00 per carabao) —
was in reality an export tax specifically withheld from municipal taxing power under Section 2287 of the
Revised Administrative Code.

So also do we say that the cases of Pacific Commercial Co. vs. Romualdez, 28 Lacson vs. City of
Bacolod, 29 andSantos vs. Municipal Government of Caloocan, 30 used by plaintiff as references, are
entirely inopposite. InPacific Commercial, the tax involved — on frozen meat — was nullified because
tax measures on cold stores were not then within the legislative grant to the City of Manila. In Lacson,
the City of Bacolod taxed every admission ticket sold in the moviehouses. And justification for this
imposition was moored to the general welfare clause of the city charter. This Court held the
ordinance ultra vires for the reason that the authority to tax cannot be derived from the general
welfare clause. In Santos, the taxes in controversy were internal organs fees, meat inspection fees and
corral fees, separate from the slaughter or slaughterhouse fees. In annulling the taxes there questioned,
this Court declared: "[W]hen the Council ordained the payment of internal organs fees, meat inspection
fees and corral fees, aside from the slaughter or slaughterhouse fees, it overstepped the limits of its
statutory grant [Sec. 1, C.A. 655]. Only one fee was allowed by that law to be charged and that was
slaughter or slaughterhouse fees."

In the cases cited then, the tax ordinances did not find plain and clear statutory prop. Such infirmity is
not present here.

PERCENTAGE TAX

3. Plaintiff argues that the municipality is bereft of authority to enact the ordinance in question because
the national government "had preempted it from entering the field of taxation of sugar centrals and
sugar refineries."33 Plaintiff seeks refuge in Section 189 of the National Internal Revenue Code which
subjects proprietors or operators of sugar centrals or sugar refineries to percentage tax.

The implausibility of this position is at once apparent. We are not dealing here with percentage tax.
Rather, we are concerned with a tax specifically for operators of sugar centrals and sugar refineries. The
rates imposed are based on the maximum annual output capacity. Which is not a percentage. Because it
is not a share. Nor is it a tax based on the amount of the proceeds realized out of the sale of sugar,
centrifugal or refined. 34

What can be said at most is that the national government has preempted the field of percentage
taxation. Section 1 of Commonwealth Act 472, while granting municipalities power to levy taxes,
expressly removes from them the power to exact "percentage taxes".

It is correct to say that preemption in the matter of taxation simply refers to an instance where the
national government elects to tax a particular area, impliedly withholding from the local government the
delegated power to tax the same field. This doctrine primarily rests upon the intention of
Congress. 35 Conversely, should Congress allow municipal corporations to cover fields of taxation it
already occupies, then the doctrine of preemption will not apply.

In the case at bar, Section 4(1) of Commonwealth Act 472 clearly and specifically allows municipal
councils to tax persons engaged in "the same businesses or occupation" on which "fixed internal
revenue privilege taxes" are "regularly imposed by the National Government." With certain exceptions
specified in Section 3 of the same statute. Our case does not fall within the exceptions. It would
therefore be futile to argue that Congress exclusively reserved to the national government the right to
impose the disputed taxes.

We rule that there is no preemption.

NO DISCRIMINATION

The ordinance does not single out Victorias as the only object of the ordinance. Said ordinance is made
to apply to any sugar central or sugar refinery which may happen to operate in the municipality. So it is,
that the fact that plaintiff is actually the sole operator of a sugar central and a sugar refinery does not
make the ordinance discriminatory. Argument along the same lines was rejected in  Shell Co. of P.I., Ltd.
vs. Vaño, 45 this Court holding that the circumstance "that there is no other person in the locality who
exercises" the occupation designated as installation manager "does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be applicable to any person or firm who exercises
such calling or occupation." And in Ormoc Sugar Company, Inc. vs. Municipal Board of Ormoc
City, 46 declaratory relief was sought to test the validity of a municipal ordinance which provides a city
tax of twenty centavos per picul of centrifugal sugar and one per centum on the gross sale of its
derivatives and by-products "produced by the Ormoc Sugar Company, Incorporated, or by any other
sugar mill in Ormoc City." Mr. Justice Enrique Fernando, delivering the opinion of this Court, declared
that the ordinance did not suffer "from a constitutional or statutory infirmity." And yet, in Ormoc, it is to
be observed that Section 1 of the ordinance spelled out Ormoc Sugar Company, Incorporated specifically
by name. Not even the name of plaintiff herein was ever mentioned in the ordinance now disputed.

DOUBLE TAXATION

Plaintiff finally impleads double taxation. Its reason is that in computing the amount of taxes to be paid
by the sugar refinery the cost of the raw sugar coming from the sugar central is not deducted;  ergo,
plaintiff is taxed twice on the raw sugar.

Double taxation has been otherwise described as "direct duplicate taxation." 48 For double taxation to
exist, "the same property must be taxed twice, when it should be taxed but once."  49 Double taxation has
also been "defined as taxing the same person twice by the same jurisdiction for the same thing."  

With the foregoing precepts in mind, we find no difficulty in saying that plaintiff's argument on double
taxation does not inspire assent. First. The two taxes cover two different objects. Section 1 of the
ordinance taxes a person operating sugar centrals or engaged in the manufacture of centrifugal sugar.
While under Section 2, those taxed are the operators of sugar refinery mills. One occupation or business
is different from the other. Second. The disputed taxes are imposed on occupation or business. Both
taxes are not on sugar. The amount thereof depends on the annual output  capacity of the mills
concerned, regardless of the actual sugar milled. Plaintiff's argument perhaps could make out a point if
the object of taxation here were the sugar it produces, not the business of producing it.

There is no double taxation.

Phil. Rural Electric Coop v Secretary of DILG

FACTS: a class suit was filed by petitioners who are members of petitioner Philippine Rural Electric
Cooperatives Association, Inc. (PHILRECA), an association of 119 electric cooperatives throughout the
country.
Under P.D. No. 269, as amended, or the National Electrification Administration Decree, cooperatives
were permanently exempt from paying income taxes and also exempt from the payment (a) of all
National Government, local government and municipal taxes and fees, including franchise, filing,
recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court or
administrative proceeding in which it may be a party, and (b) of all duties or imposts on foreign goods
acquired for its operations.

From 1971 to 1978, in order to finance the electrification projects envisioned by P.D. No. 269, as
amended, the Philippine Government, acting through the National Economic Council (now National
Economic Development Authority) and the NEA, entered into six (6) loan agreements with the USAID.
The loan agreements contain similarly worded provisions on the tax application of the loan and any
property or commodity acquired through the proceeds of the loan.

Petitioners contend that pursuant to the provisions of P.D. No. 269, as amended, and the above-
mentioned provision in the loan agreements, they are exempt from payment of local taxes, including
payment of real property tax. With the passage of the Local Government Code, however, they allege
that their tax exemptions have been invalidly withdrawn. In particular, petitioners assail Sections 193
and 234 of the Local Government Code on the ground that the said provisions discriminate against
them, in violation of the equal protection clause. Further, they submit that the said provisions are
unconstitutional because they impair the obligation of contracts between the Philippine Government
and the United States Government. They stress that cooperatives registered under R.A. No. 6938 are
singled out for tax exemption privileges under the Local Government Code. They maintain that electric
cooperatives registered with the NEA under P.D. No. 269, as amended, and electric cooperatives
registered with the Cooperative Development Authority (CDA) under R.A. No. 6938 are similarly situated

ISSUE WON LGC provisions are constitutional

HELD: YES

We are not persuaded. The equal protection clause under the Constitution means that no person or
class of persons shall be deprived of the same protection of laws which is enjoyed by other persons or
other classes in the same place and in like circumstances. [8] Thus, the guaranty of the equal protection of
the laws is not violated by a law based on reasonable classification. Classification, to be reasonable,
must (1) rest on substantial distinctions; (2) be germane to the purposes of the law; (3) not be limited to
existing conditions only; and (4) apply equally to all members of the same class. [9]

First, substantial distinctions exist between cooperatives under P.D. No. 269, as amended, and
cooperatives under R.A. No. 6938. These distinctions are manifest in at least two material respects
which go into the nature of cooperatives envisioned by R.A. No. 6938 and which characteristics are not
present in the type of cooperative associations created under P.D. No. 269, as amended.

a. Capital Contributions by Members

The importance of capital contributions by members of a cooperative under R.A. No. 6938 was
emphasized during the Senate deliberations as one of the key factors which distinguished electric
cooperatives under P.D. No. 269, as amended, from electric cooperatives under the Cooperative Code.
Cooperative members under PD 269 do not make substantial contribution to the capital required. It is
the government that puts in the capital, in most cases. Under RA 6938, the principle is that members
bind themselves to help themselves. It is because of their collectivity that they can have some
economic benefits

b. Extent of Government Control over Cooperatives

Another principle adhered to by the Cooperative Code is the principle of subsidiarity. Pursuant to this

principle, the government may only engage in development activities where cooperatives do not posses
the capability nor the resources to do so and only upon the request of such cooperatives.

In contrast, P.D. No. 269, as amended by P.D. No. 1645, is replete with provisions which grant the NEA,
upon the happening of certain events, the power to control and take over the management and
operations of cooperatives registered under it.

Second, the classification of tax-exempt entities in the Local Government Code is germane to the
purpose of the law. The Constitutional mandate that every local government unit shall enjoy local
autonomy, does not mean that the exercise of power by local governments is beyond regulation by
Congress. Thus, while each government unit is granted the power to create its own sources of revenue,
Congress, in light of its broad power to tax, has the discretion to determine the extent of the taxing
powers of local government units consistent with the policy of local autonomy. [23]

Section 193 of the Local Government Code is indicative of the legislative intent to vest broad taxing
powers upon local government units and to limit exemptions from local taxation to entities specifically
provided therein. Section 193 provides:

Section 193. Withdrawal of Tax Exemption Privileges.Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned and controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions,
are hereby withdrawn upon the effectivity of this Code. [24]

The above provision effectively withdraws exemptions from local taxation enjoyed by various entities
and organizations upon effectivity of the Local Government Code except for a) local water districts; b)
cooperatives duly registered under R.A. No. 6938; and c) non-stock and non-profit hospitals and
educational institutions. Further, with respect to real property taxes, the Local Government Code again
specifically enumerates entities which are exempt therefrom and withdraws exemptions enjoyed by all
other entities upon the effectivity of the code. Thus, Section 234 provides:

SEC. 234. Exemptions from Real Property Tax. The following are exempted from payment of the real
property tax:

(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof had been granted for consideration or otherwise, to a taxable person;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit

or religious cemeteries and all lands, buildings and improvements actually, directly, and exclusively used
for religious, charitable or educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used by local water districts
and government-owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;

(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and

(e) Machinery and equipment used for pollution control and environmental protection.

Except as provided herein, any exemption from payment of real property tax previously granted to, or
presently enjoyed by, all persons, whether natural or juridical, including all government-owned or
controlled corporations are hereby withdrawn upon the effectivity of this Code. [25]

In Mactan Cebu International Airport Authority v. Marcos, [26] this Court held that the limited and
restrictive nature of the tax exemption privileges under the Local Government Code is consistent with
the State policy to ensure autonomy of local governments and the objective of the Local Government
Code to grant genuine and meaningful autonomy to enable local government units to attain their fullest
development as self-reliant communities and make them effective partners in the attainment of national
goals. The obvious intention of the law is to broaden the tax base of local government units to assure
them of substantial sources of revenue.

While we understand petitioners predicament brought about by the withdrawal of their local tax
exemption privileges under the Local Government Code, it is not the province of this Court to go into
the wisdom of legislative enactments. Courts can only interpret laws. The principle of separation of
powers prevents them from re-inventing the laws.

Finally, Sections 193 and 234 of the Local Government Code permit reasonable classification as these
exemptions are not limited to existing conditions and apply equally to all members of the same class.
Exemptions from local taxation, including real property tax, are granted to all cooperatives covered by
R.A. No. 6938 and such exemptions exist for as long as the Local Government Code and the provisions
therein on local taxation remain good law.

Petitioners contend that the withdrawal by the Local Government Code of the tax exemptions of
cooperatives under P.D. No. 269, as amended, is an impairment of the tax exemptions provided under
the loan agreements. Petitioners argue that as beneficiaries of the loan proceeds, pursuant to the above
provision, [a]ll the assets of petitioners, such as lands, buildings, distribution lines acquired through the
proceeds of the Loan Agreements are tax exempt. [31]

We hold otherwise.

A plain reading of the provision quoted above readily shows that it does not grant any tax exemption in
favor of the borrower or the beneficiary either on the proceeds of the loan itself or the properties
acquired through the said loan. It simply states that the loan proceeds and the principal and interest of
the loan, upon repayment by the borrower, shall be without deduction of any tax or fee that may be
payable under Philippine law as such tax or fee will be absorbed by the borrower with funds other
than the loan proceeds. Further, the provision states that with respect to any payment made by the
borrower to (1) any contractor or any personnel of such contractor or any property transaction and (2)
any commodity transaction using the proceeds of the loan, the tax to be paid, if any, on such
transactions shall be absorbed by the borrower and/or beneficiary through funds other than the loan
proceeds.

Beyond doubt, the import of the tax provision in the loan agreements cited by petitioners is twofold:  (1)
the borrower is entitled to receive from and is obliged to pay the lender the principal amount of the loan
and the interest thereon in full, without any deduction of the tax component thereof imposed under
applicable Philippine law and any tax imposed shall be paid by the borrower with funds other than
the loan proceeds and (2) with respect to payments made to any contractor, its personnel or any
property or commodity transaction entered into pursuant to the loan agreement and with the use of the
proceeds thereof, taxes payable under the said transactions shall be paid by the borrower and/or
beneficiary with the use of funds other than the loan proceeds. The quoted provision does not purport
to grant any tax exemption in favor of any party to the contract, including the beneficiaries thereof. The
provisions simply shift the tax burden, if any, on the transactions under the loan agreements to the
borrower and/or beneficiary of the loan. Thus, the withdrawal by the Local Government Code under
Sections 193 and 234 of the tax exemptions previously enjoyed by petitioners does not impair the
obligation of the borrower, the lender or the beneficiary under the loan agreements as in fact, no tax
exemption is granted therein.

Nitafan v CIR
FACTS: Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53,
respectively, of the Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek
to prohibit and/or perpetually enjoin respondents, the Commissioner of Internal Revenue and the
Financial Officer of the Supreme Court, from making any deduction of withholding taxes from their
salaries.

In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial
officers constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10,
Article VIII of the 1987 Constitution mandating that "(d)uring their continuance in office, their salary
shall not be decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in
and by said Constitution."

ISSUE: WON withholding taxes is a diminution in salary

HELD: NO

As will be shown hereinafter, the clear intent of the Constitutional Commission was to delete the
proposed express grant of exemption from payment of income tax to members of the Judiciary, so as to
"give substance to equality among the three branches of Government" in the words of Commissioner
Rigos. In the course of the deliberations, it was further expressly made clear, specially with regard to
Commissioner Joaquin F. Bernas' accepted amendment to the amendment of Commissioner Rigos, that
the salaries of members of the Judiciary would be subject to the general income tax applied to all
taxpayers.

The debates, interpellations and opinions expressed regarding the constitutional provision in question
until it was finally approved by the Commission disclosed that the true intent of the framers of the 1987
Constitution, in adopting it, was to make the salaries of members of the Judiciary taxable. The
ascertainment of that intent is but in keeping with the fundamental principle of constitutional
construction that the intent of the framers of the organic law and of the people adopting it should be
given effect.10 The primary task in constitutional construction is to ascertain and thereafter assure the
realization of the purpose of the framers and of the people in the adoption of the Constitution. 11 it may
also be safely assumed that the people in ratifying the Constitution were guided mainly by the
explanation offered by the framers.

Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again
reproduced hereunder:

The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower
courts shall be fixed by law. During their continuance in office, their salary shall not be   decreased.
(Emphasis supplied).

it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of
Justices and Judges but such rate must be higher than that which they are receiving at the time of
enactment, or if lower, it would be applicable only to those appointed after its approval. It would be a
strained construction to read into the provision an exemption from taxation in the light of the discussion
in the Constitutional Commission.

With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income
tax upon the salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs.
Meer,13 as affirmed inEndencia vs. David  14 must be declared discarded. The framers of the fundamental
law, as the alter ego  of the people, have expressed in clear and unmistakable terms the meaning and
import of Section 10, Article VIII, of the 1987 Constitution that they have adopted

CIR v BPI
FACTS: In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR)
assessed respondent Bank of the Philippine Islands’ (BPI’s) deficiency percentage and documentary
stamp taxes for the year 1986 in the total amount of P129,488,656.63

BPI argued that the “deficiency assessments" were no assessments at all. The taxpayer is not informed,
even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency
assessment is to inform taxpayer why he has incurred a deficiency so that he can make an intelligent
decision on whether to pay or to protest the assessment.

On May 8, 1991, the CIR responded by asserting the deficiency taxes that were assessed and was
already final.

Hence, BPI filed a petition for review in the CTA. 11 In a decision dated November 16, 1995, the CTA
dismissed the case for lack of jurisdiction since the subject assessments had become final and
unappealable because BPI failed to protest on time under Section 270 of the National Internal Revenue
Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125.

On appeal, the CA reversed the tax court’s decision and resolution and remanded the case to the
CTA14 for a decision on the merits. 15 It ruled that the October 28, 1988 notices were not valid
assessments because they did not inform the taxpayer of the legal and factual bases therefor. It
declared that the proper assessments were those contained in the May 8, 1991 letter which provided
the reasons for the claimed deficiencies.

Hence the instant case.

The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments.
He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the
precise purpose of notifying taxpayers of the assessed amounts due and demanding payment
thereof.21 He contends that there was no law or jurisprudence then that required notices to state the
reasons for assessing deficiency tax liabilities.22

BPI counters that due process demanded that the facts, data and law upon which the assessments were
based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228),
specifically provides that:

"[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void."

According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due
process requires even under the former Section 270.

ISSUE:

1) whether or not the assessments issued to BPI for deficiency percentage and documentary stamp
taxes for 1986 had already become final and unappealable and

2) whether or not BPI was liable for the said taxes.

HELD:

The former Section 27018 (now renumbered as Section 228) of the NIRC stated:

Sec. 270. Protesting of assessment. — When the [CIR] or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be
prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the
taxpayer fails to respond, the [CIR] shall issue an assessment based on his findings.

xxx xxx xxx (emphasis supplied)

Were the October 28, 1988 Notices Valid Assessments?

BPI’s contention has no merit. The present Section 228 of the NIRC provides:

Sec. 228. Protesting of Assessment. — When the [CIR] or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however,
That a preassessment notice shall not be required in the following cases:

xxx xxx xxx

The taxpayer shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the
deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of
the tax liabilities and a demand for payment thereof within 30 days after receipt.

In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to
its amendment by RA 8424 (also known as the Tax Reform Act of 1997). 23 In CIR v. Reyes,24 we held that:

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment
of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied
upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the
Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment.  The old
requirement of merely notifying the taxpayer of the CIR's findings was changed in
1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would
be made; otherwise, the assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During
those dates, RA 8424 was already in effect. The notice required under the old law was no longer
sufficient under the new law.25 (emphasis supplied; italics in the original)

Accordingly, when the assessments were made pursuant to the former Section 270, the only
requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law
required a written statement to the taxpayer of the law and facts on which the assessments were based.
The Court cannot read into the law what obviously was not intended by Congress. That would be judicial
legislation, nothing less.

Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax
liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed
period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and jurisprudence.

The sentence

[t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void

was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997.
Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning. 28

Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an
affirmation of what the law required under the former Section 270. The amendment introduced by RA
8424 was an innovation and could not be reasonably inferred from the old law. 29 Clearly, the legislature
intended to insert a new provision regarding the form and substance of assessments issued by the CIR.30
Under the former Section 270, there were two instances when an assessment became final and
unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision: 35

Sec. 270. Protesting of assessment.1a\^/phi1.net

xxx xxx xxx

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation in such form and manner as may be prescribed by the implementing regulations within
thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and
unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely affected
by the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said
decision; otherwise, the decision shall become final, executory and demandable.

Implications Of A Valid Assessment

Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the
same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify
as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter
of assessment, we shall inform you of the taxpayer’s decision on whether to pay or protest the
assessment."36 Hence, by its own declaration, BPI did not regard this letter as a protest against the
assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the
October 28, 1988 notices as valid or proper assessments.

The inevitable conclusion is that BPI’s failure to protest the assessments within the 30-day period
provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA
correctly dismissed BPI’s appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that would reopen the question of its liability on
the merits.37 Not only that. There arose a presumption of correctness when BPI failed to protest the
assessments:

Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the
duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers
will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 38

Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to
have failed to appeal the CIR’s final decision regarding the disputed assessments within the 30-day
period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision … on
the matter." BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal
but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on
February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its
omission. We have already declared that:

… the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his
action on an assessment questioned by a taxpayer constitutes his final determination on the disputed
assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended.  On the basis of his
statement indubitably showing that the Commissioner's communicated action is his final decision on
the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the taxpayer would be able to determine
when his right to appeal to the tax court accrues.

The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to
continually delay the finality of the assessment — and, consequently, the collection of the amount
demanded as taxes — by repeated requests for recomputation and reconsideration. On the part of the
[CIR], this would encourage his office to conduct a careful and thorough study of every questioned
assessment and render a correct and definite decision thereon in the first instance. This would also
deter the [CIR] from unfairly making the taxpayer grope in the dark and speculate as to which action
constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet
a pressing need for fair play, regularity, and orderliness in administrative action. 39 (emphasis supplied)

Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject
tax assessments.

We realize that these assessments (which have been pending for almost 20 years) involve a considerable
amount of money. Be that as it may, we cannot legally presume the existence of something which was
never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers
will not be held liable for the proper taxes assessed against them:

Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor
endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the
very existence of the state whose social contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of
the people.40

Pepsi Cola Bottling Co v Municipality of Tanauan

FACTS: the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare
Section 2 of Republic Act No. 2264.  1 otherwise known as the Local Autonomy Act, unconstitutional as an
undue delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of
the municipality of Tanauan, Leyte, null and void.

both Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates
imposed therein are practically the same, and second, that on January 17, 1963, the acting Municipal
Treasurer of Tanauan, Leyte, as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant
in said municipality, sought to enforce compliance by the latter of the provisions of said Ordinance No.
27, series of 1962.

Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and
collects "from soft drinks producers and manufacturers a tax of one-sixteenth (1/16) of a centavo for
every bottle of soft drink corked." 2 
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and
collects "on soft drinks produced or manufactured within the territorial jurisdiction of this municipality a
tax of ONE CENTAVO (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity."

The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'

On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint
and upholding the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23
and 27 legal and constitutional; ordering the plaintiff to pay the taxes due under the oft the said
Ordinances

ISSUE: 1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?

2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific taxes?

3. — Are Ordinances Nos. 23 and 27 unjust and unfair?

HELD:

1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of
right to every independent government, without being expressly conferred by the people. 6 It is a power
that is purely legislative and which the central legislative body cannot delegate either to the executive or
judicial department of the government without infringing upon the theory of separation of powers. The
exception, however, lies in the case of municipal corporations, to which, said theory does not apply.
Legislative powers may be delegated to local governments in respect of matters of local concern. 7 This is
sanctioned by immemorial practice. 8 By necessary implication, the legislative power to create political
corporations for purposes of local self-government carries with it the power to confer on such local
governmental agencies the power to tax. 9 Under the New Constitution, local governments are granted
the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of revenue and to levy
taxes, subject to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of
Republic Act No. 2264 emanated from beyond the sphere of the legislative power to enact and vest in
local governments the power of local taxation.

The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would
not suffice to invalidate the said law as confiscatory and oppressive. In delegating the authority, the
State is not limited 6 the exact measure of that which is exercised by itself. When it is said that the
taxing power may be delegated to municipalities and the like, it is meant that there may be delegated
such measure of power to impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the State has not
deemed wise to tax for more general purposes. 10 

This is not to say though that the constitutional injunction against deprivation of property without due
process of law may be passed over under the guise of the taxing power, except when the taking of the
property is in the lawful exercise of the taxing power, as when

(1) the tax is for a public purpose;

(2) the rule on uniformity of taxation is observed;

(3) either the person or property taxed is within the jurisdiction of the government levying the tax; and

(4) in the assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 

Due process is usually violated where the tax imposed is for a private as distinguished from a public
purpose; a tax is imposed on property outside the State, i.e., extraterritorial taxation; and arbitrary or
oppressive methods are used in assessing and collecting taxes.

But, a tax does not violate the due process clause, as applied to a particular taxpayer, although the
purpose of the tax will result in an injury rather than a benefit to such taxpayer. Due process does not
require that the property subject to the tax or the amount of tax to be raised should be determined by
judicial inquiry, and a notice and hearing as to the amount of the tax and the manner in which it shall be
apportioned are generally not necessary to due process of law. 12

There is no validity to the assertion that the delegated authority can be declared unconstitutional on the
theory of double taxation. It must be observed that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not be exercised. 13 The reason is that the State has
exclusively reserved the same for its own prerogative. Moreover, double taxation, in general, is not
forbidden by our fundamental law, since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and some states of the Union.  14 Double
taxation becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same
governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case where one
tax is imposed by the State and the other by the city or municipality. 17

2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because
these two ordinances cover the same subject matter and impose practically the same tax rate. The
thesis proceeds from its assumption that both ordinances are valid and legally enforceable. This is not
so. As earlier quoted, Ordinance No. 23, which was approved on September 25, 1962, levies or collects
from soft drinks producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of the bottle used. When it was discovered that the
producer or manufacturer could increase the volume contents of the bottle and still pay the same tax
rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962, imposing a
tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23,
it was 1/16 of a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in
enacting Ordinance No. 27 is thus clear: it was intended as a plain substitute for the prior Ordinance
No. 23, and operates as a repeal of the latter, even without words to that effect. 

That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a
specific tax. Undoubtedly, the taxing authority conferred on local governments under Section 2,
Republic Act No. 2264, is broad enough as to extend to almost "everything, accepting those which are
mentioned therein." As long as the text levied under the authority of a city or municipal ordinance is not
within the exceptions and limitations in the law, the same comes within the ambit of the general rule,
pursuant to the rules of exclucion attehus  and exceptio firmat regulum in cabisus non excepti  19 The
limitation applies, particularly, to the prohibition against municipalities and municipal districts to
impose "any percentage tax or other taxes in any form based thereon  nor impose taxes on articles
subject to specific tax  except gasoline, under the provisions of the National Internal Revenue Code."

NOT A PERCENTAGE TAX

For purposes of this particular limitation, a municipal ordinance which prescribes a set ratio between
the amount of the tax and the volume of sale of the taxpayer imposes a sales tax and is null and void
for being outside the power of the municipality to enact. 20But, the imposition of "a tax of one centavo
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all soft drinks produced or
manufactured under Ordinance No. 27 does not partake of the nature of a percentage tax on sales, or
other taxes in any form based thereon. The tax is levied on the produce (whether sold or not) and not
on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio between the volume of
sales and the amount of the tax. 21

NOT A SPECIFIC TAX

Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles,
such as distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes,
matches firecrackers, manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil,
cinematographic films, playing cards, saccharine, opium and other habit-forming drugs. 22 Soft drink is
not one of those specified.

Domingo v Garlitos
FACTS: in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this
Court declared as final and executory the order for the payment by the estate of the estate and
inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance
of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter
Scott Price." In order to enforce the claims against the estate the fiscal presented a petition dated June
21, 1961, to the court below for the execution of the judgment. The petition was, however, denied by
the court which held that the execution is not justifiable as the Government is indebted to the estate
under administration in the amount of P262,200.

ISSUE: WON the indebtedness of the Government to the Estate offsets the inheritance taxes due from
the estate

HELD: YES

The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit.

Another ground for denying the petition of the provincial fiscal is the fact that the court having
jurisdiction of the estate had found that the claim of the estate against the Government has been
recognized and an amount of P262,200 has already been appropriated for the purpose by a
corresponding law (Rep. Act No. 2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for services rendered have already
become overdue and demandable is 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, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by
operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and
debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the
estate of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not
the proper remedy for the petitioner. Appeal is the remedy.

Mamba v Lara
FACTS: Petitioner is a congressman of the Province of Cagayan while respondent is the governor. filed a
Petition for Annulment of Contracts which awarded the construction of the Cagayan Town Center to
Asset Builders Corp. The petitioners put in issue the overpriced construction of the town center; the
grossly disadvantageous bond flotation; the irrevocable assignment of the provincial government’s
annual regular income, including the IRA, to respondent RCBC to cover and secure the payment of the
bonds floated; and the lack of consultation and discussion with the community regarding the proposed
project, as well as a proper and legitimate bidding for the construction of the town center.

The respondents, on the other hand, assail the legal standing of petitioners to file the suit and that the
matter of contract entered into by the provincial government is in the nature of a political question

The trial court dismissed the case.

ISSUE: WON the petitioners have legal standing

HELD:

Petitioners have legal standing to sue as taxpayers

A taxpayer is allowed to sue where there is a claim that public funds are illegally disbursed, or that the
public money is being deflected to any improper purpose, or that there is wastage of public funds
through the enforcement of an invalid or unconstitutional law. 39 A person suing as a taxpayer, however,
must show that the act complained of directly involves the illegal disbursement of public funds derived
from taxation. 40 He must also prove that he has sufficient interest in preventing the illegal expenditure
of money raised by taxation and that he will sustain a direct injury because of the enforcement of the
questioned statute or contract. 41 In other words, for a taxpayer’s suit to prosper, two requisites must be
met: (1) public funds derived from taxation are disbursed by a political subdivision or instrumentality
and in doing so, a law is violated or some irregularity is committed and (2) the petitioner is directly
affected by the alleged act. 42

In light of the foregoing, it is apparent that contrary to the view of the RTC,

a taxpayer need not be a party to the contract to challenge its validity. 43 As long as taxes are involved,
people have a right to question contracts entered into by the government.
In this case, although the construction of the town center would be primarily sourced from the proceeds
of the bonds, which respondents insist are not taxpayer’s money, a government support in the amount
of P187 million would still be spent for paying the interest of the bonds. 44 In fact, a Deed of
Assignment 45 was executed by the governor in favor of respondent RCBC over the Internal Revenue
Allotment (IRA) and other revenues of the provincial government as payment and/or security for the
obligations of the provincial government under the Trust Indenture Agreement dated September 17,
2003. Records also show that on March 4, 2004, the governor requested the Sangguniang
Panlalawigan to appropriate an amount of P25 million for the interest of the bond. 46Clearly, the first
requisite has been met.

As to the second requisite, the court, in recent cases, has relaxed the stringent "direct injury test"
bearing in mind that locus standi is a procedural technicality. 47 By invoking "transcendental
importance", "paramount public interest", or "far-reaching implications", ordinary citizens and taxpayers
were allowed to sue even if they failed to show direct injury. 48 In cases where serious legal issues were
raised or where public expenditures of millions of pesos were involved, the court did not hesitate to give
standing to taxpayers. 49

We find no reason to deviate from the jurisprudential trend.

To begin with, the amount involved in this case is substantial at P231,908,232.39. What is more, the
provincial government would be shelling out a total amount of P187 million for the period of seven
years by way of subsidy for the interest of the bonds. Without a doubt, the resolution of the present
petition is of paramount importance to the people of Cagayan who at the end of the day would bear the
brunt of these agreements.

Another point to consider is that local government units now possess more powers, authority and
resources at their disposal, 56 which in the hands of unscrupulous officials may be abused and misused to
the detriment of the public. To protect the interest of the people and to prevent taxes from being
squandered or wasted under the guise of government projects, a liberal approach must therefore be
adopted in determining locus standi in public suits.

CASE JUSTICIABLE

A political question is a question of policy, which is to be decided by the people in their sovereign
capacity or by the legislative or the executive branch of the government to which full discretionary
authority has been delegated.57

the issues raised in the petition do not refer to the wisdom but to the legality of the acts complained of.
Thus, we find the instant controversy within the ambit of judicial review. Besides, even if the issues were
political in nature, it would still come within our powers of review under the expanded jurisdiction
conferred upon us by Section 1, Article VIII of the Constitution, which includes the authority to
determine whether grave abuse of discretion amounting to excess or lack of jurisdiction has been
committed by any branch or instrumentality of the government. 

Tiu v CA
FACTS: RA 7227 created the Subic Special Economic Zone in the lands occupied by the Subic Naval Base.
The SEZ was to be operated and managed as a separate customs territory ensuring free flow or
movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as
well as provided with incentives such as tax and duty-free importations of raw materials, capital and
equipment. 

EO 97-A, on the other hand, provided for the area within which the tax-and-duty-free privilege was
operative which was only in the Secured Area consisting of the presently fenced-in former Subic Naval
Base. Business enterprises and individuals (Filipinos and foreigners) residing within the  Secured Area are
free to import raw materials, capital goods, equipment, and consumer items tax and duty-
free. Consumption items, however, must be consumed within the Secured Area. Removal of raw
materials, capital goods, equipment and consumer items out of the Secured Area for sale to non-SSEFPZ
registered enterprises shall be subject to the usual taxes and duties, except as may be provided herein

the petitioners challenged before this Court the constitutionality of EO 97-A for allegedly being violative
of their right to equal protection of the laws. Executive Order No. 97-A (EO 97-A), according to which the
grant and enjoyment of the tax and duty incentives authorized under Republic Act No. 7227 (RA 7227)
were limited to the business enterprises and residents within the fenced-in area of the Subic Special
Economic Zone (SSEZ). petitioners contend that the SSEZ encompasses (1) the City of Olongapo, (2) the
Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base. 

espondent Court held that there is no substantial difference between the provisions of EO 97-A and
Section 12 of RA 7227. In both, the Secured Area is precise and well-defined as xxx the lands occupied by
the Subic Naval Base. The appellate court concluded that such being the case, petitioners could not
claim that EO 97-A is unconstitutional, while at the same time maintaining the validity of RA 7227.

ISSUE: whether the provisions of Executive Order No. 97-A confining the application of R.A. 7227 within
the secured area and excluding the residents of the zone outside of the secured area is discriminatory or
not.[4]

HELD:

the real concern of RA 7227 is to convert the lands formerly occupied by the US military bases into
economic or industrial areas. In furtherance of such objective, Congress deemed it necessary to extend
economic incentives to attract and encourage investors, both local and foreign. Among such
enticements are:[11] (1) a separate customs territory within the zone, (2) tax-and-duty-free importations,
(3) restructured income tax rates on business enterprises within the zone, (4) no foreign exchange
control, (5) liberalized regulations on banking and finance, and (6) the grant of resident status to certain
investors and of working visas to certain foreign executives and workers.

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the
law, (3) not be limited to existing conditions only, and (4) apply equally to all members of the same class.
[9]

Certainly, there are substantial differences between the big investors who are being lured to establish
and operate their industries in the so-called secured area and the present business operators outside
the area. On the one hand, we are talking of billion-peso investments and thousands of new jobs. On the
other hand, definitely none of such magnitude. In the first, the economic impact will be national; in the
second, only local. Even more important, at this time the business activities outside the secured area are
not likely to have any impact in achieving the purpose of the law, which is to turn the former military
base to productive use for the benefit of the Philippine economy. There is, then, hardly any reasonable
basis to extend to them the benefits and incentives accorded in RA 7227.  Additionally, as the Court of
Appeals pointed out, it will be easier to manage and monitor the activities within the secured area,
which is already fenced off, to prevent fraudulent importation of merchandise or smuggling.

It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws. [13] As
long as there are actual and material differences between territories, there is no violation of the
constitutional clause. And of course, anyone, including the petitioners, possessing the requisite
investment capital can always avail of the same benefits by channeling his or her resources or business
operations into the fenced-off free port zone.

We believe that the classification set forth by the executive issuance does not apply merely to existing
conditions. As laid down in RA 7227, the objective is to establish a self-sustaining, industrial,
commercial, financial and investment center in the area. There will, therefore, be a long-term difference
between such investment center and the areas outside it.

Lastly, the classification applies equally to all the resident individuals and businesses within the secured
area. The residents, being in like circumstances or contributing directly to the achievement of the end
purpose of the law, are not categorized further. Instead, they are all similarly treated, both in privileges
granted and in obligations required.

Chamber of Real Estate and Builders Assn v Executive Secretary

FACTS: Under the Minimum Corporate Income Tax (MCIT) Scheme, corporations are assessed 2% of its
gross income when such MCIT is greater than the normal corporate income tax imposed whenever such
corporation has zero or negative taxable income or whenever the amount of minimum corporate
income tax is greater than the normal income tax due from such corporation.

CREBA argues that this scheme is confiscatory because it levies income tax even if there is no realized
gain. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into account. [31] Thus, pegging the
tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not realized gain.

ISSUE: WON the MCIT is confiscatory because it taxes capital instead of income and does not allow for
deductions

HELD: NO.

Petitioner is correct in saying that income is distinct from capital. [44] Income means all the wealth which
flows into the taxpayer other than a mere return on capital.Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a definite period of time. [45] Income
is gain derived and severed from capital. [46] For income to be taxable, the following requisites must exist:

 (1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. [47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.  In
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the
capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed  in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the
base the corporations gross income.

Besides, 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. [49]

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in

many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity
of taxation.[50]

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax. [56]This is because
deductions are a matter of legislative grace.[57]

petitioner Chamber of Real Estate and Builders Associations, Inc. (CREBA), an association of real estate
developers and builders, is questioning the constitutionality of Section 27 (E) of Republic Act (RA)
8424[2] and the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement
said provision and those involving creditable withholding taxes

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations
and creditable withholding tax (CWT) on sales of real properties classified as ordinary assets.

1. Petitioner argues that the MCIT violates the due process clause because it levies income tax
even if there is no realized gain.

 Section 27(E) of RA 8424 provides for MCIT on domestic corporations. Under the MCIT scheme, a
corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross income
when such MCIT is greater than the normal corporate income tax imposed under Section 27(A). [4]  If the
regular income tax is higher than the MCIT, the corporation does not pay the MCIT.  Any excess of the
MCIT over the normal tax shall be carried forward and credited against the normal income tax for the
three immediately succeeding taxable years.  The MCIT Scheme is implemented by RR 9-98 which states
that the MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due
from such corporation.

2. Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-
98, and Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures
for the collection of CWT on the sale of real properties categorized as ordinary assets. Petitioner
contends that these revenue regulations are contrary to law for two reasons: first, they ignore
the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent
Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross
selling price or fair market value of the real properties classified as ordinary assets.

 Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.

Respondents contend that there is no actual case calling for the exercise of judicial power and it is not
yet ripe for adjudication because [petitioner] did not allege that CREBA, as a corporate entity, or any of
its members, has been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real
property. Neither did petitioner allege that its members have shut down their businesses as a result of
the payment of the MCIT or CWT. 

ISSUE: (1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

HELD:

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota  of the case

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute.[11] On the other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it. [12]

Contrary to respondents assertion, we do not have to wait until petitioners members have shut down
their operations as a result of the MCIT or CWT. The assailed provisions are already being
implemented. As we stated in Didipio Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v.
Gozun:[13]

 By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said
to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial duty. [14]

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege any
material interest or any wrong that it may suffer from the enforcement of [the assailed provisions]. [15]

 Legal standing or locus standi is a partys personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged. [16] In Holy
Spirit Homeowners Association, Inc. v. Defensor,[17] we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing
the true income of corporations. [21] It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control and enforce. It is a
means to ensure that everyone will make some minimum contribution to the support of the public
sector. The congressional deliberations on this are illuminating:

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make a
reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters. [23]

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income,
it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its operations. [25] This grace period allows a new
business to stabilize first and make its ventures viable before it is subjected to the MCIT. [26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years. [27]

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.[28]

MCIT IS NOT VIOLATIVE OF DUE PROCESS

 Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into account. [31] Thus, pegging the
tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital because
gross income, unlike net income, is not realized gain

Petitioner is correct in saying that income is distinct from capital. [44] Income means all the wealth which
flows into the taxpayer other than a mere return on capital.Capital is a fund or property existing at one
distinct point in time while income denotes a flow of wealth during a definite period of time. [45] Income
is gain derived and severed from capital. [46] For income to be taxable, the following requisites must exist:

 (1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation. [47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income.  In
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the
capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed  in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the
base the corporations gross income.

Besides, 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. [49]

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in

many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity
of taxation.[50]

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax. [56]This is because
deductions are a matter of legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base
of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

RR 9-98

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on
gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to
be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or negative taxable income.

CWT

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003
were promulgated with grave abuse of discretion amounting to lack of jurisdiction and patently in
contravention of law[62] because they ignore such distinctions. Petitioners conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value
(FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.[63]

The withholding tax system is a procedure through which taxes (including income taxes) are collected.
[61]
 Under Section 57 of RA 8424, the types of income subject to withholding tax are divided into three
categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at source
and (c) tax-free covenant bonds.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION OF CWT ON SALES OF REAL
PROPERTY CONSIDERED AS ORDINARY ASSETS
We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws. [66] The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the governments cash
flow.[67] This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means
and remedies.[68]

Respondent Secretary has the authority to require the withholding of a tax on items of income payable
to any person, national or juridical, residing in the Philippines. Such authority is derived from Section
57(B) of RA 8424

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B)
to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax
is imposed on the income payable and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF INDIVIDUALS OR CORPORATIONS
ENGAGED IN THE REAL ESTATE BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business
income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. [69] They are installments on the annual tax which may be due at the end of the
taxable year.[70] The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is obligated to
withhold the tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net
income at the end of the taxable year. Instead, said withholding agents knowledge and privity are
limited only to the particular transaction in which he is a party. In such a case, his basis can only be the
GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.

NO BLURRING OF DISTINCTIONS
BETWEEN ORDINARY ASSETS AND CAPITAL ASSETS
 
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized
as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6%
on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final
tax is also withheld at source.[72]
 The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and
CWT are distinguished as follows:
 
 
FWT CWT
a) The amount of income tax a) Taxes withheld on certain income
withheld by the withholding agent is payments are intended to equal or at
constituted as a full and final least approximate the tax due of the
payment of the income tax due from payee on said income.
the payee on the said income.
 
b)The liability for payment of the tax b) Payee of income is required to
rests primarily on the payor as a report the income and/or pay the
withholding agent. difference between the tax withheld
and the tax due on the income. The
payee also has the right to ask for a
refund if the tax withheld is more than
the tax due.
c) The payee is not required to file  
an income tax return for the
c) The income recipient is still required
particular income.[73]
to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of
the NIRC, as amended.[74]
 
As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed
on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioners contention that ordinary assets are being lumped together with, and treated similarly as,
capital assets in contravention of the pertinent provisions of RA 8424.
 
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are
contrary to the provisions of RA 8424 on the manner and time of filing of the return, payment and
assessment of income tax involving ordinary assets. [75]
The fact that the tax is withheld at source does not automatically mean that it is treated exactly
the same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of
the CWT. The withholding agent/buyers act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.
NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)
(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
33; and 282 of this Code on specified items of income shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to the same conditions as provided in Section 58 of this
Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

 This line of reasoning is non sequitur.

 Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:

 if the income is generated in the active pursuit and performance of the corporations primary purposes,
the same is not passive income[76]

 It is income generated by the taxpayers assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received
from savings.

 On the other hand, Section 57(B) provides that the Secretary can require a CWT on income payable to
natural or juridical persons, residing in the Philippines. There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.
 Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter
encompasses any income other than those listed in 57(A). Since the law itself makes distinctions, it is
wrong to regard 57(A) and 57(B) in the same way.

NO DEPRIVATION OF PROPERTY

WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the
end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the
taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process requirement applies to the
power to tax.[79] The CWT does not impose new taxes nor does it increase taxes. [80] It relates entirely to
the method and time of payment.

NO VIOLATION OF EQUAL PROTECTION

 Petitioner claims that the revenue regulations are violative of the equal protection clause because the
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate
business is involved in a continuous process of production and it incurs costs and expenditures on a
regular basis. The only difference is that goods produced by the real estate business are house and lot
units.[84]

The taxing power has the authority to make reasonable classifications for purposes of taxation.
[87]
 Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe
no constitutional limitation.[88] The real estate industry is, by itself, a class and can be validly treated
differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger and
its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

 
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.

Commissioner v TODA
FACTS: a Notice of Assessment sent to Cibeles Insurance Corporation (CIC) by the Commissioner of
Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey
commercial building known as Cibeles Building against the estate of Toda.

Toda, deceased, was the president of CIC and owner of 99.991% of its issued and outstanding capital
stock. Toda was authorized to sell the Cibeles Building and the two parcels of land on which the building
stands.

Toda sold it for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same
day to Royal Match Inc. (RMI) for P200 million.

For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]

On 16 April 1990, CIC filed its corporate annual income tax return [7] for the year 1989, declaring, among
other things, its gain from the sale of real property in the amount ofP75,728.021. After crediting
withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.

On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as
evidenced by a Deed of Sale of Shares of Stocks.

Three and a half years later, or on 16 January 1994, Toda died.

On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice [10] and demand letter
to the CIC for deficiency income tax for the year 1989 in the amount ofP79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the
old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax
liabilities for the fiscal years 1987-1989.

In the letter dated 19 October 1995, [14] the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in the income structure of
the proceeds of the sale of the two parcels of land and the building thereon to an individual capital
gains, thus evading the higher corporate income tax rate of 35%.

the Commissioner argued that the two transactions actually constituted a single sale of the property by
CIC to RMI, and that Altonaga was neither the buyer of the property from CIC nor the seller of the same
property to RMI. The additional gain of P100 million (the difference between the second simulated sale
for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of
only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income
tax of CIC.
Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the
remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable
for the deficiency income tax, especially because the gains realized from the sale were withdrawn by
him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer
for his liability.

CTA Ruling: the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the
government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted
by CIC, the same constituted mere tax avoidance, and not tax evasion.

CA Ruling: the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more
advantageously situated and having the necessary expertise in matters of taxation, is better situated to
determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda
Estate

ISSUE: 1. Is this a case of tax evasion or tax avoidance?

2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?

HELD:

Is this a case of tax evasion

or tax avoidance?

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. [23]

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. [24]

All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior
to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received  P40
million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and reflected in its trial
balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and
reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show that the real buyer of the
properties was RMI, and not the intermediary Altonaga.

The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one
of the many trusted corporate executives of Toda.
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate
tax planning. Such scheme is tainted with fraud.

Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is
taken of another.[30]

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital
gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring
title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the
property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a
tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of
the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income
tax liability.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the
mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion. [31]

Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.
[32]
 The incidence of taxation depends upon the substance of a transaction. The tax consequences arising
from gains from a sale of property are not finally to be determined solely by the means employed to
transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the
commencement of negotiations to the consummation of the sale is relevant. A sale by one person
cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through
which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms,
which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.[33]

To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of
our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. [34] The two sale
transactions should be treated as a single direct sale by CIC to RMI.

Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now
27 (A) of the Tax Reform Act of 1997), which stated as follows:

Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon
the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or
organized but not including general professional partnerships, in accordance with the following:

Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.

CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 1986 [35] (now 6% under Section 24 (D) (1) of
the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued
by the BIR must be upheld.

Has the period of

assessment prescribed?

No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of
a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance
of in the civil or criminal action for collection thereof .

Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,
falsification or omission, as the case may be.

As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years
from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was
claimed to have been discovered only on 8 March 1991. [37] The assessment for the 1989 deficiency
income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for
deficiency income tax was well within the prescriptive period.

Is respondent Estate liable

for the 1989 deficiency

income tax of Cibeles

Insurance Corporation?

A corporation has a juridical personality distinct and separate from the persons owning or composing it.
Thus, the owners or stockholders of a corporation may not generally be made to answer for the
liabilities of a corporation and vice versa. There are, however, certain instances in which personal
liability may arise. It has been held in a number of cases that personal liability of a corporate director,
trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:

1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or
other persons;

2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or

4. He is made, by specific provision of law, to personally answer for his corporate action. [38]

It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987,
1988, and 1989.

When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself
personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income
tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose
from Todas contractual undertaking, as contained in the Deed of Sale of Shares of Stock.

Smart Communications v City of Davao

FACTS: On February 18, 2002, Smart filed a special civil action for declaratory relief [3] for the
ascertainment of its rights and obligations under the Tax Code of the City of Davao, which imposes a
franchise tax on businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers
that its telecenter in Davao City is exempt from payment of franchise tax to the City.

The petition was denied. Hence the instant case.

Smart argues on the following grounds: (1) the in lieu of all taxes clause in Smarts franchise, Republic Act
No. 7294 (RA 7294), covers local taxes; the rule of strict construction against tax exemptions is not
applicable; (2) the in lieu of all taxes clause is not rendered ineffective by the Expanded VAT Law; (3)
Section 23 of Republic Act No. 7925[4] (RA 7925) includes a tax exemption; and (4) the imposition of a
local franchise tax on Smart would violate the constitutional prohibition against impairment of the
obligation of contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smarts
legislative franchise contains the contentious in lieu of all taxes clause. The Section reads:
Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the same taxes on
their real estate buildings and personal property, exclusive of this franchise, as other persons or
corporations which are now or hereafter may be required by law to pay. In addition thereto, the
grantee, its successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross
receipts of the business transacted under this franchise by the grantee, its successors or assigns and
the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the
grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the
National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter
enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

xxx[5]

Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality clause,
contains the word exemption, viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry Any advantage, favor,

privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall
ipso facto become part of previously granted telecommunications franchises and shall be accorded
immediately and unconditionally to the grantees of such franchises: Provided, however, That the
foregoing shall neither apply to nor affect provisions of telecommunications franchises concerning
territory covered by the franchise, the life span of the franchise, or the type of the service authorized by
the franchise.[6]

ISSUE: WON Smart is liable to pay for local franchise tax

HELD: YES

A review of the recent decisions of the Court on the matter of exemptions from local franchise tax and
the interpretation of the word exemption found in Section 23 of RA 7925 is imperative in order to
resolve this issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,[7] Digitel used as an

argument the in lieu of all taxes clauses/provisos found in the legislative franchises of Globe, [8] Smart
and Bell,[9] vis--vis Section 23 of RA 7925, in order to claim exemption from the payment of local
franchise tax. Digitel claimed, just like the petitioner in this case, that it was exempt from the payment
of any other taxes except the national franchise and income taxes. Digitel alleged that Smart was
exempted from the payment of local franchise tax.
However, it failed to substantiate its allegation, and, thus, the Court denied Digitels claim for exemption
from provincial franchise tax.  Cited was the ruling of the Court in PLDT v. City of Davao,[10] wherein the
Court, speaking through Mr. Justice Vicente V. Mendoza, held that in approving Section 23 of RA No.
7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications
entities. Section 23 cannot be considered as having amended PLDTs franchise so as to entitle it to
exemption from the imposition of local franchise taxes. The Court further held that tax exemptions are
highly disfavored and that a tax exemption must be expressed in the statute in clear language that
leaves no doubt of the intention of the legislature to grant such exemption. And, even in the instances
when it is granted, the exemption must be interpreted instrictissimi juris against the taxpayer and
liberally in favor of the taxing authority.

The Court also clarified the meaning of the word exemption in Section 23 of RA 7925: that the word
exemption as used in the statute refers or pertains merely to an exemption from regulatory or reporting
requirements of the Department of Transportation and Communication or the National Transmission
Corporation and not to an exemption from the grantees tax liability.

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna,[11] PLDT was a holder of a
legislative franchise under Act No. 3436, as amended. On August 24, 1991, the terms and conditions of
its franchise were consolidated under Republic Act No. 7082, Section 12 of which embodies the so-called
"in-lieu-of-all taxes" clause.Under the said Section, PLDT shall pay a franchise tax equivalent to three
percent (3%) of all its gross receipts, which franchise tax shall be "in lieu of all taxes."  The issue that the
Court had to resolve was whether PLDT was liable to pay franchise tax to the  Province of Laguna in view
of the in lieu of all taxes clause in its franchise and Section 23 of RA 7925.

Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts are
resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing
powers, the Court held that Section 23 of RA 7925 could not be considered as having amended
petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes.

In ruling against the claim of PLDT, the Court cited the previous decisions in  PLDT v. City of
Davao[12] and PLDT v. City of Bacolod,[13] in denying the claim for exemption from the payment of local
franchise tax.

 
In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the franchisee
is still liable to pay the local franchise tax, unless it is expressly and unequivocally exempted from the
payment thereof under its legislative franchise. The in lieu of all taxes clause in a legislative franchise
should categorically state that the exemption applies to both local and national taxes; otherwise, the
exemption claimed should be strictly construed against the taxpayer and liberally in favor of the taxing
authority.

Republic Act No. 7716, otherwise known as the Expanded VAT Law, did not remove or abolish the
payment of local franchise tax. It merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance
with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor
abolish the imposition of local franchise tax by cities or municipaties.

The power to tax by local government units emanates from Section 5, Article X of the Constitution which
empowers them to create their own sources of revenues and to levy taxes, fees and charges subject to
such guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not
inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the
national government. VAT inures to the benefit of the national government, while a local franchise tax is
a revenue of the local government unit.

PBCom v CIR
FACTS: In its annual ITR, PBCom reported net losses thereby showing no income tax liability for 1985-
1986. But during these two years, PBCom earned rental income from leased properties. The lessees
withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69
in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax
credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their
lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). 

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of
petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law. The petitioners claim for refund in 1986
amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by
PBCom against its tax payment in the succeeding year.

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on
the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states
that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and
that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within
ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads:
ISSUE: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the
ground of prescription, despite petitioners reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years?

HELD:

After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to
the petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it
disregards the two-year prescriptive period set by law.

Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds
for the State to finance the needs of the citizenry and to advance the common weal. [13] Due process of
law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so
because it is upon taxation that the government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes adopted to enforce the collection of taxes
levied should be summary and interfered with as little as possible. [14]

From the same perspective, claims for refund or tax credit should be exercised within the time fixed by
law because the BIR being an administrative body enforced to collect taxes, its functions should not be
unduly delayed or hampered by incidental matters.

Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides
for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally
collected,  viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. --  No suit or proceeding shall be maintained
in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without
authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a
claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment;
Provided however, That the Commissioner may, even without a written claim therefor, refund or credit
any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Italics supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced.  The two-year
prescriptive period provided, should be computed from the time of filing the Adjustment Return and
final payment of the tax for the year.

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period
of two years to ten years on claims of excess quarterly income tax payments, such circular created a
clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the
sense of more specific and less general interpretations of tax laws) which are issued from time to time
by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce it, is entitled to great respect by the
courts.Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to be
erroneous.[20] Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement. [21]

In the case of People vs. Lim,[22] it was held that rules and regulations issued by administrative officials to
implement a law cannot go beyond the terms and provisions of the latter.

CIR v Hantex Trading

FACTS: Hantex Trading Co is a company organized under the Philippines. It is engaged in the sale of
plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For
this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry)
with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October
1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information that the respondent had imported
synthetic resin amounting to P115,599,018.00 but only declaredP45,538,694.57. Thus, Hantex receive a
subpoena to present its books of account which it failed to do. The bureau cannot find any original
copies of the products Hantex imported since the originals were eaten by termites. Thus, the Bureau
relied on the certified copies of the respondent’s Profit and Loss Statement for 1987 and1988 on file
with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer,
as well as excerpts from the entries certified by Tomas and Danganan. The case was submitted to the
CTA which ruled that Hantex have tax deficiency and is ordered to pay, per investigation of the Bureau.
The CA ruled that the income and sales tax deficiency assessments issued by the petitioner were
unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax
of the respondent were not duly authenticated by the public officer charged with their custody, nor
verified under oath by the EIIB and the BIR investigators.

Issue: Whether or not the final assessment of the petitioner against the respondent for deficiency
income tax and sales tax for the latter’s 1987 importation of resins and calcium bicarbonate is based on
competent evidence and the law.

Held: Section 16 of the NIRC of 1977, as amended, provides that the Commissioner of Internal Revenue
has the power to make assessments and prescribe additional requirements for tax administration and
enforcement. Among such powers are those provided in paragraph (b), which provides that “Failure to
submit required returns, statements, reports and other documents. – When a report required by law as
a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time
fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable.” This
provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative
duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayer’s failure to file
one, or to amend a return already filed in the BIR. The “best evidence” envisaged in Section 16 of the
1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the
subject of the assessment process, the accounting records of other taxpayers engaged in the same line
of business, including their gross profit and net profit sales. Such evidence also includes data, record,
paper, document or any evidence gathered by internal revenue officers from other taxpayers who had
personal transactions or from whom the subject taxpayer received any income; and record, data,
document and information secured from government offices or agencies, such as the SEC, the Central
Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. However, the
best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere
photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency
assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered
as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are
of no probative value as basis for any deficiency income or business taxes against a taxpayer