G.R. No. 115455 October 30, 1995

ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 115525 October 30, 1995

JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary
of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their
AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.

G.R. No. 115543 October 30, 1995

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,

vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE
BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS, respondents.

G.R. No. 115544 October 30, 1995

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING
CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L.
DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON.
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B.
DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115754 October 30, 1995

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.

G.R. No. 115781 October 30, 1995

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C.

CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE
ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V.
VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT
COALITION, INC., and PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAÑADA, petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF
INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995

PHILIPPINE AIRLINES, INC., petitioner,

vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 115873 October 30, 1995

COOPERATIVE UNION OF THE PHILIPPINES, petitioner,

vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON.
TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B.
DE OCAMPO, in his capacity as Secretary of Finance, respondents.

G.R. No. 115931 October 30, 1995

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF

PHILIPPINE BOOK SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO,
as the Commissioner of Internal Revenue; and HON. GUILLERMO PARAYNO, JR., in his
capacity as the Commissioner of Customs, respondents.

RESOLUTION

MENDOZA, J.:

These are motions seeking reconsideration of our decision dismissing the petitions filed in these
cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the Expanded
Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by the several
petitioners in these cases, with the exception of the Philippine Educational Publishers Association,
Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.

The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a reply.
In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.

On June 27, 1995 the matter was submitted for resolution.

I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners (Tolentino,
Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and Builders
Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did not "originate
exclusively" in the House of Representatives as required by Art. VI, §24 of the Constitution. Although
they admit that H. No. 11197 was filed in the House of Representatives where it passed three
readings and that afterward it was sent to the Senate where after first reading it was referred to the
Senate Ways and Means Committee, they complain that the Senate did not pass it on second and
third readings. Instead what the Senate did was to pass its own version (S. No. 1630) which it
approved on May 24, 1994. Petitioner Tolentino adds that what the Senate committee should have
done was to amend H. No. 11197 by striking out the text of the bill and substituting it with the text of
S. No. 1630. That way, it is said, "the bill remains a House bill and the Senate version just becomes
the text (only the text) of the House bill."

The contention has no merit.

The enactment of S. No. 1630 is not the only instance in which the Senate proposed an amendment
to a House revenue bill by enacting its own version of a revenue bill. On at least two occasions
during the Eighth Congress, the Senate passed its own version of revenue bills, which, in
consolidation with House bills earlier passed, became the enrolled bills. These were:

R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND DUTY
EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved by the President
on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which was approved by the
House on January 29, 1992, and S. No. 1920, which was approved by the Senate on February 3,
1992.

R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE REWARD
TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES) which was approved by
the President on May 22, 1992. This Act is a consolidation of H. No. 22232, which was approved by
the House of Representatives on August 2, 1989, and S. No. 807, which was approved by the
Senate on October 21, 1991.

On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on
which the laws were approved by the President and dates the separate bills of the two chambers of
Congress were respectively passed:

1. R.A. NO. 7642

AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING FOR

THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL INTERNAL
REVENUE CODE (December 28, 1992).

House Bill No. 2165, October 5, 1992

Senate Bill No. 32, December 7, 1992

2. R.A. NO. 7643

AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE TO

REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY MONTH AND TO
ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN VAT REVENUE,
AMENDING FOR THIS PURPOSE CERTAIN SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992)

House Bill No. 1503, September 3, 1992

Senate Bill No. 968, December 7, 1992

3. R.A. NO. 7646

AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE TO

PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE TAXES BY
LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE CERTAIN PROVISIONS
OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED (February 24,
1993)

House Bill No. 1470, October 20, 1992

Senate Bill No. 35, November 19, 1992

4. R.A. NO. 7649

AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL

SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS) TO
DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE RATE OF
THREE PERCENT (3%) ON GROSS PAYMENT FOR THE PURCHASE OF
GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS FOR SERVICES
RENDERED BY CONTRACTORS (April 6, 1993)

House Bill No. 5260, January 26, 1993

Senate Bill No. 1141, March 30, 1993

5. R.A. NO. 7656

AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED

CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN CONDITIONS TO
THE NATIONAL GOVERNMENT, AND FOR OTHER PURPOSES (November 9,
1993)

House Bill No. 11024, November 3, 1993

Senate Bill No. 1168, November 3, 1993

6. R.A. NO. 7660

AN ACT RATIONALIZING FURTHER THE STRUCTURE AND ADMINISTRATION

OF THE DOCUMENTARY STAMP TAX, AMENDING FOR THE PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED, ALLOCATING FUNDS FOR SPECIFIC PROGRAMS, AND FOR
OTHER PURPOSES (December 23, 1993)

House Bill No. 7789, May 31, 1993

Senate Bill No. 1330, November 18, 1993

7. R.A. NO. 7717

 AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF SHARES
OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK EXCHANGE
OR THROUGH INITIAL PUBLIC OFFERING, AMENDING FOR THE PURPOSE
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, BY INSERTING A
NEW SECTION AND REPEALING CERTAIN SUBSECTIONS THEREOF (May 5,
1994)

House Bill No. 9187, November 3, 1993

Senate Bill No. 1127, March 23, 1994

Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise of
its power to propose amendments to bills required to originate in the House, passed its own version
of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630, petitioners
Tolentino and Roco, as members of the Senate, voted to approve it on second and third readings.

On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would make
if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted as a
substitute measure, "taking into Consideration . . . H.B. 11197."

Indeed, so far as pertinent, the Rules of the Senate only provide:

RULE XXIX

AMENDMENTS

xxx xxx xxx

§68. Not more than one amendment to the original amendment shall be considered.

No amendment by substitution shall be entertained unless the text thereof is

submitted in writing.

Any of said amendments may be withdrawn before a vote is taken thereon.

§69. No amendment which seeks the inclusion of a legislative provision foreign to the
subject matter of a bill (rider) shall be entertained.

xxx xxx xxx

§70-A. A bill or resolution shall not be amended by substituting it with another which
covers a subject distinct from that proposed in the original bill or resolution.
(emphasis added).

Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine Senate
possesses less power than the U.S. Senate because of textual differences between constitutional
provisions giving them the power to propose or concur with amendments.

Art. I, §7, cl. 1 of the U.S. Constitution reads:

 All Bills for raising Revenue shall originate in the House of Representatives; but the
Senate may propose or concur with amendments as on other Bills.

Art. VI, §24 of our Constitution reads:

All appropriation, revenue or tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with amendments.

The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention of
the framers of our Constitution to restrict the Senate's power to propose amendments to revenue
bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify "originate" and
"the words 'as in any other bills' (sic) were eliminated so as to show that these bills were not to be
like other bills but must be treated as a special kind."

The history of this provision does not support this contention. The supposed indicia of constitutional
intent are nothing but the relics of an unsuccessful attempt to limit the power of the Senate. It will be
recalled that the 1935 Constitution originally provided for a unicameral National Assembly. When it
was decided in 1939 to change to a bicameral legislature, it became necessary to provide for the
procedure for lawmaking by the Senate and the House of Representatives. The work of proposing
amendments to the Constitution was done by the National Assembly, acting as a constituent
assembly, some of whose members, jealous of preserving the Assembly's lawmaking powers,
sought to curtail the powers of the proposed Senate. Accordingly they proposed the following
provision:

All bills appropriating public funds, revenue or tariff bills, bills of local application, and
private bills shall originate exclusively in the Assembly, but the Senate may propose
or concur with amendments. In case of disapproval by the Senate of any such bills,
the Assembly may repass the same by a two-thirds vote of all its members, and
thereupon, the bill so repassed shall be deemed enacted and may be submitted to
the President for corresponding action. In the event that the Senate should fail to
finally act on any such bills, the Assembly may, after thirty days from the opening of
the next regular session of the same legislative term, reapprove the same with a vote
of two-thirds of all the members of the Assembly. And upon such reapproval, the bill
shall be deemed enacted and may be submitted to the President for corresponding
action.

The special committee on the revision of laws of the Second National Assembly vetoed the proposal.
It deleted everything after the first sentence. As rewritten, the proposal was approved by the National
Assembly and embodied in Resolution No. 38, as amended by Resolution No. 73. (J. ARUEGO,
KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment was submitted to the
people and ratified by them in the elections held on June 18, 1940.

This is the history of Art. VI, §18 (2) of the 1935 Constitution, from which Art. VI, §24 of the present
Constitution was derived. It explains why the word "exclusively" was added to the American text from
which the framers of the Philippine Constitution borrowed and why the phrase "as on other Bills" was
not copied. Considering the defeat of the proposal, the power of the Senate to propose amendments
must be understood to be full, plenary and complete "as on other Bills." Thus, because revenue bills
are required to originate exclusively in the House of Representatives, the Senate cannot enact
revenue measures of its own without such bills. After a revenue bill is passed and sent over to it by
the House, however, the Senate certainly can pass its own version on the same subject matter. This
follows from the coequality of the two chambers of Congress.

That this is also the understanding of book authors of the scope of the Senate's power to concur is
clear from the following commentaries:

The power of the Senate to propose or concur with amendments is apparently

without restriction. It would seem that by virtue of this power, the Senate can
practically re-write a bill required to come from the House and leave only a trace of
the original bill. For example, a general revenue bill passed by the lower house of the
United States Congress contained provisions for the imposition of an inheritance tax .
This was changed by the Senate into a corporation tax. The amending authority of
the Senate was declared by the United States Supreme Court to be sufficiently broad
to enable it to make the alteration. [Flint v. Stone Tracy Company, 220 U.S. 107, 55
L. ed. 389].

(L. TAÑADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES 247

(1961))

The above-mentioned bills are supposed to be initiated by the House of

Representatives because it is more numerous in membership and therefore also
more representative of the people. Moreover, its members are presumed to be more
familiar with the needs of the country in regard to the enactment of the legislation
involved.

The Senate is, however, allowed much leeway in the exercise of its power to propose
or concur with amendments to the bills initiated by the House of Representatives.
Thus, in one case, a bill introduced in the U.S. House of Representatives was
changed by the Senate to make a proposed inheritance tax a corporation tax. It is
also accepted practice for the Senate to introduce what is known as an amendment
by substitution, which may entirely replace the bill initiated in the House of
Representatives.

(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).

In sum, while Art. VI, §24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively in
the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which a bill is
referred may do any of the following:

(1) to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new bill
as a substitute, in which case it will be known as a committee bill; or (4) to make no
report at all.

(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))

To except from this procedure the amendment of bills which are required to originate in the House
by prescribing that the number of the House bill and its other parts up to the enacting clause must be
preserved although the text of the Senate amendment may be incorporated in place of the original
body of the bill is to insist on a mere technicality. At any rate there is no rule prescribing this form. S.
No. 1630, as a substitute measure, is therefore as much an amendment of H. No. 11197 as any
which the Senate could have made.

II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume that
S. No. 1630 is an independent and distinct bill. Hence their repeated references to its certification
that it was passed by the Senate "in substitution of S.B. No. 1129, taking into consideration P.S.
Res. No. 734 and H.B. No. 11197," implying that there is something substantially different between
the reference to S. No. 1129 and the reference to H. No. 11197. From this premise, they conclude
that R.A. No. 7716 originated both in the House and in the Senate and that it is the product of two
"half-baked bills because neither H. No. 11197 nor S. No. 1630 was passed by both houses of
Congress."

In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of the
provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at the same time indicates that
the provisions of the Senate bill were precisely intended to be amendments to the House bill.

Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill was
a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass the
Senate on second and three readings. It was enough that after it was passed on first reading it was
referred to the Senate Committee on Ways and Means. Neither was it required that S. No. 1630 be
passed by the House of Representatives before the two bills could be referred to the Conference
Committee.

There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630. When
the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the disclosure of bank
deposits), were referred to a conference committee, the question was raised whether the two bills
could be the subject of such conference, considering that the bill from one house had not been
passed by the other and vice versa. As Congressman Duran put the question:

MR. DURAN. Therefore, I raise this question of order as to procedure: If a House bill
is passed by the House but not passed by the Senate, and a Senate bill of a similar
nature is passed in the Senate but never passed in the House, can the two bills be
the subject of a conference, and can a law be enacted from these two bills? I
understand that the Senate bill in this particular instance does not refer to
investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of
deposits in banks but also investigation of investments in government securities.
Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.

Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:

THE SPEAKER. The report of the conference committee is in order. It is precisely in

cases like this where a conference should be had. If the House bill had been
approved by the Senate, there would have been no need of a conference; but
precisely because the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now considering the report of
that committee.
 (2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))

III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are distinct
and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's) contention that
because the President separately certified to the need for the immediate enactment of these
measures, his certification was ineffectual and void. The certification had to be made of the version
of the same revenue bill which at the moment was being considered. Otherwise, to follow petitioners'
theory, it would be necessary for the President to certify as many bills as are presented in a house of
Congress even though the bills are merely versions of the bill he has already certified. It is enough
that he certifies the bill which, at the time he makes the certification, is under consideration. Since on
March 22, 1994 the Senate was considering S. No. 1630, it was that bill which had to be certified.
For that matter on June 1, 1993 the President had earlier certified H. No. 9210 for immediate
enactment because it was the one which at that time was being considered by the House. This bill
was later substituted, together with other bills, by H. No. 11197.

As to what Presidential certification can accomplish, we have already explained in the main decision
that the phrase "except when the President certifies to the necessity of its immediate enactment,
etc." in Art. VI, §26 (2) qualifies not only the requirement that "printed copies [of a bill] in its final form
[must be] distributed to the members three days before its passage" but also the requirement that
before a bill can become a law it must have passed "three readings on separate days." There is not
only textual support for such construction but historical basis as well.

Art. VI, §21 (2) of the 1935 Constitution originally provided:

(2) No bill shall be passed by either House unless it shall have been printed and
copies thereof in its final form furnished its Members at least three calendar days
prior to its passage, except when the President shall have certified to the necessity of
its immediate enactment. Upon the last reading of a bill, no amendment thereof shall
be allowed and the question upon its passage shall be taken immediately thereafter,
and the yeas and nays entered on the Journal.

When the 1973 Constitution was adopted, it was provided in Art. VIII, §19 (2):

(2) No bill shall become a law unless it has passed three readings on separate days,
and printed copies thereof in its final form have been distributed to the Members
three days before its passage, except when the Prime Minister certifies to the
necessity of its immediate enactment to meet a public calamity or emergency. Upon
the last reading of a bill, no amendment thereto shall be allowed, and the vote
thereon shall be taken immediately thereafter, and the yeas and nays entered in the
Journal.

This provision of the 1973 document, with slight modification, was adopted in Art. VI, §26 (2) of the
present Constitution, thus:

(2) No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the President
certifies to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be allowed,
and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on separate
days are required and a bill has to be printed in final form before it can be passed, the need for a law
may be rendered academic by the occurrence of the very emergency or public calamity which it is
meant to address.

Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the case, an
enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or the situation
calling for its enactment any less an emergency.

Apparently, the members of the Senate (including some of the petitioners in these cases) believed
that there was an urgent need for consideration of S. No. 1630, because they responded to the call
of the President by voting on the bill on second and third readings on the same day. While the
judicial department is not bound by the Senate's acceptance of the President's certification, the
respect due coequal departments of the government in matters committed to them by the
Constitution and the absence of a clear showing of grave abuse of discretion caution a stay of the
judicial hand.

At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate where it
was discussed for six days. Only its distribution in advance in its final printed form was actually
dispensed with by holding the voting on second and third readings on the same day (March 24,
1994). Otherwise, sufficient time between the submission of the bill on February 8, 1994 on second
reading and its approval on March 24, 1994 elapsed before it was finally voted on by the Senate on
third reading.

The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested in
the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES AND
STATUTORY CONSTRUCTION §10.04, p. 282 (1972)). These purposes were substantially
achieved in the case of R.A. No. 7716.

IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the

Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in violation of
the constitutional policy of full public disclosure and the people's right to know (Art. II, §28 and Art.
III, §7) the Conference Committee met for two days in executive session with only the conferees
present.

As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a new
rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine Congress
has not adopted a rule prescribing open hearings for conference committees.

It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at least
staff members were present. These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not stenographers as in this case who
on the last two days of the conference were excluded. There is no showing that the conferees
themselves did not take notes of their proceedings so as to give petitioner Kilosbayan basis for
claiming that even in secret diplomatic negotiations involving state interests, conferees keep notes of
their meetings. Above all, the public's right to know was fully served because the Conference
Committee in this case submitted a report showing the changes made on the differing versions of
the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee Report. The members of both
houses could thus ascertain what changes had been made in the original bills without the need of a
statement detailing the changes.

The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised a
point of order. He said:

MR. BENGZON. My point of order is that it is out of order to consider the report of
the conference committee regarding House Bill No. 2557 by reason of the provision
of Section 11, Article XII, of the Rules of this House which provides specifically that
the conference report must be accompanied by a detailed statement of the effects of
the amendment on the bill of the House. This conference committee report is not
accompanied by that detailed statement, Mr. Speaker. Therefore it is out of order to
consider it.

Petitioner Tolentino, then the Majority Floor Leader, answered:

MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in connection
with the point of order raised by the gentleman from Pangasinan.

There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the bill
have been amended. In this case before us an entire bill is presented; therefore, it
can be easily seen from the reading of the bill what the provisions are. Besides, this
procedure has been an established practice.

After some interruption, he continued:

MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the reason for
the provisions of the Rules, and the reason for the requirement in the provision cited
by the gentleman from Pangasinan is when there are only certain words or phrases
inserted in or deleted from the provisions of the bill included in the conference report,
and we cannot understand what those words and phrases mean and their relation to
the bill. In that case, it is necessary to make a detailed statement on how those
words and phrases will affect the bill as a whole; but when the entire bill itself is
copied verbatim in the conference report, that is not necessary. So when the reason
for the Rule does not exist, the Rule does not exist.

(2 CONG. REC. NO. 2, p. 4056. (emphasis added))

Congressman Tolentino was sustained by the chair. The record shows that when the ruling was
appealed, it was upheld by viva voce and when a division of the House was called, it was sustained
by a vote of 48 to 5. (Id.,
p. 4058)

Nor is there any doubt about the power of a conference committee to insert new provisions as long
as these are germane to the subject of the conference. As this Court held in Philippine Judges
Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz, the
jurisdiction of the conference committee is not limited to resolving differences between the Senate
and the House. It may propose an entirely new provision. What is important is that its report is
subsequently approved by the respective houses of Congress. This Court ruled that it would not
entertain allegations that, because new provisions had been added by the conference committee,
there was thereby a violation of the constitutional injunction that "upon the last reading of a bill, no
amendment thereto shall be allowed."

Applying these principles, we shall decline to look into the petitioners' charges that

an amendment was made upon the last reading of the bill that eventually became
R.A. No. 7354 and that copies thereof in its final form were not distributed among the
members of each House. Both the enrolled bill and the legislative journals certify that
the measure was duly enacted i.e., in accordance with Article VI, Sec. 26 (2) of the
Constitution. We are bound by such official assurances from a coordinate
department of the government, to which we owe, at the very least, a becoming
courtesy.

(Id. at 710. (emphasis added))

It is interesting to note the following description of conference committees in the Philippines in a

1979 study:

Conference committees may be of two types: free or instructed. These committees

may be given instructions by their parent bodies or they may be left without
instructions. Normally the conference committees are without instructions, and this is
why they are often critically referred to as "the little legislatures." Once bills have
been sent to them, the conferees have almost unlimited authority to change the
clauses of the bills and in fact sometimes introduce new measures that were not in
the original legislation. No minutes are kept, and members' activities on conference
committees are difficult to determine. One congressman known for his idealism put it
this way: "I killed a bill on export incentives for my interest group [copra] in the
conference committee but I could not have done so anywhere else." The conference
committee submits a report to both houses, and usually it is accepted. If the report is
not accepted, then the committee is discharged and new members are appointed.

(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND

LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M. SHAW,
eds.)).

In citing this study, we pass no judgment on the methods of conference committees. We cite it only
to say that conference committees here are no different from their counterparts in the United States
whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all events, under
Art. VI, §16(3) each house has the power "to determine the rules of its proceedings," including those
of its committees. Any meaningful change in the method and procedures of Congress or its
committees must therefore be sought in that body itself.

V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art. VI, §26
(1) of the Constitution which provides that "Every bill passed by Congress shall embrace only one
subject which shall be expressed in the title thereof." PAL contends that the amendment of its
franchise by the withdrawal of its exemption from the VAT is not expressed in the title of the law.

Pursuant to §13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu of all
other taxes, duties, royalties, registration, license and other fees and charges of any kind, nature, or
description, imposed, levied, established, assessed or collected by any municipal, city, provincial or
national authority or government agency, now or in the future."

PAL was exempted from the payment of the VAT along with other entities by §103 of the National
Internal Revenue Code, which provides as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added

tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws or international agreements to
which the Philippines is a signatory.

R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by amending
§103, as follows:

§103. Exempt transactions. — The following shall be exempt from the value-added

tax:

xxx xxx xxx

(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The amendment of §103 is expressed in the title of R.A. No. 7716 which reads:

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING

ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE
PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF
THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER
PURPOSES.

By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR
THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE
NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND FOR OTHER PURPOSES,"
Congress thereby clearly expresses its intention to amend any provision of the NIRC which stands in
the way of accomplishing the purpose of the law.

PAL asserts that the amendment of its franchise must be reflected in the title of the law by specific
reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the constitutional
requirement, since it is already stated in the title that the law seeks to amend the pertinent provisions
of the NIRC, among which is §103(q), in order to widen the base of the VAT. Actually, it is the bill
which becomes a law that is required to express in its title the subject of legislation. The titles of H.
No. 11197 and S. No. 1630 in fact specifically referred to §103 of the NIRC as among the provisions
sought to be amended. We are satisfied that sufficient notice had been given of the pendency of
these bills in Congress before they were enacted into what is now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL was
rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL CORPORATION,
DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES, PROVIDING FOR
REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES CONNECTED THEREWITH. It
contained a provision repealing all franking privileges. It was contended that the withdrawal of
franking privileges was not expressed in the title of the law. In holding that there was sufficient
description of the subject of the law in its title, including the repeal of franking privileges, this Court
held:

To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable
but would actually render legislation impossible. [Cooley, Constitutional Limitations,
8th Ed., p. 297] As has been correctly explained:

The details of a legislative act need not be specifically stated in its

title, but matter germane to the subject as expressed in the title, and
adopted to the accomplishment of the object in view, may properly be
included in the act. Thus, it is proper to create in the same act the
machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of its
execution. If such matters are properly connected with the subject as
expressed in the title, it is unnecessary that they should also have
special mention in the title. (Southern Pac. Co. v. Bartine, 170 Fed.
725)

(227 SCRA at 707-708)

VI. Claims of press freedom and religious liberty. We have held that, as a general proposition, the
press is not exempt from the taxing power of the State and that what the constitutional guarantee of
free press prohibits are laws which single out the press or target a group belonging to the press for
special treatment or which in any way discriminate against the press on the basis of the content of
the publication, and R.A. No. 7716 is none of these.

Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is unconstitutional."

With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.

Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden to
which other businesses have long ago been subject. It is thus different from the tax involved in the
cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233, 80 L.
Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising receipts
only of newspapers whose weekly circulation was over 20,000, with the result that the tax applied
only to 13 out of 124 publishers in Louisiana. These large papers were critical of Senator Huey Long
who controlled the state legislature which enacted the license tax. The censorial motivation for the
law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460 U.S.
575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it could have
been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of using, storing
or consuming tangible goods, the press was not. Instead, the press was exempted from both taxes.
It was, however, later made to pay a special use tax on the cost of paper and ink which made these
items "the only items subject to the use tax that were component of goods to be sold at retail." The
U.S. Supreme Court held that the differential treatment of the press "suggests that the goal of
regulation is not related to suppression of expression, and such goal is presumptively
unconstitutional." It would therefore appear that even a law that favors the press is constitutionally
suspect. (See the dissent of Rehnquist, J. in that case)

Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn "absolutely
and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those previously
granted to PAL, petroleum concessionaires, enterprises registered with the Export Processing Zone
Authority, and many more are likewise totally withdrawn, in addition to exemptions which are partially
withdrawn, in an effort to broaden the base of the tax.

The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt transactions are:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn, sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).

(b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)
The PPI asserts that it does not really matter that the law does not discriminate against the press
because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):

The fact that the ordinance is "nondiscriminatory" is immaterial. The protection

afforded by the First Amendment is not so restricted. A license tax certainly does not
acquire constitutional validity because it classifies the privileges protected by the
First Amendment along with the wares and merchandise of hucksters and peddlers
and treats them all alike. Such equality in treatment does not save the ordinance.
Freedom of press, freedom of speech, freedom of religion are in preferred position.

The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the
exercise of its right. Hence, although its application to others, such those selling goods, is valid, its
application to the press or to religious groups, such as the Jehovah's Witnesses, in connection with
the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme Court put
it, "it is one thing to impose a tax on income or property of a preacher. It is quite another thing to
exact a tax on him for delivering a sermon."

A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil. 386
(1957) which invalidated a city ordinance requiring a business license fee on those engaged in the
sale of general merchandise. It was held that the tax could not be imposed on the sale of bibles by
the American Bible Society without restraining the free exercise of its right to propagate.

The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a privilege,
much less a constitutional right. It is imposed on the sale, barter, lease or exchange of goods or
properties or the sale or exchange of services and the lease of properties purely for revenue
purposes. To subject the press to its payment is not to burden the exercise of its right any more than
to make the press pay income tax or subject it to general regulation is not to violate its freedom
under the Constitution.

Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to those
who cannot afford to pay so that to tax the sales would be to increase the price, while reducing the
volume of sale. Granting that to be the case, the resulting burden on the exercise of religious
freedom is so incidental as to make it difficult to differentiate it from any other economic imposition
that might make the right to disseminate religious doctrines costly. Otherwise, to follow the
petitioner's argument, to increase the tax on the sale of vestments would be to lay an impermissible
burden on the right of the preacher to make a sermon.

On the other hand the registration fee of P1,000.00 imposed by §107 of the NIRC, as amended by
§7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of registration
and enforcement of provisions such as those relating to accounting in §108 of the NIRC. That the
PBS distributes free bibles and therefore is not liable to pay the VAT does not excuse it from the
payment of this fee because it also sells some copies. At any rate whether the PBS is liable for the
VAT must be decided in concrete cases, in the event it is assessed this tax by the Commissioner of
Internal Revenue.

VII. Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2) classifies
transactions as covered or exempt without reasonable basis and (3) violates the rule that taxes
should be uniform and equitable and that Congress shall "evolve a progressive system of taxation."

With respect to the first contention, it is claimed that the application of the tax to existing contracts of
the sale of real property by installment or on deferred payment basis would result in substantial
increases in the monthly amortizations to be paid because of the 10% VAT. The additional amount, it
is pointed out, is something that the buyer did not anticipate at the time he entered into the contract.

The short answer to this is the one given by this Court in an early case: "Authorities from numerous
sources are cited by the plaintiffs, but none of them show that a lawful tax on a new subject, or an
increased tax on an old one, interferes with a contract or impairs its obligation, within the meaning of
the Constitution. Even though such taxation may affect particular contracts, as it may increase the
debt of one person and lessen the security of another, or may impose additional burdens upon one
class and release the burdens of another, still the tax must be paid unless prohibited by the
Constitution, nor can it be said that it impairs the obligation of any existing contract in its true legal
sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong, 39 Phil. 567, 574 (1919)). Indeed not
only existing laws but also "the reservation of the essential attributes of sovereignty, is . . . read into
contracts as a postulate of the legal order." (Philippine-American Life Ins. Co. v. Auditor General, 22
SCRA 135, 147 (1968)) Contracts must be understood as having been made in reference to the
possible exercise of the rightful authority of the government and no obligation of contract can extend
to the defeat of that authority. (Norman v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).

It is next pointed out that while §4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise be
exempted.

The sale of food items, petroleum, medical and veterinary services, etc., which are essential goods
and services was already exempt under §103, pars. (b) (d) (1) of the NIRC before the enactment of
R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to these
transactions, while subjecting those of petitioner to the payment of the VAT. Moreover, there is a
difference between the "homeless poor" and the "homeless less poor" in the example given by
petitioner, because the second group or middle class can afford to rent houses in the meantime that
they cannot yet buy their own homes. The two social classes are thus differently situated in life. "It is
inherent in the power to tax that the 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.'" (Lutz v. Araneta, 98 Phil. 148, 153 (1955). Accord,
City of Baguio v. De Leon, 134 Phil. 912 (1968); Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984);
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).

Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI, §28(1)
which provides that "The rule of taxation shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."

Equality and uniformity of taxation means that all taxable articles or kinds of property of the same
class be taxed at the same rate. The taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement it is enough that the statute or
ordinance applies equally to all persons, forms and corporations placed in similar situation. (City of
Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted. R.A.
No. 7716 merely expands the base of the tax. The validity of the original VAT Law was questioned
in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 383 (1988) on
grounds similar to those made in these cases, namely, that the law was "oppressive, discriminatory,
unjust and regressive in violation of Art. VI, §28(1) of the Constitution." (At 382) Rejecting the
challenge to the law, this Court held:

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform.
...

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 engaged 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,
so that the costs of basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within the reach of the
general public.

(At 382-383)

The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative Union of
the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of taxation because the law imposes a flat
rate of 10% and thus places the tax burden on all taxpayers without regard to their ability to pay.

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are
regressive. What it simply provides is that Congress shall "evolve a progressive system of taxation."
The constitutional provision has been interpreted to mean simply that "direct taxes are . . . to be
preferred [and] as much as possible, indirect taxes should be minimized." (E. FERNANDO, THE
CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed, the mandate to Congress
is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps
are the oldest form of indirect taxes, would have been prohibited with the proclamation of Art. VIII,
§17(1) of the 1973 Constitution from which the present Art. VI, §28(1) was taken. Sales taxes are
also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not

impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In the
case of the VAT, the law minimizes the regressive effects of this imposition by providing for zero
rating of certain transactions (R.A. No. 7716, §3, amending §102 (b) of the NIRC), while
granting exemptions to other transactions. (R.A. No. 7716, §4, amending §103 of the NIRC).

Thus, the following transactions involving basic and essential goods and services are exempted from
the VAT:

(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or services
to enhance agriculture (milling of palay, corn sugar cane and raw sugar, livestock,
poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
 (b) Goods used for personal consumption or use (household and personal effects of
citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.

(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.

(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.

(e) Works of art and similar creations sold by the artist himself.

(f) Transactions exempted under special laws, or international agreements.

(g) Export-sales by persons not VAT-registered.

(h) Goods or services with gross annual sale or receipt not exceeding P500,000.00.

(Respondents' Consolidated Comment on the Motions for Reconsideration, pp. 58-

60)

On the other hand, the transactions which are subject to the VAT are those which involve goods and
services which are used or availed of mainly by higher income groups. These include real properties
held primarily for sale to customers or for lease in the ordinary course of trade or business, the right
or privilege to use patent, copyright, and other similar property or right, the right or privilege to use
industrial, commercial or scientific equipment, motion picture films, tapes and discs, radio, television,
satellite transmission and cable television time, hotels, restaurants and similar places, securities,
lending investments, taxicabs, utility cars for rent, tourist buses, and other common carriers, services
of franchise grantees of telephone and telegraph.

The problem with CREBA's petition is that it presents broad claims of constitutional violations by
tendering issues not at retail but at wholesale and in the abstract. There is no fully developed record
which can impart to adjudication the impact of actuality. There is no factual foundation to show in
the concrete the application of the law to actual contracts and exemplify its effect on property rights.
For the fact is that petitioner's members have not even been assessed the VAT. Petitioner's case is
not made concrete by a series of hypothetical questions asked which are no different from those
dealt with in advisory opinions.

The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere

allegation, as here, does not suffice. There must be a factual foundation of such
unconstitutional taint. Considering that petitioner here would condemn such a
provision as void on its face, he has not made out a case. This is merely to adhere to
the authoritative doctrine that where the due process and equal protection clauses
are invoked, considering that they are not fixed rules but rather broad standards,
there is a need for proof of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity must prevail.

(Sison, Jr. v. Ancheta, 130 SCRA at 661)

Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case,
however. Enforcement of the law may give rise to such a case. A test case, provided it is an actual
case and not an abstract or hypothetical one, may thus be presented.

Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not really
settle legal issues.

We are told that it is our duty under Art. VIII, §1, ¶2 to decide whenever a claim is made that "there
has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the government." This duty can only arise if an actual case or
controversy is before us. Under Art . VIII, §5 our jurisdiction is defined in terms of "cases" and all that
Art. VIII, §1, ¶2 can plausibly mean is that in the exercise of that jurisdiction we have the judicial
power to determine questions of grave abuse of discretion by any branch or instrumentality of the
government.

Put in another way, what is granted in Art. VIII, §1, ¶2 is "judicial power," which is "the power of a
court to hear and decide cases pending between parties who have the right to sue and be sued in
the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as distinguished from
legislative and executive power. This power cannot be directly appropriated until it is apportioned
among several courts either by the Constitution, as in the case of Art. VIII, §5, or by statute, as in the
case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary Reorganization Act of 1980 (B.P.
Blg. 129). The power thus apportioned constitutes the court's "jurisdiction," defined as "the power
conferred by law upon a court or judge to take cognizance of a case, to the exclusion of all others."
(United States v. Arceo, 6 Phil. 29 (1906)) Without an actual case coming within its jurisdiction, this
Court cannot inquire into any allegation of grave abuse of discretion by the other departments of the
government.

VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union of
the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to adopt a
definite policy of granting tax exemption to cooperatives that the present Constitution embodies
provisions on cooperatives. To subject cooperatives to the VAT would therefore be to infringe a
constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated exempting
cooperatives from the payment of income taxes and sales taxes but in 1984, because of the crisis
which menaced the national economy, this exemption was withdrawn by P.D. No. 1955; that in 1986,
P.D. No. 2008 again granted cooperatives exemption from income and sales taxes until December
31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and that finally in 1987 the
framers of the Constitution "repudiated the previous actions of the government adverse to the
interests of the cooperatives, that is, the repeated revocation of the tax exemption to
cooperatives and instead upheld the policy of strengthening the cooperatives by way of the grant of
tax exemptions," by providing the following in Art. XII:

§1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and an expanding
productivity as the key to raising the quality of life for all, especially the
underprivileged.

The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both
 domestic and foreign markets. However, the State shall protect Filipino enterprises
against unfair foreign competition and trade practices.

In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged
to broaden the base of their ownership.

§15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.

Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175, §5.
What P.D. No. 1955, §1 did was to withdraw the exemptions and preferential treatments theretofore
granted to private business enterprises in general, in view of the economic crisis which then beset
the nation. It is true that after P.D. No. 2008, §2 had restored the tax exemptions of cooperatives in
1986, the exemption was again repealed by E.O. No. 93, §1, but then again cooperatives were not
the only ones whose exemptions were withdrawn. The withdrawal of tax incentives applied to all,
including government and private entities. In the second place, the Constitution does not really
require that cooperatives be granted tax exemptions in order to promote their growth and viability.
Hence, there is no basis for petitioner's assertion that the government's policy toward cooperatives
had been one of vacillation, as far as the grant of tax privileges was concerned, and that it was to put
an end to this indecision that the constitutional provisions cited were adopted. Perhaps as a matter
of policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives, no
violation of any constitutional policy can be charged.

Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are exempt
from taxation. Such theory is contrary to the Constitution under which only the following are exempt
from taxation: charitable institutions, churches and parsonages, by reason of Art. VI, §28 (3), and
non-stock, non-profit educational institutions by reason of Art. XIV, §4 (3).

CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives the
equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that
there is greater need to provide cheaper electric power to as many people as possible, especially
those living in the rural areas, than there is to provide them with other necessities in life. We cannot
say that such classification is unreasonable.

We have carefully read the various arguments raised against the constitutional validity of R.A. No.
7716. We have in fact taken the extraordinary step of enjoining its enforcement pending resolution of
these cases. We have now come to the conclusion that the law suffers from none of the infirmities
attributed to it by petitioners and that its enactment by the other branches of the government does
not constitute a grave abuse of discretion. Any question as to its necessity, desirability or expediency
must be addressed to Congress as the body which is electorally responsible, remembering that, as
Justice Holmes has said, "legislators are the ultimate guardians of the liberties and welfare of the
people in quite as great a degree as are the courts." (Missouri, Kansas & Texas Ry. Co. v. May, 194
U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as petitioner in G.R. No. 115543 does in
arguing that we should enforce the public accountability of legislators, that those who took part in
passing the law in question by voting for it in Congress should later thrust to the courts the burden of
reviewing measures in the flush of enactment. This Court does not sit as a third branch of the
legislature, much less exercise a veto power over legislation.

WHEREFORE, the motions for reconsideration are denied with finality and the temporary restraining
order previously issued is hereby lifted.

SO ORDERED.

Narvasa, C.J., Feliciano, Melo, Kapunan, Francisco and Hermosisima, Jr., JJ., concur.

Padilla and Vitug, JJ., maintained their separate opinion.

Regalado, Davide, Jr., Romero, Bellosillo and Puno, JJ, maintained their dissenting opinion.

Panganiban, J., took no part.

G.R. No. L-46720             June 28, 1940

WELLS FARGO BANK & UNION TRUST COMPANY, petitioner-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, respondent-appellee.

De Witt, Perkins and Ponce Enrile for appellant.

Office of the Solicitor-General Ozaeta and Assistant Solicitor-General Concepcion for appellee.
Ross, Lawrence, Selph and Carrascoso, James Madison Ross and Federico Agrava as amici curiæ.

MORAN, J.:

An appeal from a declaratory judgment rendered by the Court of First Instance of Manila.

Birdie Lillian Eye, wife of Clyde Milton Eye, died on September 16, 1932, at Los Angeles, California,
the place of her alleged last residence and domicile. Among the properties she left her one-half
conjugal share in 70,000 shares of stock in the Benguet Consolidated Mining Company, an
anonymous partnership (sociedad anonima), organized and existing under the laws of the
Philippines, with is principal office in the City of Manila. She left a will which was duly admitted to
probate in California where her estate was administered and settled. Petitioner-appellant, Wells
Fargo Bank & Union Trust Company, was duly appointed trustee of the created by the said will. The
Federal and State of California's inheritance taxes due on said shares have been duly paid.
Respondent Collector of Internal Revenue sought to subject anew the aforesaid shares of stock to
the Philippine inheritance tax, to which petitioner-appellant objected. Wherefore, a petition for a
declaratory judgment was filed in the lower court, with the statement that, "if it should be held by a
final declaratory judgment that the transfer of the aforesaid shares of stock is legally subject to the
Philippine inheritance tax, the petitioner will pay such tax, interest and penalties (saving error in
computation) without protest and will not file to recover the same; and the petitioner believes and t
herefore alleges that it should be held that such transfer is not subject to said tax, the respondent will
not proceed to assess and collect the same." The Court of First Instance of Manila rendered
judgment, holding that the transmission by will of the said 35,000 shares of stock is subject to
Philippine inheritance tax. Hence, this appeal by the petitioner.

Petitioner concedes (1) that the Philippine inheritance tax is not a tax property, but upon
transmission by inheritance (Lorenzo vs. Posadas, 35 Off. Gaz., 2393, 2395), and (2) that as to real
and tangible personal property of a non-resident decedent, located in the Philippines, the Philippine
inheritance tax may be imposed upon their transmission by death, for the self-evident reason that,
being a property situated in this country, its transfer is, in some way, defendant, for its effectiveness,
upon Philippine laws. It is contended, however, that, as to intangibles, like the shares of stock in
question, their situs is in the domicile of the owner thereof, and, therefore, their transmission by
death necessarily takes place under his domiciliary laws.

Section 1536 of the Administrative Code, as amended, provides that every transmission by virtue of
inheritance of any share issued by any corporation of sociedad anonima organized or constituted in
the Philippines, is subject to the tax therein provided. This provision has already been applied to
shares of stock in a domestic corporation which were owned by a British subject residing and
domiciled in Great Britain. (Knowles vs. Yatco, G. R. No. 42967. See also Gibbs vs. Government of
P. I., G. R. No. 35694.) Petitioner, however, invokes the rule laid down by the United States
Supreme Court in four cases (Farmers Loan & Trust Company vs. Minnesota, 280 U.S. 204; 74 Law.
ed., 371; Baldwin vs. Missouri, 281 U.S., 586; 74 Law. ed., 1056, Beidler vs. South Carolina Tax
Commission 282 U. S., 1; 75 Law. ed., 131; First National Bank of Boston vs. Maine, 284 U. S., 312;
52 S. Ct., 174, 76 Law. ed., 313; 77 A. L. R., 1401), to the effect that an inheritance tax can be
imposed with respect to intangibles only by the State where the decedent was domiciled at the time
of his death, and that, under the due-process clause, the State in which a corporation has been
incorporated has no power to impose such tax if the shares of stock in such corporation are owned
by a non-resident decedent. It is to be observed, however, that in a later case (Burnet vs. Brooks,
288 U. S., 378; 77 Law. ed., 844), the United States Supreme Court upheld the authority of the
Federal Government to impose an inheritance tax on the transmission, by death of a non-resident, of
stock in a domestic (America) corporation, irrespective of the situs of the corresponding certificates
of stock. But it is contended that the doctrine in the foregoing case is not applicable, because the
due-process clause is directed at the State and not at the Federal Government, and that the federal
or national power of the United States is to be determined in relation to other countries and their
subjects by applying the principles of jurisdiction recognized in international relations. Be that as it
may, the truth is that the due-process clause is "directed at the protection of the individual and he is
entitled to its immunity as much against the state as against the national government."
(Curry vs. McCanless, 307 U. S., 357, 370; 83 Law. ed., 1339, 1349.) Indeed, the rule laid down in
the four cases relied upon by the appellant was predicated on a proper regard for the relation of the
states of the American Union, which requires that property should be taxed in only one state and that
jurisdiction to tax is restricted accordingly. In other words, the application to the states of the due-
process rule springs from a proper distribution of their powers and spheres of activity as ordained by
the United States Constitution, and such distribution is enforced and protected by not allowing one
state to reach out and tax property in another. And these considerations do not apply to the
Philippines. Our status rests upon a wholly distinct basis and no analogy, however remote, cam be
suggested in the relation of one state of the Union with another or with the United States. The status
of the Philippines has been aptly defined as one which, though a part of the United States in the
international sense, is, nevertheless, foreign thereto in a domestic sense. (Downes vs. Bidwell, 182
U. S., 244, 341.)

At any rate, we see nothing of consequence in drawing any distinct between the operation and effect
of the due-process clause as it applies to the individual states and to the national government of the
United States. The question here involved is essentially not one of due-process, but of the power of
the Philippine Government to tax. If that power be conceded, the guaranty of due process cannot
certainly be invoked to frustrate it, unless the law involved is challenged, which is not, on
considerations repugnant to such guaranty of due process of that of the equal protection of the laws,
as, when the law is alleged to be arbitrary, oppressive or discriminatory.

Originally, the settled law in the United States is that intangibles have only one situs for the purpose
of inheritance tax, and that such situs is in the domicile of the decedent at the time of his death. But
this rule has, of late, been relaxed. The maxim mobilia sequuntur personam, upon which the rule
rests, has been described as a mere "fiction of law having its origin in consideration of general
convenience and public policy, and cannot be applied to limit or control the right of the state to tax
property within its jurisdiction" (State Board of Assessors vs. Comptoir National D'Escompte, 191 U.
S., 388, 403, 404), and must "yield to established fact of legal ownership, actual presence and
control elsewhere, and cannot be applied if to do so result in inescapable and patent injustice." (Safe
Deposit & Trust Co. vs. Virginia, 280 U. S., 83, 91-92) There is thus a marked shift from artificial
postulates of law, formulated for reasons of convenience, to the actualities of each case.

An examination of the adjudged cases will disclose that the relaxation of the original rule rests on
either of two fundamental considerations: (1) upon the recognition of the inherent power of each
government to tax persons, properties and rights within its jurisdiction and enjoying, thus, the
protection of its laws; and (2) upon the principle that as o intangibles, a single location in space is
hardly possible, considering the multiple, distinct relationships which may be entered into with
respect thereto. It is on the basis of the first consideration that the case of Burnet vs. Brooks, supra,
was decided by the Federal Supreme Court, sustaining the power of the Government to impose an
inheritance tax upon transmission, by death of a non-resident, of shares of stock in a domestic
(America) corporation, regardless of the situs of their corresponding certificates; and on the basis of
the second consideration, the case of Cury vs. McCanless, supra.

In Burnet vs. Brooks, the court, in disposing of the argument that the imposition of the federal estate
tax is precluded by the due-process clause of the Fifth Amendment, held:

The point, being solely one of jurisdiction to tax, involves none of the other consideration
raised by confiscatory or arbitrary legislation inconsistent with the fundamental conceptions
of justice which are embodied in the due-process clause for the protection of life, liberty, and
property of all persons — citizens and friendly aliens alike. Russian Volunteer
Fleet vs. United States, 282 U. S., 481, 489; 75 Law ed., 473, 476; 41 S. Ct., 229;
Nicholas vs. Coolidge, 274 U. S., 531; 542, 71 Law ed., 1184, 1192; 47 S. Ct., 710; 52 A. L.
R., 1081; Heiner vs. Donnon, 285 U.S., 312, 326; 76 Law ed., 772, 779; 52 S. Ct., 358. If in
the instant case the Federal Government had jurisdiction to impose the tax, there is
manifestly no ground for assailing it. Knowlton vs. Moore, 178 U.S., 41, 109; 44 Law. ed.,
969, 996; 20 S. Ct., 747; MaGray vs. United States, 195 U.S., 27, 61; 49 Law. ed., 78; 97; 24
S. Ct., 769; 1 Ann. Cas., 561; Flint vs. Stone Tracy Co., 220 U.S., 107, 153, 154; 55 Law.
ed., 389, 414, 415; 31 S. Ct., 342; Ann. Cas., 1912B, 1312; Brushaber vs. Union p. R. Co.,
240 U.S., 1, 24; 60 Law. ed., 493, 504; 36 S. Ct., 236; L. R. A., 1917 D; 414, Ann. Cas,
1917B, 713; United States vs. Doremus, 249 U. S., 86, 93; 63 Law. ed., 439, 496; 39 S. Ct.,
214. (Emphasis ours.)

And, in sustaining the power of the Federal Government to tax properties within its borders,
wherever its owner may have been domiciled at the time of his death, the court ruled:

. . . There does not appear, a priori, to be anything contrary to the principles of international
law, or hurtful to the polity of nations, in a State's taxing property physically situated within its
borders, wherever its owner may have been domiciled at the time of his death. . . .

As jurisdiction may exist in more than one government, that is, jurisdiction based on distinct
grounds — the citizenship of the owner, his domicile, the source of income, the situs of the
property — efforts have been made to preclude multiple taxation through the negotiation of
appropriate international conventions. These endeavors, however, have proceeded upon
express or implied recognition, and not in denial, of the sovereign taxing power as exerted by
governments in the exercise of jurisdiction upon any one of these grounds. . . . (See pages
396-397; 399.)

In Curry vs. McCanless, supra, the court, in deciding the question of whether the States of Alabama
and Tennessee may each constitutionally impose death taxes upon the transfer of an interest in
intangibles held in trust by an Alabama trustee but passing under the will of a beneficiary decedent
domiciles in Tennessee, sustained the power of each State to impose the tax. In arriving at this
conclusion, the court made the following observations:

In cases where the owner of intangibles confines his activity to the place of his domicile it
has been found convenient to substitute a rule for a reason, cf. New York ex rel.,
Cohn vs. Graves, 300 U.S., 308, 313; 81 Law. ed., 666, 670; 57 S. Ct., 466; 108 A. L. R.,
721; First Bank Stock Corp. vs. Minnesota, 301 U. S., 234, 241; 81 Law. ed., 1061, 1065; 57
S. Ct., 677; 113 A. L. R., 228, by saying that his intangibles are taxed at their situs and not
elsewhere, or perhaps less artificially, by invoking the maxim mobilia sequuntur personam.
Blodgett vs. Silberman, 277 U.S., 1; 72 Law. ed., 749; S. Ct., 410, supra;
Baldwin vs. Missouri, 281 U. S., 568; 74 Law. ed., 1056; 50 S. Ct., 436; 72 A. L. R.,
1303, supra, which means only that it is the identify owner at his domicile which gives
 jurisdiction to tax. But when the taxpayer extends his activities with respect to his intangibles,
so as to avail himself of the protection and benefit of the laws of another state, in such a way
as to bring his person or properly within the reach of the tax gatherer there, the reason for a
single place of taxation no longer obtains, and the rule even workable substitute for the
reasons may exist in any particular case to support the constitutional power of each state
concerned to tax. Whether we regard the right of a state to tax as founded on power over the
object taxed, as declared by Chief Justice Marshall in McCulloch vs. Maryland, 4 Wheat.,
316; 4 Law. ed., 579, supra, through dominion over tangibles or over persons whose
relationships are source of intangibles rights, or on the benefit and protection conferred by
the taxing sovereignty, or both, it is undeniable that the state of domicile is not deprived, by
the taxpayer's activities elsewhere, of its constitutional jurisdiction to tax, and consequently
that there are many ;acumstances in which more than one state may have jurisdiction to
impose a tax and measure it by some or all of the taxpayer's intangibles. Shares or corporate
stock be taxed at the domicile of the shareholder and also at that of the corporation which
the taxing state has created and controls; and income may be taxed both by the state where
it is earned and by the state of the recipient's domicile. protection, benefit, and power over
the subject matter are not confined to either state. . . .(p. 1347-1349.)

. . . We find it impossible to say that taxation of intangibles can be reduced in every case to
the mere mechanical operation of locating at a single place, and there taxing, every legal
interest growing out of all the complex legal relationships which may be entered into between
persons. This is the case because in point of actuality those interests may be too diverse in
their relationships to various taxing jurisdictions to admit of unitary treatment without
discarding modes of taxation long accepted and applied before the Fourteen Amendment
was adopted, and still recognized by this Court as valid. (P. 1351.)

We need not belabor the doctrines of the foregoing cases. We believe, and so hold, that the issue
here involved is controlled by those doctrines. In the instant case, the actual situs of the shares of
stock is in the Philippines, the corporation being domiciled therein. And besides, the certificates of
stock have remained in this country up to the time when the deceased died in California, and they
were in possession of one Syrena McKee, secretary of the Benguet Consolidated Mining Company,
to whom they have been delivered and indorsed in blank. This indorsement gave Syrena McKee the
right to vote the certificates at the general meetings of the stockholders, to collect dividends, and
dispose of the shares in the manner she may deem fit, without prejudice to her liability to the owner
for violation of instructions. For all practical purposes, then, Syrena McKee had the legal title to the
certificates of stock held in trust for the true owner thereof. In other words, the owner residing in
California has extended here her activities with respect to her intangibles so as to avail herself of the
protection and benefit of the Philippine laws. Accordingly, the jurisdiction of the Philippine
Government to tax must be upheld.

Judgment is affirmed, with costs against petitioner-appellant.

Avanceña, C.J., Imperial, Diaz and Concepcion, JJ., concur.

G.R. No. 109289 October 3, 1994

RUFINO R. TAN, petitioner,
vs.
RAMON R. DEL ROSARIO, JR., as SECRETARY OF FINANCE & JOSE U. ONG, as
COMMISSIONER OF INTERNAL REVENUE, respondents.

G.R. No. 109446 October 3, 1994

CARAG, CABALLES, JAMORA AND SOMERA LAW OFFICES, CARLO A. CARAG,

MANUELITO O. CABALLES, ELPIDIO C. JAMORA, JR. and BENJAMIN A. SOMERA,
JR., petitioners,
vs.
RAMON R. DEL ROSARIO, in his capacity as SECRETARY OF FINANCE and JOSE U. ONG, in
his capacity as COMMISSIONER OF INTERNAL REVENUE, respondents.

Rufino R. Tan for and in his own behalf.

Carag, Caballes, Jamora & Zomera Law Offices for petitioners in G.R. 109446.

VITUG, J.:

These two consolidated special civil actions for prohibition challenge, in G.R. No. 109289, the
constitutionality of Republic Act No. 7496, also commonly known as the Simplified Net Income
Taxation Scheme ("SNIT"), amending certain provisions of the National Internal Revenue Code and,
in
G.R. No. 109446, the validity of Section 6, Revenue Regulations No. 2-93, promulgated by public
respondents pursuant to said law.

Petitioners claim to be taxpayers adversely affected by the continued implementation of the

amendatory legislation.

In G.R. No. 109289, it is asserted that the enactment of Republic Act

No. 7496 violates the following provisions of the Constitution:

Article VI, Section 26(1) — Every bill passed by the Congress shall embrace only
one subject which shall be expressed in the title thereof.

Article VI, Section 28(1) — The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.

Article III, Section 1 — No person shall be deprived of . . . property without due

process of law, nor shall any person be denied the equal protection of the laws.

In G.R. No. 109446, petitioners, assailing Section 6 of Revenue Regulations No. 2-93, argue that
public respondents have exceeded their rule-making authority in applying SNIT to general
professional partnerships.

The Solicitor General espouses the position taken by public respondents.

The Court has given due course to both petitions. The parties, in compliance with the Court's
directive, have filed their respective memoranda.

G.R. No. 109289

Petitioner contends that the title of House Bill No. 34314, progenitor of Republic Act No. 7496, is a
misnomer or, at least, deficient for being merely entitled, "Simplified Net Income Taxation Scheme
for the Self-Employed
and Professionals Engaged in the Practice of their Profession" (Petition in G.R. No. 109289).

The full text of the title actually reads:

An Act Adopting the Simplified Net Income Taxation Scheme For The Self-Employed
and Professionals Engaged In The Practice of Their Profession, Amending Sections
21 and 29 of the National Internal Revenue Code, as Amended.

The pertinent provisions of Sections 21 and 29, so referred to, of the National Internal Revenue
Code, as now amended, provide:

Sec. 21. Tax on citizens or residents. —

xxx xxx xxx

(f) Simplified Net Income Tax for the Self-Employed and/or Professionals Engaged in
the Practice of Profession. — A tax is hereby imposed upon the taxable net income
as determined in Section 27 received during each taxable year from all sources,
other than income covered by paragraphs (b), (c), (d) and (e) of this section by every
individual whether
a citizen of the Philippines or an alien residing in the Philippines who is self-
employed or practices his profession herein, determined in accordance with the
following schedule:

Not over P10,000 3%

Over P10,000 P300 + 9%

but not over P30,000 of excess over P10,000

Over P30,000 P2,100 + 15%

but not over P120,00 of excess over P30,000

Over P120,000 P15,600 + 20%

but not over P350,000 of excess over P120,000

Over P350,000 P61,600 + 30%

of excess over P350,000

Sec. 29. Deductions from gross income. — In computing taxable income subject to

tax under Sections 21(a), 24(a), (b) and (c); and 25 (a)(1), there shall be allowed as
deductions the items specified in paragraphs (a) to (i) of this
section: Provided, however, That in computing taxable income subject to tax under
 Section 21 (f) in the case of individuals engaged in business or practice of
profession, only the following direct costs shall be allowed as deductions:

(a) Raw materials, supplies and direct labor;

(b) Salaries of employees directly engaged in activities in the course of or pursuant to

the business or practice of their profession;

(c) Telecommunications, electricity, fuel, light and water;

(d) Business rentals;

(e) Depreciation;

(f) Contributions made to the Government and accredited relief organizations for the
rehabilitation of calamity stricken areas declared by the President; and

(g) Interest paid or accrued within a taxable year on loans contracted from accredited
financial institutions which must be proven to have been incurred in connection with
the conduct of a taxpayer's profession, trade or business.

For individuals whose cost of goods sold and direct costs are difficult to determine, a
maximum of forty per cent (40%) of their gross receipts shall be allowed as
deductions to answer for business or professional expenses as the case may be.

On the basis of the above language of the law, it would be difficult to accept petitioner's view that the
amendatory law should be considered as having now adopted a gross income, instead of as having
still retained the net income, taxation scheme. The allowance for deductible items, it is true, may
have significantly been reduced by the questioned law in comparison with that which has prevailed
prior to the amendment; limiting, however, allowable deductions from gross income is neither
discordant with, nor opposed to, the net income tax concept. The fact of the matter is still that
various deductions, which are by no means inconsequential, continue to be well provided under the
new law.

Article VI, Section 26(1), of the Constitution has been envisioned so as (a) to prevent log-rolling
legislation intended to unite the members of the legislature who favor any one of unrelated subjects
in support of the whole act, (b) to avoid surprises or even fraud upon the legislature, and (c) to fairly
apprise the people, through such publications of its proceedings as are usually made, of the subjects
of legislation.  The above objectives of the fundamental law appear to us to have been sufficiently
1

met. Anything else would be to require a virtual compendium of the law which could not have been
the intendment of the constitutional mandate.

Petitioner intimates that Republic Act No. 7496 desecrates the constitutional requirement that
taxation "shall be uniform and equitable" in that the law would now attempt to tax single
proprietorships and professionals differently from the manner it imposes the tax on corporations and
partnerships. The contention clearly forgets, however, that such a system of income taxation has
long been the prevailing rule even prior to Republic Act No. 7496.

Uniformity of taxation, like the kindred concept of equal protection, merely requires that all subjects
or objects of taxation, similarly situated, are to be treated alike both in privileges and liabilities (Juan
Luna Subdivision vs. Sarmiento, 91 Phil. 371). Uniformity does not forfend classification as long as:
(1) the standards that are used therefor are substantial and not arbitrary, (2) the categorization is
germane to achieve the legislative purpose, (3) the law applies, all things being equal, to both
present and future conditions, and (4) the classification applies equally well to all those belonging to
the same class (Pepsi Cola vs. City of Butuan, 24 SCRA 3; Basco vs. PAGCOR, 197 SCRA 52).

What may instead be perceived to be apparent from the amendatory law is the legislative intent to
increasingly shift the income tax system towards the schedular approach  in the income taxation of
2

individual taxpayers and to maintain, by and large, the present global treatment  on taxable
3

corporations. We certainly do not view this classification to be arbitrary and inappropriate.

Petitioner gives a fairly extensive discussion on the merits of the law, illustrating, in the process,
what he believes to be an imbalance between the tax liabilities of those covered by the amendatory
law and those who are not. With the legislature primarily lies the discretion to determine the nature
(kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation. This court
cannot freely delve into those matters which, by constitutional fiat, rightly rest on legislative
judgment. Of course, where a tax measure becomes so unconscionable and unjust as to amount to
confiscation of property, courts will not hesitate to strike it down, for, despite all its plenitude, the
power to tax cannot override constitutional proscriptions. This stage, however, has not been
demonstrated to have been reached within any appreciable distance in this controversy before us.

Having arrived at this conclusion, the plea of petitioner to have the law declared unconstitutional for
being violative of due process must perforce fail. The due process clause may correctly be invoked
only when there is a clear contravention of inherent or constitutional limitations in the exercise of the
tax power. No such transgression is so evident to us.

G.R. No. 109446

The several propositions advanced by petitioners revolve around the question of whether or not
public respondents have exceeded their authority in promulgating Section 6, Revenue Regulations
No. 2-93, to carry out Republic Act No. 7496.

The questioned regulation reads:

Sec. 6. General Professional Partnership — The general professional partnership

(GPP) and the partners comprising the GPP are covered by R. A. No. 7496. Thus, in
determining the net profit of the partnership, only the direct costs mentioned in said
law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are
not reimbursed or paid by the partnership but are not considered as direct cost, are
not deductible from his gross income.

The real objection of petitioners is focused on the administrative interpretation of public respondents
that would apply SNIT to partners in general professional partnerships. Petitioners cite the pertinent
deliberations in Congress during its enactment of Republic Act No. 7496, also quoted by the
Honorable Hernando B. Perez, minority floor leader of the House of Representatives, in the latter's
privilege speech by way of commenting on the questioned implementing regulation of public
respondents following the effectivity of the law, thusly:

MR. ALBANO, Now Mr. Speaker, I would like to get the correct
impression of this bill. Do we speak here of individuals who are
earning, I mean, who earn through business enterprises and
therefore, should file an income tax return?
 MR. PEREZ. That is correct, Mr. Speaker. This does not apply to
corporations. It applies only to individuals.

(See Deliberations on H. B. No. 34314, August 6, 1991, 6:15 P.M.; Emphasis ours).

Other deliberations support this position, to wit:

MR. ABAYA . . . Now, Mr. Speaker, did I hear the Gentleman from
Batangas say that this bill is intended to increase collections as far as
individuals are concerned and to make collection of taxes equitable?

MR. PEREZ. That is correct, Mr. Speaker.

(Id. at 6:40 P.M.; Emphasis ours).

In fact, in the sponsorship speech of Senator Mamintal Tamano on the Senate

version of the SNITS, it is categorically stated, thus:

This bill, Mr. President, is not applicable to business corporations or

to partnerships; it is only with respect to individuals and professionals.
(Emphasis ours)

The Court, first of all, should like to correct the apparent misconception that general professional
partnerships are subject to the payment of income tax or that there is a difference in the tax
treatment between individuals engaged in business or in the practice of their respective professions
and partners in general professional partnerships. The fact of the matter is that a general
professional partnership, unlike an ordinary business partnership (which is treated as a corporation
for income tax purposes and so subject to the corporate income tax), is not itself an income
taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but
on the partners themselves in their individual capacity computed on their distributive shares of
partnership profits. Section 23 of the Tax Code, which has not been amended at all by Republic Act
7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships. — (a) Persons
exercising a common profession in general partnership shall be liable for income tax
only in their individual capacity, and the share in the net profits of the general
professional partnership to which any taxable partner would be entitled whether
distributed or otherwise, shall be returned for taxation and the tax paid in accordance
with the provisions of this Title.

(b) In determining his distributive share in the net income of the partnership, each
partner —

(1) Shall take into account separately his distributive share of the
partnership's income, gain, loss, deduction, or credit to the extent
provided by the pertinent provisions of this Code, and

(2) Shall be deemed to have elected the itemized deductions, unless

he declares his distributive share of the gross income undiminished
by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his
profession alone or individually and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed, outside of the gross compensation
income tax and the final tax on passive investment income, under the present income tax system all
individuals deriving income from any source whatsoever are treated in almost invariably the same
manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider Republic Act
No. 7496 as an entirely independent, not merely as an amendatory, piece of legislation. The view
can easily become myopic, however, when the law is understood, as it should be, as only forming
part of, and subject to, the whole income tax concept and precepts long obtaining under the National
Internal Revenue Code. To elaborate a little, the phrase "income taxpayers" is an all embracing term
used in the Tax Code, and it practically covers all persons who derive taxable income. The law, in
levying the tax, adopts the most comprehensive tax situs of nationality and residence of the taxpayer
(that renders citizens, regardless of residence, and resident aliens subject to income tax liability on
their income from all sources) and of the generally accepted and internationally recognized income
taxable base (that can subject non-resident aliens and foreign corporations to income tax on their
income from Philippine sources). In the process, the Code classifies taxpayers into four main
groups, namely: (1) Individuals, (2) Corporations, (3) Estates under Judicial Settlement and (4)
Irrevocable Trusts (irrevocable both as to corpus and as to income).

Partnerships are, under the Code, either "taxable partnerships" or "exempt partnerships." Ordinarily,
partnerships, no matter how created or organized, are subject to income tax (and thus alluded to as
"taxable partnerships") which, for purposes of the above categorization, are by law assimilated to be
within the context of, and so legally contemplated as, corporations. Except for few variances, such
as in the application of the "constructive receipt rule" in the derivation of income, the income tax
approach is alike to both juridical persons. Obviously, SNIT is not intended or envisioned, as so
correctly pointed out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the payment
of income tax.

"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor even
considered as independent taxable entities for income tax purposes. A
general professional partnership is such an example.  Here, the partners themselves, not the
4

partnership (although it is still obligated to file an income tax return [mainly for administration and
data]), are liable for the payment of income tax in their individual capacity computed on their
respective and distributive shares of profits. In the determination of the tax liability, a partner does so
as an individual, and there is no choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no more than a mere mechanism or a
flow-through entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above standing
rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either before
or after the amendatory legislation, to place in an unequal footing or in significant variance the
income tax treatment of professionals who practice their respective professions individually and of
those who do it through a general professional partnership.

WHEREFORE, the petitions are DISMISSED. No special pronouncement on costs.

SO ORDERED.

Narvasa, C.J., Cruz, Feliciano, Regalado, Davide, Jr., Romero, Bellosillo, Melo, Quiason, Puno,
Kapunan and Mendoza, JJ., concur.

Padilla and Bidin, JJ., are on leave.

G.R. Nos. L-9456 and L-9481             January 6, 1958

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
DOMINGO DE LARA, as ancilliary administrator of the estate of HUGO H. MILLER (Deceased),
and the COURT OF TAX APPEALS, respondents.

Allison J. Gibbs, Zafra, De Leon and Veneracion for Domingo E. de Lara.

Assistant Solicitor General Ramon L. Avancena and Cezar L. Kierulf for the Collector of Internal
Revenue.

MONTEMAYOR, J.:

These are two separate appeals, one by the Collector of Internal Revenue, later on referred to as the
Collector, and the other by Domingo de Lara as Ancilliary Administrator of the estate of Hugo H.
Miller, from the decision of the Court of Tax Appeals of June 25, 1955, with the following dispositive
part:

WHEREFORE, respondent's assessment for estate and inheritance taxes upon the estate of
the decedent Hugo H. Miller is hereby modified in accordance with the computation attached
as Annex "A" of this decision. Petitioner is hereby ordered to pay the amount of P2,047.22
representing estate taxes due, together with the interests and other increments. In case of
failure to pay the amount of P2,047.22 within thirty (30) days from the time this decision has
become final, the 5 per cent surcharge and the corresponding interest due thereon shall be
paid as a part of the tax.

The facts in the case gathered from the record and as found by the Court of Tax Appeals may be
briefly stated as follows: Hugo H. Miller, an American citizen, was born in Santa Cruz, California,
U.S.A., in 1883. In 1905, he came to the Philippines. From 1906 to 1917, he was connected with the
public school system, first as a teacher and later as a division superintendent of schools, later
retiring under the Osmeiia Retirement Act. After his retirement, Miller accepted an executive position
in the local branch of Ginn & Co., book publishers with principal offices in New York and Boston,
U.S.A., up to the outbreak of the Pacific War. From 1922 up to December 7, 1941, he was stationed
in the Philippines as Oriental representative of Ginn & Co., covering not only the Philippines, but also
China and Japan. His principal work was selling books specially written for Philippine schools. In or
about the year 1922, Miller lived at the Manila Hotel. His wife remained at their home in Ben-
Lomond, Santa Cruz, California, but she used to come to the Philippines for brief visits with Miller,
staying three or four months. Miller also used to visit his wife in California. He never lived in any
residential house in the Philippines. After the death of his wife in 1931, he transferred from the
Manila Hotel to the Army and Navy Club, where he was staying at the outbreak of the Pacific War.
On January 17, 1941, Miller executed his last will and testament in Santa Cruz, California, in which
he declared that he was "of Santa Cruz, California". On December 7, 1941, because of the Pacific
War, the office of Ginn & Co. was closed, and Miller joined the Board of Censors of the United
States Navy. During the war, he was taken prisoner by the Japanese forces in Leyte, and in
January, 1944, he was transferred to Catbalogan, Samar, where he was reported to have been
executed by said forces on March 11, 1944, and since then, nothing has been heard from him. At
the time of his death in 1944, Miller owned the following properties:

Real Property situated in Ben-Lomond, Santa Cruz,

California valued P
at ...................................................................... 5,000.00
 Real property situated in Burlingame, San Mateo,
California valued
at ...............................................................................
......... 16,200.00
Tangible Personal property,
worth............................................. 2,140.00
Cash in the banks in the United
States.................................... 21,178.20
Accounts Receivable from various persons in the
United States including
notes ............................................................... 36,062.74
Stocks in U.S. Corporations and U.S. Savings
Bonds, valued
at ............................................................................... 123,637.1
......... 6
Shares of stock in Philippine Corporations, valued at
.......... 51,906.45

Testate proceedings were instituted before the Court of California in Santa Cruz County, in the
course of which Miller's will of January 17, 1941 was admitted to probate on May 10, 1946. Said
court subsequently issued an order and decree of settlement of final account and final distribution,
wherein it found that Miller was a "resident of the County of Santa Cruz, State of California" at the
time of his death in 1944. Thereafter ancilliary proceedings were filed by the executors of the will
before the Court of First Instance of Manila, which court by order of November 21, 1946, admitted to
probate the will of Miller was probated in the California court, also found that Miller was a resident of
Santa Cruz, California, at the time of his death. On July 29, 1949, the Bank of America, National
Trust and Savings Association of San Francisco California, co-executor named in Miller's will, filed
an estate and inheritance tax return with the Collector, covering only the shares of stock issued by
Philippines corporations, reporting a liability of P269.43 for taxes and P230.27 for inheritance taxes.
After due investigation, the Collector assessed estate and inheritance taxes, which was received by
the said executor on April 3, 1950. The estate of Miller protested the assessment of the liability for
estate and inheritance taxes, including penalties and other increments at P77,300.92, as of January
16, 1954. This assessment was appealed by De Lara as Ancilliary Administrator before the Board of
Tax Appeals, which appeal was later heard and decided by the Court of Tax Appeals.

In determining the "gross estate" of a decedent, under Section 122 in relation to section 88 of our
Tax Code, it is first necessary to decide whether the decedent was a resident or a non-resident of
the Philippines at the time of his death. The Collector maintains that under the tax laws, residence
and domicile have different meanings; that tax laws on estate and inheritance taxes only mention
resident and non-resident, and no reference whatsoever is made to domicile except in Section 93 (d)
of the Tax Code; that Miller during his long stay in the Philippines had required a "residence" in this
country, and was a resident thereof at the time of his death, and consequently, his intangible
personal properties situated here as well as in the United States were subject to said taxes. The
Ancilliary Administrator, however, equally maintains that for estate and inheritance tax purposes, the
term "residence" is synonymous with the term domicile.

We agree with the Court of Tax Appeals that at the time that The National Internal Revenue Code
was promulgated in 1939, the prevailing construction given by the courts to the "residence" was
synonymous with domicile. and that the two were used intercnangeabiy. Cases were cited in support
of this view, paricularly that of Velilla vs. Posadas, 62 Phil. 624, wherein this Tribunal used the terms
"residence" and "domicile" interchangeably and without distinction, the case involving the application
of the term residence employed in the inheritance tax law at the time (section 1536- 1548 of the
Revised Administrative Code), and that consequently, it will be presumed that in using the term
residence or resident in the meaning as construed and interpreted by the Court. Moreover, there is
reason to believe that the Legislature adopted the American (Federal and State) estate and
inheritance tax system (see e.g. Report to the Tax Commision of the Philippines, Vol. II, pages 122-
124, cited in I Dalupan, National Internal Revenue Code Annotated, p. 469-470). In the United
States, for estate tax purposes, a resident is considered one who at the time of his death had his
domicile in the United States, and in American jurisprudence, for purposes of estate and taxation,
"residence" is interpreted as synonymous with domicile, and that—

The incidence of estate and succession has historically been determined by domicile and
situs and not by the fact of actual residence. (Bowring vs. Bowers, (1928) 24 F 2d 918, at
921, 6 AFTR 7498, cert. den (1928) 272 U.S.608).

We also agree with the Court of Tax Appeals that at the time of his death, Miller had his residence or
domicile in Santa Cruz, California. During his country, Miller never acquired a house for residential
purposes for he stayed at the Manila Hotel and later on at the Army and Navy Club. Except this wife
never stayed in the Philippines. The bulk of his savings and properties were in the United States. To
his home in California, he had been sending souvenirs, such as carvings, curios and other similar
collections from the Philippines and the Far East. In November, 1940, Miller took out a property
insurance policy and indicated therein his address as Santa Cruz, California, this aside from the fact
that Miller, as already stated, executed his will in Santa Cruz, California, wherein he stated that he
was "of Santa Cruz, California". From the foregoing, it is clear that as a non-resident of the
Philippines, the only properties of his estate subject to estate and inheritance taxes are those shares
of stock issued by Philippines corporations, valued at P51,906.45. It is true, as stated by the Tax
Court, that while it may be the general rule that personal property, like shares of stock in the
Philippines, is taxable at the domicile of the owner (Miller) under the doctrine of mobilia secuuntur
persona, nevertheless, when he during his life time,

. . . extended his activities with respect to his intangibles, so as to avail himself of the
protection and benefits of the laws of the Philippines, in such a way as to bring his person or
property within the reach of the Philippines, the reason for a single place of taxation no
longer obtains- protection, benefit, and power over the subject matter are no longer confined
to California, but also to the Philippines (Wells Fargo Bank & Union Trust Co. vs. Collector
(1940), 70 Phil. 325). In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled herein: and besides, the right to vote the
certificates at stockholders' meetings, the right to collect dividends, and the right to dispose
of the shares including the transmission and acquisition thereof by succession, all enjoy the
protection of the Philippines, so that the right to collect the estate and inheritance taxes
cannot be questioned (Wells Fargo Bank & Union Trust Co. vs. Collector supra). It is
recognized that the state may, consistently with due process, impose a tax upon transfer by
death of shares of stock in a domestic corporation owned by a decedent whose domicile was
outside of the state (Burnett vs. Brooks, 288 U.S. 378; State Commission vs. Aldrich, (1942)
316 U.S. 174, 86 L. Ed. 1358, 62 ALR 1008)." (Brief for the Petitioner, p. 79-80).

The Ancilliary Administrator for purposes of exemption invokes the proviso in Section 122 of the Tax
Code, which provides as follows:

. . ."And Provided, however, That no tax shall be collected under this Title in respect of
intangible personal property (a) if the decedent at the time of his death was a resident of a
foreign country which at the time of his death did not impose a transfer tax or death tax of
any character in respect of intangible personal property of citizens of the Philippines not
 residing in that country, or (b) if the laws of the foreign country of which the decedent was
resident at the tune of his death allow a similar exemption from transfer taxes or death taxes
of every character in respect of intangible personal property owned by citizen, of the
Philippine not residing in that foreign country.

The Ancilliary Administrator bases his claim of exemption on (a) the exemption of non-residents from
the California inheritance taxes with respect to intangibles, and (b) the exemption by way of
reduction of P4,000 from the estates of non-residents, under the United States Federal Estate Tax
Law. Section 6 of the California Inheritance Tax Act of 1935, now reenacted as Section 13851,
California Revenue and Taxation Code, reads as follows:

SEC. 6. The following exemption from the tax are hereby allowed:

xxx             xxx             xxx.

(7) The tax imposed by this act in respect of intangible personal property shall not be
payable if decedent is a resident of a State or Territory of the United States or a foreign state
or country which at the time of his death imposed a legacy, succession of death tax in
respect of intangible personal property within the State or Territory or foreign state or country
of residents of the States or Territory or foreign state or country of residence of the decedent
at the time of his death contained a reciprocal provision under which non-residents were
exempted from legacy or succession taxes or death taxes of every character in respect of
intangible personal property providing the State or Territory or foreign state or country of
residence of such non-residents allowed a similar exemption to residents of the State,
Territory or foreign state or country of residence of such decedent.

Considering the State of California as a foreign country in relation to section 122 of Our Tax Code
we beleive and hold, as did the Tax Court, that the Ancilliary Administrator is entitled to exemption
from the tax on the intangible personal property found in the Philippines. Incidentally, this exemption
granted to non-residents under the provision of Section 122 of our Tax Code, was to reduce the
burden of multiple taxation, which otherwise would subject a decedent's intangible personal property
to the inheritance tax, both in his place of residence and domicile and the place where those
properties are found. As regards the exemption or reduction of P4,000 based on the reduction under
the Federal Tax Law in the amount of $2,000, we agree with the Tax Court that the amount of
$2,000 allowed under the Federal Estate Tax Law is in the nature of deduction and not of an
exemption. Besides, as the Tax Court observes--.

. . . this exemption is allowed on all gross estate of non-residents of the United States, who
are not citizens thereof, irrespective of whether there is a corresponding or similar exemption
from transfer or death taxes of non-residents of the Philippines, who are citizens of the
United States; and thirdly, because this exemption is allowed on all gross estates of non-
residents irrespective of whether it involves tangible or intangible, real or personal property;
so that for these reasons petitioner cannot claim a reciprocity. . .

Furthermore, in the Philippines, there is already a reduction on gross estate tax in the amount of
P3,000 under section 85 of the Tax Code, before it was amended, which in part provides as follows:

SEC. 85. Rates of estate tax.—There shall be levied, assessed, collected, and paid upon the
transfer of the net estate of every decedent, whether a resident or non-resident of the
Philippines, a tax equal to the sum of the following percentages of the value of the net estate
determined as provided in sections 88 and 89:
 One per centrum of the amount by which the net estate exceeds three thousand pesos and
does not exceed ten thousand pesos;. . .

It will be noticed from the dispositive part of the appealed decision of the Tax Court that the Ancilliary
Administrator was ordered to pay the amount of P2,047.22, representing estate taxes due, together
with interest and other increments. Said Ancilliary Administrator invokes the provisions of Republic
Act No. 1253, which was passed for the benefit of veterans, guerrillas or victims of Japanese
atrocities who died during the Japanese occupation. The provisions of this Act could not be invoked
during the hearing before the Tax Court for the reason that said Republic Act was approved only on
June 10, 1955. We are satisfied that inasmuch as Miller, not only suffered deprivation of the war, but
was killed by the Japanese military forces, his estate is entitled to the benefits of this Act.
Consequently, the interests and other increments provided in the appealed judgment should not be
paid by his estate.

With the above modification, the appealed decision of the Court of Tax Appeals is hereby affirmed.
We deem it unnecessary to pass upon the other points raised in the appeal. No costs.

Bengzon, Paras, C.J., Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Endencia, and Felix, JJ., concur.

The Lawphil Project - Arellano Law Foundation

G.R. No. 127105 June 25, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the
decision of the Court of Tax Appeals in CTA Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the Philippine

laws, entered into a license agreement with SC Johnson and Son, United States of
America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to
which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and
distribute the products covered by the Agreement and secure assistance in
management, marketing and production from SC Johnson and Son, U. S. A.

The said License Agreement was duly registered with the Technology Transfer
Board of the Bureau of Patents, Trade Marks and Technology Transfer under
Certificate of Registration No. 8064 (Exh. "A").

For the use of the trademark or technology, [respondent] was obliged to pay SC
Johnson and Son, USA royalties based on a percentage of net sales and subjected
the same to 25% withholding tax on royalty payments which [respondent] paid for the
period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs.
"B" to "L" and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing
that, "the antecedent facts attending [respondent's] case fall squarely within the
same circumstances under which said MacGeorge and Gillete rulings were issued.
Since the agreement was approved by the Technology Transfer Board, the
preferential tax rate of 10% should apply to the [respondent]. We therefore submit
that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject
to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax
Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax
Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par.
12). [Respondent's] claim for there fund of P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

 Year Fee Tax Paid Tax Balance

——— ——— ——— ——— ———

July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190

September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877

March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122

May 603,076 150,769 60,308 90,461

———— ———— ———— ———

P6,421,770 P1,605,443 P642,177 P963,266 1

======== ======== ======== ========

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc.
(S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case
was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty
payments from July 1992 to May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and
ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of
P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to
May, 1993. 2

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals
which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the
petition and affirming in toto the CTA ruling.
3

This petition for review was filed by the Commissioner of Internal Revenue raising the following
issue:
 THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON,
USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON
ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE
RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the
"most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on
royalties derived by a resident of the United States from sources within the Philippines only if the
circumstances of the resident of the United States are similar to those of the resident of West
Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided
under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax
Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of
royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause
cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the
payment of a tax, or royalty remittances for that matter, these must necessarily refer to
circumstances that are tax-related. Finally, petitioner argues that since S.C. Johnson's invocation of
the "most favored nation" clause is in the nature of a claim for exemption from the application of the
regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1)
because it contains a defective certification against forum shopping as required under SC Circular
No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and
(2) that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under
similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under
similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that
is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state
to avail of more liberal provisions contained in another tax treaty wherein the country of residence of
such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable;
thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances".
S.C. Johnson also contends that the Commissioner is estopped from insisting on her interpretation
that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for
the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92
which was already abandoned by the Commissioner's predecessor in 1993; and was expressly
revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are
subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to
the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is
prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed
by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular
No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the
requirement that the certification should be signed by petitioner and not by counsel does not apply to
petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates
that even if the phrase "paid under similar circumstances" embodied in the most favored nation
clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or
absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material
circumstance to such payment and would be determinative of the said clause's application. 1âwphi1.nêt
We address first the objection raised by private respondent that the certification against forum
shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor
General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL
REQUISITES FOR PETITIONS FILED
WITH THE SUPREME COURT AND
THE COURT OF APPEALS TO
PREVENT FORUM SHOPPING OR
MULTIPLE FILING OF PETITIONS
AND COMPLAINTS

TO: xxx xxx xxx

The attention of the Court has been called to the filing of multiple petitions and
complaints involving the same issues in the Supreme Court, the Court of Appeals or
other tribunals or agencies, with the result that said courts, tribunals or agencies
have to resolve the same issues.

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court
of Appeals, the petitioner aside from complying with pertinent provisions of the Rules
of Court and existing circulars, must certify under oath to all of the following facts or
undertakings: (a) he has not theretofore commenced any other action or proceeding
involving the same issues in the Supreme Court, the Court of Appeals, or any
tribunal or
agency; . . .

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall
be a cause for the summary dismissal of the multiple petitions or complaints; . . .

The circular expressly requires that a certificate of non-forum shopping should be attached to
petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-
91 applies only to original actions and not to appeals as in the instant case is not supported by the
text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result in
the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals or any
other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the
only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter
12, title III, Book IV of the 1987 Administrative Code  to be represented only by the Solicitor General,
4

the certification executed by the OSG in this case constitutes substantial compliance with Circular
No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is the
interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be
imposed by the Philippines upon royalties received by a non-resident foreign corporation. The
provision states insofar as pertinent
that —
 1) Royalties derived by a resident of one of the Contracting States
from sources within the other Contracting State may be taxed by both
Contracting States.

2) However, the tax imposed by that Contracting State shall not

exceed.

a) In the case of the United States, 15 percent of the

gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of

the royalties;

(ii) 15 percent of the gross amount of

the royalties, where the royalties are
paid by a corporation registered with
the Philippine Board of Investments
and engaged in preferred areas of
activities; and

(iii) the lowest rate of Philippine tax

that may be imposed on royalties of
the same kind paid under similar
circumstances to a resident of a third
State.

x x x           x x x          x x x

(emphasis supplied)

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is
entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-
Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in the Contracting

State in which they arise, and according to the law of that State, but
the tax so charged shall not exceed:

x x x           x x x          x x x

b) 10 percent of the gross amount of royalties arising

from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or
process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for
information concerning industrial, commercial or
scientific experience.
 For as long as the transfer of technology, under Philippine law, is subject to approval,
the limitation of the tax rate mentioned under b) shall, in the case of royalties arising
in the Republic of the Philippines, only apply if the contract giving rise to such
royalties has been approved by the Philippine competent authorities.

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the
gross amount of such royalties against German income and corporation tax for the taxes payable in
the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty.
Article 24 of the RP-Germany Tax Treaty states —

1) Tax shall be determined in the case of a resident of the Federal

Republic of Germany as follows:

x x x           x x x          x x x

b) Subject to the provisions of German tax law

regarding credit for foreign tax, there shall be allowed
as a credit against German income and corporation
tax payable in respect of the following items of income
arising in the Republic of the Philippines, the tax paid
under the laws of the Philippines in accordance with
this Agreement on:

x x x           x x x          x x x

dd) royalties, as defined in paragraph

3 of Article 12;

x x x           x x x          x x x

c) For the purpose of the credit referred in

subparagraph; b) the Philippine tax shall be deemed
to be

x x x           x x x          x x x

cc) in the case of royalties for which

the tax is reduced to 10 or 15 per cent
according to paragraph 2 of Article 12,
20 percent of the gross amount of
such royalties.

x x x           x x x          x x x

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a
20 percent matching credit in the former convention and private respondent cannot invoke the
concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty.
Petitioner's position is explained thus:
 Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine
tax paid on income from sources within the Philippines is allowed as a credit against
German income and corporation tax on the same income. In the case of royalties for
which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of
the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of
such royalty. To illustrate, the royalty income of a German resident from sources
within the Philippines arising from the use of, or the right to use, any patent, trade
mark, design or model, plan, secret formula or process, is taxed at 10% of the gross
amount of said royalty under certain conditions. The rate of 10% is imposed if credit
against the German income and corporation tax on said royalty is allowed in favor of
the German resident. That means the rate of 10% is granted to the German taxpayer
if he is similarly granted a credit against the income and corporation tax of West
Germany. The clear intent of the "matching credit" is to soften the impact of double
taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that provided under
the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax
Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US
Tax Treaty. 5

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax
Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the
reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of
a third state". The respondent court held that "Words are to be understood in the context in which
they are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic
instructs" that the treaty provision in question should refer to royalties of the same kind paid under
similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to take into
account the purpose animating the treaty provisions in point. To begin with, we are not aware of any
law or rule pertinent to the payment of royalties, and none has been brought to our attention, which
provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and
the circumstances of payment thereof are the same for all the recipients of such royalties and there
is no disparity based on nationality in the circumstances of such payment.  On the other hand, a
6

cursory reading of the various tax treaties will show that there is no similarity in the provisions on
relief from or avoidance of double taxation  as this is a matter of negotiation between the contracting
7

parties.  As will be shown later, this dissimilarity is true particularly in the treaties between the
8

Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered
into for the avoidance of double taxation.  The purpose of these international agreements is to
9

reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.   More precisely, the tax conventions are drafted
10

with a view towards the elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer in respect of the same
subject matter and for identical periods.   The apparent rationale for doing away with double taxation
11

is of encourage the free flow of goods and services and the movement of capital, technology and
persons between countries, conditions deemed vital in creating robust and dynamic
economies.   Foreign investments will only thrive in a fairly predictable and reasonable international
12

investment climate and the protection against double taxation is crucial in creating such a climate.  13

Double taxation usually takes place when a person is resident of a contracting state and derives
income from, or owns capital in, the other contracting state and both states impose tax on that
income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First,
it sets out the respective rights to tax of the state of source or situs and of the state of residence with
regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred
on one of the contracting states; however, for other items of income or capital, both states are given
the right to tax, although the amount of tax that may be imposed by the state of source is limited.  14

The second method for the elimination of double taxation applies whenever the state of source is
given a full or limited right to tax together with the state of residence. In this case, the treaties make it
incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two
methods of relief — the exemption method and the credit method. In the exemption method, the
income or capital which is taxable in the state of source or situs is exempted in the state of
residence, although in some instances it may be taken into account in determining the rate of tax
applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method,
although the income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter. The basic
difference between the two methods is that in the exemption method, the focus is on the income or
capital itself, whereas the credit method focuses upon the tax.  15

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will
give up a part of the tax in the expectation that the tax given up for this particular investment is not
taxed by the other
country.   Thus the petitioner correctly opined that the phrase "royalties paid under similar
16

circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated
"circumstances that are tax-related".

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to
use property or rights, i.e. trademarks, patents and technology, located within the Philippines.   The
17

United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based
there. Under the RP-US Tax Treaty, the state of residence and the state of source are both
permitted to tax the royalties, with a restraint on the tax that may be collected by the state of
source.   Furthermore, the method employed to give relief from double taxation is the allowance of a
18

tax credit to citizens or residents of the United States (in an appropriate amount based upon the
taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not
exceed the limitations provided by United States law for the taxable year.   Under Article 13 thereof,
19

the Philippines may impose one of three rates — 25 percent of the gross amount of the royalties; 15
percent when the royalties are paid by a corporation registered with the Philippine Board of
Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that
may be imposed on royalties of the same kind paid under similar circumstances to a resident of a
third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if
the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are
paid under similar circumstances. This would mean that private respondent must prove that the RP-
US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes
imposable upon royalties earned from sources within the Philippines as those allowed to their
German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount of royalties paid under the law of
the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart
provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the
gross amount of royalties paid. Said Article 23 reads:

Article 23

Relief from double taxation

Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the limitations of

the law of the United States (as it may be amended from time to time
without changing the general principle thereof), the United States
shall allow to a citizen or resident of the United States as a credit
against the United States tax the appropriate amount of taxes paid or
accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a
Philippine corporation from which it receives dividends in any taxable
year, shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying such
dividends with respect to the profits out of which such dividends are
paid. Such appropriate amount shall be based upon the amount of
tax paid or accrued to the Philippines, but the credit shall not exceed
the limitations (for the purpose of limiting the credit to the United
States tax on income from sources within the Philippines or on
income from sources outside the United States) provided by United
States law for the taxable year. . . .

The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b)
(iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in
the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign
investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure
higher than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends
to be achieved and that the general purpose is a more important aid to the meaning of a law than
any rule which grammar may lay down.   It is the duty of the courts to look to the object to be
20

accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a
reasonable or liberal construction which will best effectuate its purpose.   The Vienna Convention on
21

the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and in the light of its object
and
purpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors
to invest in the Philippines — a crucial economic goal for developing countries.   The goal of double
23
taxation conventions would be thwarted if such treaties did not provide for effective measures to
minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor.
Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there
should be a concomitant commitment on the part of the state of residence to grant some form of tax
relief, whether this be in the form of a tax credit or exemption.   Otherwise, the tax which could have
24

been collected by the Philippine government will simply be collected by another state, defeating the
object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the investor, no benefit would
redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it
impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the
regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on "relief from double taxation"
in the two tax treaties in question should be considered in light of the purpose behind the most
favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less
favorable than that which has been or may be granted to the "most favored" among other
countries.   The most favored nation clause is intended to establish the principle of equality of
25

international treatment by providing that the citizens or subjects of the contracting nations may enjoy
the privileges accorded by either party to those of the most favored nation.   The essence of the
26

principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax
treaty to which the country of residence of such taxpayer is also a party provided that the subject
matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West
Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and
technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit
(20% for royalties) would derogate from the design behind the most grant equality of international
treatment since the tax burden laid upon the income of the investor is not the same in the two
countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of
most favored nation treatment precisely to underscore the need for equality of treatment.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax
credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West
Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted
under the latter treaty for the reason that there is no payment of taxes on royalties under similar
circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in
derogation of sovereign authority and to be construed strictissimi juris against the person or entity
claiming the exemption.   The burden of proof is upon him who claims the exemption in his favor and
27

he must be able to justify his claim by the clearest grant of organic or statute law.   Private
28

respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is
nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7,
1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals
are hereby SET ASIDE.

SO ORDERED.
Vitug, Panganiban and Purisima, JJ., concur.

Romero, J., abroad, on official business leave.

G.R. No. L-7521           October 18, 1955

VERONICA SANCHEZ, plaintiff-appellant,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.

Benjamin C. Yatco for appellant.

Office of the Solicitor General Ambrocio Padilla and Solicitors Esmeraldo Umali and Roman
Cansino, Jr. for appellee.

REYES, J.B.L., J.:

Appellant Veronica Sanchez is the owner of a two-story, four-door "accessoria" building at 181
Libertad Street, Pasay City, which she constructed in 1947. The building has an assessed value of
P21,540 and the land is assessed at P7,980, or a total value of P29,540 (Exhibit 2). While appellant
lives in one of the apartments, she is renting the rest to other persons. In 1949, she derived an
income therefrom of P7,540 (Exhibit 1). Appellant also runs a small dry goods store in the Pasay
market, from which she derives an annual income of about P1,300 (also Exhibit 1).

In the early part of 1951, the Collector of Internal Revenue made demand upon appellant for the
payment of P163.51 as income tax for the year 1950, and P637 as real estate dealer's tax for the
year 1946 to 1950, plus the sum of P50 as compromise (Exhibit 4). Appellant paid the taxes
demanded under protest, and on October 16, 1951 filed action in the Court of First Instance of
Manila (C. C. No. 14957) against the Collector of Internal Revenue for the refund of the taxes paid,
claiming that she is not a real estate dealer. The lower Court, after trial, found appellant to be such a
dealer, as defined by section 194 (s) of the National Internal Revenue Code, as amended by
Republic Act Nos. 42 and 588, and declared the collection of the taxes in question legal and in
accordance with said provision. Wherefore, Veronica Sanchez appealed to this Court.

At the outset, it should be noted that while appellant claims the refund of the amount of P825
allegedly paid by her to the Collector of Internal Revenue as real estate dealer's tax, it appears that
the sum of P163.31 thereof corresponds to her income tax for the year 1949 (Exhibit 4), so that the
amount of tax actually involved herein is only P687, paid by appellant as real estate dealer's tax for
the year 1946 to 1950. We notice also that the lower Court, in deciding this case, applied the
definition of "real estate dealer" in section 194 (s) of the National Internal Revenue Code, as
amended by Republic Acts Nos. 42 and 588. Republic Act No. 588 took effect only on September
22, 1950, while the tax in question was paid by appellant for the year 1946 to 1950. Hence, the law
applicable to this case is section 194 (s) of the Tax Code before it was amended by Republic Act No.
588, which defines real estate dealers as follows:

"Real estate dealers" includes all persons who for their own account are engaged in the sale
of lands, buildings or interests therein or in leasing real estate. (R. A. No. 42)
Does appellant fall within the above definition? We are of the opinion that she does. The kind of
nature of the building constructed by her—which is a four-door "accessoria"—shows that it was from
the beginning intended for lease as a source of income or profit to the owner; and while appellant
resides in one of the apartments, it appears that she always rented the other apartments to other
persons from the time the building was constructed up to the time of the filing of this case.

The case of Argellies vs. Meer* G. R. No. L-3730, promulgated on April 25, 1952, cited by appellant
in support of her appeal, is not in point. In that case, Argellies had always resid d outside the
Philippines, and his properties in Manila were administered and managed by a local real estate
company. We held that Argellies could not be considered as engaged in business of letting real
estate, because he did not appear to have reinvested the rents received by him from this country,
nor to have taken part in the management of his local holdings. In the case at bar, however, it was
appellant who had the apartment in question constructed, purposely for lease or profit, and she
manages the property herself. While she runs a small store in Pasay market, it is unlikely and the
evidence does not show, that she devotes all her personal time and labor to such store, considering
its size and the fact that she derives little income therefrom. On the other hand, the work of attending
to her leased property and her tenants would not take much of her time and attention, especially
since she lives in the premises herself. And the leasing of her apartment appears to be her principal
means of livelihood, for the income she derives therefrom amounts to more than five times that
which she makes from her store.

Considering, therefore, that appellant constructed her four-door "accesoria" purposely for rent or
profit; that she has been continuously leasing the same to third persons since its construction in
1947; that she manages her property herself; and that said leased holding appears to be her main
source of livelihood, we conclude that appellant is engaged in the leasing of real estate, and is a real
estate dealer as defined by section 194 (s) of the Internal Revenue Code, as amended by Republic
Act No. 42.

Appellant argues that she is already paying real estate taxes on her property, as well as income tax
on the income derive therefrom, so that to further subject its rentals to the "real estate dealers' tax"
amounts to double taxation. This argument has already been rejected by this Court in the case
of People vs. Mendaros, et al., L-6975, promulgated May 27, 1955, wherein we held that "it is a well
settled rule that license tax may be levied upon a business or occupation although the land or
property used there in is subject to property tax", and that "the state may collect an ad valorem tax
on property used in a calling, and at the same time impose a license tax on the pursuit of that
calling", the imposition of the latter kind of tax being in no sense a double tax.

The evidence shows, however, that the apartment house in question was constructed only in 1947,
while the real estate dealer's tax demanded of and paid by appellant was for the year 1946 to 1950
(see Exhibit 4). Wherefore, appellant is entitled to a refund of the tax paid for the year 1946,
amounting to P37.50.

With the modification that the appellee Collector of Internal Revenue is ordered to refund to
appellant Veronica Sanchez the amount of P37.50 paid as real estate dealer's tax for the year 1946,
the decision appealed from is, in all other respects, affirmed. Costs against appellants. So ordered.

Bengzon, Acting C. J., Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo, and Concepcion,
JJ., concur.