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11. PCGG v. Cojuangco
Petitioner: Republic of the Philippines, represented by the Presidential Commission on Good
Government (PCGG)
Respondents: Cocofed, et al. and Ballares, et al., Eduardo M. Cojuangco Jr. and the
Sandiganbayan (First Division)
Facts:
Immediately after the 1986 EDSA Revolution, then President Corazon C. Aquino issued Executive
Order (EO) Nos. 1, 2 and 14. On the explicit premise that 'vast resources of the government have
been amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and close
associates both here and abroad,' the Presidential Commission on Good Government (PCGG) was
created by Executive Order No. 1 to assist the President in the recovery of the ill-gotten wealth thus
accumulated whether located in the Philippines or abroad. Executive Order No. 2 states that the ill-
gotten assets and properties are in the form of bank accounts, deposits, trust accounts, shares of
stocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds
of real and personal properties in the Philippines and in various countries of the world. Executive
Order No. 14, on the other hand, empowered the PCGG, with the assistance of the Office of the
Solicitor General and other government agencies, inter alia, to file and prosecute all cases
investigated by it under EO Nos. 1 and 2.
Pursuant to these laws, the PCGG issued and implemented numerous sequestrations, freeze
orders and provisional takeovers of allegedly ill-gotten companies, assets and properties, real or
personal.
Among the properties sequestered by the Commission were shares of stock in the United Coconut
Planters Bank (UCPB) registered in the names of the alleged "one million coconut farmers," the so-
called Coconut Industry Investment Fund companies (CIIF companies) and Private Respondent
Eduardo Cojuangco Jr. (hereinafter "Cojuangco").
The first division of the Sandiganbayan in Civil Case Nos. 0031-A, 0033-B, and 0033-P allowed
respondents COCOFED, et al, Ballares, et al, as well as Cojuangco, et al, to exercise their right to
vote their shares of stock and to be voted upon in the UCPB at the 6 March 2001 Stockholder’s
Meeting, and any subsequent continuation or resetting thereof. They were also permitted to
perform such acts as will normally follow in the exercise of these rights as stockholders. All of the
aforementioned persons are acknowledged registered stockholders of the UCPB.
The Republic of the Philippines (Republic) contended that the Sandiganbayan committed grave
abuse of discretion in enjoining the Presidential Commission on Good Government (PCGG) from
voting the sequestered shares of stock in the UCPB despite the fact that the sequestration shares
were purchased with coconut levy funds. The same funds were declared public in character. A
previous resolution allowed the PCGG to vote the sequestered shares.
Issues:
Do the coconut levy funds partake of the nature of taxes? If the answer is in the affirmative, do they
constitute public funds?
Court’s Ruling:
The Supreme Court held that the coconut levy funds partake of the nature of taxes. Consequently,
the government should be allowed to continue voting those shares inasmuch as they were
purchased with coconut levy funds – that are prima facie public in character or, at the very least,
are clearly affected with public interest.
Rationale:
The right to vote sequestered shares of stock registered in the names of private individuals or
entitles and alleged to have been acquired with ill-gotten wealth shall, as a rule, be exercised by the
registered owner. The PCGG may, however, be granted such voting right provided in can (1) show
prima facie evidence that the wealth and/or the shares are indeed ill-gotten; and (2) demonstrate
imminent danger of dissipation of the assets, thus necessitating their continued sequestration and
voting by the government until a decision, ruling with finality on their ownership, is promulgated by
the proper court.
Coconut levy funds partake of the nature of taxes which, in general, are enforced proportional
contributions from persons and properties, exacted by the State by virtue of its sovereignty for the
support of government and for all public needs.
Based on this definition, a tax has three elements, namely: a) it is an enforced proportional
contribution from persons and properties; b) it is imposed by the State by virtue of its sovereignty;
and c) it is levied for the support of the government. Taxation is done not merely to raise revenues
to support the government, but also to provide means for the rehabilitation and the stabilization of a
threatened industry, which is so affected with public interest as to be within the police power of the
State
To avoid misunderstanding and confusion, the Court was categorical and positive than its earlier
pronouncements: the coconut levy funds are not only affected with public interest; they are, in fact,
prima facie public funds.
Public funds are those moneys belonging to the State or to any political subdivision of the State;
more specifically, taxes, customs duties and moneys raised by operation of law for the support of
the government or for the discharge of its obligations.
Having conclusively shown that the sequestered UCPB shares were purchased with coconut levies,
the Court held that these funds and shares are, at the very least, affected with public interest.
12. CIR v PLDT
Petitioner: Commissioner of Internal Revenue
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 TAXATION1 CASE DIGESTS
Respondent: Philippine Long Distance Telephone Company
Facts:
This is a petition for review and reversal of the decision of the CA affirming the Court of Tax
Appeals (CTA) decision in favor of PLDT and against the CIR for taxes paid to the Bureau of
Internal Revenue (BIR) in connection with its importation from 1992 to 1994 of equipment,
machineries and spare parts.
For equipment, machineries and spare parts it imported for its business on different dates from
October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken
down as follows: (a) compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00
and other internal revenue taxes of P25,337,697.00. For similar importations made between March
1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT).
As a franchise holder of a grant to install, operate, and maintain telecommunications facilities
throughout the Philippines, PLDT was entitled to a tax exemption privilege under Sec12 or RA7082
(grant of franchise) reads:
Sec. 12. The grantee … 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 are now or hereafter may be required by law to pay. In addition thereto, the
grantee, … shall pay a franchise tax equivalent to three percent (3%) of all gross receipts
of the telephone or other telecommunications businesses 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 … shall continue to
be liable for income taxes payable under Title II of the National Internal Revenue Code
pursuant to Sec. 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.
In view thereof, PLDT wrote a letter to the BIR requesting confirmation of its exemption privilege. In
response, the BIR deemed PLDT liable for the 3% franchise tax and exempt from VAT on its
importation of equipment, machineries and spare parts needed in its franchise operations,
confirming PLDT’s exemption privilege.
Armed with the BIR ruling, PLDT filed a claim for tax credit/refund of the VAT, compensating taxes,
advance sales taxes and other taxes it had been paying erroneously from October, 1992-
December, 1994. In February, 1998, the CTA granted this petition, although ruling that a portion
(from Oct-Dec16, 1992 had already prescribed and was beyond the 2-yr period allowed by law for
refunds) The CIR was thereby ordered to REFUND or to ISSUE in favor of petitioner a Tax Credit
Certificate in the reduced amount of P223,265,276.00 representing erroneously paid value-added
taxes, compensating taxes, advance sales taxes and other BIR taxes on its importation of
equipments (sic), machineries and spare parts for the period covering the taxable years 1992 to
1994. This decision was punctuated by a dissenting opinion of Judge Amancio Saga who clarified
that the “in lieu of” provision of Sec12 refers only to direct taxes and not to indirect taxes such as
VAT, compensating tax, and advance sales tax.
The BIR moved for reconsideration and the same was denied. This was elevated to the CA on
appeal, and the appeal was dismissed. Thus, the elevation to the SC.
Issue:
WON THE CA ERRED IN HOLDING THAT PLDT IS EXEMPT FROM THE PAYMENT OF VALUE-
ADDED TAXES, COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR TAXES
ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS FRANCHISE THAT THE 3%
FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BE IN LIEU OF ALL TAXES ON ITS
FRANCHISE OR EARNINGS THEREOF.
Held:
YES, The CA erred in holding that PLDT is exempt from the payment of VAT, etc in lieu of all taxes
on its franchise or earnings.
Rationale:
The court has ruled, time and again, that taxation is the rule, Exemption is the exception.
Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority. To him, therefore, who claims a refund or
exemption from tax payments rests the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted.
The clause “in lieu of all taxes” in Section 12 of RA 7082 is immediately followed by the limiting or
qualifying clause “on this franchise or earnings thereof”, suggesting that the exemption is limited to
taxes imposed directly on PLDT since taxes pertaining to PLDT’s franchise or earnings are its
direct liability. Accordingly, indirect taxes, not being taxes on PLDT’s franchise or earnings, are
outside the purview of the “in lieu” provision.
The 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing
articles. It is not a tax on the franchise of a business enterprise or on its earnings. It is imposed on
all taxpayers who import goods (unless such importation falls under the category of an exempt
transaction under Sec. 109 of the Revenue Code) whether or not the goods will eventually be sold,
bartered, exchanged or utilized for personal consumption. The VAT on importation replaces the
advance sales tax payable by regular importers who import articles for sale or as raw materials in
the manufacture of finished articles for sale.
Other Learnings:
1. Direct taxes are those that are exacted from the very person who, it is intended or
desired, should pay them; they are impositions for which a taxpayer is directly liable on
the transaction or business he is engaged in.
2. On the other hand, indirect taxes are those that are demanded, in the first instance, from,
or are paid by, one person in the expectation and intention that he can shift the burden to
someone else. Stated otherwise, indirect taxes are taxes wherein the liability for the
payment of the tax falls on one person but the burden thereof can be shifted or passed
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 TAXATION1 CASE DIGESTS

on to another person, such as when the tax is imposed upon goods before reaching the
consumer who ultimately pays for it.

a. Advance sales tax has the attributes of an indirect tax because the tax-paying
importer of goods for sale or of raw materials to be processed into
merchandise can shift the tax or, to borrow from Philippine Acetylene Co, Inc.
vs. Commissioner of Internal Revenue, lay the “economic burden of the tax”,
on the purchaser, by subsequently adding the tax to the selling price of the
imported article or finished product.

b. Compensating tax also partakes of the nature of an excise tax payable by all
persons who import articles, whether in the course of business or not. The
rationale for compensating tax is to place, for tax purposes, persons
purchasing from merchants in the Philippines on a more or less equal basis
with those who buy directly from foreign countries.

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14. PLANTERS PRODUCTS, INC., vs. FERTIPHIL CORPORATION.

Facts:

President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which
provided, among others, for the imposition by the Fertilizer Pesticide Authority (FPA) of a capital
recovery component (CRC) on thedomestic sale of all grades of fertilizers in the Philippines. The
goal is to make and keep respondent PPI viable. After the1986 Edsa Revolution, FPA voluntarily
stopped the imposition of the P10 levy. With the return of democracy, Fertiphildemanded from PPI
a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the
demandFertiphil filed a complaint for collection and damages against FPA and PPI with the RTC in
Makati. It questioned theconstitutionality of LOI No. 1465 for being unjust, unreasonable,
oppressive, invalid and an unlawful imposition thatamounted to a denial of due process of law.
FPA, through the Solicitor General, countered that the issuance of LOI No.1465 was a valid
exercise of the police power of the State in ensuring the stability of the fertilizer industry in the
country

Issue/Held:

Whether the levy is in exercise of police power or taxation power- YES

Ratio:

We agree with the RTC that the imposition of the levy was an exercise by the State of its taxation
power. While itis true that the power of taxation can be used as an implement of police power, the
primary purpose of the levy isrevenue generation. If the purpose is primarily revenue, or if revenue
is, at least, one of the real and substantial purposes,then the exaction is properly called a tax.

An inherent limitation on the power of taxation is public purpose. Taxes areexacted only for a
public purpose. They cannot be used for purely private purposes or for the exclusive benefit
of private persons.

The purpose of a law is evident from its text or inferable from other secondary sources. Here, we
agree with the RTC and that CA that the levy imposed under LOI No. 1465 was not for a public
purpose because it expressly provided that the levy be imposed to benefit PPI, a private company.

Note: The operative act doctrine states that acts done when a law was actually constitutional are
valid even when that law is later repealed. In this case, LOI 1465 was actually unconstitutional to
begin with, PPI is not precluded from paying back the money granted to it by the said law.

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 TAXATION1 CASE DIGESTS

the tax is imposed upon goods before reaching the consumer who ultimately pays for it. On the
other hand, in case of withholding of taxes, the incidence and burden of taxation fall on the same
26. Asia International Auctioneers, Inc. v. Commissioner of Internal Revenue entity, the statutory taxpayer. The burden of taxation is not shifted to the withholding agent who
merely collects, by withholding, the tax due from income payments to entities arising from certain
Facts: transactions and remits the same to the government. Due to this difference, the deficiency VAT and
excise tax cannot be deemed as withholding taxes merely because they constitute indirect
On August 25, 2004, Asia International Auctioneers, Inc. (“AIA” for brevity), a corporation taxes. Asia International Auctioneers, Inc. vs. Commissioner of Internal Revenue, G.R. No.
Operating within the Subic Special Economic Zone and is engaged in the importation and selling of 179115. September 26, 2012.
used motor vehicles and heavy equipment, was assessed by the Commissioner of Internal
Revenue (“CIR”) for deficiency Value Added Tax and Excise Tax in the amounts of P
102,535,520.00 and P4,334,715.00, respectively, or a total amount of P 106,870,235.00, inclusive
of penalties and interest, for auction sales conducted on February 5, 6, 7, and 8, 2004.AIA claimed
that it filed a timely protest letter through registered mail on August 30, 2004 and submitted
additional supporting documents on September 24, 2004 and November 22, 2004. CIR’s failure to
act on the protest prompted AIA to file a petition for review before the Court of Tax Appeals on June
20, 2005. However, the CIR filed a motion to dismiss on the ground of lack of jurisdiction since
AIA’s failure to file its protest within the 30-day reglamentary period rendered the assessment final
and executory. After trial, the Court of Tax Appeals First Division ruled that there was no sufficient
evidence to prove the receipt of the protest letter by the CIR. AIA filed a motion for reconsideration
but was denied; hence, this petition for review. On January 30, 2008, AIA filed a Manifestation and
Motion with Leave of the Honorable Court to Defer or Suspend Further Proceedings since it availed
of the Tax Amnesty Program under Republic Act 9480, known as the Tax Amnesty Act of 2007. On
February 5, 2008, the Bureau of Internal Revenue issued a Certification of Qualification stating that
AIA “has availed and qualified for Tax Amnesty for Taxable Year 2005 and Prior Years” pursuant to
RA 9480.

Issue:

Is AIA disqualified from availing itself of the Tax Amnesty under Section 8 (a) of RA 9480?

Held:

No. Under Section 8 (a) of the RA 9480 withholding agents with respect to their withholding tax
liabilities shall be disqualified to avail of the tax amnesty. In this case, AIA was not being assessed
as withholding agent that failed to withhold or remit the deficiency VAT and excise tax but as a
taxpayer who is directly liable for the said taxes. Moreover, RA 9480 does not exclude from its
coverage taxpayers operating within special economic zones. Hence, AIA is qualified to avail of the
Tax Amnesty under RA 9480.

Note: Indirect Taxes vs. Withholding Taxes. The Commissioner of Internal Revenue (CIR)
contends that taxpayer is disqualified to avail itself of amnesty under Republic Act No. 9480
because it is “deemed” a withholding agent for deficiency value-added tax (VAT) and excise taxes.
The CIR did not assess taxpayer as a withholding agent that failed to withhold or remit the
deficiency VAT and excise tax to the Bureau of Internal Revenue under the relevant provisions of
the National Internal Revenue Code. Indirect taxes, like value-added tax (VAT) and excise tax, are
different from withholding taxes. To distinguish, in indirect taxes, the incidence of taxation falls on
one person but the burden thereof can be shifted or passed on to another person, such as when

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LIMITATIONS ON THE POWER OF TAXATION
A. INHERENT LIMITATIONS
27. PASCUAL VS. SEC OF PUBLIC WORKS
FACTS:
In 1953, RA 920 was passed. This law appropriated P85,000.00 “for the construction,
reconstruction, repair, extension and improvement” of “Pasig feeder road terminals. Pascual, then
governor of Rizal, assailed the validity of the law. He claimed that the appropriation was actually
going to be used for private use for the terminals sought to be improved were part of the Antonio
Subdivision. The said Subdivision is owned by Senator Zulueta who was a member of the same
Senate that passed and approved the same RA. Pascual claimed that Zulueta misrepresented in
Congress the fact that he owns those terminals and that his property would be unlawfully enriched
at the expense of the taxpayers if the said RA would be upheld. Pascual then prayed that the Sec
of Public Works be restrained from releasing funds for such purpose. Zulueta, on the other hand,
perhaps as an afterthought, donated the said property to the City of Pasig.
ISSUE:
Whether or not the appropriation is valid.
HELD:
The donation of the property to the government to make the property public does not cure the
constitutional defect. The fact that the law was passed when the said property was still a private
property cannot be ignored. “In accordance with the rule that the taxing power must be exercised
for public purposes only, money raised by taxation can be expanded only for public purposes and
not for the advantage of private individuals.” Inasmuch as the land on which the projected feeder
roads were to be constructed belonged then to Zulueta, the result is that said appropriation sought
a private purpose, and, hence, was null and void. The rule is that if the public advantage or benefit
is merely incidental in the promotion of a particular enterprise, suchdefect shall render the
law invalid. On the other hand, if what is incidental is the promotion of a private enterprise, the tax
law shall bedeemed ―for public purpose‖
28. PEPSI-COLA v. Municipal of Leyte
FACTS:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294,
challenging the power of taxation delegated to municipalities under the Local Autonomy Act
(Republic Act No. 2264, as amended, June 19, 1959).
On February 14, 1963, 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 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.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state
that, first, 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 one-sixteenth (1/16) of a centavo
for every bottle of soft drink corked." For the purpose of computing the taxes due, the person, firm,
company or corporation producing soft drinks shall submit to the Municipal Treasurer a monthly
report, of the total number of bottles produced and corked during the month.
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 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.
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:
The constitutionality of Section 2 of Republic Act No. 2264 is hereby upheld and Municipal
Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing Municipal
Ordinance No. 23 is hereby declared of valid and legal effect.
• 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
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 TAXATION1 CASE DIGESTS
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 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.
• The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
soft drinks, produced or manufactured, or an equivalent of 1-½ centavos per case,
cannot be considered unjust and unfair. An increase in the tax alone would not support
the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations are
allowed much discretion in determining the rates of imposable taxes. This is in line with
the constitutional policy of according the widest possible autonomy to local governments
in matters of local taxation, an aspect that is given expression in the Local Tax Code (PD
No. 231, July 1, 1973). Unless the amount is so excessive as to be prohibitive, courts
will go slow in writing off an ordinance as unreasonable.
29. MIAA vs. City of Paranaque
FACTS:
The Manila International Airport Authority (MIAA) operates the Ninoy Aquino International
Airport (NAIA) Complex in Parañaque City under Executive Order No. 903 (MIAA Charter), as
amended. As such operator, it administers the land, improvements and equipment within the
NAIA Complex. In March 1997, the Office of the Government Corporate Counsel (OGCC)
issued Opinion No. 061 to the effect that the Local Government Code of 1991 (LGC) withdrew
the exemption from real estate tax granted to MIAA under Section 21of its Charter. Thus,
MIAA paid some of the real estate tax already due. In June 2001, it received Final Notices of
Real Estate Tax Delinquency from the City of Parañaque for the taxable years 1992 to 2001.
The City Treasurer subsequently issued notices of levy and warrants of levy on the airport
lands and buildings. At the instance of MIAA, the OGCC issued Opinion No. 147 clarifying
Opinion No. 061, pointing out that Sec. 206 of the LGC requires persons exempt from real
estate tax to show proof of exemption. According to the OGCC, Sec. 21 of the MIAA Charter is
the proof that MIAA is exempt from real estate tax. MIAA, thus, filed a petition with the Court of
Appeals seeking to restrain the City of Paranaque from imposing real estate tax on, levying
against, and auctioning for public sale the airport lands and buildings, but this was dismissed
for having been filed out of time. Hence, MIAA filed this petition for review, pointing out that it
is exempt from real estate tax under Sec. 21 of its charter and Sec. 234 of the LGC. It invokes
the principle that the government cannot tax itself as a justification for exemption, since the
airport lands and buildings, being devoted to public use and public service, are owned by the
Republic of the Philippines. On the other hand, the City of Parañaque invokes Sec. 193 of the
LGC, which expressly withdrew the tax exemption privileges of government-owned and
controlled corporations (GOCC) upon the affectivity of the LGC.It asserts that an international
airport is not among the exceptions mentioned in the said law. Meanwhile, the City of
Parañaque posted and published notices announcing the public auction sale of the airport
lands and buildings. In the afternoon before the scheduled public auction, MIAA applied with
the Court for the issuance of a TRO to restrain the auction sale. The Court issued a TRO on
the day of the auction sale, however, the same was received only by the City of Parañaque
three hours after the sale.
ISSUE:
Whether or not the airport lands and buildings of MIAA are exempt from real estate tax?
HELD:
The airport lands and buildings of MIAA are exempt from real estate tax imposed by local
governments. Sec. 243(a) of the LGC exempts from real estate tax any real property owned
by the Republic of the Philippines. This exemption should be read in relation with Sec.133(o)
of the LGC, which provides that the exercise of the taxing powers of local governments shall
not extend to the levy of taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities.
These provisions recognize the basic principle that local governments cannot tax the national
government, which historically merely delegated to local governments the power to tax. The
rule is that a tax is never presumed and there must be clear language in the law imposing the
tax. This rule applies with greater force when local governments seek to tax national
government instrumentalities. Moreover, a tax exemption is construed liberally in favor of
national government instrumentalities. MIAA is not a GOCC, but an instrumentality of the
government. The Republic remains the beneficial owner of the properties. MIAA itself is owned
solely by the Republic. At any time, the President can transfer back to the Republic title tithe
airport lands and buildings without the Republic paying MIAA any consideration. As long as
the airport lands and buildings are reserved for public use, their ownership remains with the
State. Unless the President issues a proclamation withdrawing these properties from public
use, they remain properties of public dominion. As such, they are inalienable, hence, they are
not subject to levy on execution or foreclosure sale, and they are exempt from real estate tax.
However, portions of the airport lands and buildings that MIAA leases to private entities are
not exempt from real estate tax. In such a case, MIAA has granted the beneficial use of such
portions for a consideration to a taxable person
30. SEA-LAND SERVICE, INC. VS. COURT OF APPEALS
FACTS:
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 TAXATION1 CASE DIGESTS
Petitioner Sea-Land Service Incorporated, an American international shipping company licensed by
the Securities and Exchange Commission to do business in the Philippines entered into a contract
with the United States Government to transport military household goods and effects of U.S.
military personnel assigned to the Subic Naval Base. Sea-Land paid its corresponding corporate
income tax for the taxable year 1984 at the rate of 1.5% in accordance with Section 25(a) (2) of the
National Internal Revenue Code in relation to Article 9 of the RP-US Tax Treaty. Subsequently,
Sea-Land filed a claim for refund alleging that the taxes it paid were made in mistake because
under the RP-US Military Base Agreement, it is exempt from the payment of taxes.
ISSUE:
Does the income that petitioner derived from services in transporting the household goods and
effects of U.S. military personnel fall within the tax exemption provided in the RP-US Military Bases
Agreement?
RULING:
NO. Laws granting exemption from tax are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing power. The transport or shipment of household goods and effects of
U.S. military personnel is not included in the term "construction, maintenance, operation and
defense of the bases.” Neither could the performance of this service to the U.S. government be
interpreted as directly related to the defense and security of the Philippine territories
31. 31st INFANTRY POST EXCHANGE vs. POSADAS
FACTS: The 31st Infantry Post Exchange is a post exchange constituted in accordance with Army
regulations and the laws of the United States. in the course of its duly authorized business
transactions, the Exchange made many purchases of various and diverse commodities, goods,
wares and merchandise from various merchants in the Philippines. The Commissioner collected a
sales tax of 1 1/2 % of the gross value of the commodities, etc. from the merchants who sold said
commodities to the Exchange. A formal protest was lodged by the Exchange.
ISSUE: Whether or not the petitioner is exempt from the sales tax imposed against its suppliers.
RULING: The court ruled in the negative. Taxes have been collected from merchants who made
sales to Army Post Exchanges since 1904 (Act 1189, Section 139). Similar taxes are paid by those
who sell merchandise to the Philippine Government, and by those who do business with the US
Army and Navy in the Philippines. Herein, the merchants who effected the sales to the Post
Exchange are the ones who paid the tax; and it is the officers, soldiers, and civilian employees and
their families who are benefited by the post exchange to whom the tax is ultimately shifted. An
Army Post Exchange, although an agency within the US Army, cannot secure exemption from
taxation for merchants who make sales to the Post Exchange.
32. REAGAN V. CIR
FACTS:
Reagan, an American citizen and an employee of Bendix Radio, Division of Bendix Aviation
Corporation, which provides technical assistance to the US Air Force, was assigned at Clark Air
Base. 9 months thereafter before his tour of duty expired, he imported a tax-free 1960 Cadillac car
with accessories valued at $6,443.83, inclusive of freight, insurance and other charges. After more
than 2 months, he asked his Base Commander at the Clark Air Base for a permit to sell the car
which was granted provided that the sale should be made to a member of the US Armed Forces or
a US citizen employed in the US military base in the Philippines. He then sold the car for $6,600 to
Johnson, Jr. who was a member of the US Marine Corps in Cavite. Johnson, Jr. then sold the car
to Meneses for P32,000. As a result of the transaction thus made, respondent CIR fixed as his net
taxable income arising from the sale the amount of P17,912.34, making him liable for income tax in
the sum of P2,979 plus the legal rate of interest. After paying the income tax, he sought a refund
from CIR claiming that he is exempt. While the action was pending, he filed the case with the CTA
seeking the recovery of what he paid plus the legal rate of interest. Reagan is imputing that the
Clark Air Force is foreign soil or territory and thus is beyond the government’s jurisdictional power
to tax. His ground is based upon an obiter dictum in a 1962 deicision
ISSUE:
Whether the said income tax of P2,979 was legally collected by the CIR from Reagan? Is Clark Air
Force foreign soil or territory?
HELD:
Petitioner was liable for the income tax arising from the sale of his automobile in the Clark Field Air
Base which clearly within the Philippine Government’s territorial jurisdiction to tax.
Nothing is better settled than that the Philippines being independent and sovereign, its authority
may be exercised over its entire domain. There is no portion thereof that is beyond its power. Its
laws govern therein, and everyone to whom it applies must submit to its terms. The ground
occupied by an embassy is not in fact the territory of the foreign State to which the premises belong
through possession or ownership. The lawfulness or unlawfulness of acts there committed is
determined by the territorial sovereign.
The first and crucial error imputed to the Court of Tax Appeals to the effect that it should have held
that the Clark Air Force is foreign soil or territory for purposes of income tax legislation is clearly
without support in law. As thus correctly viewed, petitioner's hope for the reversal of the decision
completely fades away. There is nothing in the Military Bases Agreement that lends support to such
an assertion. It has not become foreign soil or territory. This country's jurisdictional rights therein,
certainly not excluding the power to tax, have been preserved. As to certain tax matters, an
appropriate exemption was provided for.
The ruling relied upon was from the case Saura Import and Export Co. v. Meer, which affirmed a
decision rendered 7 months ago holding liable as an importer, within the contemplation of the NIRC
provision, the trading firm that purchased army goods from a US government agency in the
MCZNOA / ALSC2016 / ATTY. MONTERO
 TAXATION1 CASE DIGESTS
Philippines. Judge Tuason, in this case, proceeded to discuss the role of the American military
contingent in the Philippines as a belligerent occupant. In the course of such a dissertion, drawing
on his well-known gift for rhetoric and cognizant that he was making an as if statement, he did say:
"While in army bases or installations within the Philippines those goods were in contemplation of
law on foreign soil." Such statement was only an obiter dictum and is not controlling on the
question before the court, which is the petitioner’s liability for the income tax.
The provision in the Military Bases Agreement of the Philippine Government’s consent that the US
exercise jurisdiction in certain cases is only a matter of comity, courtesy or expediency over the
bases as part of the Philippine territory or divested itself completely of jurisdiction over offenses
committed therein. This provision cannot be construed as a limitation upon the rights of the
Philippine Government.
The conclusion is thus irresistible that the crucial error assigned, the only one that calls for
discussion to the effect that for income tax purposes the Clark Air Force Base is outside Philippine
territory, is utterly without merit.
33. CIR V. MITSUBISHI METAL CORP.: INTERNATIONAL COMITY
FACTS:
Atlas Consolidated Mining entered into a Loan and Sales Contract with Mitsubishi. Under the
Contract, Mitsubishi would lend Atlas $20M for the installation of a new concentrator for copper
production, and in turn, Atlas would sell to Mitsubishi all the copper concentrates produced from the
machine for the next 15 years. Thereafter, Mitsubishi applied for a loan with Eximbank of Japan so
that it could comply with its obligations under the contract. Mitsubishi also applied for a loan with a
consortium of Japanese banks. The total amount of both loans was $20M. Atlas made interest
payments in favor of Mitsubishi totaling P13M. The corresponding 15% tax on the interest in the
amount of P1.9M was withheld and remitted to the Government. Subsequently, Mitsubishi and
Atlas filed a claim for tax credit, requesting that the P1.9M be applied against their existing tax
liabilities on the ground that the interest earned by Mitsubishi on the loan was exempt from tax as
provided in the National Revenue Code.
ISSUE:
Whether the interest is tax-exempt.
HELD:
No, the interest is not exempt from tax. The National Internal Revenue Code provides that income
received from loans in the Philippines extended by financing institutions owned, controlled, or
financed by foreign governments are exempt from tax. Mitsubishi and Atlas claim that the interest
earned from the loan falls under the above exemption because Mitsubishi was merely acting as an
agent of Eximbank, which is a financing institution owned, controlled, and financed by the Japanese
Government. They allege that Mitsubishi was merely the conduit between Atlas and Eximbank, and
that the ultimate creditor was really Eximbank.
The SC held that Mitsubishi was not a mere agent of Eximbank. It entered into the agreement with
Atlas in its own independent capacity. The transaction between Mitsubishi and Atlas on the one
hand, and between Mitsubishi and Eximbank on the other, were separate and distinct. No agency
relationship was established between Eximbank and Mitsubishi. Since the transaction was between
Mitsubishi and Atlas, the exemption that would have been applicable to Eximbank, does not apply.
The interest is therefore not exempt from tax.
34. CIR V. MARUBENI CORPORATION
FACTS:
Marubeni was a Japanese corporation engaged in the import and export, trading, and construction
business. It completed two contracts in 1984, the income from which it did not declare. One of the
contracts was with the National Development Company (NDC) in connection with the construction
of a wharf/port complex in Leyte. The other contract was with the Philippine Phosphate Fertilizer
Corp (Philfos) for the construction of an ammonia storage complex also in Leyte.
The Commissioner of Internal Revenue (CIR) then made an assessment on Marubeni's deficiency
taxes. It found that the NDC and Philpos contracts were made on a “turn-key” basis (a job in which
the contractor agrees to complete the work of building and installation to the point of readiness or
occupancy; in other words, the products are brought to the client complete and ready for use)
amounting to about P960M+.
The two contracts were divided into two parts – the offshore portion and the onshore portion. All
materials and equipment in the contract under the offshore portion were manufactured and
completed in Japan. After manufacture, these were transported to Leyte and installed to the pier
with the use of bolts. IR found that Marubeni was liable for contractor's tax on the offshore portion.
Marubeni filed a petition with the CTA, arguing that the income derived from the offshore portion
should be exempt from tax since it was derived outside of the Philippine jurisdiction. (NOTE: There
was another argument on tax amnesty plus a brief history on the project, but I didn't include this
anymore since it's not relevant to the topic)
ISSUE:
Whether the income of Marubeni is taxable even if it claims that it was earned outside of the
Philippines.
HELD:
No. Marubeni is not liable for the contractor’s tax.
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 TAXATION1 CASE DIGESTS

A contractor’s tax is in the nature of an excise tax on the exercise of a privilege of selling services
or labor rather than a sale of products. It is directly collectible from the person exercising the
privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges
or business are done or performed within the jurisdiction of said authority. Like property taxes, it
cannot be imposed on an occupation or privilege outside the taxing district.

In this case, the ship loaders, boats and mobile equipment used in the construction projects were
all designed, engineered and fabricated in Japan. They were merely shipped to Leyte and
assembled there. While the construction and installation work were completed within the
Philippines, some pieces of equipment and supplies were completely designed and engineered in
Japan. Since these services were rendered outside the taxing jurisdiction of the Philippines, they
are therefore not subject to the contractor’s tax.

MCZNOA / ALSC2016 / ATTY. MONTERO

 TAXATION1 CASE DIGESTS
B. CONSTITUTIONAL LIMITATIONS
(i) UNIFORMITY
35. TIU V. CA
FACTS:
Petitioners assail the CA decision and resolution that upheld the constitutionality and validity of EO
97-A, according to which the grant and enjoyment of the tax and duty incentives authorized under
RA 7227 (“An Act Accelerating the Conversion of Military Reservations Into Other Productive Uses,
Creating the Bases Conversion and Development Authority for this Purpose, Providing Funds
Therefor and for Other Purposes”) were limited to the business enterprises and residents within the
fenced-in area of the Subic Special Economic Zone (SSEZ). Among others, Section 12 of RA 7227
provides that, “The provision of existing laws, rules and regulations to the contrary notwithstanding,
no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of
paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises
within the Subic Special Economic Zone shall be remitted to the National Government, one percent
(1%) each to the local government units affected by the declaration of the zone in proportion to their
population area, and other factors. In addition, there is hereby established a development fund of
one percent (1%) of the gross income earned by all businesses and enterprises within the Subic
Special Economic Zone to be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas xxx
In case of conflict between national and local laws with respect to tax exemption privileges in the
Subic Special Economic Zone, the same shall be resolved in favor of the latter;”
EO 97, which clarified the application of the incentives provided thus:
Sec. 1. On Import Taxes and Duties. — Tax and duty-free importations shall apply only to raw
materials, capital goods and equipment brought in by business enterprises into the SSEZ. Except
for these items, importations of other goods into the SSEZ, whether by business enterprises or
resident individuals, are subject to taxes and duties under relevant Philippine laws.
The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts
of the Philippine territory shall be subject to duties and taxes under relevant Philippine laws.
Sec. 2. On All Other Taxes. — In lieu of all local and national taxes (except import taxes and
duties), all business enterprises in the SSEZ shall be required to pay the tax specified in Section
12(c) of R.A. No. 7227.
Respondent 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 ‘. . . the lands
occupied by the Subic Naval Base and its contiguous extensions as embraced, covered and
defined by the 1947 Military Bases Agreement between the Philippines and the United States of
America, as amended . . .’” 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. The court a quo also explained that the intention of Congress was to confine the
coverage of the SSEZ to the “secured area” and not to include the “entire Olongapo City and other
areas mentioned in Section 12 of the law.” The Court of Appeals further justified the limited
application of the tax incentives as being within the prerogative of the legislature, pursuant to its
“avowed purpose [of serving] some public benefit or interest.” It ruled that “EO 97-A merely
implements the legislative purpose of [RA 7227].”
Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals Decision
and Resolution.
ISSUE:
W/N EO 37-A is constitutional
HELD:
YES. Said Order is not violative of the equal protection clause; neither is it discriminatory. There are
real and substantive distinctions between the circumstances obtaining inside and those outside the
Subic Naval Base, thereby justifying a valid and reasonable classification.
We believe it was reasonable for the President to have delimited the application of some incentives
to the confines of the former Subic military base. It is this specific area which the government
intends to transform and develop from its status quo ante as an abandoned naval facility into a self-
sustaining industrial and commercial zone, particularly for big foreign and local investors to use as
operational bases for their businesses and industries. The classification is, therefore, germane to
the purposes of the law.
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.
It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws.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 channelling his or her resources or
business operations into the fenced-off free port zone.
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. Petition DENIED.
36. JOHN HAY PEOPLES ALTERNATIVE COALITION V. LIM
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 TAXATION1 CASE DIGESTS
FACTS:
RA No. 7227 created the Bases Conversion and Development Authority (BCDA), which also
created the Subic Special Economic Zone (Subic SEZ). Aside from granting incentives to Subic
SEZ, RA 7227 also granted the President is an express authority to create other SEZs in the areas
covered respectively by the Clark military reservation, the Wallace Air Station in San Fernando, La
Union, and Camp John Hay through executive proclamations. BCDA entered into a MOA and
Escrow Agreement with TUNTEX and ASIAWORLD, private corporations under the laws of the
British Virgin Islands, preparatory to the formation of a joint venture for the development of Poro
Point La Union and Camp John Hay as premier tourist destinations and recreation centers. BCDA,
TUNTEX and ASIAWORLD executed a JVA to put up the Baguio International Development and
Management Corporation which would lease areas within Camp John Hay and Poro Point for the
attainment of the tourist and recreation spots in La Union and Camp John Hay. President Ramos
issued Proclamation No. 420 which established a SEZ on a portion of Camp John Hay. 2nd
sentence of Section 3 of said Proclamation provided for national and local tax exemption within and
granted other economic incentives to the John Hay Special Economic Zone. “Section 3: Investment
Climate in John Hay Special Economic Zone.- Pursuant to Section 5(m) and Section 15 of RA No.
7227, the John Hay Poro Point Development Corporation shall implement all necessary policies,
rules, and regulations governing the zone, including investment incentives, in consultation with
pertinent government departments. Among others, the zone shall have all the applicable incentives
of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable
incentives granted in the Export Processing Zones, the Petitioners filed this case to enjoin the
respondents from implementing Proc. 420 for being unconstitutional on grounds of:
 For being illegal and invalid in so far as it grants tax exemptions thus amounting to
unconstitutional exercise of by the President of power granted only to legislature
 Limits powers and interferes with the autonomy of the city
 Violates rule that all taxes should be uniform and equitable
ISSUE:
1. W/N Proclamation No. 420 is constitutional by providing for national and local tax
exemption within and granting other economic incentives to the John Hay Special
Economic Zone. NO, 2nd sentence, Section 3 of said proclamation is unconstitutional.
2. W/N Proclamation No. 420 is constitutional for limiting or interfering with the local
autonomy of Baguio City.
HELD:
YES. The 2nd Sentence of SECTION 3 of Proclamation No. 420 is hereby declared NULL and
VOID and is accordingly declared of no legal force and effect. Public respondents are hereby
enjoined from implementing the aforesaid void provision. Proclamation No. 420, without the
invalidated portion, remains valid and effective. Under Section 12 of RA No. 7227 it is clear that
ONLY THE SUBIC SEZ which was granted by Congress with tax exemption, investment incentives
and the like. THERE IS NO EXPRESS EXTENSION OF THE SAID PROVISION IN
PRESIDENTIAL PROCLAMATION No. 420. (Section 12 kept mentioning Subic Special Economic
Zone, specifically…) Also found in the deliberations of the Senate, a confirmation of the exclusivity
of the tax and investment privileges to Subic SEZ. “Senator Angara: The Gentleman is absolutely
correct. Mr. President. SO WE MUST CONFINE THESE POLICIES ONLY TO SUBIC.” It is the
legislature, unless limited by a provision of the state constitution that has full power to exempt any
person, corporation or class of property from taxation, its power to exempt being as broad as its
power to tax. Other than the Congress, the Constitution may itself provide for specific tax
exemptions, or local governments may pass ordinances on exemption only from local taxes. The
challenged grant of tax exemption must have concurrence of a majority of all members of
Congress. In same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition
and usage for Congress to legislate upon. Tax exemption cannot be implied as it must be
categorically and un mistakably expressed – if it were the intent of the legislature to grant to the
John Hay SEZ the same tax exemption and incentives given to Subic SEZ, it would have so
expressly provided in RA 7227. BCDA, under R.A 7227, is expressly entrusted with broad rights of
ownership
37. COCONUT OIL REFINERS ASSOCIATION INC. V. BCDA
FACTS:
RA 7227 was enacted providing for the sound and balanced conversion of the Clark and Subic
military reservations and their extensions into alternative productive uses in the form of special
economic zones. President Ramos issued EO 80 which declared that Clark (CSEZ) shall have all
the applicable incentives granted to the Subic Special Economic and Free Port Zone (SSEZ) under
RA 7227. Petitioners claim that the said E.O as well as RA 7227 are replete with constitutional
infirmities and must be declared invalid and void.
Petitioner assails:
 EO 80 and BCDA Board Resolution: allowing the tax and duty-free sale at retail of
consumer goods imported via clark for consumption outside CSEZ.
 EO 97, EO 97-A: granting $100 monthly and $200 yearly tax-free shopping privileges to
SSEZ residents living outside secured area of SSEZ and to Filipinos aged 15 and over
residing outside SSEZ
Petitioners argue that the Executive Department, by allowing thru questioned issuances the setting
up of tax and duty free shops and the removal of consumer ggoods and items from the zones
without payment of correspondning duties and taxes arbitrarily provided additional exemptions to
the limitations imposed by RA 7227.
ISSUE: (other issues: equal protection clause, preferential use of Filipino labor, prohibition against
unfair competition)
W/N assailed issuances amounts to violation of the rule on separation of powers being executive
legislation.
HELD:
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 TAXATION1 CASE DIGESTS
Petitioners claim that the wording of RA 7227 clearly limits the grant of tax incentives to the
importation of raw materials and capital equipment only, hence they claim that assailed issuances
constitute executive legislation for invalidly granting tax incentives in importation of consumer
goods. The court however said that to limit the tax-free importation privilege of enterprises to those
located inside the special zone only to raw materials clearly runs counter to the intention of the
legislature to create a free port where “free flow of goods or capital within, into and out of the
zones” is insured. The records of the Senate containing the discussion of the concept of SEZ in
Sec 12a RA 7227 show the legislative intent that consumer goods entering the SSEZ which satisfy
the needs of the zone and are consumed there are not subject to duties and taxes in accordance
with Philippine laws. According to Senator Guingona: The SEZ could embrace the needs of
tourism, servicing, financing and other investment aspects. However with regard to the executive
order issued by President Ramos concerning Clark as being a SEZ (and thus enjoy tax exemptions
and incentives) the court declared that such was an invalid exercise of executive legislation. As was
decided in the case of Camp John Jay, wherein the court held that John Hay was not granted any
tax exemption as it was not anywhere stated in the law. As in this case, RA 7227 expressly
provides for the grant of incentives to the SSEZ it fails to make any similar grant however to the
other economic zones including Clark. Tax and duty free incentives being in the nature of tax
exemptions the basis thereof should be categorically and unmistakably expressed from the
language of the statute.
38. ARTURO TOLENTINO VS. SEC OF FINANCE & CIR
FACTS:
The Case is about challenging the Constitutionality of RA7716 otherwise known as Expanded
Value Added Tax (EVAT). A lot of issues were thrown like: (1) it did not originate exclusively in the
House of Representatives; (2) The Growing Budget deficit is not an Emergency, especially
Philippines where budget deficit is a chronic condition. These are motions directly filed to the
Supreme Court seeking reconsideration to dismiss the case. The enactment of RA 7716 otherwise
known as EVAT was brought about by the enormous budget deficit of the Philippines. It is an
amendment which seeks to restructure the VAT by widening its tax base. Arturo Tolentino together
with other petitioners like the CREBA and other Civil Society riding on the popularity of the issue on
EVAT to gain political grounds assents that EV AT violates the rules that taxes should be uniform
and equitable and that Congress shall evolve a progressive system of Taxation. CREBA claims that
VAT is regressive because the law imposes a flat rate of 10% and thus places the Tax Burden on
all tax payers without regard to their ability to pay. The mandate of Congress is to evolve a
progressive tax system.
ISSUES:
Whether or not EVAT violates the rule that Taxes evolve a progressive system of Taxation?
HELD:
Motion Denied. The Constitution does not really prohibit imposition of Indirect Taxes. It has been
interpreted to mean simply that Direct Taxes are to be preferred as much as possible whereas
Indirect Taxes should be minimized. Sales Taxes are the oldest form of Indirect Taxes.
It merelyexpandsthe base of the Tax. Resort to indirect taxes should beminimized but not avoid
entirely because it is difficult, if not IMPOSSIBLE, to avoid them by imposing such taxes according
to the Taxpayers ability to pay. Where VAT imposes regressive taxation, the Law on VAT
minimizes the regressive effects of this imposition by providing for ZERO Rating of certain
transactions like Goods in its Original State (Palay, Corn), Educational Services, Work of Art,
Export sales by person not VAT registered. Transactions which involve VAT are goods and
services used or availed mainly by higher income group.
39. ABAKADA GURO PARTY LIST V. THE HONORABLE EXECUTIVE SECRETARY
EDUARDO ERMITA
FACTS:
R.A. 9337 / the EVAT Law, a VAT reform Act enacted on May 24, 2005. Sections 4, 5 and 6 of said
Act amends Sections 106, 107 and 108, respectively, of the NIRC. Section 4 imposes a 10% VAT
on sale of goods and properties, Section 5 imposes a 10% VAT on importation of goods, and
Section 6 imposes a 10% VAT on sale of services and use or lease of properties. This law
authorized the President, upon recommendation of the Secretary of Finance, to raise the VAT rate
to 12% effective January 1, 2006, if two conditions are satisfied:
 VAT collection as a percentage of GDP of the previous year exceeds 2 4/5%
 National government deficit as a percentage of GDP of the previous year exceeds 1 ½%
maintaining the rate of 10% until the conditions above took place.
 It also inserted a provision imposing a 70% limit on the amount of input tax to be credited
against the output tax.
Petitions were thus filed assailing the constitutionality of the law:
 ABAKADA argued that Congress abandoned its exclusive authority to fix taxes by giving
the President the authority upon the Finance Sec’s recommendation to raise VAT to 12%
 Sen. Pimentel and Rep. Escudero argued that the law was an undue delegation of
legislative powers and a violation of due process
 Pilipinas Shell dealers argued that the VAT reform was arbitrary, oppressive and
confiscatory.
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 TAXATION1 CASE DIGESTS
 On the other hand, respondents countered that the law was complete, that it left no
discretion to the President, and that it merely charged the President with carrying out the
rate increase once any of the 2 conditions arise.
ISSUE:
W/N R.A. 9337 is constitutional
HELD:
YES, it is valid and constitutional.
1. Law was NOT an undue delegation of legislative power. Congress didn’t delegate the power to
tax but the mere implementation of the law – the ascertainment of facts contingent on
conditions already provided. In this case, the legislature made the operation of the 12% rate
contingent upon 2 specified conditions. Thus, no discretion would be exercised by the
President, and he would only exercise the ministerial duty of imposing the 12% rate.
Moreover, the President can’t alter or modify / nullify / set aside the findings of fact of the
Secretary of Finance, who will ascertain the said conditions because the SoF will not act as
alter ego of President but AGENT of the legislative department.
2. The 12% increase does NOT impose an unfair and unnecessary additional tax burden.
Because of the country’s gloomy states of economic affairs, it is necessary to raise revenue to
meet government expenditures.
3. The 70% limitation on input tax does NOT violate due process and EPC Input tax is NOT a
property right but a STATUTORY privilege, w/c may be regulated. Besides, the unutilized input
tax may be credited in the subsequent periods or even refunded, so it is NOT completely lost.
Neither does it violate EPC w/ regard to the 5% creditable withholding tax imposed on
payments made by the government for TAXABLE TRANSACTIONS. This is because it is
applied equally to members of the same class. Taxable transactions with the government are
subject to a uniform 5% rate, in contrast to its different rates prior to amendment. It is clear
that Congress intended to treat differently taxable transactions with the government.
4. The law is consistent w/ Uniformity and Equitability of Taxation Uniformity of taxation means
that all taxable articles/property of the SAME CLASS be taxed at the SAME RATE. In this
case, the tax law is uniform as it provides for a standard rate of 10% / 12% on all goods and
services. It does NOT even make any distinction as to the type of industry / trade that will bear
the 70% limitation on the creditable input tax, 5year amortization of input tax paid on purchase
of capital goods or the 5% final withholding tax by the government. The law is also equitable
because it is equipped with a threshold margin—the 10/12% VAT rate will not apply to the sale
of goods w/ gross annual sales at P1.5 or below. Small corner sari-sari stores are
consequently exempt from its application.
5. Even if VAT is regressive, it is still constitutional. The constitution does NOT prohibit the
imposition of indirect taxes / a regressive system of taxation. It simply provides that Congress
shall EVOLVE a progressive system of taxation, meaning direct taxes must be preferred to
indirect taxes. In the case of the VAT, the law minimizes the regressive effects of this
imposition by providing for zero rating of certain transactions.
40. MISAMIS ORIENTAL ASSOCIATION OF COCO TRADERS, INC. V. DEPARTMENT OF
FINANCE SECRETARY
FACTS:
Petitioner Misamis Oriental Association of Coco Traders, Inc. is a domestic corporation whose
members, individually or collectively, are engaged in the buying and selling of copra in Misamis
Oriental. The petitioner alleges that prior to the issuance of Revenue Memorandum Circular 47-91
on June 11, 1991, which implemented VAT Ruling 190-90, copra was classified as agricultural food
product under $ 103(b) of the National Internal Revenue Code and, therefore, exempt from VAT at
all stages of production or distribution. Under Sec. 103(b) of the NIRC, the sale of agricultural food
products in their original state is exempt from VAT at all stages of production or distribution. The
reclassification had the effect of denying to the petitioner the exemption it previously enjoyed when
copra was classified as an agricultural food product under §103(b) of the NIRC. Petitioner
challenges RMC No. 47-91 on various grounds.
ISSUES:
(1) Whether the BIR is the proper the competent government agency to determine the proper
classification of food products.
(2) Whether RMC No. 47-91 is discriminatory and violative of the equal protection clause of the
Constitution.
HELD:
The court, as to the first issue, ruled in the affirmative. The BIR, as the government agency charged
with the implementation and interpretation of the tax laws, is entitled to great respect. In interpreting
Section 103 of the NIRC, the Commissioner of Internal Revenue correctly gave it a strict
construction consistent with the rule that tax exemptions must be strictly construed against the
taxpayer and liberally in favor of the state. The ruling was made by the Commissioner of Internal
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 TAXATION1 CASE DIGESTS
Revenue in the exercise of his power under § 245 of the NIRC to "make rulings or opinions in
connection with the implementation of the provisions of internal revenue laws, including rulings on
the classification of articles for sales tax and similar purposes.” With regard to the second issue, the
court ruled in the negative. Petitioner likewise claims that RMC No. 47-91 is violative of the equal
protection clause because while coconut farmers and copra producers are exempt, traders and
dealers are not, although both sell copra in its original state. Petitioners add that oil millers do not
enjoy tax credit out of the VAT payment of traders and dealers. The argument has no merit. There
is a material or substantial difference between coconut farmers and copra producers, on the one
hand, and copra traders and dealers, on the other. The former produce and sell copra, the latter
merely sell copra. The Constitution does not forbid the differential treatment of persons so long as
there is a reasonable basis for classifying them differently. It is not true that oil millers are exempt
from VAT. Pursuant to § 102 of the NIRC, they are subject to 10% VAT on the sale of services.
41.CIR V. LINGAYEN GULF ELECTRIC POWER CO.
FACTS:
Lingayen Gulf Electric Power operates an electric power plant serving the municipalities of
Lingayen and Binmaley, Pangaisnan, pursuant to municipal franchise granted it by the respective
municipal councils. The franchises provided that the grantee shall pay quarterly to the Provincial
Treasury of Pangasinan 1% ofthe gross earnings obtained through the privilege for the first 20
years (from 1946), and 2% during the remaining 15 years of the life of the franchise. Bureau of
Internal Revenue (BIR) assessed against and demanded from the private respondent deficiency
franchise taxes and surcharges for the years 1946 to 1954 applying the franchise tax rate of 5% on
gross receipts from March 1, 1948 to December 31, 1954 as prescribed in Section 259 of the
National Internal Revenue Code, instead of the lower rates as provided in the municipal franchises.
The private respondent protested the said assessment and requested for a conference with a view
to settling the liability amicably. The Commissioner denied the request of the private respondent.
Thus, the private respondent appealed to the Court of Tax Appeals.
Pending the hearing of the case, Republic Act (R.A.) No. 3843 was passed granting to the private
respondent a legislative franchise for the operation of the electric light, heat, and power system in
the same municipalities of Pangasinan. Section 4 thereof provides that:
[…] the grantee shall pay into the Internal Revenue office of each Municipality in which it
is supplying electric current to the public under this franchise, a tax equal to two per
centum of the gross receipts from electric current sold or supplied under this franchise.
The grantee is hereby expressly exempted and effective further upon the date the original
franchise was granted, no other tax and/or licenses other than the franchise tax of two
per centum on the gross receipts as provided for in the original franchise shall be
collected, any provision of law to the contrary notwithstanding.
On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843 should
apply and accordingly dismissed the claim of the Commissioner of Internal Revenue. The said
ruling is now the subject of the petition at bar.
ISSUES:
1. Whether or not the 5% franchise tax prescribed in Section 259 of the National Internal
Revenue Code assessed against the private respondent on its gross receipts realized before
the effectivity of R.A- No. 3843 is collectible.
2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of the
"uniformity and equality of taxation" clause of the Constitution.
3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could be given
retroactive effect so as to render uncollectible the taxes in question which were assessed
before its enactment.
HELD:
1. We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a
legislative franchise in June, 1963, amending, altering, or even repealing the original municipal
franchises, and providing that the private respondent should pay only a 2% franchise tax on its
gross receipts, "in lieu of any and all taxes and/or licenses of any kind, nature or description
levied, established, or collected by any authority whatsoever, municipal, provincial, or national,
now or in the future ... and effective further upon the date the original franchise was granted,
no other tax and/or licenses other than the franchise tax of two per centum on the gross
receipts ... shall be collected, any provision of law to the contrary notwithstanding." Thus, by
virtue of R.A- No. 3843, the private respondent was liable to pay only the 2% franchise tax,
effective from the date the original municipal franchise was granted.
2. A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be
taxed alike The Legislature has the inherent power not only to select the subjects of taxation
but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause. It is true that the private respondents municipal franchises were obtained
under Act No. 667 2 of the Philippine Commission, but these original franchises have been
replaced by a new legislative franchise, i.e. R.A. No. 3843. Thus, it only effected the transfer of
a taxable property from one class to another.
3. Given the validity of said law, it should be applied retroactively so as to render uncollectible
the taxes in question which were assessed before its enactment. The question of whether a
statute operates retrospectively or only prospectively depends on the legislative intent. In the
instant case, Act No. 3843 provides that “effective … upon the date the original franchise was
granted, no other tax and/or licenses other than the franchise tax of two per centum on the
gross receipts … shall be collected, any provision to the contrary notwithstanding.” Republic
Act No. 3843 therefore specifically provided for the retroactive effect of the law.
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 TAXATION1 CASE DIGESTS
42. KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS V. TAN
FACTS:
These four (4) petitions seek to nullify Executive Order No. 273 issued by the President of the
Philippines, and which amended certain sections of the National Internal Revenue Code and
adopted the value-added tax, for being unconstitutional in that its enactment is not allegedly within
the powers of the President; that the VAT is oppressive, discriminatory, regressive, and violates the
due process and equal protection clauses and other provisions of the 1987 Constitution.
The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by
every seller, with aggregate gross annual sales of articles and/or services, exceeding P200,00.00,
to his purchase of goods and services, unless exempt. VAT is computed at the rate of 0% or 10%
of the gross selling price of goods or gross receipts realized from the sale of services.
The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and
producers, advance sales tax, and compensating tax on importations. The framers of EO 273 that it
is principally aimed to rationalize the system of taxing goods and services; simplify tax
administration; and make the tax system more equitable, to enable the country to attain economic
recovery.
The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued.
As pointed out by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO
273, was essentially a single stage value added tax system computed under the "cost subtraction
method" or "cost deduction method" and was imposed only on original sale, barter or exchange of
articles by manufacturers, producers, or importers. Subsequent sales of such articles were not
subject to sales tax. However, with the issuance of PD 1991 on 31 October 1985, a 3% tax was
imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006 on 31
December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the
second sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every
sale to 10%, unless zero-rated or exempt.
ISSUE:
Whether or not EO 273 is unconstitutional
HELD:
No. Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an
arbitrary or despotic manner by reason of passion or personal hostility. It appears that a
comprehensive study of the VAT had been extensively discussed by this framers and other
government agencies involved in its implementation, even under the past administration. As the
Solicitor General correctly sated. "The signing of E.O. 273 was merely the last stage in the exercise
of her legislative powers. The legislative process started long before the signing when the data
were gathered, proposals were weighed and the final wordings of the measure were drafted,
revised and finalized. Certainly, it cannot be said that the President made a jump, so to speak, on
the Congress, two days before it convened."
Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive.
The petitioners" assertions in this regard are not supported by facts and circumstances to warrant
their conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory
or unjust. Petitioners merely rely upon newspaper articles which are actually hearsay and have
evidentiary value. To justify the nullification of a law, there must be a clear and unequivocal breach
of the Constitution, not a doubtful and argumentative implication.
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. A tax is
considered uniform when it operates with the same force and effect in every place where the
subject may be found." The sales tax adopted in EO 273 is applied similarly on all goods and
services sold to the public, which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or services by
persons engage in business with an aggregate gross annual sales exceeding P200,000.00. Small
corner sari-sari stores are consequently exempt from its application. Likewise exempt from the tax
are sales of farm and marine products, spared as they are from the incidence of the VAT, are
expected to be relatively lower and within the reach of the general public.
The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers
Association of the Philippines that EO 273, more particularly the new Sec. 103 (r) of the National
Internal Revenue Code, unduly discriminates against customs brokers.
At any rate, the distinction of the customs brokers from the other professionals who are subject to
occupation tax under the Local Tax Code is based upon material differences, in that the activities of
customs brokers (like those of stock, real estate and immigration brokers) partake more of a
business, rather than a profession and were thus subjected to the percentage tax under Sec. 174 of
the National Internal Revenue Code prior to its amendment by EO 273. EO 273 abolished the
percentage tax and replaced it with the VAT.
43. SISON V. ANCHETA
FACTS:
Sison assails the validity of BP 135 w/c further amended Sec 21 of the National Internal Revenue
Code of 1977. The law provides that there’d be a higher tax impost against income derived from
professional income as opposed to regular income earners. Sison, as a professional businessman,
and as taxpayer alleges that by virtue thereof, “he would be unduly discriminated against by the
imposition of higher rates of tax upon his income arising from the exercise of his profession vis-a-
vis those which are imposed upon fixed income or salaried individual taxpayers.” He characterizes
the above section as arbitrary amounting to class legislation, oppressive and capricious in
character. There is a transgression of both the equal protection and due process clauses of the
Constitution as well as of the rule requiring uniformity in taxation.
ISSUE:
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 TAXATION1 CASE DIGESTS
Whether the imposition of a higher tax rate on taxable net income derived from business or
profession than on compensation is constitutionally infirm.
HELD:
1. On due process: Due process clause may be invoked where a taxing statute is so arbitrary
that it finds no support in the Constitution. Example: when taxation amounts to the confiscation
of property, which is a clear abuse of power; when assailed tax measure is beyond the
jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so
harsh and unreasonable
2. On equal protection: The Constitution does not require things which are different in fact or
opinion to be treated in law as though they were the same. 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.
3. On uniform taxation: According to the Constitution: "The rule of taxation shall be uniform and
equitable." It is met when the tax operates with the same force and effect in every place where
the subject may be found. The rule of uniformity does not call for perfect uniformity or perfect
equality, because this is hardly attainable. Supreme Court held: "Equality and uniformity in
taxation means that all taxable articles or kinds of property of the same class shall be taxed at
the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. Where the differentiation complained of conforms to
the practical dictates of justice and equity it "is not discriminatory within the meaning of this
clause and is therefore uniform." Apparently, what misled petitioner is his failure to take into
consideration the distinction between a tax rate and a tax base. There is no legal objection to
a broader tax base or taxable income by eliminating all deductible items and at the same time
reducing the applicable tax rate. Taxpayers may be classified into different categories. It. is
enough that the classification must rest upon substantial distinctions that make real
differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135,
the, discernible basis of classification is the susceptibility of the income to the application of
generalized rules removing all deductible items for all taxpayers within the class and fixing a
set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of
compensation income are set apart as a class. As there is practically no overhead expense,
these taxpayers are e not entitled to make deductions for income tax purposes because they
are in the same situation more or less. On the other hand, in the case of professionals in the
practice of their calling and businessmen, there is no uniformity in the costs or expenses
necessary to produce their income. It would not be just then to disregard the disparities by
giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on
the basis of gross income. There is ample justification then for the Batasang Pambansa to
adopt the gross system of income taxation to compensation income, while continuing the
system of net income taxation as regards professional and business income.
44. VILLANUEVA V. CITY OF ILOILO
FACTS:
On September 30, 1946 the municipal board of Iloilo City enacted Ordinance 86. The Supreme
Court, however, declared the ordinance ultra vires. On January 15, 1960 the municipal board of
Iloilo City, believing that with the passage of Republic Act 2264, otherwise known as the Local
Autonomy Act, it had acquired the authority or power to enact an ordinance similar to that
previously declared by the Supreme Court as ultra vires, enacted Ordinance 11 (eleven), series of
1960, imposing municipal license tax on persons engaged in the business of operating tenement
houses.
In Iloilo City, the appellees Eusebio Villanueva and Remedios S. Villanueva are owners of five
tenement houses, aggregately containing 43 apartments, while the other appellees and the same
Remedios S. Villanueva are owners of ten apartments. By virtue of the ordinance in question, the
appellant City collected from spouses Eusebio Villanueva and Remedios S. Villanueva, for the
years 1960-1964, the sum of P5,824.30, and from the appellees Pio Sian Melliza, Teresita S.
Topacio, and Remedios S. Villanueva, for the years 1960-1964, the sum of P1,317.00.
On July 11, 1962 and April 24, 1964, the plaintiffs-appellees filed a complaint, and an amended
complaint, respectively, against the City of Iloilo, praying that Ordinance 11, series of 1960, be
declared "invalid for being beyond the powers of the Municipal Council of the City of Iloilo to enact,
and unconstitutional for being violative of the rule as to uniformity of taxation and for depriving
said plaintiffs of the equal protection clause of the Constitution," and that the City be ordered to
refund the amounts collected from them under the said ordinance. The lower court rendered
judgment declaring the ordinance illegal.
ISSUES:
(1) Whether or not the City of Iloilo is empowered by the Local Autonomy Act to impose tenement
taxes.
(2) Whether or not Ordinance 11, series of 1960, does violate the rule of uniformity of taxation.
HELD:
(1) Yes. The lower court has interchangeably denominated the tax in question as a tenement tax or
an apartment tax. Called by either name, it is not among the exceptions listed in Section 2 of the
Local Autonomy Act. The imposition by the ordinance of a license tax on persons engaged in the
business of operating tenement houses finds authority in Section 2 of the Local Autonomy Act
which provides that chartered cities have the authority to impose municipal license taxes or fees
upon persons engaged in any occupation or business, or exercising privileges within their
respective territories, and "otherwise to levy for public purposes, just and uniform taxes, licenses, or
fees."
(2) No. The ordinance is not violative of the rule of uniformity in taxation. The Supreme Court has
already ruled that tenement houses constitute a distinct class of property. It has likewise ruled that
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 TAXATION1 CASE DIGESTS

"taxes are uniform and equal when imposed upon all property of the same class or character within
the taxing authority." The fact, therefore, that the owners of other classes of buildings in the City of
Iloilo do not pay the taxes imposed by the ordinance in question is no argument at all against
uniformity and equality of the tax imposition. Neither is the rule of equality and uniformity violated by
the fact that tenement taxes are not imposed in other cities, for the same rule does not require that
taxes for the same purpose should be imposed in different territorial subdivisions at the same time.
So long as the burden of the tax falls equally and impartially on all owners or operators of tenement
houses similarly classified or situated, equality and uniformity of taxation is accomplished. Hence,
the judgment of the lower court is reversed. The ordinance in question is valid.
It is true that the uniformity essential to the valid exercise of the power of taxation does not require
identity or equality under all circumstances, or negate the authority to classify the objects of
taxation. The classification made in the exercise of this authority, to be valid, must, however, be
reasonable and this requirement is not deemed satisfied unless: (1) it is based upon substantial
distinctions which make real differences; (2) these are germane to the purpose of the legislation or
ordinance; (3) the classification applies, not only to present conditions, but, also, to future
conditions substantially identical to those of the present; and (4) the classification applies equally to
all those who belong to the same class.

These conditions are not fully met by the ordinance in question. Indeed, if its purpose was merely to
levy a burden upon the sale ofsoft drinks or carbonated beverages, there is no reason why sales
45. PEPSI-COLA BOTTLING CO. V. CITY OF BUTUAN thereof by dealers other than agents or consignees of producers or merchants established outside
the City of Butuan should be exempt from the tax.
FACTS:
Hence, decision appealed from is reversed. City of Butuan is sentenced to refund plaintiff and is
Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices restrained and prohibited permanently from enforcing said Ordinance, as amended.
and principal place of business in Quezon City. Plaintiff's warehouse in the City of Butuan serves
as storage for its products the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan
and all the municipalities in the Province of Agusan. These "Pepsi-Cola" soft drinks are bottled in
46. ORMOC SUGAR CO., VS. TREASURER OF ORMOC
Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and sale in the City
of Butuan and all municipalities of Agusan.
FACTS:

On August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently
On January 29, 1964, the Municipal Board of Ormoc City passed Ordinance No. 4, Series of 1964,
amended by Ordinance No. 122 and effective November 28, 1960. Ordinance No. 110 as
imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc.,
amended, imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles of Pepsi-
in Ormoc City a municipal tax equivalent to one per centum (1%) per export sale to the United
Cola. The plaintiff paid under protest the amount of P4.926.63 from August 16 to December 31,
States of America and other foreign countries." Payments for said tax were made, under protest, by
1960 and the amount of P9,250.40 from January 1 to July 30, 1961.
Ormoc Sugar Company, Inc. on March 20, 1964 for P7,087.50 and on April 20, 1964 for P5,000.00,
or a total of P12,087.50.
The plaintiff filed a complaint for the recovery of the total amount of P14,177.03 paid under protest,
on the ground that Ordinance No. 110 as amended of the City of Butuan is illegal, that the tax
On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Courtof First Instance of Leyte a
imposed is excessive and that it is unconstitutional. The Court of First Instance ruled in favor of
complaint against the City of Ormoc as well as its Treasurer, Municipal Board and Mayor, alleging
the defendant.
that the afore-stated ordinance is unconstitutional for being violative of the equal protection clause
(Sec. 1[1], Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1], Art. VI,
ISSUE:
Constitution), aside from being an export tax forbidden under Section 2287 of the Revised
Administrative Code. It further alleged that the tax is neither a production nor a license tax which
Whether or not the disputed ordinance is void because it is highly unjust and discriminatory
Ormoc City under Section 15-kk of its charter and under Section 2 of Republic Act 2264, otherwise
known as the Local Autonomy Act, is authorized to impose; and that the tax amounts to a customs
HELD:
duty, fee or charge in violation of paragraph 1 of Section 2 of Republic Act 2264 because the tax is
on both the sale and export of sugar.
Yes. Even if the burden in question were regarded as a tax on the sale of said beverages, it would
still be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution
The Court of First Instance, on August 6, 1964, upheld the constitutionality of the ordinance and
and the law, since only sales by "agents or consignees" of outside dealers would be subject to the
declared the taxing power of defendant chartered city broadened by the Local Autonomy Act.
tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume
of their sales, and even if the same exceeded those made by said agents or consignees of
ISSUE:
producers or merchants established outside the City of Butuan, would be exempt from the disputed
tax.

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 TAXATION1 CASE DIGESTS
Whether or not the constitutional limits on the power of taxation, specifically the equal protection
clause and rule of uniformity, were infringed.
HELD:
Yes. Equal protection clause applies only to persons or things identically situated, and does not
bar a reasonable classification of the subject of legislation. A classification is reasonable where (1)
it is based on substantial distinctions which make real differences; (2) these are germane to the
purpose of the law; (3) the classification applies not only to present conditions but also to future
conditions which are substantially identical to those of the present; (4) the classification applies only
to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it
taxes only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none
other. At the time of the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was
the only sugar central in the city of Ormoc. Still, the classification, to be reasonable, should be in
terms applicable to future conditions as well.
The taxing ordinance should not be singular and exclusive as to exclude any subsequently
established sugar central, of the same class as plaintiff, from the coverage of the tax. As it is now,
even if later a similar company is set up, it cannot be subject to the tax because the ordinance
expressly points only to Ormoc Sugar Company, Inc. as the entity to be levied upon.
Hence, decision appealed from is reversed and the challenged ordinance is declared
unconstitutional.
47. PHILIPPINE TRUST COMPANY V. YATCO
FACTS:
Prior to the filing of these suits, and for a number of years, the plaintiffs-appellants had been paying
capital and deposit taxes without protest, formerly under section 111 of Act No. 1189, and later
under section 1499 of the Revised Administrative Code of 1917, as amended.
Appellants challenge the constitutionality of the aforesaid section of the Revised Administrative
Code, principally on the grounds that it violates the rule regarding uniformity of taxation, and that it
is discriminatory, and therefore violative of the equal protection clause of the Constitution.
Appellants stoutly maintain that although the foregoing provision is of
general application and operates on all banks of the same kind doing business in the Philippines,
the exemption of the National City Bank of New York from the impositions therein specifically
provided (National City Bank of New York v. Posadas) makes the law discriminatory and violates
the rule of uniformity in taxation
ISSUE:
Whether or not the said section of the Revised Administrative Code violates the rule on uniformity
of taxation.
HELD:
No. A tax is considered uniform when it operates with the same force and effect in every place
where the subject may be found. Section 1499 of the Revised Administrative Code, as amended,
applies uniformly to, and operates on, all banks in the Philippines without distinction and
discrimination, and if the National City Bank of New York is exempted from
its operation because it is a federal instrumentality subject only to the authority of Congress, that
alone could have the effect of rendering it violative of the rule of uniformity. In every well-regulated
and enlightened state or government, certain descriptions of property and also certain institutions
are exempt from taxation, but these exemptions have never been regarded as disturbing the rules
of taxation, even where the fundamental law had ordained that it should be uniform.
48. BRITISH AMERICAN TOBACCO V CAMACHO
FACTS:
R.A. 8240 was passed recodifying the NIRC where Sec 142 was renumbered Sec 145. British
American Tobacco assailed the validity of Sec. 145 of the NIRC (amended by RA 8240), arguing
that the said provisions are violative of the equal protection and uniformity clause of the
Constitution. Section 145 provides for a four-tier tax rate based on net retail price per pack of
cigarettes: (1) low-priced, (2) medium-priced, (3) high-priced, and (4) premiumpriced. Section 145
further provides that NEW BRANDS (registered after January 1, 1997) of cigarettes shall be taxed
at their current retail price. If the current net retail price has not been established, the suggested net
retail price shall be used to determine the specific tax classification. On the other hand, old or
existing brands (registered before January 1, 1997) shall be taxed at their net retail price as of
October 1, 1996. (Net retail price = price @ which cigarettes are sold on retail in 20 supermarkets
in MM; Suggested net retail price = net retail price @ which brands of cigarettes are intended by
the manufacturer to be sold). To implement RA 8240, BIR issued a Revenue Regulation (RR No. 1-
97) classifying existing brands of cigarettes as those existing or active (old) brands prior to January
1, 1997, while new brands of cigarettes are those registered after January 1, 1997. Another
Revenue Regulation was issued amending the first (RR No. 9-2003) by providing BIR with the
power to periodically review every two years / earlier the current net retail price of new brands to
ESTABLISH / UPDATE their tax classification. In June 2001, British American Tobacco introduced
the Lucky Strike Filter, Lucky Strike Lights and Lucky Strike Menthol Lights. Lucky Strike was taxed
based on its suggested gross retail price from the time of its introduction in the market in 2001 until
the BIR market survey in 2003. The brands were sold at P22.54, P22.61 and P21.23 so the
applicable tax rate is P13.44 per pack. BAT now argues that the "classification freeze provision"
violates the equal protection and uniformity of taxation clauses because the Lucky Strike brands
are taxed based on their 1996 net retail prices while new brands are taxed based on their present
day net retail prices. Thus, Lucky Strike suffers from higher taxes while its competitors pay a lower
amount. BAT further argued that the tobacco excise law was discriminatory because under it,
brands that entered the market after 1996 were imposed taxes based on their current retail prices
MCZNOA / ALSC2016 / ATTY. MONTERO
 TAXATION1 CASE DIGESTS
while older brands paid taxes based on their 1996 retail prices. Meanwhile, Philip Morris, Fortune
Tobacco, Mighty Corp. and JT International (respondents-in-intervention) claim that no inequality
exists between cigarettes and that nullification of said annex would bring about tremendous loss.
ISSUES:
1. W/N Sec. 145 of the NIRC violates EPC and uniformity of taxation clauses
2. W/N the Revenue Regulations are invalid in so far as they empower BIR to reclassify and
update the classification of new brands every two years or earlier
HELD:
Sec. 145 NIRC is constitutional but the RRs are invalid for granting the BIR the power to reclassify
and update the classification. The classification freeze provision does not violate the equal
protection and uniformity of taxation. It meets the standards for valid classification: rests on a
substantial distinction, is germane to the purpose of the law, applies to present and future
conditions and applies equally to all those belonging to the same class. (NOTE: The second
condition, however, was not fully satisfied as it failed to promote fair competition among the players
in the industry. However, this does not make the assailed law unconstitutional). The classification
freeze provision was done in good faith and is germane to the purpose of the law. It was inserted
for reasons of practicality and expediency. Since a new brand was not yet in existence at the time
of the passage of RA 8240, then Congress needed a uniform mechanism to fix the tax bracket of a
new brand. The current net retail price, similar to what was used to classify the brands as of
October 1, 1996, was thus the logical and practical choice. With the amendments introduced by RA
9334, the freezing of the tax classifications now expressly applies not just to old brands (cigarettes
which are taxed on the basis of average net retail price as of October 1, 1996) but to newer brands
introduced after the effectivity of RA 8240 on January 1, 1997 and any new brand that will be
introduced in the future. Thus, the classification freeze provision could hardly be considered biased
toward older brands over newer brands. Congress was even willing to delegate the power to
periodically adjust the excise tax rate and tax brackets as well as to periodically resurvey and
reclassify the cigarette brands based on the increase in the consumer price index to the DOF and
the BIR. Thus, the provision was the result of Congress’s earnest efforts to improve the efficiency
and effectivity of the tax administration over sin products while trying to balance the same with
other State interests.
On Uniformity: Uniformity of taxation requires that all subjects or objects of taxation, similarly
situated, are to be treated alike both in privileges and liabilities. In the instant case, there is no
question that the CFP meets the geographical uniformity requirement because the assailed law
applies to ALL CIGARETTE BRANDS n the Philippines.
On Inequitablity and Regressivity: BAT claims that the use of different tax bases for old brands
as against new brands is discriminatory / inequitable, and that the CFP is regressive in character.
This cannot be sustained because the CFP meets the requirements of the EPC.
49. ABAKADA GURO PARTY LIST VS. PURISIMA
FACTS:
Republic Act 9335 (Attrition Act of 2005) was enacted to optimize the revenue-generation capability
and collection of the Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC). The law
intends to encourage BIR and BOC officials and employees to exceed their revenue targets by
providing a system of rewards and sanctions through the creation of a Rewards and Incentives
Fund (Fund) and a Revenue Performance Evaluation Board (Board). It covers all officials and
employees of the BIR and the BOC with at least six months of service, regardless of employment
status.
The Fund is sourced from the collection of the BIR and the BOC in excess of their revenue targets
for the year, as determined by the Development Budget and Coordinating Committee (DBCC). Any
incentive or reward is taken from the fund and allocated to the BIR and the BOC in proportion to
their contribution in the excess collection of the targeted amount of tax revenue. Petitioners,
invoking their right as taxpayers filed this petition challenging the constitutionality of RA 9335, a tax
reform legislation, claim, among others, that limiting the scope of the system of rewards and
incentives only to officials and employees of the BIR and the BOC violates the constitutional
guarantee of equal protection. There is no valid basis for classification or distinction as to why such
a system should not apply to officials and employees of all other government agencies.
ISSUES:
Whether or not limiting the scope of the system of rewards and incentives (under RA 9335) only to
officials and employees of the BIR and the BOC violates the constitutional guarantee of equal
protection.
HELD:
No. Petitioners have failed to overcome the presumption of constitutionality in favor of RA 9335.
The equal protection clause recognizes a valid classification, that is, a classification that has a
reasonable foundation or rational basis and not arbitrary. With respect to RA 9335, its expressed
public policy is the optimization of the revenue-generation capability and collection of the BIR and
the BOC. Since the subject of the law is the revenue- generation capability and collection of the BIR
and the BOC, the incentives and/or sanctions provided in the law should logically pertain to the said
agencies. Moreover, the law concerns only the BIR and the BOC because they have the common
distinct primary function of generating revenues for the national government through the collection
of taxes, customs duties, fees and charges.
The BIR performs the following functions:
Sec. 18. The Bureau of Internal Revenue. – The Bureau of Internal Revenue, which shall be
headed by and subject to the supervision and control of the Commissioner of Internal
Revenue, who shall be appointed by the President upon the recommendation of the Secretary
[of the DOF], shall have the following functions:
(1) Assess and collect all taxes, fees and charges and account for all revenues
collected;
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 TAXATION1 CASE DIGESTS
(2) Exercise duly delegated police powers for the proper performance of its functions and
duties
xxxx xxxx xxxx
On the other hand, the BOC has the following functions:
Sec. 23. The Bureau of Customs. – The Bureau of Customs which shall be headed and
subject to the management and control of the Commissioner of Customs, who shall be
appointed by the President upon the recommendation of the Secretary[of the DOF] and
hereinafter referred to as Commissioner, shall have the following functions:
(1) Collect custom duties, taxes and the corresponding fees, charges and
penalties;
(2) Account for all customs revenues collected;
(3) Exercise police authority for the enforcement of tariff and customs laws;
xxxx xxxx xxxx
Both the BIR and the BOC are bureaus under the DOF. They principally perform the special
function of being the instrumentalities through which the State exercises one of its great inherent
functions – taxation. Indubitably, such substantial distinction is germane and intimately related to
the purpose of the law. Hence, the classification and treatment accorded to the BIR and the BOC
under RA 9335 fully satisfy the demands of equal protection.
50. CIR V. FORTUNE TOBACCO (2011)
FACTS:
Beginning January 1, 1997, Republic Act No. (RA) 82403 took effect and a shift from ad valorem to
specific taxes was made. Sec 142 stated that:
The specific tax from any brand of cigarettes within the next three (3) years of effectivity of this Act
shall not be lower than the tax [which] is due from each brand on October 1, 1996: Provided,
however, That in cases where the specific tax rates imposed in paragraphs (1), (2), (3) and (4)
hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand
of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall
be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998.
The rates of specific tax on cigars and cigarettes under paragraphs (1), (2), (3) and (4) hereof, shall
be increased by twelve percent (12%) on January 1, 2000. [emphases ours]
To implement RA 8240 and pursuant to its rule-making powers, the CIR issued Revenue
Regulation No. (RR) 1-97 whose Section 3(c) and (d) echoed the above-quoted portion of Section
142 of the 1977 Tax Code, as amended.
The 1977 Tax Code was later repealed by RA 8424, or the National Internal Revenue Code of 1997
(1997 Tax Code), and Section 142, as amended by RA 8240, was renumbered as Section 145.
This time, to implement the 12% increase in specific taxes mandated under Section 145 of the
1997 Tax Code and again pursuant to its rule-making powers, the CIR issued RR 17-99, which
reads:
Section 1. New Rates of Specific Tax. The specific tax rates imposed under the following sections
are hereby increased by twelve percent (12%). […]Provided, however, that the new specific tax rate
for any existing brand of cigars [and] cigarettes packed by machine, distilled spirits, wines and
fermented liquors shall not be lower than the excise tax that is actually being paid prior to January
1, 2000.
Pursuant to these laws, respondent Fortune Tobacco Corporation (Fortune Tobacco) paid in
advance excise taxes for the year 2003 in the amount of P11.15 billion, and for the period covering
January 1 to May 31, 2004 in the amount of P4.90 billion.
In June 2004, Fortune Tobacco filed an administrative claim for tax refund with the CIR for
erroneously and/or illegally collected taxes in the amount of P491 million. Without waiting for the
CIR’s action on its claim, Fortune Tobacco filed with the CTA a judicial claim for tax refund.
In its decision dated May 26, 2006, the CTA First Division ruled in favor of Fortune Tobacco and
granted its claim for refund. The CTA First Division’s ruling was upheld on appeal by the CTA en
banc in its decision dated July 12, 2007.9 The CIR’s motion for reconsideration of the CTA en
banc’s decision was denied in a resolution dated October 4, 2007 . Fortune Tobacco’s claim for
refund of overpaid excise taxes is based primarily on what it considers as an "unauthorized
administrative legislation" on the part of the CIR. Specifically, it assails the proviso in Section 1 of
RR 17-99 that requires the payment of the "excise tax actually being paid prior to January 1, 2000"
if this amount is higher than the new specific tax rate, i.e., the rates of specific taxes imposed in
1997 for each category of cigarette, plus 12%. It claimed that by including the proviso, the CIR went
beyond the language of the law and usurped Congress’ power. As mentioned, the CTA sided with
Fortune Tobacco and allowed the latter to claim the refund.
The CIR points out that Section 145(c) of the 1997 Tax Code categorically declares that "[t]he
excise tax from any brand of cigarettes within the [three-year transition period from January 1, 1997
to December 31, 1999] shall not be lower than the tax, which is due from each brand on October 1,
1996." He posits that there is no plausible reason why the new specific tax rates due beginning
January 1, 2000 should not be subject to the same rule as those due during the transition period.
To the CIR, the adoption of the "higher tax rule" during the transition period unmistakably shows the
intent of Congress not to lessen the excise tax collection. Thus, the CTA should have construed the
ambiguity or omission in Section 145(c) in a manner that would uphold the law’s policy and intent.
Fortune Tobacco argues otherwise. To it, Section 145(c) of the 1997 Tax Code read and
interpreted as it is written; it imposes a 12% increase on the rates of excise taxes provided under
sub-paragraphs (1), (2), (3), and (4) only; it does not say that the tax due during the transition
period shall continue to be collected if the amount is higher than the new specific tax rates. It
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 TAXATION1 CASE DIGESTS
contends that the "higher tax rule" applies only to the three-year transition period to offset the
burden caused by the shift from ad valorem to specific taxes.
ISSUES:
1. W/N CIR went beyond the terms of the law
2. W/N there was uniformity of taxation
HELD:
Section 145 states that during the transition period, i.e., within the next three (3) years from the
effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the
tax due from each brand on 1 October 1996. This qualification, however, is conspicuously absent
as regards the 12% increase which is to be applied on cigars and cigarettes packed by machine,
among others, effective on 1 January 2000. Clearly and unmistakably, Section 145 mandates a
new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1
January 2000 without regard to whether the revenue collection starting from this period may turn
out to be lower than that collected prior to this date.
By adding the qualification that the tax due after the 12% increase becomes effective shall not be
lower than the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively
imposes a tax which is the higher amount between the ad valorem tax being paid at the end of the
three (3)-year transition period and the specific tax under paragraph C, sub-paragraph (1)-(4), as
increased by 12% – a situation not supported by the plain wording of Section 145 of the Tax
Code.16
Following the principle of stare decisis,1our ruling in the present case should no longer come as a
surprise. The proviso in Section 1 of RR 17-99 clearly went beyond the terms of the law it was
supposed to implement, and therefore entitles Fortune Tobacco to claim a refund of the overpaid
excise taxes collected pursuant to this provision.
The amount involved in the present case and the CIR’s firm insistence of its arguments
nonetheless compel us to take a second look at the issue, but our findings ultimately lead us to the
same conclusion. Indeed, we find more reasons to disagree with the CIR’s construction of the law
than those stated in our 2008 Fortune Tobacco ruling, which was largely based on the application
of the rules of statutory construction.
Rule of uniformity of taxation violated by the proviso in Section 1, RR 17-99
Although the brands all belong to the same category, the proviso in Section 1, RR 17-99 authorized
the imposition of different (and grossly disproportionate) tax rates (see column [D]). It effectively
extended the qualification stated in the third paragraph of Section 145(c) of the 1997 Tax Code that
was supposed to apply only during the transition period:
The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of
R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996[.]
In the process, the CIR also perpetuated the unequal tax treatment of similar goods that was
supposed to be cured by the shift from ad valorem to specific taxes.
51. BUREAU OF CUSTOMS EMPLOYEES ASSOC V. TEVES
FACTS:
Former Pres. Arroyo signed into law R.A. No. 9335 for the purpose of optimizing the revenue-
generation capability and collection of the BIRand BOC and to encourage BIR and BOC officials
and employees to exceed their revenue targets by providing a system of rewards andsanctions
through the creation of Rewards and Incentives Fund and a Revenue Performance Evaluation
Board.The Boards in the BIR and BOC are composed of Secretaries of Finance, Budget and their
undersecretaries, Dir Gen NEDA and his deputy DirGen, Commissioners of BIR and BOC and their
deputy commissioners, two representatives from rank and file employees and representativefrom
the officials nominated by their recognized organization.Each Board has the duty to:
1. Prescribe the rules and guidelines for the allocation, distribution and release of the Fund
2. Set criteria and procedures for removing from the service officials and employees whose
revenue collection falls short of the target
3. Terminate personnel in accordance with the criteria adopted by the Board
4. Prescribe a system for performance evaluation
5. Perform other functions, including the issuance of rules and regulations and
6. Submit an annual report to Congress.
Petitioner Bureau of Customs Employees Association (BOCEA) contends that enactment and
implementation of R.A. No. 9335 are tainted with constitutional infirmities. Pursuant to RA 9335 and
its IRR, Collection District Performance Contracts was disseminated to lower ranking officials and
employees for signing. BOCEA contends that the target was impossible to meet due to
governments own policies on reduced tariff rates and tax breaks to big business, the occurrence of
natural calamities and because of other economic factors. BOCEA claimed that some BOC
employees were coerced and forced to sign the performance contract. The personnel were
threatened if they will not sign they would face possible reassignment, reshuffling, or worse be
placed on floating status. Petition was filed to the Supreme Court. BOCEA argued among others,
that its members and other BOC employees are in great danger of losing their jobs should they
failed to meet the required target, in clear violation of their constitutional right of security of tenure
and the irrespective families prejudice. During the first year implementation of RA 9335, BOC
employees exerted commendable efforts and exceed their target of 196B of as much as2B for that
year alone. However this was attained because oil companies made advance tax payments to
BOC. Rewards are given, which they described as unjust, unfair, dubious and fraudulent because
only top officials of BOC got huge reward while the employees received only P8,500.00.
ISSUES:
1. WON RA9335 and its IRR violate the right to due process
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 TAXATION1 CASE DIGESTS
2. WON RA9335 and its IRR violates equal protection clause
3. WON RA9335 and its IRR violates constitution
HELD:
1. Section 7 of RA 9335 clearly give due consideration that may affect the level of collection. In
the same manner, exemptions were set, contravening BOCEA’s claim that its members may
be removed for unattained target collection even due to causes which are beyond their control.
Moreover, an employee’s right to be heard is not at all prevented and his right to appeal is not
deprived of him. In fine, a BIR or BOC official or employee in this case cannot be arbitrarily
removed from the service without according him his constitutional right to due process.
2. The law concerns only the BIR and the BOC because they have the common distinct primary
function of generating revenues for the national government through the collection of taxes,
customs duties, fees and charges. Both the BIR and the BOC are bureaus under the DOF.
They principally perform the special function of being the instrumentalities through which the
State exercises one of its great inherent functions— taxation. Indubitably, such substantial
distinction is germane and intimately related to the purpose of the law. Hence,
the classification and treatment accorded to the BIR and the BOC under RA [No.] 9335 fully
satisfy the demands of equal protection.
3. This case there was a valid delegation of legislative power. The court ruled that the test for
validity of delegation of legislative power were fully satisfied. RA 9335 adequately states the
policy and standards to guide the President in fixing revenue targets and the implementing
agencies carrying out the provisions of the law as stated in Section 2 Declaration of Policy.
The court has recognized the following as sufficient standards: Public Interest, Justice and
equity, public convenience and welfare and simplicity, economy and welfare. In this case, the
declared policy optimization of the revenue-generation capability and collection of the BIR and
BOC is infused with public interest
(ii) NON-IMPAIRMENT
52. REPUBLIC OF THE PHILIPPINES VS. CAGUIOA
FACTS:
In 1992, Congress enacted Republic Act No. 7227 also known as the Bases Conversion and
Development Act of 1992 which created the Subic Special Economic and Freeport Zone (SBF) and
the Subic Bay Metropolitan Authority (SBMA)
Included in RA 7227:
 Subic Special Economic Zone shall 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 provide incentives and equipment. However, exportation or
removal of goods from the territory of the Subic Special Economic Zone to the other parts of
the Philippine territory shall be subject to customs duties and taxes under the Customs and
Tariff Code
 The provisions of existing laws, rules and regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed within the Subic Special Economic Zone.
Pursuant to the law, several private respondents applied for and were granted Certificates of
Registration and Tax Exemption by the SBMA. Their respective certificates states that:
 The Company shall be entitled to tax and duty-free importation of raw materials, capital
equipment, and household and personal items for use solely on the Subic Bay Freeport Zone.
Congress subsequently passed RA 9334 effective Jan. 1, 2005 which states that all importations of
cigars, cigarettes, distilled spirits, fermented liquors and wines into the SBF, including those
intended to be transhipped to other free ports in the Philippines, shall be treated as ordinary
importations subject to all applicable taxes, duties and charges, including excise taxes. (Sec. 6)
On Feb. 3, 2005, former BIR Commissioner Payano, requested the Customs Commissioner Jereos
to immediately collect the excise tax due on imported alcohol and tobacco products brought to the
Duty Free Philippines (DFP) and Freeport zones.
On Feb. 7, 2005, SBMA issued a Memorandum directing the departments concerned to require
locators/importers in the SBF to pay the corresponding duties and taxes on their importations of
cigars, cigarettes, liquors and wines before said items are cleared and released from the Freeport.
However, certain SBF locators which were exclusively engaged in the transhipment of cigarette
products for foreign destinations were allowed by the SBMA to process their import documents
subject to their submission of an Undertaking with the Bureau of Customs.
On Feb. 15, 2005, private respondents wrote the offices of the Collector of Customs and the SBMA
Administrator requesting for a reconsideration of the directives in the imposition of duties and taxes
on cigars, cigarettes, liquor and wines. Despite these letters, they were not allowed to file any
warehouse entry for shipment.
Thus, the private respondent enterprises, brought before the RTC of Olongapo City a civil action for
declatory relief to have certain provisions of RA 9334 declared unconstitutional. These are their
arguments:
 RA 9334 should not be interpreted as altering, modifying or amending the provisions of RA
7227 because repeals by implication are not favoured
 A general law like RA 9334 cannot amend RA 7227, which is a special law
 The assailed law violates the one-bill-one-subject rule embodied in Sec. 26 Art. VI of the
Constitution as well as the constitutional proscription against the impairment of the obligations
of contracts.
The private respondents also prayed for the issuance of a writ of preliminary injunction and/or
Temporary Restraining Order (TRO) and preliminary mandatory injunction alleging that great and
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 TAXATION1 CASE DIGESTS
irreparable loss and injury would befall them as a consequence of the imposition of taxes on
alcohol and tobacco products brought into the SBF.
Petitioners opposed the private respondents’ prayer arguing that:
 Tax exemptions are not presumed and even when granted, are strictly construed against the
grantee
 An increase in business expense is not the injury contemplated by law
 The drawback mechanism established in the law clearly negates the possibility of the feared
injury
 Taxes are the lifeblood of the government and their prompt and certain availability is an
imperious need. Greater injury would be inflicted on the public should the writ be granted.
On May 11, 2005 Caguioa granted private respondents’ application for issuance of writ of
preliminary injunction.
Petitioners seek via petition for certiorari and prohibition to annul the May 4, 2005 Order issued by
public respondent Caguioa of the RTC granting private respondents’ application for issuance of writ
of preliminary injunction.
ISSUE:
1. Whether or not, Caguioa erred in the issuance of the writ of preliminary injunction
2. Whether or not, RA 9334 is unconstitutional because it violates the constitutional provision on
the proscription against the impairment of obligations of contracts.
HELD:
The arguments raised by private respondents which pertain to the constitutionality of RA 9334
subject matter of the case pending litigation before the trial court have no bearing in resolving the
present petition.
On the issue of the issuance of the preliminary injunction and the petitioners petition for certiorari:
 The writ of certiorari to nullify and set aside the Order of May 4, 2005 as well as the Writ of
Preliminary Injunction issued by respondent Caguioa is granted.
 As a rule, courts should avoid issuing a writ of preliminary injunction which would in effect
dispose of the main case without trial.
 A court may issue a writ of preliminary injunction only when the petitioner assailing a statute
has made out a case of unconstitutionality or invalidity strong enough, in the mind of the judge,
to overcome the presumption of validity, in addition to a showing of a clear legal right to the
remedy sought.
Tax exemption being a mere statutory privilege, may be modified or withdraw at will by the granting
authority. Taxation is subject to restrictions which rest on the discretion of the authority exercising it.
As a general rule, tax exemptions are construed strictissimi juris against the taxpayer and liberally
in favor of the taxing authority. The burden of proof rests upon the party claiming exemption to
prove that it is in fact covered by the exemption so claimed. In case of doubt, non-exemption is
favored.
A tax exemption cannot be grounded upon the continued existence of a statute which precludes its
change or repeal. The rights granted under the Certificates of Registration and Tax Exemption of
private respondents are not absolute and unconditional as to constitute rights in esse - those clearly
founded on or granted by law or is enforceable as a matter of law. Whatever right may have been
acquired on the basis of the Certificates of Registration and Tax Exemption must yield to the State's
valid exercise of police power.The feared injurious effects of the imposition of duties, charges and
taxes on imported cigars, cigarettes, distilled spirits, fermented liquors and wines on private
respondents' businesses cannot possibly outweigh the dire consequences that the non-collection of
taxes, not to mention the unabated smuggling inside the SBF, would wreak on the government.
53. MERALCO V. PROVINCE OF LAGUNA
FACTS:
Meralco was granted by several municipalities of the Province of Laguna a franchise to operate. In
1991 Republic Act No. 7160 was issued in which enjoined local government units to create their
own sources of revenue and to levy taxes, fees and charges, subject to the limitations expressed
therein, consistent with the basic policy of local autonomy. Pursuant to this respondent province
enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993 which imposed taxes
on businesses enjoying a franchise at a rate of fifty percent (50%) of one percent (1%) of the gross
annual receipts, which shall include both cash sales and sales on account realized during the
preceding calendar year within this province, including the territorial limits on any city located in the
province.
Petitioner Meralco paid the said tax under protest. A formal claim for refund was thereafter sent by
Meralco to the Provincial Treasurer claiming that the franchise tax it had paid and continued to pay
to the National Government pursuant to P.D. 551 already included the franchise tax imposed by the
Provincial Tax Ordinance. Meralco also contended that Laguna’s imposition of franchise tax
contravened the provisions of P.D. 551 Section 1 which provided that the franchise tax payable by
all grantees of franchises to generate, distribute and sell electric current for light, heat and power
shall be two per cent (2%) of their gross receipts received from the sale of electric current and from
transactions incident to the generation, distribution and sale of electric current.
The issue was brought to a trial court, wherein a decision was made in favor of the Province of
Laguna, hence this petition.
ISSUE:
Whether the imposition of franchise tax by the Province of Laguna is violative of the non-
impairment clause of the Constitution.
HELD:
The imposition of franchise tax was deemed a valid exercise of power by the local government of
Laguna.
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 TAXATION1 CASE DIGESTS
Under the present Constitution, where there is neither a grant nor a prohibition by statute, tax
power must be deemed to exist, although Congress may provide statutory limitations and
guidelines. This rule’s purpose is to safeguard the viability and self-sufficiency of local government
units by directly granting them general and broad tax powers. However this delegation is not
absolute and unconditional as the legislature must see to it that (a) the taxpayer will not be over-
burdened or saddled with multiple and unreasonable impositions; (b) each local government unit
will have its fair share of available resources; (c) the resources of the national government will not
be unduly disturbed; and (d) local taxation will be fair, uniform, and just. The Local Government
Code contains a provision which also provides for the withdrawal of all tax exemptions that it may
have previously granted as in this case. The 1991 Code explicitly authorizes provincial
governments, notwithstanding “any exemption granted by any law or other special law, x x x (to)
impose a tax on businesses enjoying a franchise. It has also been held the oft used term in tax
exemptions in “lieu of all taxes” should be deemed to give way to this power of the Local
Governments to withdraw such exemptions. The Courts have also viewed its previous rulings on
tax exemption cases as laying stress on the legislative intent of the amendatory law whether the tax
exemption privilege is to be withdrawn or not rather than on whether the law can or cannot
withdraw the tax exemption, without violating the constitution.
While the Court often refers to tax exemptions in special franchises as being in the nature of
contracts and as a part of inducement for carryon on the franchise, they are far from being strictly
contractual in nature. Contractual tax exemptions are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered into by
them under enabling laws in which the government, acting in its private capacity, sheds its cloak of
authority and waives its governmental immunity. Tax exemptions of this kind may not be revoked
without impairing the obligations of contracts. They should not however be confused with tax
exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond
the purview of the non-impairment clause of the Constitution. The 1987 Constitution is explicit that
no franchise for the operation of a public utility shall be granted except under the condition that
such privilege shall be subject to amendment, alteration or repeal by Congress as and when the
common good so requires.
54. PROVINCE OF MISAMIS ORIENTAL V. CAGAYAN ELECTRIC
FACTS:
Cagayan Electric Power and Light Company, Inc. (CEPALCO for short) was granted a franchise on
June 17, 1961 under Republic Act No. 3247 to install, operate and maintain an electric light, heat
and power system in the City of Cagayan de Oro and its suburbs
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby granted, the grantee shall pay a
franchise tax equal to three per centum of the gross earnings for electric current sold under this
franchise, of which two per centum goes into the National Treasury and one per centum goes into
the treasury of the Municipalities of Tagoloan, Opol, Villanueva and Jasaan and Cagayan de Oro
City, as the case may be: Provided, That the said franchise tax of three per centum of the gross
earnings shall be in lieu of all taxes and assessments of whatever authority upon privileges
earnings, income, franchise, and poles, wires, transformers, and insulators of the grantee from
which taxes and assessments the grantee is hereby expressly exempted.
On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 of which
provides:
Sec. 9. Franchise Tax.—Any provision of special laws to the contrary notwithstanding, the province
may impose a tax on businesses enjoying franchise, based on the gross receipts realized within its
territorial jurisdiction, at the rate of not exceeding one-half of one per cent of the gross annual
receipts for the preceding calendar year.
Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted Provincial Revenue
Ordinance No. 19, whose Section 12 reads:
Sec. 12. Franchise Tax.—There shall be levied, collected and paid on businesses enjoying
franchise tax of one-half of one per cent of their gross annual receipts for the preceding calendar
year realized within the territorial jurisdiction of the province of Misamis Oriental.
The Provincial Treasurer of Misamis Oriental demanded payment of the provincial franchise tax
from CEPALCO. The company refused to pay, alleging that it is exempt from all taxes except the
franchise tax required by R.A. No. 6020. Nevertheless, in view of the opinion rendered by the
Provincial Fiscal, upon CEPALCO's request, upholding the legality of the Revenue Ordinance,
CEPALCO paid under protest on May 27, 1974 the sum of P 4,276.28 and appealed the fiscal's
ruling to the Secretary of Justice who reversed it and ruled in favor of CEPALCO. On June 26,
1976, the Secretary of Finance issued Local Tax Regulation No. 3-75 adopting entirely the opinion
of the Secretary of Justice.
ISSUE:
whether or not a corporation whose franchise expressly provides that the payment of the franchise
tax of three per centum of the gross earnings shall be in lieu of all taxes and assessments of
whatever authority upon privileges, earnings, income, franchise, and poles, wires, transformers,
and insulators of the grantee, is exempt from paying a provincial franchise tax. –
HELD:
CEPALCO is exempt. The rule is that a special and local statute applicable to a particular case is
not repealed by a later statute which is general in its terms, provisions and application even if the
terms of the general act are broad enough to include the cases in the special law (id.) unless there
is manifest intent to repeal or alter the special law. Republic Acts Nos. 3247, 3570 and 6020 are
special laws applicable only to CEPALCO, while P.D. No. 231 is a general tax law. The
presumption is that the special statutes are exceptions to the general law (P.D. No. 231) because
they pertain to a special charter granted to meet a particular set of conditions and circumstances.
The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes of
whatever authority" except the three per centum (3%) tax on its gross earnings. Local Tax
Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976, has made it crystal clear
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 TAXATION1 CASE DIGESTS
that the franchise tax provided in the Local Tax Code (P.D. No. 231, Sec. 9) may only be imposed
on companies with franchises that do not contain the exempting clause. Thus it provides:
The franchise tax imposed under local tax ordinance pursuant to Section 9 of the Local Tax Code,
as amended, shall be collected from businesses holding franchise but not from business
establishments whose franchise contain the "in-lieu-of-all-taxes-proviso".
Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the
franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila
Railroad from payment of internal revenue tax for its importations of coal and oil under Act No.
2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil.
224). Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light and Ice
Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato
55. CAGAYAN ELECTRIC POWER V. CIR
FACTS:
This is about the liability of petitioner Cagayan Electric Power & Light Co., Inc. for income tax
amounting to P75,149.73 for the more than seven-month period of the year 1969 in addition to
franchise tax.
The petitioner is the holder of a legislative franchise, Republic Act No. 3247, under which its
payment of 3% tax on its gross earnings from the sale of electric current is "in lieu of all taxes and
assessments of whatever authority upon privileges, earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee, from which taxes and assessments the grantee is
hereby expressly exempted" (Sec. 3). On June 27, 1968, Republic Act No. 5431 amended section
24 of the Tax Code by making liable for income tax all corporate taxpayers not specifically exempt
under paragraph (c) (1) of said section and section 27 of the Tax Code notwithstanding the
"provisions of existing special or general laws to the contrary". Thus, franchise companies were
subjected to income tax in addition to franchise tax.
However, in petitioner's case, its franchise was amended by Republic Act No. 6020, effective
August 4, 1969, by authorizing the petitioner to furnish electricity to the municipalities of Villanueva
and Jasaan, Misamis Oriental in addition to Cagayan de Oro City and the municipalities of
Tagoloan and Opol. The amendment reenacted the tax exemption in its original charter or
neutralized the modification made by Republic Act No. 5431 more than a year before.
By reason of the amendment to section 24 of the Tax Code, the Commissioner of Internal Revenue
in a demand letter dated February 15, 1973 required the petitioner to pay deficiency income taxes
for 1968-to 1971. The petitioner contested the assessments. The Commissioner cancelled the
assessments for 1970 and 1971 but insisted on those for 1968 and 1969.
The petitioner filed a petition for review with the Tax Court, which on February 26, 1982 held the
petitioner liable only for the income tax for the period from January 1 to August 3, 1969 or before
the passage of Republic Act No. 6020 which reiterated its tax exemption. The petitioner appealed
to this Court.
ISSUE:
Whether or not petitioner is exempted from income tax?
HELD:
WHEREFORE, the judgment of the Tax Court is affirmed with the modification that the petitioner is
liable only for the tax proper and that it should not pay the delinquency penalties. No costs.
We hold that Congress could impair petitioner's legislative franchise by making it liable for income
tax from which heretofore it was exempted by virtue of the exemption provided for in section 3 of its
franchise.
The Constitution provides that a franchise is subject to amendment, alteration or repeal by the
Congress when the public interest so requires (Sec. 8, Art. XIV, 1935 Constitution; Sec. 5, Art. XIV,
1973 Constitution), Section 1 of petitioner's franchise, Republic Act No. 3247, provides that it is
subject to the provisions of the Constitution and to the terms and conditions established in Act No.
3636 whose section 12 provides that the franchise is subject to amendment, alteration or repeal by
Congress.
Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax all
corporate taxpayers not expressly exempted therein and in section 27 of the Code, had the effect of
withdrawing petitioner's exemption from income tax.
The Tax Court acted correctly in holding that the exemption was restored by the subsequent
enactment on August 4, 1969 of Republic Act No. 6020 which reenacted the said tax exemption.
Hence, the petitioner is liable only for the income tax for the period from January 1 to August 3,
1969 when its tax exemption was modified by Republic Act No. 5431.
It is relevant to note that franchise companies, like the Philippine Long Distance Telephone
Company, have been paying income tax in addition to the franchise tax.
However, it cannot be denied that the said 1969 assessment appears to be highly controversial.
The Commissioner at the outset was not certain as to petitioner's income tax liability. It had reason
not to pay income tax because of the tax exemption in its franchise. For this reason, it should be
liable only for tax proper and should not be held liable for the surcharge and interest.
56. CASANOVAS V. HORD
Facts:
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 TAXATION1 CASE DIGESTS
Casanovas brought this action for the recovery of the sum of P9,600, paid by him under protest as
taxes on certain mining claims owned by him in the Province of Ambos Camarines against
Collector of Internal Revenue, Hord.
In January, 1897, the Spanish Government, in accordance with the provisions of the royal decree of
the 14th of May, 1867, granted to Casanovas certain mines in the said Province, of which mines
the latter is now the owner.
That in the said Decree, the plaintiff-appellant, on each mining claim of 60,000 sq.m. shall pay forty
escudos (P20.00) and twenty escudos (P10.00) for 150,000 sq. m., iron mines and mines of
combustible minerals shall be exempt from the annual tax for a period of 30 years, a further tax of
3% shall be paid on the gross earnings. And no other taxes, except those mentioned in the said
Decree shall be imposed upon mining and metallurgical industries.
Hord conceded that there were valid perfected mining concessions granted prior to the 11th of
April, 1899, however, the said concessions would fall within the provisions of sec. 134 of Act No.
1189 (Internal Revenue Act), and accordingly imposed tax upon these properties.
SEC. 134. On all valid perfected mining concessions granted prior to April eleventh, eighteen
hundred and ninety-nine, there shall be levied and collected on the after January first, nineteen
hundred and five, the following taxes:
2. (a) On each claim containing an area of sixty thousand square meters, an annual tax of one
hundred pesos; (b) and at the same rate proportionately on each claim containing an area in
excess of, or less than, sixty thousand square meters.
3. On the gross output of each an ad valorem tax equal to three per centum of the actual market
value of such output.
Casanovas claimed that said provision is void, as it violated section 5 of the Act of Congress of July
1, 1902 which provides that “No law impairing the obligations of contract shall be enacted”.
ISSUE:
W/N Sec. 134 of Act No. 1189 is valid? NO
HELD:
The judgment is REVERSED and ordered in favor of the plaintiff –appellant and against the
defendant-appellee for P9,600, with interest thereon.
The Court finds that this deed constituted a contract between the Spanish Government and the
plaintiff, the obligation of which contract was impaired by the enactment of section 134 of the
Internal Revenue Law above cited, thereby infringing the provisions above quoted from section 5 of
the act of Congress of July 1, 1902.The State had no power by subsequent legislation to impose
taxes upon the property that would infringe the obligations of contract.
In Conflict with Section 60 of the Act of Congress of July 1, 1902.
“That nothing in this Act shall be construed to effect the rights of any person, partnership, or
corporation, having a valid, perfected mining concession granted prior to April eleventh, eighteen
hundred and ninety-nine, but all such concessions shall be conducted under the provisions of the
law in force at the time they were granted, subject at all times to cancellation by reason of illegality
in the procedure by which they were obtained, or for failure to comply with the conditions prescribed
as requisite to their retention in the laws under which they were granted: Provided, That the owner
or owners of every such concession shall cause the corners made by its boundaries to be distinctly
marked with permanent monuments within six months after this act has been promulgated in the
Philippine Islands, and that any concessions, the boundaries of which are not so marked within this
period shall be free and open to explorations and purchase under the provisions of this act”
In this section, concessions can be canceled only by reason of illegality in the procedure by which
they were obtained, or for failure to comply with the conditions prescribed as requisite for their
retention in the laws under which they were granted. There is nothing in the section which indicates
that they can be canceled for failure to comply with the conditions prescribed by subsequent
legislation.
(iii) TAXATION OF SPECIAL ENTITIES
57. AMERICAN BIBLE SOCIETY V. CITY OF MANILA
FACTS:
In the course of its ministry, plaintiff's Philippine agency has been distributing and selling bibles
and/or gospel portions thereof (except during the Japanese occupation) throughout the Philippines
and translating the same into several Philippine dialects. The acting City Treasurer of the City of
Manila informed plaintiff that it was conducting the business of general merchandise since
November, 1945, without providing itself with the necessary Mayor's permit and municipal license,
in violation of Ordinance No. 3000, as amended, and Ordinances Nos. 2529, 3028 and 3364, and
required plaintiff to secure, within three days, the corresponding permit and license fees, together
with compromise covering the period from the 4th quarter of 1945 to the 2nd quarter of 1953, in the
total sum of P5,821.45.
Plaintiff protested against this requirement, but the City Treasurer demanded that plaintiff deposit
and pay under protest the sum of P5,891.45, if suit was to be taken in court regarding the same. To
avoid the closing of its business as well as further fines and penalties in the premises, plaintiff paid
to the defendant under protest the said permit and license fees in the aforementioned amount,
giving at the same time notice to the City Treasurer that suit would be taken in court to question the
legality of the ordinances under which, the said fees were being collected, which was done on the
same date by filing the complaint that gave rise to this action. In its complaint plaintiff prays that
judgment be rendered declaring the said Municipal Ordinance No. 3000, as amended, and
Ordinances Nos. 2529, 3028 and 3364 illegal and unconstitutional, and that the defendant be
ordered to refund to the plaintiff the sum of P5,891.45 paid under protest.
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 TAXATION1 CASE DIGESTS
Defendant answered the complaint, maintaining in turn that said ordinances were enacted by the
Municipal Board of the City of Manila by virtue of the power granted to it by section 2444,
subsection (m-2) of the Revised Administrative Code, superseded on June 18, 1949, by section 18,
subsection (1) of Republic Act No. 409, known as the Revised Charter of the City of Manila, and
praying that the complaint be dismissed, with costs against plaintiff.
RTC dismissed the complaint.
ISSUES:
1. WON the ordinances of the City of Manila, Nos. 3000, as amended, and 2529, 3028 and
3364, are constitutional and valid
2. WON the provisions of said ordinances are applicable or not to the case at bar.
HELD:
Decision appealed from is REVERSED. YES, it is valid.
Ordinance 3000 is of general application and not particularly directed against institutions like the
plaintiff, and it does not contain any provisions whatever prescribing religious censorship nor
restraining the free exercise and enjoyment of any religious profession. The necessity of the permit
is made to depend upon the power of the City to license or tax said business, trade or occupation.
The license fees required to be paid quarterly in Section 1 of said Ordinance No. 2529, as
amended, are not imposed directly upon any religious institution but upon those engaged in any of
the business or occupations therein enumerated, such as retail "dealers in general merchandise"
which, it is alleged, cover the business or occupation of selling bibles, books, etc.
The business of "retail dealers in general merchandise" is expressly enumerated in subsection (o),
section 18 of Republic Act No. 409; hence, an ordinance prescribing a municipal tax on said
business does not have to be approved by the President to be effective, as it is not among those
referred to in said subsection (ii). Moreover, the questioned ordinances are still in force, having
been promulgated by the Municipal Board of the City of Manila under the authority granted to it by
law.
Ordinance No. 2529, as amended, cannot be applied to appellant, for in doing so it would impair its
free exercise and enjoyment of its religious profession and worship as well as its rights of
dissemination of religious beliefs. With respect to Ordinance No. 3000, as amended, which
requires the obtention the Mayor's permit before any person can engage in any of the businesses,
trades or occupations enumerated therein, it does NOT impose any charge upon the enjoyment of
a right granted by the Constitution, nor tax the exercise of religious practices. Ordinance No. 3000
cannot be considered unconstitutional, even if applied to plaintiff Society. But as Ordinance No.
2529 of the City of Manila, as amended, is not applicable, Ordinance No. 3000, as amended is also
inapplicable to said business, trade or occupation of the plaintiff.
The license fee herein involved is imposed upon appellant for its distribution and sale of bibles and
other religious literature. The power to tax the exercise of a privilege is the power to control or
suppress its enjoyment. . . . Those who can tax the exercise of this religious practice can make its
exercise so costly as to deprive it of the resources necessary for its maintenance.
It is flat license tax levied and collected as a condition to the pursuit of activities whose enjoyment is
guaranteed by the constitutional liberties of press and religion and inevitably tends to suppress their
exercise.
The right to enjoy freedom of the press and religion occupies a preferred position as against the
constitutional right of property owners.
It may be true that in the case at bar the price asked for the bibles and other religious pamphlets
was in some instances a little bit higher than the actual cost of the same but this cannot mean that
appellant was engaged in the business or occupation of selling said "merchandise" for profit.
58. CIR V. BISHOP OF THE MISSIONARY DISTRICT
FACTS:
The Missionary District (Missionary District of the Philippine Islands of the Protestant Episcopal
Church the U.S.A.), a duly established religious order in the Philippines, received from the
Missionary Society (Domestic and Foreign Missionary Society of the Protestant Episcopal Church
in the US) various shipments of materials, supplies, equipment and other articles intended for use
in the construction and operation of the new St. Luke's Hospital in Quezon City and the Brent
Hospital and St. Stephen's High School. The Missionary District also received from a certain
William Minnis of Canada a stove for the use of the Brent Hospital. On these shipments, the
Commissioner of Internal Revenue levied and collected the total amount of P118,847 as
compensating tax.
The Bishop of the Missionary District filed claims for refund on the ground that under RA 1916, the
materials and articles received by him were exempt from the payment of compensating tax. As the
two-year period for recovery of tax was about to expire, the Bishop filed a petition for review in the
Court of Tax Appeals, without awaiting action on his claim for refund. Subsequently, he also filed
two supplemental petitions for review covering other shipments received by him and on which he
had paid compensating taxes.
The CIR denied respondent's claim for refund on the ground that St. Luke's Hospital was not a
charitable institution and, therefore, was not exempt under the law. He also contends that the
importations in question cannot be considered "donations" because the Missionary Society, which
made the shipments, and the Missionary District in the Philippines are not different persons but
rather are one and the same, the latter being a mere branch of the former. After trial, the Tax Court
rendered a decision holding the shipments exempt from taxation ordering the petitioner to refund to
the respondent the amount of P118,847. It denied the petitioner’s a motion for reconsideration of its
decision.
ISSUE:
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 TAXATION1 CASE DIGESTS
WON St. Luke's Hospital is exempt from taxation.
Note: The Secretary of Finance states in his Dept. Order No. 18 that hospitals admitting pay
patients and charity patients are not charitable institutions.
HELD:
YES. Petitions is denied.
This Court has already held that the following requisites must concur in order that a taxpayer may
claim exemption under the law (1) the imported articles must have been donated; (2) the donee
must be a duly incorporated or established international civic organization, religious or charitable
society, or institution for civic religious or charitable purposes; and (3) the articles so imported must
have been donated for the use of the organization, society or institution or for free distribution and
not for barter, sale or hire.
By stipulation of the parties, the respondent Bishop is admitted to be a corporation sole duly
registered with the Securities and Exchange Commission and that the Missionary District is a "duly
incorporated and established religious society." They are, therefore, entities separate and distinct
from the Missionary. The fact that the Missionary District, of which respondent is the Bishop, is a
branch of the Missionary Society is of no moment. It is a branch only in religious matters, in matters
of faith and dogma. In other respects, it is independent. The Tax Court's finding that the materials
and supplies were purchased by the Missionary Society with money obtained from contributions
from other people who should be considered the real donors is also assailed as being based on the
uncorroborated testimony of Robert Meyer, Treasurer of the Missionary District, who it is said, did
not have personal knowledge of the matter testified to by him. This is not so. As respondent points
out, the various deeds of donation state in paragraph 3 that the "Missionary Society is a non-profit
organization and derives its support from voluntary contributions."
CIR denied respondent's claim for refund because pursuant to the last proviso of RA 1916, the
Secretary of Finance issued Department Order No. 18 on October 20, 1958, stating that
Hospitals that admit pay patients and charity patients ... are not charitable institutions for purposes
of Republic Act No 1916.
It should be enough to point out that the admission of pay patients does not detract from the
charitable character of a hospital, if, as in the case of St. Luke's Hospital, its funds are devoted
exclusively to the Maintenance of the institution. The Secretary of Finance cannot limit or otherwise
qualify the enjoyment of this exemption granted under RA 1916 in implementing the law.
59. LLADOC V. CIR
FACTS:
M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to Rev. Fr. Crispin Ruiz, then parish
priest of Victorias, Negros Occidental, for the construction of a new Catholic Church in the locality.
The total amount was actually spent for the purpose intended.
The following year, Fr. Ruiz was subsitituted by his successor, Fr. Casimiro Lladoc (petitioner).
Subsequently, the donor M.B. Estate, Inc. filed the donor's gift tax return. The respondent
Commissioner of Internal Revenue issued an assessment for donee's gift tax against the Catholic
Parish of Victorias, of which Fr. Lladoc was already the priest. The
Tax amounted to P1,370.00 including surcharges plus interests of 1% monthly, and the
compromise for the late filing of the return.
Fr. Lladoc lodged a protest to the assessment and requested the withdrawal thereof. These were
denied. The petitioner then appealed to the Court of Tax Appeals. He contested among others:
 that at the time of the donation, he was not the parish priest in Victorias and it was his
predecessor, Fr. Ruiz, that should be liable
 that there is no legal entity or juridical person known as the "Catholic Parish Priest of
Victorias," and, therefore, he should not be liable for the donee's gift tax and the head of the
Diocese should be liable instead.
 that the assessment of the gift tax, even against the Roman Catholic Church, would not be
valid, for such would be a clear violation of section 22(3), Art. VI of the Constitution which
exempts from taxation cemeteries, churches and parsonages or convents, appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious purposes.
 CTA: affirmed the decision of the Commissioner of Internal Revenue except with regard to the
imposition of the compromise penalty in the amount of P20.00. The petioner then appealed to
the SC.
The Supreme Court issued a resolution ordering parties to show cause why the Head of the
Diocese should or should not be substituted in lieu of Lladoc. It also issued a resolution ordering
the Head of the Diocese to present issues and defenses he might wish to raise. The Roman
Catholic Bishop of Bacolod, manifested that it was submitting itself to the jurisdiction and orders of
this Court and that it was presenting, by reference, the brief of petitioner Fr. Lladoc as its own and
for all purposes.
ISSUE:
Whether or not Fr Lladoc should be liable for the assessed donee's gift tax on the P10,000.00
donated for the construction of the Victorias Parish Church.
HELD:
The tax liability exists! However, Fr. Lladoc is NOT personally liable for the said gift tax. Instead, the
Supreme Court ordered that the Head of the Diocese (Bishop of Bacolod) should pay the said gift
tax.
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 TAXATION1 CASE DIGESTS
Gift tax is an excise tax, not property tax; Excise tax is NOT included in tax exemption even if
exclusively used for religious purposes. The exemption is only from the payment of taxes assessed
on such properties enumerated, as property taxes, as contra distinguished from excise taxes. In the
present case, what the Collector assessed was a donee's gift tax; the assessment was not on the
properties themselves. It did not rest upon general ownership; it was an excise upon the use made
of the properties, upon the exercise of the privilege of receiving the properties. Manifestly, gift tax is
not within the exempting provisions of the section just mentioned. A gift tax is not a property tax, but
an excise tax imposed on the transfer of property by way of gift inter vivos, the imposition of which
on property used exclusively for religious purposes, does not constitute an impairment of the
Constitution. As well observed by the learned respondent Court, the phrase "exempt from taxation,"
as employed in the Constitution (supra) should not be interpreted to mean exemption from all kinds
of taxes. And there being no clear, positive or express grant of such privilege by law, in favor of
petitioner, the exemption herein must be denied.
Head of Diocese is the real party in interest. The Court gave merit to the claim of Fr. Lladoc that
cannot be liable as he was not yet a priest of Victorias at the time of donation. The “Catholic Parish
Priest of Victorias” as the donee pertains to the Head of the Diocese, therefore making the latter the
real party in interest and thus validly may substitute Fr. Lladoc as party in the case; and thus liable
for the payment of the excise tax.
60. HERRERA V. QUEZON CITY BOARD OF ASSESSMENT APPEALS
FACTS:
Director of the Bureau of Hospitals authorized the petitioners to establish and operate the "St.
Catherine's Hospital". On or about January 3, 1953, the petitioners sent a letter to the Quezon City
Assessor requesting exemption from payment of real estate tax on the lot, building and other
improvements comprising the hospital stating that the same was established for charitable and
humanitarian purposes and not for commercial gain. After an inspection of the premises and after a
careful study of the case, the exemption from real property taxes was granted effective the years
1953, 1954 and 1955.
Subsequently, however, in a letter the Quezon City Assessor notified the petitioners that the
previously mentioned properties were re-classified from exempt to "taxable" and thus assessed for
real property taxes effective 1956. The petitioners appealed the assessment to the Quezon City
Board of Assessment Appeals, which, in a decision affirmed the decision of the City Assessor.
The building involved in this case is principally used as a hospital. It is mainly a surgical and
orthopedic hospital with emphasis on obstetrical cases, the latter constituting 90% of the total
number of cases registered therein. The hospital has thirty-two (32) beds, of which twenty (20) are
for charity-patients and twelve (12) for pay-patients. It is made to appear that there are two kinds of
charity patients — (a) those who come for consultation only ("out-charity patients"); and (b) those
who remain in the hospital for treatment ("lying-in-patients"). The out-charity patients are given free
consultation and prescription, although sometimes they are furnished with free medicines. The
charity lying-in-patients are given free medical service and medicine although the food served to
the pay-patients is very much better than that given to the former.
Petitioners also operate within the premises of the hospital the "St. Catherine's School of
Midwifery". The students practice in the St. Catherine's Hospital, as well as in the St. Mary's
Hospital, which is also owned by the petitioners.
ISSUE:
Whether or not the lot, building and other improvements occupied by the St. Catherine Hospital are
exempt from the real property tax and whether or not the said properties are used exclusively for
charitable or educational purposes.
HELD:
Exempted from real property tax. It should be noted, however, that, according to the very statement
of facts made in the decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20)
are for charity-patients; that "the income realized from pay-patients is spent for improvement of the
charity wards;" and that "petitioners, as directress" of said hospital, "does not receive any salary,"
although its resident physician gets a monthly salary of P170.00. "In other words, where rendering
charity is its primary object, and the funds derived from payments made by patients able to pay are
devoted to the benevolent purposes of the institution, the mere fact that a profit has been made will
not deprive the hospital of its benevolent character"
Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is "not limited to property actually indispensable" therefor but extends to facilities which
are "incidental to and reasonably necessary for" the accomplishment of said purposes, such as, in
the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing
facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents"
Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is,
therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from
claiming that it is devoted exclusively to benevolent purposes, it being admitted that the income
derived from pay-patients is devoted to the improvement of the charity wards, which represent
almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-charity patients" who
come only for consultation.
Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200
students, who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which,
likewise, belongs to petitioners herein, does not, and cannot, affect the exemption to which St.
Catherine's Hospital is entitled under our fundamental law. On the contrary, it furnishes another
ground for exemption for or "all lands, building and improvements used exclusively for religious,
charitable or educational purposes shall be exempt from taxation," pursuant to the Constitution,
regardless of whether or not material profits are derived from the operation of the institutions in
question. In other words, Congress may, if it deems fit to do so, impose taxes upon such "profits",
but said "lands, buildings and improvements" are beyond its taxing power.
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 TAXATION1 CASE DIGESTS
61. THE ROMAN CATHOLIC BISHOP OF NUEVA SEGOVIA v. THE PROVINCIAL BOARD OF
ILOCOS NORTE
FACTS:
The Roman Catholic Apostolic Church, represented by the Bishop of Nueva Segovia, possesses
and is the owner of a parcel of land in the municipality of San Nicolas, Ilocos Norte, all four sides of
which face on public streets. On the south side is a part of the churchyard, the convent and an
adjacent lot used for a vegetable garden and in which there is a stable and a well for the use of the
convent. In the center is the remainder of the churchyard and the church. On the north is an old
cemetery with two of its walls still standing, and a portion where formerly stood a tower, the base of
which still be seen.
The Province of Ilocos Norte required the Church to pay the land tax on the lot adjoining the
convent and the lot which formerly was the cemetery with the portion where the tower stood. The
Bishop paid under protest and then filed an action for the recovery of the amounts paid, alleging
that the collection of this tax is illegal.
ISSUE:
Whether or not the parcels of land are exempt from tax.
HELD:
The lots are exempt from land tax. The Province of Ilocos Norte was ordered to refund the amounts
paid.
The exemption in favor of the convent in the payment of the land tax (sec. 344 [c] Administrative
Code) refers to the home of the parties who presides over the church and who has to take care of
himself in order to discharge his duties. It therefore must, in the sense, include not only the land
actually occupied by the church, but also the adjacent ground destined to the ordinary incidental
uses of man. Except in large cities where the density of the population and the development of
commerce require the use of larger tracts of land for buildings, a vegetable garden belongs to a
house and, in the case of a convent, it use is limited to the necessities of the priest, which comes
under the exemption.
In regard to the lot which formerly was the cemetery, while it is no longer used as such, neither is it
used for commercial purposes and, according to the evidence, is now being used as a lodging
house by the people who participate in religious festivities, which constitutes an incidental use in
religious functions, which also comes within the exemption.
62. CIR v. COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN’S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC.
FACTS:
YMCA is a non-stock, non-profit institution, which conducts various programs and activities that are
beneficial to the public, especially the young people, pursuant to its religious, educational and
charitable objectives. In 1980, YMCA, among others, an amount of income (about P700k+) from
leasing out a portion of its premises to small shop owners, like restaurants and canteen operators,
and from parking fees collected from non-members. The CIR thus issued an assessment to YMCA
totaling about P415k+ including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency withholding tax on
wages. YMCA protested the assessment and filed a letter. In reply, the CIR denied the claims of
YMCA.YMCA thus filed a petition to the CTA to take out the taxes and CTA ruled in favor of YMCA.
CIR filed a petition with the CA to reverse, but CA affirmed CTA's decision.
ISSUE:
W/N the income derived from rentals of real property owned by YMCA (established as "a welfare,
educational and charitable non-profit corporation") is subject to income tax under the NIRC and
Constitution
HELD:
YES, the income derived by YMCA from rentals of its real property is subject to income tax.
Under the NIRC:
While Section 27 of the NIRC provides that non-profit organizations and clubs shall not be taxed on
their income, it also provides that this exemption will not apply to income derived from 1) properties,
real or personal, and 2) any other activities conducted for profit shall be subject to tax (amended by
PD 1457).
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
interpretation in construing tax exemptions. A claimed exemption must expressly be granted in a
statute stated in a language too clear to be mistaken. The phrase "any of their activities conducted
for profit” does not qualify the word “properties.” This makes income from the property of the
organization taxable, regardless of how that income is used -- whether for profit or for lofty non-
profit purposes. Thus, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the aforementioned law.
Under the Constitution:
YMCA submits that Article VI, Section 28 of the Constitution exempts “charitable institutions” from
the payment not only of property taxes but also of income tax from any source. However, it is clear
from the debates and opinions of the constitutional framers that the exemption does not pertain to
income tax but only property taxes.
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 TAXATION1 CASE DIGESTS
YMCA also posits that it is an "educational instititution" within the purview of Art XIV, Sec 4. For the
YMCA to be granted the exemption, it must prove with substantial evidence that: it falls under the
classification non-stock, non-profit educational institution; and the income it seeks to be exempted
from taxation is used actually, directly, and exclusively for educational purposes.
However, no evidence was submitted by YMCA to prove that they met the requisites. The term
“educational institution” or “institution of learning” has acquired a well-known technical meaning, of
which the members of the Constitutional Commission are deemed cognizant.
Under the Education Act of 1982, such term refers to schools, which is synonymous with formal
education OR a school seminary, college, or educational establishment. The Court, upon
examining the “Amended Articles of Incorporation” and “By-Laws” of the YMCA, but found nothing
in them that even hints that it is a school or an educational institution.
Even if YMCA is an educational institution, the Court also notes that YMCA did not submit proof of
the proportionate amount of the subject income that was actually, directly and exclusively used for
educational purposes.
NOTE: (if Sir asks about how this differs with OTHER cases): The cases relied on by YMCA do not
support its cause. YMCA of Manila v. CIR and Abra Valley College, Inc. v. Aquino are not
applicable, because the controversy in both cases involved exemption from the payment of
property tax, not income tax. Hospital de San Juan de Dios, Inc. v. Pasay City is not in point either,
because it involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City -- an issue not at all related to that involved
in a claimed exemption from the payment if income taxes imposed on property leases. In Jesus
Sacred Heart College v. Com. Of Internal Revenue, the party therein, which claimed an exemption
from the payment of income tax, was an educational institution which submitted substantial
evidence that the income subject of the controversy had been devoted or used solely for
educational purposes. On the other hand, YMCA in the present case had not given any proof that
it is an educational institution, or that of its rent income is actually, directly and exclusively used for
educational purposes.
63. LUNG CENTER OF THE PHILIPPINES V. QUEZON CITY
FACTS:
Lung Center is a non-stock and non-profit entity established by PD No. 1823. It is the registered
owner of a parcel of land located at Quezon Ave, QC. Erected in the middle of the aforesaid lot is a
hospital known as the Lung Center of the Philippines. A big space at the ground floor is being
leased to private parties as canteen and small store spaces as well as to medical practitioners who
use the same as private clinics for their patients whom they charge for their professional fees. Lung
Center accepts paying and non-paying patients and renders medical services to both paying and
non-paying out-patients. Aside from its income from paying patients, it receives annual subsidies
from the government.
In 1993, both the land and hospital building were assessed for real property taxes in P4,554,860 by
the City Assessor. Petitioner filed a Claim for Exemption from real property taxes with the City
Assessor, on the ground that it is a charitable institution. It was denied. They appealed his decision
to the Local Board of Assessment Appeals who dismissed their petition and was affirmed by the
Central Board of Assessment Appeals as well as the Court of Appeals.
Lung Center alleges that under Sec.28, par.3 of the Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its hospital beds were used for charity patients
and that the major thrust of its hospital is to serve charity patients. Thus, it contends that it is a
charitable institution exempt from taxes.
ISSUES:
1. Whether Lung Center is a charitable institution within the context of PD1823 and the 1973
and 1987 Constitutions?
2. Whether the real properties of Lung Center are exempt from real property taxes?
HELD:
Petition was partially granted. As a charitable institution, Lung Center is exempt from real property
taxes but those portions that are leased to private entities are taxable. Charity may be applied to
almost anything that tend to promote the well-being of social man. 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 maintaining for gain, profit or private advantage.
Under PD1823, petitioner is a non-profit and non-stock corporation to be administered by the Office
of the President with the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the high
incidence of lung and pulmonary diseases in the Philippines. Hence, its medical services are to be
rendered to the public in general in any and all walks of life including those who are poor and needy
without discrimination.
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 any of the persons managing or operating the institution.
In this case, petitioner adduced substantial evidence that it spent its income, including the subsidies
from government for 1991 and 1992 for its patients and for the operation of the hospital. It even
incurred a net loss in those years from its operations.
Even though petitioner is a charitable institution, the Court held that the portions of its real property
leased to private entities are not exempt as they are not actually, directly and exclusively used for
charitable purposes. PD1823 holds that petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building. The tax exemption under the Constitution
only covers property tax.
MCZNOA / ALSC2016 / ATTY. MONTERO
 TAXATION1 CASE DIGESTS
Under the 1987 Constitution, petitioner is burdened to prove that it is a charitable institution and its
real properties are ACTUALLY, DIRECTLY AND EXCLUSIVELY used for charitable purposes. 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. 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, not the use of the
income from the real property that is determinative of whether the property is used for tax-exempt
purposes.
Petitioner had failed to prove that the entirety of its real property is actually, directly and exclusively
used for charitable purposes. The portions of the land leased to private entities as well as those
parts of the hospital leased to private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions of the hospital used for its
patients whether paying or non-paying are exempt from real property taxes.
64. CIR V. ST. LUKE’S MEDICAL CENTER
FACTS:
St. Luke’s Medical Center, Inc. (St. Luke’s) is a hospital organized as a non-stock and non-profit
corporation.The BIR assessed St. Luke’s deficiency taxes for 1998 comprised of deficiency income
tax, value-added tax, and withholding tax. The BIR claimed that St. Luke’s should be liable for
income tax at a preferential rate of 10% as provided for by Section 27(B). Further, the BIR claimed
that St. Luke’s was actually operating for profit in 1998 because only 13% of its revenues came
from charitable purposes. Moreover, the hospital’s board of trustees, officers and employees
directly benefit from its profits and assets. On the other hand, St. Luke’s maintained that it is a
non-stock and non-profit institution for charitable and social welfare purposes exempt from income
tax under Section 30(E) and (G) of the NIRC. It argued that the making of profit per se does not
destroy its income tax exemption.
ISSUE:
Whether St. Luke’s is liable for deficiency income tax in 1998 under Section 27(B) of the NIRC,
which imposes a preferential tax rate of 10^ on the income of proprietary non-profit hospitals.
HELD:
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section 30(E) and (G) on
the other hand, can be construed together without the removal of such tax exemption.
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1) proprietary
non-profit educational institutions and (2) proprietary non-profit hospitals. The only qualifications
for hospitals are that they must be proprietary and non-profit. “Proprietary” means private, following
the definition of a “proprietary educational institution” as “any private school maintained and
administered by private individuals or groups” with a government permit. “Non-profit” means no
net income or asset accrues to or benefits any member or specific person, with all the net income
or asset devoted to the institution’s purposes and all its activities conducted not for profit. “Non-
profit” does not necessarily mean “charitable.” In Collector of Internal Revenue v. Club Filipino Inc.
de Cebu, this Court considered as non-profit a sports club organized for recreation and
entertainment of its stockholders and members. The club was primarily funded by membership fees
and dues. If it had profits, they were used for overhead expenses and improving its golf course. The
club was non-profit because of its purpose and there was no evidence that it was engaged in
a profit-making enterprise.
To be a charitable institution, however, an organization must meet the substantive test of charity
in Lung Center. The issue in Lung Center concerns exemption from real property tax and not
income tax. However, it provides for the test of charity in our jurisdiction. Charity is essentially a gift
to an indefinite number of persons which lessens the burden of government. In other words,
charitable institutions provide for free goods and services to the public which would otherwise
fall on the shoulders of government. Thus, as a matter of efficiency, the government forgoes taxes
which should have been spent to address public needs, because certain private entities
already assume a part of the burden. This is the rationale for the tax exemption of charitable
institutions. The loss of taxes by the government is compensated by its relief from doing public
works which would have been funded by appropriations from the Treasury
The Constitution exempts charitable institutions only from real property taxes. In the NIRC,
Congress decided to extend the exemption to income taxes. However, the way Congress crafted
Section 30(E) of the NIRC is materially different from Section 28(3), Article VI of the Constitution.
(Emphasis supplied)
Section 30(E) of the NIRC defines the corporation or association that is exempt from income tax.
On the other hand, Section 28(3), Article VI of the Constitution does not define a charitable
institution, but requires that the institution “actually, directly and exclusively” use the property for a
charitable purpose.
To be exempt from real property taxes, Section 28(3), Article VI of the Constitution requires that a
charitable institution use the property “actually, directly and exclusively” for charitable purposes.
To be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable institution
must be “organized and operated exclusively” for charitable purposes. Likewise, to be exempt
from income taxes, Section 30(G) of the NIRC requires that the institution be “operated exclusively”
for social welfare. However, the last paragraph of Section 30 of the NIRC qualifies the words
“organized and operated exclusively” by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the disposition made of such income,
shall be subject to tax imposed under this Code. In short, the last paragraph of Section 30 provides
that if a tax exempt charitable institution conducts “any” activity for profit, such activity is not tax
exempt even as its not-for-profit activities remain tax exempt.
MCZNOA / ALSC2016 / ATTY. MONTERO
 TAXATION1 CASE DIGESTS

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

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

St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be completely
tax exempt from all its income. However, it remains a proprietary non-profit hospital under Section
27(B) of the NIRC as long as it does not distribute any of its profits to its members and such profits
are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital, is
entitled to the preferential tax rate of 10% on its net income from its for-profit activities. St. Luke’s is
therefore liable for deficiency income tax in 1998 under Section 27(B) of the NIRC. However, St.
Luke’s has good reasons to rely on the letter dated 6 June 1990 by the BIR, which opined that St.
Luke’s is “a corporation for purely charitable and social welfare purposes” and thus exempt from
income tax.

In Michael J. Lhuillier, Inc. v. Commissioner of Internal Revenue, the Court said that “good faith and
honest belief that one is not subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.”

MCZNOA / ALSC2016 / ATTY. MONTERO